Contract law is the law of exchange and the law of future exchange by jennyyingdi

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									Contract law is the law of exchange and the law of future exchange.
Exchanges are really about two people becoming better off. But, we need the certainty of some sort
of action if the other party does not fulfil their side of the promise. If there wasn’t a court to go to the
system would not work quite as well, although you will try to avoid going to court.
I) Contract Formation
   A) Consideration OR Substitute
      1) Consideration = Bargained-For Exchange of “Legal Detriments.”
          (a) Elements of Consideration
              (i) Bargained-for Exchange
                   Parties don’t really need to “bargain” – A making an offer and B accepting can
                     constitute a bargain.
                      A can say “I’ll pay you $10 to cross the Brooklyn Bridge,” and B can just cross
                        the bridge.
                   Restatement §71
                            To constitute consideration, a performance or a return promise must be bargained for.
                            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.
                            The performance may consist of:
                              An act other than a promise, OR
                              A forbearance, OR
                              The creation, modification, or destruction of a legal relation.
                            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.
              (ii)   Legal Detriments
                      Both sides making promises – Each suffers “legal detriment” in that each can be
                        sued for not fulfilling promise (Bilateral K).
                         Example: If you promise to cross the Brooklyn Bridge, I’ll pay you $10 when
                           you’re done.
                      Promise on one side and performance on the other - Promise is a legal detriment
                        on promisor’s side and performance is legal detriment on promisee’s side
                        (Unilateral K).
                         Example: I’ll pay you $10 if you cross the Brooklyn Bridge.
                         Hammer v. Sidway, New York Court of Appeals, 1891
                                Uncle promissed his nephew that if he would refrain from drinking, using tobacco,
                                 swearing and playing cards or billiards for money until he was 21 he would pay him
                                 $5,000.
                                Is there consideration here by nephew?
                                  Yes, because the nephew gave up a legal right.
                        Restatement §71
                            To constitute consideration, a performance or a return promise must be bargained for.
                            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.
                            The performance may consist of:
                              An act other than a promise, OR
                              A forbearance, OR
                              The creation, modification, or destruction of a legal relation.
                            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.
          (b) Consideration Rules
              (i) Past Consideration Generally Isn’t Consideration (there are exceptions)
                   Past consideration cannot be “bargained-for” with respect to the current contract.
                   Moral duty arising out of past performance ≠ legal duty.
                   Plowman v. Indian Refining Co, United States District Court, 1937

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               Employees were asked to terminate employment but told they would stay on payroll at one-
                half their normal wage. Employer stopped paying them after about one year.
               Can the employees past work be consideration (thus making this a contract instead of a
                gratuitous promise)?
                 No, past consideration is not “bargained for” and cannot be consideration.
(ii)    A Condition Is Not Consideration
         If in a reasonable situation the “requested action” would not be considered a
           requested payment for the promise, then the requested action is not
           consideration. It is simply a condition to receive the benefits of a gratuitous
           promise.
         Questions to ask to determine if requested action is consideration:
            Will the requested action benefit the promisor?
                If yes, looks more like consideration.
            Will the requested action simply allow the promisee to receive a gift?
                If yes, looks more like condition.
            Was there a detriment to the promisee?
                If yes, looks more like consideration.
         The more difficult the promisor makes the requested act the closer it comes to
           being consideration.
         Plowman v. Indian Refining Co, United States District Court, 1937
               Employees were asked to terminate employment but told they would stay on payroll at one-
                half their normal wage. Employer stopped paying them after about one year.
               Can the act of picking up a check be consideration (thus making this a contract instead of a
                gratuitous promise)?
                 No, this was simply a “condition” for the employees to receive a gratuitous promise. It did
                     not benefit the promisor in any way.
(iii)   Recital of Receipt of Consideration Is Not Consideration
         Dougherty v. Salt, New York Court of Appeals, 1919
               P received a note from his aunt for $3,000 payable at her death or before. Note said “You
                have always done for me, and I have signed this note for you. Now, do not lose it. Some day
                it will be valuable.”
               Does this note constitute consideration?
                 No. The kid did not have to do anything. Simply showing a receipt for something does
                     not constitute consideration.
(iv) The     Law Does Not Pass on the Adequacy of Consideration
           As long as there is consideration there is no requirement of equivalence in values
            exchanged.
           Restatement §79
               In the requirement of consideration is met, there is no additional requirement of:
                 A gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the
                     promisee; or
                 Equivalence in the values exchanged; or
                 Mutuality of obligation.
           Batsakis v. Demotsis, Texas Court of Civil Appeals, 1949
               D accepted money from P and agreed to pay back much larger amount of money (exchange
                rates considered).
               Is the contract unenforceable because of the inequality of the consideration?
                 No. The court will not look at adequacy of consideration.
(v)     Illusory Promises Are Not Consideration
         Illusory Promises – non-exclusive purchase/sale agreement with no minimum
            purchase requirement.
         Restatement §77
               A promise or apparent promise is not consideration if by its terms the promisor or purported
                promisor reserves a choice of alternative performances, unless

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                        Each of the alternative performances would have been consideration if it alone had been
                         bargained for; OR
                        One of the alternative performances would have been consideration and there is or
                         appears to the parties to be a substantial possibility that before the promisor exercises
                         his choice events may eliminate the alternatives which would not have been considered.
     (vi) Just    Because What Is Bargained-For Does Not Necessarily Induce the Making
             of a Promise Does Not Mean It Is Not Sufficient Consideration.
              Restatement §81
                    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. (Bilateral Case).
                    The fact that the promise does not of itself induce the performance or return promise does
                     not prevent the performance or return promise from being consideration for the promise.
                     (Unilateral Case).
  (c) The Power of Agents to Bind Their Principals
      (i) Definition of Agency
            Agency is a consensual relationship in which one person, the agent, agrees to
              act on behalf of, and subject to the control of, another person, the principal. The
              agency relationship is a consensual one; it is usually created by contract
              between the principal and its agent, although agency may also be gratuitous.
      (ii) Types of Authority
            Actual Authority
               Express Authority – Agent’s act is viewed as principal’s act if principal
                  expressly instructs agent to act.
               Implied (or Inferred) Authority – Agent’s act is viewed as principal’s act
                  when agent is acting in order to meet a general mandate or instruction given
                  by the principal. (Note: Most authority is created by implication).
            Apparent Authority – When it reasonably appears to a third party that the agent
              was acting on behalf of the principal (usually due to something that the principal
              has done previously).
               Plowman v. Indian Refining Co, United States District Court, 1937
                        Employees were asked to terminate employment (by vise-president and general
                         manager) but told they would stay on payroll at one-half their normal wage. Employer
                         stopped paying them after about one year.
                        Did vice-president and manager have apparent authority?
                          No. There were no meeting minutes, memo instructions or verbal instructions given
                             here to create any kind of authority.
                          Professor seems to disagree and say apparent authority could be argued. It does
                             not require express instruction. The employees could have reasonably thought that
                             the vice-president and general manager had authority.
     (iii)   Remedies Other Than Authority
              Ratification – Agent may not have any authority for his acts, thus not acting on
               behalf of the principal. But, if the principal later approves of the agent’s actions
               they will be held liable.
              Plowman v. Indian Refining Co, United States District Court, 1937
                    Employees were asked to terminate employment but told they would stay on payroll at one-
                     half their normal wage. Employer stopped paying them after about one year.
                    Has the employer ratified the agreement by one-half regular wage payments?
                      No. The ratification cannot exist unless the person alleged to have ratified knew what
                          they were ratifying. Here, there is no evidence that the company knew what had
                          happened.
                Estoppel (Reliance) – Principal may be estopped from denying the agent’s
                 authority if by words or acts it has caused reliance to detriment of other.
2) Promissory Estoppel: Reliance in Lieu of Legal Detriment
   (a) Elements of Promissory Estoppel Based on Reliance

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      (i) Action or Forbearance
      (ii) Induced by Promise
      (iii) That Promisor Reasonably Should Expect, AND
      (iv) Injustice Can Be Avoided Only By Enforcing the                    Promise (was reliance
          reasonable?)
      (v) Restatement §90
                 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.
                 A charitable subscription or a marriage settlement is binding under Subsection (1) without proof
                  that the promise induced action or forbearance.
   (b) Types of Reliance Cases
       (i) What you give up isn’t part of the bargain ( not consideration, no K) but it
           yields a loss to you and that is what you are trying to recover.
            Kirksey v. Kirksey, Alabama Supreme Court, 1845
                     D wrote P (widow of his brother) to leave her home and move to his land to raise her children.
                     If a promise is made by a promisor, without the existence of consideration, and the promisee
                      takes action reliant on that promise, can that action be considered as a substitute for
                      consideration.
                       No. The promise is a mere gratuity and reliance is not a substitute for consideration.
                       Today this would be different. This is a classical case. Under the modern system
                           reliance is often substituted for consideration.
      (ii)    There was no legal detriment ( no consideration) but you take reasonable
              action based on the promise.
               Shoemaker v. Commonwealth Bank, Pennsylvania Superior Court, 1997
                     P’s let home insurance lapse and bank warned they would purchase for them. Bank let
                      insurance lapse without repurchasing. Home destroyed by fire.
                     Do the P’s have a cause of action based on reliance?
                       Yes. D said they were going to obtain the insurance (inducement).  P’s did not obtain
                           insurance (forbearance). D should have reasonably expected the action and injustice
                           can be avoided no other way.
      (iii)   In a charity case there is often no legal detriment ( no consideration) but that
              charity takes reasonable action based on the promise.
               King v. Trustees of Boston University, Supreme Judicial Court of Massachusetts,
                  1995
                     Dr. King deposited papers with D. P sues for conversion and says papers belong to Dr.
                      Kings estate.
                     Does the charity have a reliance case?
                       Yes, an act by the promisee that is of higher standard than normal or expected, even if
                          occurring after the promise has been made, might be considered as reliance (and
                          therefore a substitute for consideration).
      (iv) Employee      benefit/pension cases may meet test for reliance, but they are
              federally regulated (usually by statutes) and  cannot be regulated by case
              law.
3) Restitution: In Lieu of a Bargained-for Exchange
   (a) Elements of Restitution
       (i) Enrichment (one party receives benefit)
       (ii) Agrees to Pay OR Unjustly Enriched.
             Agrees to Pay (by one of the following)
               Actual Agreement – Promise, but not contemporaneous with action (promise
                 made after action) on account of which restitution is sought.
                  Party received material benefit, OR
                  There was originally legal obligation
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                     Mills v. Wyman, Massachusetts Supreme Judicial Court, 1825
                     P cared for D’s 25 year old son. D promised (after care was given) to pay P. D will
                      not pay. P sues.
                     The courts will not uphold a promise (made after services are given) for unsolicited
                      services unless the service was for the promisor (material benefit) or a minor child
                      (legal obligation) of the promisor.
                     Webb v. McGowin, Alabama Court of Appeals, 1936
                     P saved D’s testator from serious injury or bodily harm but in the process became
                      crippled. D’s testator agreed to pay P $15 every 2 wks for the rest of his life. D does
                      not want to continue payment.
                     Court finds agreement b/c benefit was to the person who agreed to pay and it was a
                      “material” benefit.
             Implied in Fact Agreements – Inferred in whole or in part from the parties’
              conduct, not solely from their words.
               Watts v. Watts, Supreme Court of Wisconsin, 1987
                     Co-habiting couple for many years, house, etc. Break up. She sues him for part of
                      property, etc.
                     Implied in fact contract exists b/c their actions show a working together to obtain
                      property, etc.
             Other Implied Agreements
               Usually enforced when the person receiving the benefit would have
                 wanted the person acting to act if given the option.
                  Glenn v. Savage, Supreme Court of Oregon, 1887
                     Lumber belonging to D fell into river. P rescued lumber without consent from D. P
                      says D should pay for service.
                     “The great and leading rule of law is to deem an act done for the benefit of another,
                      without his request, as a voluntary act of courtesy, for which no action can be
                      sustained.
                     Professor says that under modern day courts the ruling would most likely be for P b/c
                      if the D knew of the lumber being washed away he would have wanted the P to
                      rescue it.
           Unjustly Enriched (quantum meruit = contract implied in law = quasi-contract)
             All other remedies exhausted, AND
             Enriched party has not paid another
             Commerce Partnership v. Equity Contracting Co, Florida District Court of
               Appeal, 1997
                   P did subcontracting work for D through general contractor. General went bankrupt and
                    did not pay P. P sues D for payment.
                   Court remands to trial court saying that jury must decide if D has made payment yet. If d
                    has paid, then no recovery for P. If D has not paid, then recovery for P.
               Watts v. Watts, Supreme Court of Wisconsin, 1987
                   Co-habiting couple for many years, house, etc. Break up. She sues him for part of
                    property, etc.
                   Implied in law contract exists b/c D was enriched by the interactions with P and it would
                    be unjust to allow D to keep all benefits.
(iii)   Restatement §86
           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.
           A promise is not binding under Subsection (1) [above]
             If the promisee conferred the benefit as a gift or for other reasons the promisor has not been
                 unjustly enriched, OR
             To the extent that its value is disproportionate to the benefit.




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B) Manifestations of Mutual Assent
   1) Offer and Acceptance OR Contract Implied in Law or Fact OR Promissory
      Estoppel as Substitute for Bargain/Promise
     (a) Offer and Acceptance
         (i) Types of Contracts formed through traditional Offer and Acceptance.
               Bilateral Contracts: Promise for Promise
                  Offer: I promise to pay you if you promise not to drink/smoke until you’re 21.
                  Acceptance: I promise not to drink/smoke until I’m 21.
                  Consequences: Either can be sued if they do not abide by their promise.
               Unilateral Contracts: Promise for Performance
                  Offer: I promise to pay you if you don’t drink/smoke until you’re 21.
                  Acceptance: The performance of not drinking/smoking until 21.
                  Consequences
                     Classical System: Until performance is complete, the offeror can revoke
                        and the offeree is not bound to complete performance.
                     Modern System: There’s an option contract that offeree can fulfill or not at
                        his option once he starts performance.
         (ii) Offer
               Definitions
                  An offer is something that the offeree reasonably thinks he can just “accept”
                    based on manifestation by offeror.
                     Restatment 2nd § 24 – Offer Defined
                       i.   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.
                “Preliminary Negotiations” or “Invitations for an offer” are not offers.
                  Lonergan v. Scolnick, California District Court of Appeals, 1954
                       i.   D placed ad to sell land, P responded, D gave directions to land, P saw land,
                            correspondence btwn D & P to determine if P found land, description, possible prices,
                            etc. D specified these were form letters and that P should act fast if he makes a
                            decision.
                       ii. Court says these actions were only preliminary and could not reasonably be viewed
                            as an offer.
                       iii. Professor’s Note: It does not matter what the P really thought. Whether the offer was
                            really an offer is a “reasonable” test.
                The particularity of the communication (to one person vs. mass mailing) may
                 be a factor in determining whether that communication was an offer.
                The more clear, definite, explicit an offer is the more likely it will be construed
                 as an offer (an offer leaves no material terms to be negotiated).
                Dulddulao v. St. Mary of Nazareth Hospital Center, Supreme Court of Illinois,
                 1987
                      P was terminated not in regard to employee handbook.
                      An ee handbook or other policy statement creates enforceable contractual rights if the
                       traditional requirements for contract formation are present. (1) The language of the policy
                       statement must contain a promise clear enough that an employee would reasonably
                       believe that an offer has been made. (2) The statement must be disseminated to the
                       employee in such a manner that the ee is aware of its contents and reasonably believes it
                       to be an offer. (3) The ee must accept the offer by commencing or continuing to work
                       after learning of the policy statement.
                  Lefkowitz v. Great Minneapolis Surplus Store, Supreme Court of Minneapolis,
                   1957
                      P responded to D’s newspaper ad for selling a fur coat. Ad stated price, description of
                       coat and “First come first served.”

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                There was an offer because the ad was clear, definite, explicit, leaving nothing for
                 negotiation. But, some courts would say not an offer because there could be no
                 reasonable expectation that this was an offer.
           Leonard v. Pepsico, Inc., 1999
                D saw tv ad for Pepsi points showing Harrier jet for points, collected points and
                 demanded jet.
                This was not an offer because no reasonable person would have expected an offer.
(ii)   Acceptance
        Definitions
           Offer remains open for acceptance, UNLESS
              It’s lapsed by its own terms or by passage of reasonable time.
              It’s been rejected (including by counteroffer).
                 i. Restatement 2nd §38 – Rejection
                        An offeree’s power of acceptance is terminated by his rejection of the offer,
                         unless the offeror has manifested a contrary intention.
                        A manifestation of intention not to accept an offer is a rejection unless the offeree
                         manifests an intention to take it under further advisement.
                 ii. Restatement 2nd §39 – Counter-offers
                        A counter-offer is an offer made by an offeree to his offeror relating to the same
                         matter as the original offer and proposing a substituted bargain differing from that
                         proposed by the original offer.
                        An offeree’s power of acceptance is terminated by his making of a counter-offer,
                         unless the offeror has manifested a contrary intention or unless the counter offer
                         manifests a contrary intention of the offeree.
                 iii. Restatement 2nd §59 – Purported Acceptance Which Adds
                      Qualifications
                        A reply to an offer which purports to accept it but is conditional on the offeror’s
                         assent to terms additional to or different from those offered is not an acceptance
                         but is a counter-offer.
                 iv. Restatement 2nd §40 – Time When Rejection or Counter-offer
                     Terminates the Power of Acceptance
                        Rejection or counter-offer by mail or telegram does not terminate the power of
                         acceptance until received by the offeror, but limits the power so that a letter or
                         telegram of acceptance started after the sending of an otherwise effective
                         rejection or counter-offer is only a counter-offer unless the acceptance is
                         received by the offeror before he receives the rejection or counter-offer.
                Offeree knows of offeror action inconsistent with offer staying open.
                 i. Restatement 2nd §43 – Indirect Communication of Revocation
                        An offeree’s power of acceptance is terminated 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.
                Offeror has revoked it, which she validly can do at any time, effective
                 when offeree learns of revocation or act inconsistent with offer being open.
                 Offeror can revoke at any time UNLESS
                 i. There’s been consideration for it to stay open (option Contract)
                        Hypo: What if I gave a store $50 for them toput a sign on a ccouch saying that it
                         was sold? I do not know if I want to buy it yet. I just want to be able to decide
                         whether I want to come back and pay the $1,000 for the couch.
                          This is an option contract with consideration for it to stay open (as long as the
                            consideration is not part of the payment. Consideration is for the contract of
                            putting the sale sign on the couch…consideration to keep the offer open).
                       Also see Restatement 2nd § 87 (1)(a) under “Option Contracts”
                        below.
                 ii. There’s been reasonable reliance on it staying open (option K)
                      James Baird Co. v. Gimbel Bros., Inc., United States Court of
                        Appeals, 1933 (Classical case contrary to above rule).
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          D, a linoleum supplier, sent letters to contractors indicating the price at which
           they could supply linoleum for a large job hoping a contractor would bid for
           job and buy linoleum from them. P relied on their pricing to bid, D revoked
           saying they miscalculated.
          Court found for D saying an offer for an exchange is not meant to become a
           promise until a consideration has been received.
      Drennan v. Star Paving Co., California Supreme Court, 1958
       (Modern case supporting above rule).
          P a general contractor relied on a subcontractor’s bid to place his bid. D
           revoked bid saying that it was miscalculated.
        Reasonable reliance resulting in a foreseeable prejudicial change in position
           affords a compelling basis also for implying a subsidiary promise not to
           revoke an offer for a bilateral contract.
      Remember that any disclaimer that would be written would have to rely on the
       default rule. In Baird we would have to put in writing a right to rely. In Drennan
       the disclaimer would have to put in writing that it could not be relied on and may
       be revoked.
      Also see Restatement 2nd § 87 (2) under “Option Contracts” below.
      Restatement 2nd §90 – Promise Reasonably Inducing Action or
       Forbearance
          A promise which the promisor whould 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.
        A charitable subscription or a marriage settlement is binding under
           Subsection above without proof that the promise induced action or
           forebearance.
      Hypo: What if a sub’s bid had been five or six times lower than all of the other
       bids a contractor received?
        A reasonable offeree would realize that there was a mistake made in the
           offer (the reliance on it would not be reasonable. P could argue that D is in
           the business of making bids and should know what is reasonable and what
           may appear to have a mistake. D may argue that P is in the best position to
           know that a mistake has been made because he has all the bids in front of
           him.
      Hypo: What if the contractor had received the work and tries to negotiate with the
       sub or other subs on prices?
        The general cannot be held liable for anything because he has an option to
           accept or not accept, but he also cannot reopen bargaining with the sub and
           at the same time claim a continuing right to accept the original offer.
iii. Acceptance is in the form of invited performance and that performance
     has begun.
      Restatement 2nd §45 – Option Contract Created by Part
        Performance or Tender
         Where an offer invites an offeree to accept by rendering a performance and
          does not invite a promissory acceptance, an option contract is created when
          the offeree tenders or begins the invited performance or tenders a beginning
          of it.
        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.
      Hypothetical: What if I walked into a store and wanted to buy a sofa for $1,000. I
       gave the store $100 on the condition that I will come back and pay the remaining
       $900. Do I have a remedy if he sells the couch to someone?
        Yes, this is performance invited, performance begun, forming an option
          contract.
iv. A statute provides that it’s still open (firm offer)
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                Mid-South Packers, Inc. v. Shoney’s, Inc., United States Court of
                 Appeals, 1985
                    P sells bacon to D. Prices are increased, P pays increased prices but on last
                     order shorts D the amount of increased payments accrued.
                    There was no original contract between P and D because P has price
                     obligation but there is no obligation to D under this alleged “requirements”
                     contract (may be different if D was required to buy a certain amount, etc).
                     Therefore, individual contracts were formed through each invoice. Holding
                     for P. In this jurisdiction a requirements contract would be held open for 45
                     days under a statute. P argues this but court rejects b/c no requirements
                     contract was formed b/c no mutual obligation.
                UCC §2-205 – Firm Offer
                    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, but in no event may such period of irrevocability exceed three months;
                     but any such term of assurance on a form supplied by the offeree must be
                     separately signed by the offeror.
             
             Note: You could perfectly well contract around this. This rule does
             not require offers to stay open. It just provides a means for an offer
             to stay open. (Realize that there are other things you will not be
             able to contract around such as good faith).
       v. Petterson v. Pattberg, New York Court of Appeals, 1928
                P attempts to go to D and accept by completing performance payment (which he
                 had already begun), when P knocks on D’s door D says “I revoke.”
                There was valid revocation – as long as it happens before the acceptance. This
                 is under the classical system. The modern system would most likely enforce
                 contract because of reliance based upon partial performance.
      Restatement 2nd §36 – Methods of Termination of the Power of
       Acceptance
       i.    An offeree’s power of acceptance may be terminated by
              Rejection or counter-offer by the offeree, or
              Lapse of time, or
              Revocation by the offeror, or
              Death or incapacity of the offeror or offeree.
       ii.   In addition, an offeree’s power of acceptance is terminated by the non-occurrence of
             any condition of acceptance under the terms of the offer.
    Note: Under the classical system even a promise to keep an offer open
     could be revoked. Now, reliance or a statute would most likely bar the
     offeror from revoking a promise to keep an offer open.
 Acceptance must be a mirror image of the offer unless a contrary rule applies.
   Definition: If acceptance deviates at all, it’s a rejection and counteroffer.
     There’s no deal between the parties, even if deviation is trivial. (Note:
     Consequences of “no deal” is that nobody’s bound. If parties treat
     themselves as having a deal notwithstanding defective formation, there
     may be remedies, but the remedies won’t be that nobody’s bound).
   Restatement 2nd §58 – Necessity of Acceptance Complying with Terms of
     Offer
       i.    An acceptance must comply with the requirements of the offer as to the promise to
             be made or the performance to be rendered.
      Restatement 2nd §§59 – Purported Acceptance Which Adds Qualifications
       i.    A reply to an offer which purports to accept it but is conditional on the offeror’s assent
             to terms additional to or different from those offered is not an acceptance but is a
             counter-offer.
      If one or both parties isn’t a merchant: Difference is standard by which
       additional/different terms become part of contract. They are proposals.
                                      9
    The rules for when proposals become part of a deal between merchants
    don'’ apply. But aren't relegated to mirror image rule: courts may have to
    construe, especially if there'’ performance, what the parties’ deal is.
   Exception to mirror image rule: UCC 2-207 Sale of Goods (Remember,
    UCC applies to merchants!)
    i.    Where the acceptance isn’t a mirror image of the offer, there will nevertheless be a
          contract if acceptance isn’t made expressly conditional on assent to the different
          terms. Additional terms are proposals for addition to contract, and, if parties are
          merchants, become part of contract UNLESS:
           Offer expressly limits acceptance to its terms
           Terms materially alter contract, OR
           Notification of objection of new terms given.
    ii.   If parties act as though there’s a contract, court will find a contract notwithstanding
          differing terms in offer and acceptance. Terms are terms they agree on and
          “supplementary terms incorporated under other provisions of UCC” (K usually found
          on implied in fact or implied in law theory…maybe promissory estoppel).
    iii. Brown Machine, Inc. v. Hercules, Inc., Missouri Court of Appeals, 1989
         (Battle of the Forms)
             Brown Machine sells trim press to Hercules who uses it in manufacturing.
             Brown’s price quote was not an offer because it said “no order,
              sale…agreement…shall be binding upon Brown unless accepted by Brown on
              Brown Order Acknowledgement form…no one would have reasonably believed
              this was an offer.
             Hercules purchase order (without indemnity clause) was the offer and it
              contained a provision that “expressly limits acceptance to terms stated
              therein.” “Any additional or different terms proposed by seller are rejected
              unless expressly agreed to in writing.”
             Brown’s “order acknowledgement” includes the indemnification clause and says
              in boldface that if the terms and conditions are not in accordance with Hercules’
              understanding Hercules should “advice them within 7 days of…”
              Acknowledgement also says that if Brown doesn’t hear from Hercules within that
              period of time, Brown is proceeding with the construction of the equipment as per
              these…terms being agreed.
             Hercules notifies Brown of change in trim reference, and says “all other
              specifications are correct.”
             Order acknowledgement didn’t expressly say that it was made conditional on
              assent to the additional or different terms. It counts as an acceptance.
             Since Brown and Hercules are merchants, the additional terms (most importantly
              for us, the indemnification) are proposals for addition to the contract. They don’t
              become part of the contract, though, because Hercules’ offer expressly limited
              acceptance to the terms of the offer.
             So, contract terms are as set forth in Hercules’ offer, which doesn’t include the
              indemnification.
    iv. Applying UCC 2-207 Sale of Goods
         When the offer is not conditioned on A terms and the acceptance is
          not conditioned on B terms, there will be a contract formed on B
          terms, unless change is material or A notifies of objection (in which
          case A terms).
         When the offer is conditioned on A terms and the acceptance is no
          conditioned on b terms there will be a contract formed on A terms.
         When the offer is not conditioned on A terms and the acceptance is
          conditioned on B terms there will probably be a contract on B
          terms.
         When the offer is conditioned on A terms and the acceptance is
          conditioned on B terms it is unclear whether the courts will find a
          contract formed and what terms that contract will encompass.
                                  10
                In all of these cases (but especially in iii & iv) what a court does will
                 likely differ depending on whether the parties have performed or
                 not.
       v.    Hypos: Where A and B are both Merchants
              A says “I’ll sell you 20 grade A containers of dental floss for $1/each. You can
                return them if you tell me you’re going to do so in 5 days, and you return them in
                another 5 days.” B says “I acept, but I get to tell you 6 days afterwards that I’m
                                                                                    th
                going to return them, so long as I actually return them by the 10 day.”
                 They are both merchants so UCC 2-207 applies. The change is not a mirror
                     image but under UCC2-207 it does not have to be. The changed terms will
                     be part of the contract unless the offer expressly limits acceptance to its
                     terms (which it did not) or the new terms materially alter the contract (which
                     they do not), or the offeror objects to the new terms (which he did not). 
                     contract is formed w/ 6 days and 10 days terms.
                 What if A notifies of objection?
                      Probably a contract on A terms (especially if there has been
                         performance).
              A says, “I’ll sell you 20 grade A containers of dental floss for $1/each. You can
                return them if you tell me you’re going to do so in 5 days, and you return them in
                another 5 days. This offer is expressly limited to the terms hereof, and additional
                or different terms don’t become part of the offer unless I agree in writing.” B says
                “I accept, but I get to tell you 6 days afterwards that I’m going to return them, so
                                                           th
                long as I actually return them by the 10 day.”
                 B only gets the 5 days.
              A says “I’ll sell you 20 grade A containers of dental floss for $1/each. You can
                return them if you tell me you’re going to do so in 5 days, and you return them in
                another 5 days.” B says “I accept but I get to tell you 6 days afterwards that I’m
                                                                                    th
                going to return them, so long as I actually return them by the 10 day. If you
                don’t agree to all my terms we have no deal.”
                 Doesn’t count as acceptance; probably rejection and counteroffer. But once
                     they perform there would be a deal under 2-207 (3).
              A says “I’ll sell you 20 grade A containers of dental floss for $1 each. You can
                return them if you tell me you’re going to do so in 5 days, and you return them in
                another 5 days.” B says, “I accept, but I get one year to return them.”
                 B’s changed condition would most likely not become part of the deal b/c it
                     materially alters the deal.
      Normile v. Miller, Supreme Court of North Carolina, 1985
       i.    P offers to buy D’s house, D counteroffers, P does not respond, D sells to another
             party, P hears of sale, P tries to accept, P sues for specific performance.
       ii.   An acceptance must be a mirror image of the offer. P’s mirror image acceptance was
             too late. D’s counteroffer did not contain any wording to hold offer open (though the
             original offer did) and the D revoked offer by P learning of sale to another party.
 In the manner specified in the offer or in a reasonable manner.
   Restatement 2nd §50 (1) – Acceptance of Offer Defined
       i.    Acceptance of an offer is a manifestation of assent to the terms thereof made by the
             offeree in a manner invited or required by the offer.
      Restatement 2nd §58 – Necessity of Acceptance Complying with Terms of
       Offer.
       i.    An acceptance must comply with the requirements of the offer as to the promise to
             be made or the performance to be rendered.
      Restatement 2nd §60 – Acceptance of Offer Which States Place, Time, or
       Manner of Acceptance
       i.    If an offer prescribes the place, time or manner of acceptance its terms in this respect
             must be complied with in order to create a contract. If an offer merely suggests a
             permitted place, time or manner of acceptance, another method of acceptance is not
             precluded.
 Effective when sent (mailbox rule), unless offer provides otherwise; exception:
  offer under option contract is only effective upon receipt of offeree.
                                     11
                     Restatement 2nd §63 – Time When Acceptance Takes Effect
                      i.   Unless the offer provides otherwise,
                            An acceptance made in a manner and by a medium invited by an offer is
                               operative and completes the manifestation of mutual assent as soon as put out of
                               the offeree’s possession, without regard to whether it ever reaches the offeror;
                               but
                            An acceptance under an option contract is not operative until received by the
                               offeror.
                     Hypo: You are selling your sofa in a garage sale for $45 and tell me I can buy it if I accept
                      within the next 24 hours. The next morning I put a check in the mailbox. You receive the
                      check in 10 days. Are you bound or not?
                      ii. Yes because of the mailbox rule. As long as I mailed the check there is a contract.
                      iii. How can you get around this waiting period b/c of the mailbox rule?
                            Say acceptance is only effective when you receive it. If you say no mailbox rule
                               then you can get around it. Also, you can specify payment must be received by a
                               certain time, etc.
               Restatement 2nd §69 (1) – Acceptance by Silence or Exercise of Dominion
                     Where an offeree fails to reply to an offer, his silence and inaction operate as an
                      acceptance in the following cases only:
                      i. 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 exception of
                           compensation.
                      ii. Where the offeror has stated or given the offeree reason to understand that assent
                           may be manifested by silence or inaction, and the offeree in remaining silent and
                           inactive intends to accept the offer.
                      iii. Where because of previous dealings or otherwise, it is reasonable that the offeree
                           should notify the offeror if he does not intend to accept.
   (iii)   Option Contracts
            Offeror cannot revoke within a reasonable time period but offeree does not have
              to accept the offer.
            Created through consideration for option or reliance on offer.
            Option contracts balance the power of the offeror’s right to revocation.
            One important reason for option contracts is to encourage people to invest in
              determining whether they want to accept an offer.
            NOTE: One-sidedness of offeror being able to revoke is flipped when it is an
              option contract held open by reliance. On the other hand, an option contract held
              open by consideration seems a little less one-sided in either direction.
            Restatement 2nd §87 – Option Contract
                 An offer is binding as an option contract if it
                   Is in writing and signed by the offeror, recites a purported consideration for the making of
                       the offer, and proposes an exchange on fair terms within a reasonable time; or
                   Is made irrevocable by statute.
                 An offer which the offeror should reasonably expect to induce action or forbearance of a
                  substantial character on the part of the offeree before acceptance and which does induce
                  such action or forebearance is binding as an option contract to the extent necessary to avoid
                  injustice.
(b) Contracts Implied in Law or in Fact
    (i) Contract Implied in Fact – No signed writing, no offer and acceptance, but:
         Based on a tacit promise, one that is inferred in whole or in part from the parties’
          conduct, not solely from their words.
         Not put into promissory words with sufficient clarity, so a fact finder must
          examine and interpret the parties'’conduct to give definition to their unspoken
          agreement.
           Watts v. Watts, Supreme Court of Wisconsin, 1987
                     Co-habiting couple for many years, house, etc. Break up. She sues him for part of
                      property, etc.
                                                  12
                     Implied in fact contract exists b/c their actions show a working together to obtain property,
                      etc.
   (ii)   Contract Implied in Law (quasi-contract, quantum meruit) – No signed writing, no
          offer and acceptance, but:
           P has conferred benefit on D of which D has knowledge and has accepted and
              retained.
           It would be inequitable for d to retain the benefit without paying for it.
               Commerce Partnership v. Equity Contracting Co, Florida District Court of
                  Appeal, 1997
                     P did subcontracting work for D through general contractor. General went bankrupt and
                      did not pay P. P sues D for payment.
                     Court remands to trial court saying that jury must decide if D has made payment yet. If d
                      has paid, then no recovery for P. If D has not paid, then recovery for P.
                 Watts v. Watts, Supreme Court of Wisconsin, 1987
                     Co-habiting couple for many years, house, etc. Break up. She sues him for part of
                      property, etc.
                     Implied in law contract exists b/c D was enriched by the interactions with P and it would
                      be unjust to allow D to keep all benefits.
(c) Promissory Estoppel: Reliance in Lieu of Complete/Final Agreement
    (i) There’s no contractual formalities (offer and acceptance) but one party wants
        contractual relief because they “reasonably” relied. They need not rely specifically
        on a promise.
         Elements of Promissory Estoppel Based on Reliance
            Action or Forbearance
            Induced by Promise (or actions, etc)
            That Promisor Reasonably Should Expect, AND
            Injustice Can Be Avoided Only By Enforcing the Promise (was reliance
               reasonable?)
         Pop’s Cones, Inc. v. Resorts International Hotel, Inc., Superior Court of New
           Jersey, Appellate Division, 1998.
                 Pop’s a TCBY franchise after discussions with Resorts International Hotel on the possibility of
                  leasing space in its hotel, relied on Resorts’ assurances that the deal would be approved and
                  did not renew its lease at its old location.
                 There was no promise here. The actions of Resorts’ were relied upon. If promissory estoppel
                  exists the court will not hold the estoppel to a “clear and definite” promise. Reliance will still
                  be available as a remedy.
             Questions Professor asks: How is it determined whether justice/equitable
              considerations require ‘enforcement of promise’?
               With great difficulty. Note that whether reliance was reasonable may be one
                  aspect of the inquiry.
             Policy Question: In re. Pop’s Cones, clearly they did rely. How much should they
              have relied? If they were a large business would they have handled this
              different?
               Addresses the issue of paternalism. Should we protect those who are not
                  sophisticated enough to protect themselves? Are we then protecting them or
                  contributing to their lack of knowledge and encouraging them to continue that
                  lack of knowledge…also, strain between deciding this particular case and
                  setting precedent in general.
             Policy Question: Why should we have a remedy before a written contract is
              actually signed? Why encourage them to rely on a deal?
               To hopefully increase bargaining in good faith and the goal of accomplishing
                  a manifested agreement. Others feel that promises (or actions) made during
                  negotiations should only be implied promises that can only be relied upon
                                                   13
                    until that promise is changed.  reliance damages would only be those
                    between promise and changed promise.
2) In Writing if Statute of Frauds Applies, unless Exceptions apply.
   (a) Enforceability of a contract requires a writing when:
       (i) Contract cannot be performed in less than a year.
            Note: The standard view is hat a contract is not subject to the statutory provision
              if it is possible to be performed within a year, even though the prospect of such
              performance is remote.
            Note: In applying the one-year provision courts typically distinguish between the
              possibility of performance within one year and termination within one year. The
              fact that a contract may be terminated within a year is not sufficient to remove the
              contract from the requirements of the statute; only performance will do.
            Note: Sometimes an employee will allege that her employer has orally agreed to
              a contract of ‘permanent’ or ‘lifetime’ employment. If the employer asserts the
              statute of frauds one-year clause as a defense to enforcement, the court is likely
              to hold it inapplicable, on the basis that contracts measured by a lifetime are
              inherently capable of termination by full performance in less than a year, if the
              measuring lifetime should end before a year is up, as of course is always a
              possibility.
            Restatement § 130 – Contract Not to Be Performed Within a Year
                     Where any promise in a contract cannot be fully performed within a year from the time the
                      contract is made, all promises in the contract are within the Statute of Frauds until one party
                      to the contract completes his performance.
                     When one party to a contract has completed his performance, the one-year provision of the
                      Statute does not prevent enforcement of the promises of other parties.
       (ii) Goods for $500 or more.
       (iii) Other personal property more          than $5,000.
       (iv) Interest in Land.
                 Restatment §129 – Action in Reliance; Specific Performance
                     A contract for the transfer of an interest in land may be specifically enforced notwithstanding
                      failure to comply with the Statute of Frauds if it is established that the party seeking
                      enforcement, in reasonable reliance on the contract and on the continuing assent of the party
                      against whom enforcement is sought, has so changed his position that injustice can be
                      avoided only be specific performance.
       (v) Upon consideration of marriage.
       (vi) Suretyship
       (vii)Executor
       (viii) Non-Possessory security interest
       (ix) By statute.
   (b) What counts as a writing?
       (i) Needn’t be just one piece of paper.
            Restatement 2nd § 132 – Several Writings
                     The memorandum may consist of several writings if one of the writings is signed and the
                      [unsigned] writings in the circumstances clearly indicate that they relate to the same
                      transaction.
       (ii)   Crabtree v. Elizabeth Arden Sales Corp, New York Court of Appeals, 1953
                 Crabtree was hired by Arden to be the latter’s sales manager. No formal contract was signed but
                  separate writings pieced together showed Crabtree to have been hired for a two-year term with
                  pay raises after the first and second six months. When he did not receive his second pay raise,
                  Crabtree sued for damages for breach.
                 This contract is within the statute of frauds b/c it could not be performed within one year.
                 The writings did satisfy the statute of frauds b/c:
                   Some of them were signed.
                   There were writings ‘by the party to be charged’
                                                      14
              All essential terms were in the writings
              The writings all seemed to be connected (by reference or purpose).
            Were writings sufficient to charge Crabtree?
              The restatement section 131 requires the signature of the party to be charged. Therefore,
                 Arden may not be able to enforce this contract against Crabtree. These things are not
                 always symmetrical.
            What if original memo had been made by Crabtree and Crabtree wants to charge Arden?
              All of the terms are not included within writings of the D (Arden). Therefore, this may not be
                 as clear.
            This would be a much harder case if all terms were not in writing. They were all there we just had
             to use parole evidence to connect the documents, not to establish terms.
            RULE: The Statute of Frauds does not require the memorandum expressing the contract to be in
             one document. It may be pieced together out of separate writings, connected with one another
             either expressly or by the internal evidence of subject matter and occasion.
   (iii) Needn’t have all of the terms, so long as it has          the essential unperformed terms.
   (iv) Signature can be anything that authenticates.
            Restatement 2nd § 134 - Signature
                The signature to a memorandum may be any symbol made or adopted with an intention,
                 actual or apparent, to authenticate the writing as that of the signer.
   (v)   Needn’t be made for purpose of memorializing agreement (indeed, can say
         something like, “I agreed with X about such-and-such, but that’s not enforceable
         under the Statute of Frauds.”)
          Restatement 2nd § 133 – Memorandum Not Made as Such
              Except in the case of a writing evidencing a contract upon consideration of marriage, the
              Statute may be satisfied by a signed writing not made as a memorandum of a contract.
            Hypo: A and B enter into an oral contract for the sale of Blackacre. A writes and signs a letter to
             his friend C containing an accurate statement of the contract. The letter is a sufficient
             memorandum to charge A even though it is never mailed.
            Hypo: A writes to B the following letter: Dear B: I will employ you as superintendent of my mill for
             a term of three years from date, at a salary of $28,000 a year. Let me know if you wish to accept
             this offer. [signed] A. B accepts the offer orally. The letter is a sufficient memorandum to charge
             A.
            A and B enter into an oral contract by which A promises to sell and B promises to buy Blackacre
             for $5,000. A writes and signs a letter to B in which he states accurately ther terms of the
             bargain, but adds, “our agreement was oral. It, therefore, is not binding upon me, and I shall not
             carry it out.” The letter is a sufficient memorandum to charge A.
   (vi) Memo    may be made at any time before or after contract formed.
            Restatement 2nd § 136 – Time of Memorandum
           Memo may be made ‘at any time before or after’ contract formed.
                        nd
   (vii)Restatement 2 § 131 – General Requirements of a Memorandum
         Unless additional requirements are prescribed by the particular statute, a contract within the
          Statute of Frauds is enforceable if it is evidenced by any writing, signed by or on behalf of the
          party to be charged, which
           Reasonably identifies the subject matter of the contract,
           Is sufficient to indicate that a contract with respect thereto has been made between the
              parties or offered by the signer to the other party, AND
           States with reasonable certainty the essential terms of the unperformed promises in the
              contract.
(c) Exceptions
    (i) Party to be charged admits the existence of the contract.
    (ii) Contract has been performed
          Buffaloe v. Hart, North Carolina Court of Appeals, 1994
                Buffaloe alleged that an oral contract he had with the Harts to purchase their barns was valid
                 because it fell under the partial performance exception to the Statute of Frauds.
                Within the Statute of Frauds b/c the subject matter is ‘goods’ and the price is at least $500.
                The writing requirement is not met b/c there was no signature of the party to be charged (on
                 the check).

                                                 15
                  There is an exception of part performance. The buyer ‘accepted’ barns (as evidenced by
                   restoring them and trying to resell them) and seller ‘accepted’ the check.
                  RULE: A contract is taken out of the Statute of Frauds if there is sufficient evidence of part
                   performance; that is, if the seller delivered the goods and the buyer accepted them.
                  What if the check had not said “five barns” in the for line?
                    accepting that creates a contract. The court has already said that no writing exists.
                  What if D had been away and P just dropped off check?
                    Then there would be no acceptance and most likely no K.
   (iii)Specially manufactured goods
         Under this subsection the goods must be specifically manufactured for the buyer
           and ‘not suitable for sale to others in the ordinary course of the seller’s business.’
   (iv) Reliance
         Restatement 2nd § 139
                  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 the action or forbearance is
                   enforceable notwithstanding the Statute of Frauds if injustice can be avoided only by
                   enforcement of the promise. The remedy granted for breach is to be limited as justice
                   requires.
                  In determining whether injustice can be avoided only by enforcement of the promise, the
                   following circumstances are significant:
                    The availability of adequacy of other remedies, particularly cancellation and restitution;
                    The definite and substantial character of the action or forbearance in relation to the
                        remedy sought;
                    The extent to which the action or forbearance corroborates evidence of the making and
                        terms of the promise, or the making and terms are otherwise established by clear and
                        convincing evidence;
                    The reasonableness of the action or forebearance;
                    The extent to which the action or forbearance was foreseeable by the promisor.
              Restatement 2nd § 150 – Reliance on Oral Modification
                  Where the parties to an enforceable contract subsequently agree that all or part of a duty
                   need not be performed or of a condition need not occur, the Statute of Frauds does not
                   prevent enforcement of the subsequent agreement if reinstatement of the original terms
                   would be unjust in view of a material change of position in reliance on the subsequent
                   agreement.
              Alaska Democratic Party v. Rice, Supreme Court of Alaska, 1997
                  This contract is within the Statute of Frauds because it cannot be performed in one year.
                  The required writings did not exist.
                  But, the exception of promissory estoppel applies.
                  RULE: 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 the action or
                   forbearance is enforceable notwithstanding the Statute of Frauds if injustice can be avoided
                   only by enforcement of the promise.
                  What if it was the other way around and Rice decided not to work (there is still nothing in
                   writing)?
                    The party of Wakefield would need an exception in order to enforce the contract. For
                        example, he must be able to show that he relied on this contract. Maybe he told a lot of
                        people that she would work for him and that bettered his reputation or enabled him to hire
                        certain people or gain support from certain people.
   (v) Restitution-type situation         (was a writing needed in Watts?)
   (vi) Other exceptions
(d) Only a party to the contract can assert that is it unenforceable under the Statute of
    Frauds.
                       nd
    (i) Restatement 2 § 144 – Effect of Unenforceable Contract as to Third Parties
              Only a party to a contract or a transferee or successor of a party to the contract can assert that
               the contract is unenforceable under the Statute of Frauds.
(e) Between merchants, a confirmation of a contract is sufficient for enforcement unless
    there is written notice of rejection within 10 days after it is received.
    (i) UCC §2-201(2) – Formal Requirements; Statute of Frauds
                                                   16
              Between merchants if within a reasonable time a writing in confirmation of the contract and
               sufficient against the sender is received and the party receiving it has reason to know its
               contents, it satisfies the requirements of subsection (1) against such party unless written notice of
               objection to its contents is given within 10 days after it is received.
   (f) Hypotheticals:
       (i) You’re a professional dogwalker. I say to you ‘walk my dog Fido 500 times.’ Typically, the dog is
             walked once a day. Is this contract within the Statute of Frauds?
              No. A writing is not required because it could be performed within a year.
       (ii) What if I say ‘walk my dog 500 times but not more than once a day.”?
              A writing is required b/c this cannot be done in one year.
       (iii) What if the writings consist of one scribbled paper on your letterhead saying ‘500 walks, Fido, no
             more than once a day’ with your initials. There’s also another piece of paper on my letterhead, also
             initialed, that has your name and contact info, and says ‘[your name] to walk Fido, $10/walk.’ Are
             these writings sufficient to satisfy the statute of frauds if you are to be charged? If I am?
              Yes (to both ?’s), b/c both parties have ‘signed’ and the papers are connected enough to form the
                   contract (it does not have to be only one piece of paper).
   (g) Policy: Courts do not really like the Statute of Frauds. They do not usually deny
       enforcement of a contract just because there was nothing in writing if the aspect of a
       contract or an exception still exist.
3) Evidencing (objective) intent to be bound to something the court can feasibly enforce or
   give a remedy for.
   (a) Have the parties agreed, or have they only ‘agreed to agree’? (i.e. Would the court have
       to make a contract for the parties?)
       (i) ‘at a rent to be agreed upon’ vs.
       (ii) ‘at a rent to be agreed upon, taking account of changes in market prices’ vs.
       (iii) ‘at a rent to be agreed upon, increased or decreased from the baseline rent in
             accordance with the changes in the Consumer Price Index during the preceding 6
             months period’ vs.
       (iv) ‘rent to be agreed upon by 3 arbitrators, one chosen by each of the parties and the
             3rd chosen by the 1st 2’.
   (b) Do the parties intend to be bound at this stage? (if so, to what?)
       (i) What if the working draft at a particular stage contains a provision that says ‘this isn’t
             binding on either party unless and until…’? What if it doesn’t?
              While if the agreement says it’s binding it usually is, that it says it’s not may not
                  be dispositive the other way.
   (c) Is there an agreement the court can feasibly ‘enforce’ (or give a remedy for?) Is there
       ‘enough’ to enforce? What terms ‘must’ be in the contract? What terms will courts
       supply/imply?
       (i) As to sale of goods, UCC Article 2 addresses enforceability of contracts with terms
             left open, and provides guidance as to how courts are to decide on what those terms
             are.
              Open terms will not void a contract if there intent to create a contract and a
                  reasonable basis for remedy.
                   UCC § 2-204(3) – Formation in General
                      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.
              An open price term will not void a contract (unless the parties do not intend to be
               bound until the price is fixed or agreed upon). (Compare w/ other than goods/merchants
               contracts, no price, or at least no formula or method of arriving at price will most likely make those
               contracts unenforceable).
                UCC § 2-305 – Open Price Term
                      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:

                                                    17
                  i. Nothing is said as to price; OR
                  ii. The price is left to be agreed by the parties and they fail to agree; OR
                  iii. 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.
                 A price to be fixed by the seller or by the buyer means a price for him to fix in good faith.
                 When a price left to be fixed otherwise than by agreement of the parties fails to be fixed
                  through fault of one party the other may at his option treat the contract as cancelled or
                  himself fix a reasonable price.
                 Where, however, the parties intend not to be bound unless the price be fixed or agreed
                  and it is not fixed or agreed there is no contract. In such a case the buyer must return
                  any goods already received or if unable so to do must pay their reasonable value at the
                  time of delivery and the seller must return any portion of the price paid on account.
          Absence of delivery specifications will not necessarily void a contract.
            Default = all goods in single delivery; Unless circumstances allow party to
              demand delivery in lots and price is apportioned.
            UCC §2-307 – Delivery in Single Lot or Several Lots.
                 Unless otherwise agreed all goods called for by a contract for sale must be tendered in a
                  single delivery and payment is due only on such tender but where the circumstances give
                  either party the right to make or demand delivery in lots the price if it can be apportioned
                  may be demanded for each lot.
          Absence of specific time provisions or notice of termination provisions will not
           necessarily void a contract.
            UCC §2-308 – Absence of Specific Time Provisions; Notice of Termination
                 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.
                 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.
                 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.
          Absence of performance particulars will not necessarily void a contract. The
           performance must be made in good faith.
            UCC § 2-311 – Options and Cooperation Respecting Performance
                 An agreement for sale which is otherwise sufficiently definite (subsection (3) of § 2-204)
                  to be a contract is not made invalid by the fact that it leaves particulars of performance to
                  be specified by one of the parties.
                  Any such specification must be made in good faith and within limits set by commercial
                  reasonableness.
                 Unless otherwise agreed specifications relating to assortment of the goods are at the
                  buyer’s option and except as otherwise provided in subsections (1)(c) and (3) of § 2-319
                  specifications or arrangements relating to shipment are at the seller’s option.
                 Where such specification would materially affect the other party’s performance but is not
                  seasonably made or where one party’s cooperation is necessary to the agreed
                  performance of the other but is not seasonably forthcoming the other party in addition to
                  all other remedies
                  i. Is excused for any resulting delay in his own performance; AND
                  ii. May also either proceed to perform in any reasonable manner or after the time for a
                       material part of his own performance treat the failure to specify or to cooperate as a
                       breach by failure to deliver or accept the goods.
(ii)   The same general approach, with some different specifics, is applicable for contracts
       not within UCC Article 2.
        The court may supply an omitted essential term
           Restatement 2nd § 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.

                                              18
(iii)   Generally agreements to agree are not enforceable unless there’s a formula or
        method specified.
         Definitions:
           Agreements to agree are different from the ‘absence of essential terms’ cases
               above. In agreements to agree the parties have agreed to agree upon
               something in the future.
           Formal Contract Contemplated = the parties have reached agreement in
               principle on at least the major provisions of their agreement, but they
               contemplate the execution of a formal written contract.
         If there is not a specific formula or method in which they will come to terms then
          the contract is an unenforceable agreement to agree.
           Walker v. Keith, Kentucky Court of Appeals, 1964
                  Walker entered into a 10 yr lease with Keith. The contract gave Walkeran option to
                   renew the lease for 10 additional years. The parties were to agree on a fair rental at that
                   time to be fixed based on the ‘comparative basis of rental values at the date of renewal
                   with rental values at this time reflected by the comparative business conditions of the two
                   periods.’ Walker attempted to renew his lease, but Keith refused. Walker brought suit for
                   damages or specific performance.
                  RULE: When an agreement to agree does not specify the formula or method to
                   determine specifics, the contract will not be enforceable.
                  This provision is an agreement to agree that cannot be enforced. They agreed to agree
                   about rent but there was no specific method described to determine what the rent should
                   be. There was too much ambiguity in the provision to say that there was ever a “mutual”
                   meeting of the minds or agreement as to the future rent.
                  Cautionary Lesson: If you want something enforceable get very specific. (Problems are
                   that that may lead to other arguments when making the deal).
                  Conclusions or Purposes:
                    Prospectively inventing this stuff is not easy.
                    There are many ways in which someone can be unfair.
                    Sometimes disagreement is honest sometimes it is opportunistic.
                    You must plan, negotiate and anticipate when trying to establish specific, concrete
                        contracts or provisions, etc. (Think about how others may be unfair and try to
                        prevent this but still create a doable solution).
                  What if the provision had simply said that the P had a right to renew?
                    This would create a different set of arguments. This is not an agreement to
                        agree…there are just many missing terms here. The question would become
                        whether there is “something that the court can feasibly enforce or give a remedy for.”
                  Professor keeps mentioning the objectivity of contracts. We are not concerned with the
                   intentions of the actual contractors. We are concerned with what the other party would
                   reasonably understand the intent to be (manifestation of intent).
           If there is ambiguity as to the parties intentions to enter into a contact then any
            agreement will most likely be deemed only an unenforceable ‘formal contract
            contemplated’.
             Quake Construction, Inc. v. American Airlines, Inc, Supreme Court of Illinois,
                 1990
                  When American Airlines canceled its agreement with the general contractor for
                   construction of an expansion of its airport facilities, Quake, a subcontractor, alleged that
                   the letter of intent it had received from the general contractor constituted an enforceable,
                   binding contract.
                  There was a cancellation clause in the letter of intent. The reason for this clause could
                   be (1) that the D would not have used a cancellation clause if it did not intend to form a
                   contract, OR (2) that the D wanted to make sure that it did not form a contract and
                   therefore used the cancellation clause. Because of these conflicting views, the letter is
                   ambiguous and is simply an agreement to agree which is not enforceable.
                  RULE: Although letters of intent may be enforceable, such letters are not necessarily
                   enforceable unless the parties intend them to be contractually binding.


                                               19
                            If the cancellation clause had contained wording such as “Nothing else in this letter
                             withstanding. The parties to this letter are not bound until the final formal contract has
                             been completed…” There would be no question. The clause would be specific enough
                             and explicit writing would give the D a reason to cancel. (You may still have issues of
                             good faith, etc).
                   Does the fact that parties intend to sign something show that they are more
                     likely or less likely to be bound before the writing?
                      This is a tough question to answer and you could argue either way.
                         Professor says you may be able to think of this as a “rebuttable
                         presumption” such that we can presume that this would mean that they
                         are not bound before the writing unless their actions show otherwise.
                 Reliance may make an agreement to agree enforceable for equitable reasons.
                   Pop’s Cones, Inc. v. Resorts International Hotel, Superior Court of New
                     Jersey, 1998
                            Resorts International Hotel on the possibility of leasing space in its hotel, relied on
                             Resort’s assurances that the deal would be approved, and did not renew its lease on its
                             Margate location.
                            Notice that in this case there obviously was no deal. Nevertheless the court finds that
                             they can enforce an agreement under §90 (Reliance) based on equitable reasons.
                     Issues:
           (iv) Policy
                 How much should courts consider the consequences in a particular case of non-
                  enforceability?
                 How much should courts consider whether a party had the interest and ability to
                  better protect itself? (should Quake have insisted on a signed contract that
                  expressly said it was enforceable before spending money on the project?)
                 How much should courts consider whether a party in a particular case is
                  ‘sympathetic’? (what makes a party sympathetic or not?)
                   Be careful when making size comparisons…focus more on sophistication
                     than size. Are the parties equally sophisticated or do they have ‘equal
                     bargaining power’? But, don’t be too quick to say that a particular party has
                     more bargaining power. Sympathy is usually based on the capability to
                     protect themselves.
                 How should courts balance the above with the fact that they are making law to
                  apply, prospectively, to future parties situated differently than the ones before
                  them?
II) Contract Interpretation (What are the terms of the parties’ deal? Deal > Piece
    of paper and includes implied terms).
    Principles of Interpretation
       1) General Principles
        (a) Interpreted against drafter
            (i) Drafter ≠ writer; Drafter = Creator of wording.
            (ii) Especially in adhesion contracts.
            (iii) Rule developed to help a “weaker” party, though sometimes used when there is no
                  disparity.
            (iv) Reasonable Expectations Doctrine: The objectively reasonable expectations of
                  applicants and intended beneficiaries regarding the terms of insurance
                  contracts will be honored even though painstaking study of the policy
                  provisions would have negated those expectations.
                   C & J Fertilizer v. Allied Mutual, Supreme Court of Iowa, 1975
                        A definite burglary did not fall within an insurance policy definition thereof because there was
                         no exterior sign of burglary.

                                                         20
                 Court says the purpose of the provision was to not cover inside theft and that was the
                  reasonable expectation of the insured. It is established that this was not an inside theft. 
                  the reasonable expectation of the insured prevails.
                 Dissent: The fact that P knew of the disputed provision means that he could not have had the
                  reasonable expectation that the majority talks about. Also, dissent thinks majority is deciding
                  these kinds of cases instead of this specific case.
   (b) Plain Meaning
       (i) The plain meaning of the language of the contract should govern and extrinsic
             evidence is admissible only if the court concludes that the contract is ambiguous.
       (ii) Majority of courts still follow this rule, but not all.
       (iii) The party who seeks to interpret the terms of the contract in a sense narrower
             than their everyday use bears the burden of persuasion to show the intended
             narrower use within the contract.
              Frigaliment Imp. Co. v. BNS, United States District Court, 1960
                 P ordered a large quantity of ‘chicken’ from D, intending to buy young chicken suitable for
                  broiling and frying, but D believed, in considering the weights ordered at the prices fixed by
                  the parties, that the order could be filled with older chicken, suitable for stewing only, and
                  termed ‘fowl’ by P.
                 The normal word for young chicken was huhn and the P had used this word in previous
                  dealings with the D.  the court says that D had reason to know that the word ‘chicken’ would
                  be interpreted generally and if they wanted young chicken they should have used the word
                  ‘huhn.’
   (c) General/Specific
       (i) A word in a series is affected by others in the series, or, a word may be effected by
             its immediate context.
       (ii) A general term joined with a specific one will be deemed to include only things that
             are like (of the same genus as) the specific one.
       (iii) If one or more specific items are listed without any more general or inclusive terms
             other items, although similar in kind, are excluded.
   (d) Handwritten over Print; Handtyped over form
   (e) Sense – Interpret as a whole
       (i) A writing or writings that form part of the same transaction should be interpreted
             together as a whole, that is, every term should be interpreted as a part of the whole
             and not as if isolated from it.
   (f) Legality
       (i) A court should prefer an interpretation that makes an agreement reasonable, lawful,
             and effective to one that produces an unreasonable or unlawful result that renders
             the agreement ineffective.
   (g) Public Policy
       (i) If a public interest is affected by a contract, that interpretation or construction is
             preferred which favors the public interest.
   (h) Purpose of the Parties
       (i) What did each party mean? What did each think the other meant?
       (ii) Note that the purpose is objective – We are not concerned with whether they
             ‘meant’ the same thing but on their having ‘said’ the same thing.
       (iii) Reformation Cause of Action = Tell the courts we meant the same thing at the
             time even though the contract does not reflect that. Ask them to reform the
             contract to this meaning.
2) Some Special Issues (when parties assign different meanings to a term in the contract)
   (a) Enforce if there’s a basis to choose meaning; otherwise, don’t.
       (i) Courts’ general preference is to find some way to enforce a contract, if possible.
       (ii) No Contract Formed If:

                                                  21
                 Where parties have attributed different meanings to a term within a contract,
                  there is no “meeting of the minds” on that provision and a court will not enforce
                  either party’s meaning.
                   A and B have different meanings, A knows B’s meaning and B knows A’s
                      meaning.
                   A and B have different meanings, A does not know B’s meaning and B does
                      not know A’s meaning.
         (iii) Contract formed according to A’s meaning if:
                Where one party knows or has reason to know what the other party means by
                B knows A’s different meaning and A doesn’t know B’s different meaning.
                B has reason to know A’s meaning and A has no reason to know B’s meaning.
         (iv) Note overlap with ‘mistake materials in enforcement unit (mistake as grounds not to
               enforce).
         (v) Joyner v. Adams, North Carolina Court of Appeals, 1987
                P contended that the rent escalation clause of a lease was triggered by D’s failure to properly
                 develop the property.
                The interpretation decision will rest on what each party knew of the other party’s understanding of
                 the provision. The trial court incorrectly construed against the drafter w/out determining each
                 party’s knowledge of the other party’s understanding. Remanded for determination of these
                 factual issues.
                              nd
         (vi) Restatement 2 § 201, Whose Meaning Prevails
               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.
               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 the
                agreement was made:
                 That party did not know of any different meaning attached by the other, and the other knew
                      the meaning attached by the first party; or
                 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.
A) Parol Evidence Rule (When can the court look beyond the parties’ written agreement?)
   1) Rule
      (a) The parties’ agreement is to be found in the contract
          (i) Writing supercedes prior/contemporaneous agreements, and can’t look beyond ‘4
               corners’ of contract to parties’ words or other extrinsic evidence.
          (ii) But how can we tell whether a contract is ‘clear on its face’? What kind of evidence
               can we use? (Corbin view vs. restrictive view)
                Corbin View: can look at parol evidence to:
                   Determine extent of integration
                   Illuminate the meaning of the contract language, or
                   Demonstrate the parties’ intent.
                   Taylor v. State Farm, Supreme Court of Arizona, 1993
                        P alleged that the court of appeals erroneously held that his insurance bad faith claim
                         was barred by a release signed in 1981.
                        Court allowed parol evidence because the contract was reasonably susceptible to
                         differing interpretations.
                Restrictive View: can only look at parol evidence for any purpose including
                 ‘interpretation’ if determine contract language is unclear or ambiguous.
                  Thompson v. Libby, Minnesota Supreme Court,1885
                        P contends he had a verbal warranty and wants parol evidence admitted to show this
                         warranty existed.
                        Court says that the contract looks complete. Therefore no parol evidence will be
                         admitted. A warranty is a contract term and if it was included in a complete contract it
                         would be in writing.
                                                     22
         (iii)Rationale for parol evidence rule: rather like statute of frauds. Once parties have a
              written agreement, why let them say terms of their actual deal differ?
      (b) Analysis: First ask, is contract integrated? Then ask, based on type of
          integration, what evidence will be allowed?
          (i) Integration = extent to which agreement captures parties’ whole deal; often, there’s
              a clause in a contract that provides that the contract is an integration, but contract
              could be an integration notwithstanding absence of clause.)
               If agreement is ‘complete integration’, can use only to interpret
                   Although judge may exclude such evidence saying contracts is ‘clear on it
                     face’ – More likely under restrictive view.
               If agreement is partial integration, can use to interpret or supplement
               If agreement is not integrated, can use to interpret, supplement or contradict
               Restatement 2nd § 209, Integrated Agreements
                        An integrated agreement is a writing or writings constituting a final expression of one or more
                         terms of an agreement.
                        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.
                        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.
                    Restatement 2nd § 210, Completely and Partially Integrated Agreements
                        A completely integrated agreement is an integrated agreement adopted by the parties as a
                         complete and exclusive statement of the terms of the agreement.
                        A partially integrated agreement is an integrated agreement other than a completely
                         integrated agreement.
                        Whether an agreement is completely 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.
   2) Exceptions
      (a) Doesn’t apply to subsequent agreements
      (b) Doesn’t apply to collateral agreements.
         (i) An agreement to salary or vacation time would not be collateral but agreement for possible promotion
             may be collateral.
      (c) Doesn’t apply to show agreement is invalid on grounds of fraud, duress, or
          otherwise (but scope of fraud exception may be controversial)
      (d) Doesn’t apply to exclude evidence offered to establish right to ‘equitable’ remedy such
          as reformation
      (e) Doesn’t apply to evidence offered to show that the effectiveness of the agreement was
          subject to an oral condition precedent.
   3) Types of Extrinsic Evidence (where the courts can look…)
      (a) Between merchants course of dealing, usage of trade, and course of performance
          may be used to explain or supplement but not to contradict.
          (i) 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 as are included therein may not be contradicted by evidence of any
                     prior agreement or of a contemporaneous oral agreement but may be explained or supplemented
                      By course of dealing or usage of trade (§ 1-205) or by course of performance (§ 2-208); and
                      By evidence of consistent additional terms unless the court finds the writing to have been
                         intended also as a complete and exclusive statement of the terms of the agreement.
B) Implied Terms (What’s in the parties’ agreement independent of what they expressly
   agreed to?)
                                                         23
1) Gap Fillers
   (a) There are a lot of provisions that will fill in parts of a contract that are missing. They
       have not expressly agreed but the court is going to say that these things are part of the
       contract as a matter of law.
       (i) Absence of Price Will Not Necessarily Void a Contract
            UCC § 2-305, Open Price Term
                     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:
                       Nothing is said as to price; or
                       The price is left to be agreed by the parties and they fail to agree; or
                       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.
                     A price to be fixed by the seller or by the buyer means a price for him to fix in good faith.
                     When a price left to be fixed otherwise than by agreement of the parties fails to be fixed
                      through fault of one party the other may at his option treat the contract as cancelled or
                      himself fix a reasonable price.
                     Where, however, the parties intend not to be bound unless the price be fixed or agreed and it
                      is not fixed or agreed there is no contract. In such a case the buyer must return any goods
                      already received or if unable so to do must pay their reasonable value at the time of delivery
                      and the seller must return any portion of the price paid on account.
       (ii)    Absence of Delivery Specifications Will Not Necessarily Void a Contract
                UCC § 2-307, Delivery in Single Lot or Several Lots
                     Unless otherwise agreed all goods called for by a contract for sale must be tendered in a
                      single delivery and payment is due only on such tender but where the circumstances give
                      either party the right to make or demand delivery in lots the price if it can be apportioned may
                      be demanded for each lot.
       (iii)   Absence of Specified Place for Delivery Will Not Necessarily Void a Contract
                UCC § 2-308, Absence of Specified Place for Delivery
                     Unless otherwise agreed
                       The place for delivery of goods is the seller’s place of business or if he has none his
                          residence; but
                       In a contract for sale of identified goods which to the knowledge of the parties at the time
                          of contracting are in some other place, that place is the place for their delivery; and
                       Documents of title may be delivered through customary baking channels.
       (iv) Absence      of Specific Time Provisions or Notice of Termination Specifications
               Will Not Necessarily Void a Contract
                UCC § 2-309, Absence of Specific Time Provisions; Notice of Termination
                     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.
                     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.
                     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.
2) Course of Performance, Course of Dealing, Usage of Trade
   (a) Help to determine what the words mean
   (b) Definitions
       (i) Express Terms: Such as “set price”
       (ii) Course of Performance: The way this deal has been performed.
       (iii) Course of Dealing: The way prior deals between these two parties have been
             performed
       (iv) Usage of Trade: The way the industry generally performs these sorts of deals.
   (c) Serve as a backdrop to what is in the deal (might be evidence of what the deal is
       regardless of what the words mean. Contract is in part dictated by words and in part
       dictated by this larger backdrop of what they mean).
                                                      24
   (d) Express Terms > Course of Performance > Course of Dealing > Usage of Trade.
   (e) Trade usage and past course of dealings between contracting parties may
       establish terms not specifically enumerated in the contract, so long as no conflict
       is created with the written terms.
       (i) Nanakuli Paving & Rock v. Shell Oil Co, United States Court of Appeals, 1981
                D contended it had not breached a supply contract as its course of conduct established the
                 unwritten terms of the agreement.
                There was substantial evidence that the jury could rely upon in finding a consistent course of
                 conduct including price protection. As a result, the entry of judgment nov was improper.
                 Reversed.
3) Equitable Terms
   (a) Parties’ agreement is words they used, manner in which words are interpreted,
       conduct, implied terms, etc (look at everything as a whole).
       (i) Wood v. Lucy, Lady Duffgordon, New York Court of Appeals, 1917
                P, in a complicated agreement, received the exclusive right for one year, renewable on a year-to-
                 year basis if not terminated by 90 days’ notice, to endorse designs with D’s name and to market
                 all her fashion designs for which D would receive on-half that profits derived. D broke the
                 contract by placing her endorsement on designs without P’s knowledge.
                a promise by P to use “reasonable efforts” is “fairly to be implied” on these facts. Hence, there’s
                 a contract as set forth by the parties (he gets exclusive rights to use her name etc.) and she can’t
                 just act as though there isn’t. (Could he have just done nothing?) [note-he didn’t expressly
                 promise to do anything…if we don’t imply some obligation, his promise is ‘illusory,’ he doesn’t
                 give consideration, and no contract is formed]
   (b) There is always an implied term of good faith.
       (i) Good Faith = Honesty in fact in the conduct or transaction concerned.
            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.
      (ii)  Good Faith = In the case of a merchant means honesty in fact and the observance
            of reasonable commercial standards of fair dealing in the trade.
      (iii) Empire Gas Corp, v. American Bakeries Co, United States Court of Appeals, 1988
                D agreed to buy all of its propane converters from P under a requirements contract containing an
                 estimate of the number of converters D would buy, but D later decided it did not need any
                 converters and bought none.
                A buyer in a requirements contract may decide to buy less than the contract estimate, or even
                 to buy nothing, so long as the buyer acts in good faith, but good faith requires more than mere
                 second thoughts about the terms of the contract.
      (iv) Locke v. Warner Bros, Inc, California District Court of Appeals, 1997
            P claimed that D denied her the benefit of her bargain, breached her contract, fraudulently
              entered into the agreement with her, and discriminated against her on the basis of sex when it
              refused to develop any projects she presented.
            Where a contract confers on one party a discretionary power affecting the rights of the other, a
              duty is imposed to exercise that discretion in good faith and in accordance with fair dealing.
   (c) You cannot contract around the implied term of good faith.
       (i) DuPont v. Pressman, Supreme Court of Delaware, 1996
                D agreed to act as sole distributor of P’s auto refinishing products is Iowa. After several years, P
                 notified D that the distributorship was being terminated.
                A franchise agreement which may be cancelled at the will of the franchisee lacks mutuality and,
                 therefore, cannot be enforced by the franchisee.
   (d) Reasonable notification of termination is implied in every contract. (May not be
       able to contract around this).
       (i) Leibel v. Raynor Manufacturing Co, Kentucky Court of Appeals, 1978
                D, without notice, abrogated an exclusive distribution agreement with P.
                Reasonable notification is required in order to terminate an ongoing oral agreement creating a
                 manufacturer-distributor relationship.

                                                     25
(e) A warranty that the goods shall be merchantable is implied in a contract for their
    sale if the seller is a merchant with respect to goods of that kind.
    (i) UCC § 2-314, Implied Warranty: Merchantability; Usage of Trade
         Unless excluded or modified, a warranty that the goods shall be merchantable is implied in a
          contract for their sale if the seller is a merchant with respect to goods of that kind. Under this
          section the serving for value of food or drink to be consumed either on the premises or elsewhere
          is a sale.
         Goods to be merchantable must be at least such as
           Pass without objection in the trade under the contract description; and
           In the case of fungible goods, are of fair average quality within the description; and
           Are fit for the ordinary purposes for which such goods are used; and
           Run, within the variations permitted by the agreement, of even kind, quality and quantity
               within each unit and among all units involved; and
           Are adequately contained, packaged, and labeled as the agreement may require; and
           Conform to the promises or affirmations of fact made on the container or label if any.
         Unless excluded or modified other implied warranties may arise from course of dealing or usage
          of trade.
(f) When the seller knows that the buyer is buying goods for a particular purpose
    there is an implied warranty of fitness for that particular purpose.
    (i) UCC § 2-315, Implied Warranty: Fitness for a Particular Purpose
         Where the seller at the time of contracting has reason to know any particular
           purpose for which the goods are required and that the buyer is relying on the
           seller’s skill or judgement to select or furnish suitable goods, there is unless
           excluded or modified under the next section an implied warranty that the goods
           shall be fit for such purpose.
         Caceci v. DiCanio Construction Corp, Court of Appeals of New York, 1988
             P’s sued D, the guilder of their new home, when the floor began to crack and the slab
              foundation had to be replaced after several years.
             Common sense dictates that the purchasers were entitled to expect, without necessarily
              expressly stating the obvious in this contract, that the house being purchased was to be a
              habitable place. The law ought to fulfill that commonsense expectation.
(g) Implied warranties can be voided by expressly voiding them in the contract, the
    buyer’s in depth examination of the materials/model of materials, course of
    dealing or course of performance or usage of trade.
    (i) UCC § 2-316, Exclusion or Modification of Warranties
         Words or conduct relevant to the creation of an express warranty and words or conduct tending to
          negate or limit warranty shall be construed wherever reasonable as consistent with each other;
          but subject to the provisions of this Article on parol or extrinsic evidence negation or limitation is
          inoperative to the extent that such construction is unreasonable.
         Subject to subsection (3), to exclude or modify the implied warranty of merchantability or any part
          of it the language must mention merchantability and in case of a writing must be conspicuous,
          and to exclude or modify any implied warranty of fitness the exclusion must be by a writing and
          conspicuous. Language to exclude all implied warranties of fitness is sufficient if it states, for
          example, that “There are no warranties which extend beyond the description on the face hereof.”
         Notwithstanding subsection (2)
           Unless the circumstances indicate otherwise, all implied warranties are excluded by
                expressions like “as is,” “with all faults” or other language which in common understanding
                calls the buyer’s attention to the exclusion of warranties and makes plain that there is no
                implied warranty; and
           An implied warranty can also be excluded or modified by course of dealing or course of
                performance or usage of trade.
         Remedies for breach of warranty can be limited in accordance with the provisions of this Article
          on liquidation or limitation of damages on contractual modification of remedy.
(h) Warranties are sometimes ‘to a party’s knowledge’ and sometimes ‘flat’ (‘to my
    knowledge the plumbing works’ vs. ‘the plumbing works.’)
    (i) If the former, lack of knowledge means no liability.
    (ii) If the latter, lack of knowledge doesn’t help.
                                               26
        (iii)   (Warranties will also sometimes specify how hard somebody should look: ‘to the
                best of my knowledge after due inquiry.’) (Usually, the distinction comes up in the
                context of express warranties but it’s also relevant when considering the scope of
                implied warranties)
C) Policy Issues
   1) Some General Questions:
     (a) How much should the courts consider the consequences IN A PARTICULAR CASE of
         non-enforceability?
     (b) How much should courts consider whether a party had the interest and ability to better
         protect itself?
     (c) How much should courts consider whether a party in a particular case is sympathetic?
     (d) How should courts balance the above with the fact that they are making law to apply,
         prospectively, to future parties situated differently than the ones before them?
  2) Some General Issues:
     (a) What aims does contract law seek to promote?
         (i) Justice in a particular case?
         (ii) Certainty in outcomes?
         (iii) Encouraging best situated participants to expend the optimal level or resources and
               take the optimal level of precautions and care.
         (iv) To the extent these aims conflict, which should govern




                                                 27
II) Enforcement Issues
    A) Equitable Grounds not to Enforce a Contract
Problems with the Parties: Capacity to Contract
Minorities
Classical Rule: When the contract is to the minority’s benefit (as for necessaries) it is good;
when the contract is to the minority’s prejudice it is void; when the contract is uncertain as to
benefit or prejudice it is voidable, only at the election of the minority.
Modern Rule: Contracts of minorities are voidable by the minority (less amount of
depreciation as long as major acted in good faith).
Contracts for necessaries not voidable; minor liable for reasonable value thereof
Necessaries traditionally have included items that one needs to live, such as food clothing
and shelter.
Other ways that a minority’s voidability MAY be restricted:
If the minor engages in tortious conduct such as misrepresentation or age or willful
destruction of goods.
However, mere ignorance of the minor’s age is no excuse.
On reaching the age of majority, the minor must act within a reasonable period of time to
disaffirm the contract or she will be deemed to have affirmed the transaction.
                                                                   th
Hypothetical: “Boy Smith,” 17, buys a car a few days before his 18 birthday. He’s not the world’s best shopper, and
overpays. When he’s about to turn 20, somebody points out to him what a bad deal he got, and he tries to give back the
car and get his money back. What result? (Assume the age of majority is 18)
Boy Smith did not act within a reasonable amount of time after he reached majority.  he will not be able to void the
contract.
Courts have tended to allow minors to disaffirm postinjury settlement agreements.
Hypothetical: Boy George, 16, is injured in an accident, and signs a release in exchange for some money. He gets the
money and spends it (foolishly). A moment after he turns 18, he tries to void the contract. What result?

Many courts have held minor releases for injuries from activities (skiing, soccer, little league
baseball) unenforceable.
Although, many courts have held a release for injuries of minorities entered by parents to be
valid
Policy Reasons: Encouraging volunteer programs that promote organized recreational activities for
children and recognition of the liberty interest of parents in making life choices for children.
Dodson v. Shrader, Supreme Court of Tennessee, 1992
P bought a car when he was 16 and, after it “blew up” wanted the purchase contract rescinded and refused to pay for
depreciation to the truck while it had been in his hands.
Even if a minor’s contract is rescinded, the merchant may keep an amount equal to the decrease in value of the items
returned rather than refund the full purchase price.
Restatement 2nd § 14, Infants
Unless a statute provides otherwise a natural person has the capacity to incur only voidable contractual duties until the
beginning of the day before the person’s eighteenth birthday.
Policy for: We want people to be able to sell to minors (especially necessaries) but we do not want
them to be taken advantage of.
Policy against: It may have a disabling effect when a minor has reason to want to enter into a binding
contract.
Incompetence
Contract is voidable if party is incompetent (doesn’t understand)…(with burden on
incompetent to show incompetence)
Incompetence = Unable to understand the nature of the transaction or its consequences.
But if contract is fair and other party didn’t know of mental defect, contract may no longer be
voidable to the extent it’s been performed – equity will dictate remedy.
Hauer v. Union State Bank of Wautoma, Court of Appeals of Wisconsin, 1995

                                                             28
P alleged that she was actually mentally incompetent at the time she entered into an agreement to provide collateral for a
loan from D, and that D failed to act in good faith in granting the loan.
A contracting party exposes itself to a voidable contract where it is put on notice or given a reason to suspect the other
party’s incompetence such as would indicate to a reasonably prudent person that inquiry should be made of the party’s
mental condition.
Restatement 2nd § 15, Mental Illness or Defect
A person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect
He is unable to understand in a reasonable manner the nature and consequences of the transaction, or
He is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his
condition
Where the contract is made on fair terms and the other party is without knowledge of the mental illness or defect, the
power of avoidance under Subsection (1) terminates to the extent that the contract has been so performed in whole or in
part or the circumstances have so changed that avoidance would be unjust. In such a case a court may grant relief as
justice requires.
A contract is voidable if a party has reason to know that because of intoxication the other
person is unable to either understand the transaction or act in a reasonable manner.
Restatement 2nd § 16, Intoxicated Persons
A person incurs only voidable contractual duties by entering into a transaction if the other party has reason to know that
by reason of intoxication
He is unable to understand in a reasonable manner the nature and consequences of the transaction, or
He is unable to act in a reasonable manner in relation to the transaction.
Main difference between minorities and incompetence
It is easy to obtain the age of a party. It is much more difficult to ascertain the mental capacity of a
party. This is why the incompetence rule is based on the “reason to know” aspect.
Problems with the Process
Duress and Undue Influence
Duress
Traditional View: A contract could be avoided on the ground of duress only if a party could
show that the agreement was entered into for fear of loss of life or limb, mayhem or
imprisonment. The threat had to be such as to overcome the will of a person of ordinary
firmness and courage (objective).
Modern View: Duress exists where there is
A wrongful or improper threat, AND
A threat for an illegitimate end resulting in an agreement not involving a fair exchange is improper.
The threat need not be illegal to give rise to a claim of duress.
Threats to commit a crime or tort and threats of criminal prosecution are wrongful or improper.
A threat to breach a contract or to withhold payment of an admitted debt has constituted a wrongful
act, IF DONE IN BAD FAITH.
Restatement 2nd § 176, When a Threat is Improper
A threat is improper if
                                          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.
                                        What is threatened is a criminal prosecution.
                                        What is threatened is the use of civil process and the threat is made in bad faith,
                                           or
                                        The threat is a breach of the duty of good faith and fair dealing under a contract
                                           with the recipient.
A threat is improper if the resulting exchange is not on fair terms, and
                                        The threatened act would harm the recipient and would not significantly benefit
                                           the party making the threat.
                                        The effectiveness of the threat in inducing the manifestation of assent is
                                           significantly increased by prior unfair dealing by the party making the threat, or
                                        What is threatened is otherwise a use of power for illegitimate ends.
A lack of reasonable alternative, AND
There would be no adequate remedy if the threat were carried out.
In some cases, an available legal remedy may provide a reasonable alternative.
                                                              29
Although delay of resolution must also be considered and this may cause a legal remedy to be
unreasonable.
The availability on the market of similar goods and services or of other sources of funds (when threat
is to withhold services or payment) is a factor in determining reasonableness.
Toleration may be a reasonable alternative if the threat involves a minor vexation.
Actual inducement of the contract by the threat
The threat must “substantially contribute” to the manifestation of assent.
The assertion of duress must be proven by evidence that the duress resulted from D’s wrongful and
oppressive conduct and not by the P’s necessities.
The test has come to be whether the will of the person induced by the threat was overcome rather
than that of a reasonably firm person (subjective).
Physical Duress = Void Contract; Economic Duress = Voidable Contract
 K formed under economic duress may be ratified after reasonable period of time without
action brought.
Restatement 2nd § 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 intent to engage in that conduct is
physically compelled by duress, the conduct is not effective as a manifestation of assent.
Restatement 2nd § 175, When Duress by Threat Makes a Contract Voidable
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.
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.
When duress results from financial hardship:
Majority Opinion: Not a basis for duress action unless the other side had caused the financial
hardship
Minority Opinion: It is enough that one party takes advantage of the other side’s dire
circumstances without having caused the financial hardship.
Pre-existing Duty Rule = The party who refuses to perform and thereby coerces a promise
from the other party to the contract to pay him an increased compensation for doing that
which he is legally bound to do, takes an unjustifiable advantage of the necessities of the
other party.
This rule is based on the fact that there is no consideration for the modification. Current
consideration cannot equal a pre-existing obligation.
Exception: When the reason for this modification is some unforeseen and substantial
difficulty in performance then the consideration for the increased price is the performance of
these unforeseen and substantially difficult duties.  there is consideration and the pre-
existing duty rule does not apply.
Exception: If the modification has caused a material change in position and it would be
unequitable not to enforce the modification then the modification may be enforceable.
Alaska Packers Association v. Domenico, United States Court of Appeals, 1902
P, who had agreed to ship from San Francisco to Alaska at a fixed pay, refused to continue working once they reached
Alaska, and demanded a new contract with more compensation.
A promise to pay a man for doing that which he is already under contract to do is without consideration.
Restatement 2nd § 89, Modification of Executory Contract
A promise modifying a duty under a contract not fully performed on either side is binding
If the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was
made; or
To the extent provided by statute; or
To the extent that justice requires enforcement in view of material change of position in reliance on the promise.
UCC § 2-209(1), Modification…
An agreement modifying a contract within this Article needs no consideration to be binding.


                                                             30
In order to state a claim of economic duress a buyer coerced into executing a modification to
an existing agreement must at least display some protest against the higher price in order to
put the seller on notice that the modification is not freely entered into. (Galtaco case)
Claims of duress frequently arise in connection with releases executed to settle contractual
disputes or modifications of contracts.
Several courts have held that an attempt by an employer to modify its personnel handbook was
ineffective because unsupported by any consideration.
A number of courts have concluded that particular divorce agreements were voidable because of
duress exerted by one former spouse against another.
Totem Marine Tug & Barge, Inc. v. Alyeska Pipeline Service Co, Supreme Court of Alaska, 1978
P claimed that D had used economic duress to get P to sign a binding release of all claims it had against D after D
terminated a contract with P.
A contract can be avoided if it was entered into as a result of economic duress.
Kelsey-Hayes Co. v. Galtaco Redlaw Castings Corp, United States District Court, 1990
When D experienced financial losses and threatened to shut down operations, P, who had signed a three-year
requirements contract, was forced to agree to pay higher prices to keep operations going.
A subsequent contract or modification is invalid and therefore does not supersede an earlier contract when the
subsequent contract was entered into under duress.
Policy: Competing Goals
Punishment
Encouraging ‘cheapest cost avoiders’ to make optimal inquiries.
Promoting certainty of contractual commitments, and requiring parties to make appropriate inquiries
and predictions before entering into such commitments.
Undue Influence (Overpersuasion)
Undue Influence exists when
Excessive pressure (objective element) is used to
Misrepresentations do not have to exist for a finding of undue influence.
Factors to help determine overpersuasion:
Discussion of the transaction at an unusual or inappropriate time.
Consummation of the transaction in an usual place.
Insistent demand that the business be finished at once.
Extreme emphasis on untoward consequences of delay.
The use of multiple persuaders.
Absence of third-party advisers to servient party.
Statements that there is no time to consult financial advisors or attorneys.
Persuade one vulnerable to such pressure (subjective element).
While undue influence usually involves persons who bear a confidential relationship to one
another, that relationship is not required.
Odorizzi v. Bloomfield School District, California District Court of Appeals, 1966
P was arrested on homosexual charges. Immediately after his release the P convinced him to resign.
When a party’s will has been overborne, so that in effect his actions are not his own a charge of undue influence may be
sustained.
Restatement 2nd § 177, When Undue Influence Makes a Contract Voidable
Undue influence is unfair persuasion of a party who is under the domination of the person exercising the persuasion or
who by virtue of the relation between them is justified in assuming that that person will not act in a manner inconsistent
with his welfare.
If a party’s manifestation of assent is induced by undue influence by the other party, the contract is voidable by the victim.
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 undue influence either
gives value or relies materially on the transaction.
Misrepresentation and Nondisclosure
Misrepresentation
A contract is voidable 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.
                                                              31
Elements of Misrepresentation
A Misrepresentation
A fraudulent misrepresentation (intentionally or knowingly), OR
A material misrepresentation (even if not intentional or knowingly)
Inducing Manifestation of Assent
Reasonably Relied Upon




                                              32
Restatement 2nd § 162, When a Misrepresentation is Fraudulent or Material
A misrepresentation is fraudulent if the maker intends his assertion to induce a party to manifest his assent and the
maker.
Knows or believes that the assertion is not in accord with the facts, or
Does not have the confidence that he states or implies in the truth of the assertion, or
Knows that he does not have the basis that he states or implies for the assertion.
A misrepresentation is material if it would be likely to induce a reasonable person to manifest his assert, or if the maker
knows that it would be likely to induce the recipient to do so.
Restatement 2nd § 163, When a Misrepresentation Prevents Formation of a Contract
If a misrepresentation as to the character or essential terms of a proposed contract induces conduct that appears to be a
manifestation of assent by one who neither knows nor has reasonable opportunity to know of the character or essential
terms of the proposed contract, his conduct is not effective as a manifestation of assent.
Restatement 2nd § 164, When a Misrepresentation Makes a Contract Voidable
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.
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
materially on the transaction.
Other Misrepresentation Rules
When one party to a contract makes conflicting oral and written representations, it is
unreasonable for the other party to rely upon either statement.
A statement of opinion amounts to a misrepresentation of fact if the person giving the opinion
misrepresented his state of mind (i.e., stated that he held a certain opinion when in fact he did
not).
Normally, a statement of opinion amounts to an implied representation that the person giving
the opinion does not know any facts that would make the opinion false and that the person
giving the opinion knows sufficient facts to be able to render the opinion.
A statement of opinion may be actionable if the one giving the opinion:
Stands in a relationship of trust or confidence to the recipient (a ‘fiduciary relationship’).
Is an expert on matters covered by the opinion, OR
Renders the opinion to one who, because of age or other factors, is peculiarly susceptible to
misrepresentation.
Syester v. Banta, Iowa Supreme Court, 1965
P signed up for 4,057 hours of dancing lessons at a price of $29,174 due to being told that she could be a professional
dancer, etc.
Equity may, if fair to do so, relieve a party from the consequences of a release executed through a mistaken belief of fact.
Restatement 2nd § 168, Reliance on Assertions of Opinion
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 judgement as to quality, value, authenticity, or similar matters.
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 is as an assertion
That the facts known to that person are not incompatible with his opinion, or
That he knows facts sufficient to justify him in forming it.
Restatement 2nd § 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
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
Reasonably relieves that, as compared with himself, the person whose opinion is asserted has special skill, judgement or
objectivity with respect to the subject matter, or
Is for some other special reason particularly susceptible to a misrepresentation of the type involved.
Hypotheticals
Fred, seeking to sell Barney (a notorious klutz) dancing lessons, tells him that he’ll soon learn to dance like Ginger
Rogers.
What result if Fred has no idea whether Barney will learn to dance like Ginger Rogers?
What result if Fred actually believes Barney will learn to dance like Ginger Rogers?

                                                               33
What result if Barney is a savvy guy, doesn’t believe it for a minute, but buys the dancing lessons anyway because he’s
lonely and wants company?
It’s in fact true that Barney can learn to dance like Ginger Rogers. Fred also tells Barney that the dance studio is open
until 8pm each night, when it’s only open until 7:30. What result?
Best case is knowing, material, relied-on misrepresentation. If representation is immaterial, not grounds to rescind. If it’s
material, even if it’s not knowing (either the person making the representation is simply mistaken, or knows he doesn’t
know), there’s probably ground to rescind, especially if relied on.
Nondisclosure
Traditional View: Caveat Emptor – Buyer Beware = No duty to disclose.
Modern View: A vendor has an affirmative duty to disclose material facts where:
Disclosure is necessary to prevent a previous assertion from being a misrepresentation or
from being fraudulent or material;
Disclosure would correct a mistake of the other party as to a basic assumption on which that
party is making the contract and if nondisclosure amounts to a failure to act in good faith and
in accordance with reasonable standards of fair dealing.
Disclosure would correct a mistake of the other party as to the contents or effect of a writing,
evidencing or embodying an agreement in whole or in part.
The other person is entitled to know the fact because of a relationship of trust and confidence
between them.
Material Matter = One to which a reasonable person would attach importance in determining
his choice of action in the transaction in question.
Factors to help determine if material fact that should be disclosed:
Difference in degree of intelligence of the parties.
Manner in which the information is required.
Relation that parties bear to each other.
Nature of the fact not disclosed.
Non-discoverable and Intrinsic defect vs. Extrinsic and likely to affect market value.
General class to which the person who in concealing the information belongs.
Seller has more duty to disclose than purchaser.
Nature of the contract itself.
Releases and insurance contracts held to strict standard of disclosure.
Importance of the fact not disclosed.
Any conduct of the person not disclosing something to prevent discovery.
Active concealment is fraudulent.
Where the seller of a home knows of facts materially affecting the value of the property which
are not readily observable and are not known to the buyer, the seller is under a duty to
disclose them to the buyer.
Can misrepresentations be contracted around???
Majority opinion: Any provision making it possible for a party to free himself from the consequences of
his own fraud in procuring its execution is invalid.
Very minority view: When a contract contains a “specific “ disclaimer of representations, a tort action
for fraud will not lie b/c the clause shows a lack of justified reliance on any oral representation.
Hill v. Jones, Arizona Court of Appeals, 1986
Before buying D’s home, P asked whether it had been infested with termites, and D denied that there had been previous
infestations, despite firsthand knowledge of them.
Where the seller of a home knows of facts materially affecting the value of the property which are not readily observable
and are not known to the buyer, the seller is under a duty to disclose them.
Restatement 2nd § 161, When Non-Disclosure Is Equivalent to an Assertion
A person’s non-disclosure of fact known to him is equivalent to an assertion that the fact does not exist in the following
cases only:
Where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a
misrepresentation or form being fraudulent or material.


                                                              34
Where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which
that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in
accordance with reasonable standards of fair dealing.
Where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effect of a
writing, evidencing or embodying an agreement in whole or in part.
Where the other person is entitled to know the fact because of a relation of trust and confidence between them.
Hypotheticals: Comparing Non-Disclosure and Misrepresentation
Fred, seeking to sell Barney his house, tells him there’s no termites in the basement. In fact the basement is infested with
them.
What result if Fred didn’t know about the termites?
Liable anyway, unless perhaps Barney clearly knew or somehow just didn’t rely on Fred’s representation.
Fred, seeking to sell Barney his house, tells Barney nothing about termites.
What if Fred doesn’t know?
He’s not liable [unless, perhaps, circumstances deem him to have given some kind of warranty - say, he’s the builder. Or
there’s a statute under which any seller of a home gives a buyer a warranty that covers this].
If Barney asks?
Then Fred is of course liable – this becomes misrepresentation case.
Fred, seeking to sell Barney his house, tells Barney nothing about the 4 cats and 2 rabbits who live next door. Under what
circumstances can Barney claim that Fred should have told him and that Fred’s failure to do so constitutes grounds for
Barney not to have to buy the house?
If Barney, when buying the house, said ‘if there’s one thing I don’t want to do, it’s buy a house with cats and rabbits next
door. That means a lot to me.
Barney is seeking to buy Fred’s house at a not-high price. Barney is a geologist and has done a detailed geological
survey of all the houses in all of Fred’s neighborhood and believes there may be a gold mine below Fred’s house. Barney
doesn’t tell Fred about this, and it turns out that Barney is right. Fred finds out later on, when he sees Barney driving
around the neighborhood in his new Lexus with his designer dinosaurs by his side. Can Fred rescind the deal?
No. we’ll talk about this later in the context of mistakes.
What if Fred says ‘is there a gold mine under my house, by any chance’?
Barney has to tell him or risk rescission of the deal.
Problems with the Substance of the Contract
Unconscionability
Elements of Unconscionability
Procedural Unconscionability, AND
A lack of choice by one party or some defect in the bargaining process (quasi-fraud, quasi duress,
limited capacity, unfair surprise, take it or leave it, etc).
Substantive Unconscionability
Unfairness of the terms of the resulting bargain (oppressive terms, etc).
Corbin Test = Whether the terms are so extreme as to appear unconscionable according to the mores
and business practices of the time and place.
Other Rules of Unconscionability
While courts do not normally assess the sufficiency of consideration, a finding of gross
inadequacy of failure of consideration, combined with other inequitable features, will justify
equitable rescission of the agreement.
Unconscionability should be judged as of the time the contract was made.
If term is unconscionable, either hold contract unenforceable, hold certain clause, etc
unenforceable or limit the application of the unconscionable term.
Restatement 2nd § 208, Unconscionable Contract or Term
If a contract or term 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 so as to avoid any unconscionable result.
UCC § 2-302, Unconscionable Contract or Clause
If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it
was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the
unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable
result.



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When it is claimed or appears to the court that the contract or any clause 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.
Most courts hold that termination without clause provisions in a franchise contract are not
unconscionable.
However, the franchisor may be able to obtain relief under some other legal doctrine, such as
misrepresentation, etc.
Unconscionability is more likely to be found in cases involving consumers than in a
commercial setting.
However, UCC § 2-719(3) explicitly authorizes application of unconscionability to clauses that
limit liability for damages for breach of warranty.
Williams v. Walker-Thomas Furniture Co, United States Court of Appeals, 1965
P sold to D furniture burdened by a cross-collateral clause and, subsequent to D’s default, sought to replevy all goods
previously purchased by D.
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. Meaningfulness of choise is to
be determined in light of all the circumstances (i.e. gross disparity of bargaining power). The case is remanded to the
lower court for findings on the issue of unconscionability.
Piantes v. Pepperidge Farm, Inc, United States District Court, 1995
P alleged that D was estopped from terminating his franchise, had intentionally an fraudulently misrepresented its
intentions with respect to the termination without cause provision of the consignment agreement, and that the provision
was unconscionable.
Unconscionability must be determined on a case-by-case basis, with particular attention to whether the challenged
provision could result in oppression and unfair surprise to the disadvantaged party and not to allocation of risk because of
superior bargaining power. The clause at issue was not unconscionable.
Policy: Unconscionability is a remedy but it is very narrow. The basic premise of contract law is to try
to provide a means for enforcement and a security that when making contracts they are enforceable.
 this exception needs to be narrow.
Public Policy
Common types of agreements at issue:
Agreements to do something illegal
Shouldn’t be using courts to enforce these; agreements are void.
Agreements involving some illegality, often only on one side
Approach Varies
Innocent party may be able to enforce.
Even ‘non-innocent’ party may be able to get quasi-contractual relief.
Covenants not to compete
Conflicting Policy Concerns (Approach is to Balance Interests)
Freedom to Contract vs. Freedom to Work.
Reluctance to limit how, where, and when people work.
Reluctance to limit competition.
Desire to let employer get benefit of proprietary investment.
Covenants not to compete will be enforced if they are reasonable.
Reasonable Test for Covenants Not to Compete
No greater than is required for the protection of the employer.
Does not impose undue hardship on the employee.
Is not injurious to the public.
If a Covenant Not to Compete is Unreasonable, the court may:
Limit to acceptable breadth (blue pencil)
Strike provision and punish employer for overreaching.
Hopper v. All Pet Animal Clinic, Supreme Court of Wyoming, 1993
(Hopper was original D and All Pet was original P…this paragraph reflects that). P quit work with D and did not abide by
her covenant not to compete in her employment contract. This covenant stated D would not work in small-animal practice
within 5 miles of D for 3 years.
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The court found the “what” (small-animal practice) and the where (5 miles) reasonable but said that 3 years was
unreasonable and used the blue pencil approach to change the covenant to 1 year.
Restatement 2nd § 187, Non-Ancillary Restraints on Competition
A promise to refrain from competition that imposes a restraint that is not ancillary to an otherwise valid transaction or
relationship is unreasonably in restraint of trade.
Restatement 2nd § 188, Ancillary Restraints on Competition
A promise to refrain from competition that imposes a restraint that is ancillary to an otherwise valid transaction or
relationship is unreasonably in restraint of trade if
                                       The restraint is greater than is needed to protect the promisee’s legitimate
                                           interest, or
                                       The promisee’s need is outweighed by the hardship to the promisor and the likely
                                           injury to the public.
Promises imposing restraints that are ancillary to a valid transaction or relationship include the following:
                                       A promise by the seller of a business not to compete with the buyer in such a
                                           way as to injure the value of the business sold;
                                       A promise by an employee or other agent not to compete with his employer or
                                           other principal;
                                       A promise by a partner not to compete with the partnership.
When the relationship between the client and the professional is established (such as w/
doctor or lawyer) there may be a better case for the D because of the benefit of the clients to
be able to see the person they are used to seeing.
Agreements on ‘sensitive’ subjects such as surrogacy.
Approach varies depending on subject matter.
RR v. MH & Another, Supreme Judicial Court of Massachusetts, 1998
No private agreement will be automatically upheld because the main issue will always`s be the best interest of the child.
The mother’s purported consent to custody in the agreement is ineffective because no such consent should be recognized
unless given on or after the fourth day following the child’s birth.
Eliminating any financial reward to a surrogate mother is the only way to assure that no economic pressure will cause a
woman, who may well be a member of an economically vulnerable class, to act as a surrogate.
Restatement 2nd § 191, Promise Affecting Custody
A promise affecting the right of custody of a minor child is unenforceable on the grounds of public policy unless the
disposition as to custody is consistent with the best interest of the child.
Restatement 2nd § 178, When a Term Is Unenforceable on Grounds of Public Policy
A promise or other term of an agreement is unenforceable on grounds of public policy if legislation provides that it is
unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the
enforcement of such terms.
In weighing a the interest in the enforcement of a term, account is taken of:
The parties’ justified expectations
Any forfeiture that would result if enforcement were denied, and
Any special public interest in the enforcement of the particular term.
In weighing a public policy against enforcement of a term, account is taken of:
The strength of that policy as manifested by legislation or judicial decisions.
The likelihood that a refusal to enforce the term will further that policy.
The seriousness of any misconduct involved and the extent to which it was deliberate, AND
The directness of the connection between that misconduct and the term.
Hypotheticals covering all of Equitable Remedies Section
Ethel, a dashing 60 year old car saleswoman, is at a singles mixer. She meets Fred, a lonely 50 year old man, who has
recently left his job selling overpriced male beauty products. When Fred was 40, he fell on his head and, for a few months
afterwards, made some impetuous purchases; indeed, he was forced to declare bankruptcy. This was reported in the
local paper. Ethel gives Fred her card, and asks him to come and see her at the car dealership. Fred comes, and Ethel
manages, in short order, to sell him a souped-up Pontiac Firebird at a price that’s probably at the top end of ‘market;’ she
hints to him that he’ll be a ‘big hit with the ladies’ driving around in the car. The payments amount to 60% of Fred’s
income, something Ethel knows because she has to do a credit check on him. Among the terms of the contract are a
clause that says that if he defaults, he pays a penalty interest rate of 15%; the regular interest rate on the contract is 10%.
Fred can’t see very well without his glasses (and he hasn’t brought his glasses because he wants to look sharp to impress
Ethel). He therefore doesn’t see this provision. Nor does he ask whether Ethel has a license to sell cars, which, as it
turns out, is needed in the jurisdiction they both live in.


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He stops making payments on the car. What are his arguments that the agreement shouldn’t be enforceable as against
him? (And perhaps, that he should get to keep the car and not have to pay for it?) (incapacity?duress?undue
influence?unconscionability?public policy?)
Alternatively- the day after Ethel makes this deal (and before Fred has defaulted on any payments), Ricky comes in
asking for a souped-up Firebird, and she realizes that she can sell it to him for a lot more money than she got from Fred –
is there any argument she can use to void the contract?
Probably None
    B) Other Grounds: Reasons why A Party’s Performance Might not be Due
Mistake: present is different than one or both parties contemplated
Types of Mistake and Their Elements
Bilateral mistake – both parties are mistaken as to material assumption
Adversely affected party can void for material mistake unless it bears the risk
Restatement 2nd § 152, When Mistake of Both Parties Makes a Contract Voidable
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 rules stated in § 154
In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of
any relief by way of reformation, restitution, or otherwise.
Unilateral mistake – one party is mistaken
Mistake-maker can void if:
It doesn’t bear the risk of mistake, AND
One of the following:
Enforcement would be unconscionable, OR
It’s the other’s fault, OR
The other had reason to know of the mistake.
Wilfred’s, Inc. v. Metropolitan Sanitary Dist, Illinois Appellate Court, 1978
Contractor P withdrew a bid when its subcontractor proved unable to meet a subcontract commitment.
A contractor may obtain rescission of a contract formed by a bid which was mistakenly priced too low. A unilateral
mistake may afford ground for rescission where there is a material mistake and such mistake is so palpable that the party
not in error will be put on notice of its existence. Also, the party in error must have exercised reasonable care, the
mistake must be so grave that enforcement would be unconscionable, and the party not in error must not be too severely
prejudiced by rescission. Here, the trial court found that the mistake was material. As it relates to cost, this is not
surprising. The vast difference between P and the next lowest bidder should have put D on notice of some sort of
mistake. It appears that P used reasonable care, as Cigalo had been dependable in the past. The trial court found that
forfeiture of $100,000 would severely injure P, and there is no evidence of clear error in this conclusion. Finally, since P
served notice of its intention to withdraw its bid two days after the bid’s submission no prejudice to D can be shown.
Affirmed.
Restatement 2nd § 153, When Mistake of One Party Makes a Contract Voidable
Where a mistake of one party at the time of 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
The effect of the mistake is such that enforcement of the contract would be unconscionable, or
The other party had reason to know of the mistake or his fault caused the mistake.
Other Mistake Rules
General Presumption in Favor of Enforceability
It is often difficult to determine who bears the risk of mistake. This is why there can be such
differing outcomes in different courts.
Restatement 2nd § 154, When a Party Bears the Risk of Mistake
A party bears the risk of mistake when
The risk is allocated to him by agreement of the parties, or
He is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the
mistake relates but treats his limited knowledge as sufficient, or
The risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.
The erroneous belief must relate to a fact in existence at the time of the contract. The belief
which is found to be in error may not be a prediction as to future occurrence or non-
occurrence.
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When the mutual mistake is the failure of the written contract to state the actual agreement
then reformation of the contract is the normal remedy.
Mistake of Fact vs. Mistake of Judgement
Mistake of Fact = Mistake
Mistake of Judgement ≠ Mistake
Claims of mutual mistake are frequently made in an attempt to overturn releases or settlement
agreements.
Such cases involve tension btwn the social policies of finality of litigation and fair
compensation for injury. (Courts differ in holdings).
A claim of mistake as to a computation that formed the basis of a settlement or of the legal
consequences of a settlement is likely to be met with the response that such a mistake is
unilateral rather than mutual and does not constitute a basis for relief.
It is not a requirement that the mistaken party be non-negligent but they must not fall below
the level of good faith and fair dealing.
Restatement 2nd § 157, Effect of Fault of Party Seeking Relief
A mistaken party’s fault in failing to know or discover the facts before making the 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.
Once a mistake is established it is up to the courts to decide on a remedy. They do not always
have to rescind or award damages. (Remedy for mistake should be rescission, or return to
‘status quo ante’).
Lenawee County Board of Health (Pickles) v. Messerly, Michigan Supreme Court, 1982
When P found a defective sewage system shortly after P purchased rental property from D an sought a permanent
injunction proscribing human habitation, P sought rescission of their contract on the grounds of mutual mistake.
A court mutual mistake that is the prerequisite for rescission is one that relates to a basic assumption of the parties upon
which the contract was made and which materially affects the agreed performance of the parties. However, rescission
need not be granted in every case where there is such a mistake. It cannot be ordered to relieve a party who has
assumed the risk of loss in connection with the mistake. Furthermore, where both parties are innocent, as in this case,
the court exercises its equitable powers to determine which blameless party should assume the loss. Here, the ‘as is’
clause suggests it should be the P.
Restatement 2nd § 158, Relief Including Restitution
In any case governed by the rules stated in this Chapter, either party may have a claim for relief including restitution under
the rules stated in §§240 and 376.
In any case governed by the rules stated in this Chapter, if those rules together with the rules stated in Chapter 16 will not
avoid injustice, the court may grant relief on such terms as justice requires including protection of the parties’ reliance
interests.
Mistake rules are default rules – they can be contracted around.
Impossibility/Impracticability/Changed Circumstances/Frustration of Purpose: future is
different than one or both parties contemplated
Impossibility = You can’t do it
General rule is that a party may be relieved from its obligation to perform if performing is
impossible and that party didn’t bear the risk.
The death (or incapacity) of a particular person required for performance will deem the
performance impossible.
CNA Int’l Reins. Co v. Phoenix, Florida Court of Appeals, 1996
Phoenix had contract to make movie (for which his personal services were insured through CNA). Phoenix died of a drug
overdose before finishing movie and CNA paid the producer for damages and then sued the estate of Phoenix saying that
this voluntary use of drugs should not be covered under the policy.
The court upheld the rule that death makes performance impossible strictly. The reason for this was mainly because they
did not want to complicate the rule. The drug overdose had no bearing on the rule.
Restatement 2nd § 262, Death or Incapacity of Person Necessary for Performance
If the existence of a specific thing is necessary for the performance of a duty, his death or such incapacity as makes
performance impracticable is an event the non-occurrence of which was a basic assumption on which the contract was
made.
Taylor v. Caldwell, Famous impossibility case.
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Music hall booked for purpose of staging musical events. Before any of the events, the hall burns down. No express
allocation of risk in the documents. P, who’d booked the music hall sues. D wins, on grounds of impossibility.
Impracticability = It’s a profoundly less advantageous deal to do it for some unexpected
(perhaps ‘qualitative’) reason.
Elements of Impracticability:
Substantial reduction of the value of the contract (a party’s performance is made
impracticable);
Because of the occurrence of an event, the nonoccurrence of which was a basic assumption
of the contract;
Without the party’s fault;
And the party seeking relief does not bear the risk of that occurrence
Restatement 2nd § 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.
Impracticability means more than impracticality. A mere change in degree of difficulty or
expense due to such causes as increased wages, prices or raw materials or costs of
construction, unless well beyond the normal range, does not amount to impracticability since
it is this sort of risk that a fixed price contract is intended to cover.
Transatlantic v. US, Somewhat less famous impracticability case.
P shipping company enters into a contract to ship wheat to Galveston. They expect to, and price on the basis of being
able to, use the Suez Canal. While the ship is sailing, hostilities break out and the Suez Canal is closed. P’s ship is
rerouted via South Africa. P wants an extra $43,000 on top of the $305,000 it was supposed to get under the contract. D,
US, wins, on grounds that both parties were (equally) well situated to appraise and anticipate the risk of Suez Canal
closure, and both parties would have known there was some risk.
The court noted that “while it may be an overstatement to say that increased cost and difficulty of performance never
constitute impracticability, to justify relief there must be more of a variation between expected cost and the cost of
performing by an available alternative than in the present case, where the promisor can legitimately be presumed to have
accepted some degree of abnormal risk, and where impracticability is urged on the basis of added expense alone.”
Restatement 2nd § 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.
Restatement 2nd § 271, Impracticability as Excuse for Non-Occurrence of a Condition
Impracticability excuses the non-occurrence of a condition if the occurrence of the condition is not a material part of the
agreed exchange and forfeiture would otherwise result.
Frustration of Purpose = You can’t achieve what your purpose was by doing it, and the other
guy knew what your purpose was – the contract doesn’t make any sense in light of what’s
happened.
Elements of Frustration of Purpose
Substantial reduction of the value of the contract (a party’s principle purpose is substantially
frustrated);
Because of the occurrence of an event, the nonoccurrence of which was a basic assumption
of the contract;
Without the party’s fault;
And the party seeking relief does not bear the risk of that occurrence
Krell v. Henry, Famous frustration of purpose case.
Coronation of Edward VII scheduled for June 1902. Procession to pass along Pall Mall on June 26-7. Krell owns an
apartment on the procession route, and agrees to rent it for £75 during the two daytime periods, £25 being payable as a
deposit in advance. The coronation is postponed because Edward gets appendicitis. Henry refuses to pay the rest of the
£75 and Krell sues. Henry wins, because his purpose had been to view the procession and that purpose had been
frustrated.
Restatement 2nd § 265, Discharge by Supervening Frustration

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Where, after a contract is made, a party’s principal purpose is substantially frustratedwithout his fault by the occurrence of
an event the non-occurrence of which was a basic assumption on which the contract ws made, his remaining duties to
render performance are discharged, unless the language or the circumstances indicate the contrary.
Most courts have refused to grant relief under these doctrines to a party who seeks to avoid a
contract that has become more expensive or less profitable due to change in market
conditions.
Natural disaster or war have also been the basis for claimed relief from a contract under the
doctrines of impracticability and frustration but the courts have been generally unwilling to
grant relief.
Where the difficulty of performance stems not merely from unprofitability but from a physical
impossibility or difficulty of performance, there is more likelihood of excuse.
Government requirements (whether formal or informal) will most likely cause performance to
be impracticable.
Harriscom Svenska v. Harris Corp, United States Court of Appeals, 1993
D contracted with P, for distribution of its radios and spare parts to the Islamic Republic of Iran, but a shipment en route to
Sweden was detained by U.S. customs due to the United States’ prohibition of all sales to Iran of military goods. P sued
D for damages of nonperformance. D asserted a defense of impracticability.
The court recognized the defense of impracticability.
Restatement 2nd § 264, Prevention by Governmental Regulation or Order
If the performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation
or order, that regulation or order is an event the non-occurrence of which was a basic assumption on which the contract
was made.
Most courts have held that relief should not be denied simply because the event may have
been foreseeable.
Some courts have tended to require a showing that the event was at least unforeseen,
perhaps unforeseeable, at the time the parties made their contract.
Some courts have considered whether the event affected not just the contract in question but
the company’s entire operations.
If there is no express provision stating who is the risk bearer in these situations then the best
test is probably to ask who had the best opportunity to prevent the risk…though this is not
always how the courts will interpret either.
Either party may claim relief including restitution and in many instances damages will be
awarded as justice requires.
Restatement 2nd § 272, Relief Including Restitution
In any case goverened by the rules stated in this Chapter, either party may have a claim for relief including restitution
under the rules stated in §§240 and 377.
In any case governed by the rules stated in this Chapter, if those rules together with the rules stated in Chapter 16 will not
avoid injustice, the court may grant relief on such terms as justice requires including protection of the parties’ reliance
interests.
Impossibility, Impracticability and Frustration of Purpose are all default rules – you may be
able to contract around them.
Karl Wendt Farm Equipment Co v. International Harvester Co, United States Corut of Appeals, 1991
D sold its unprofitable farm equipment division to a company which did not continue to do business with all of its
franchisees. P was a franchisee and sued for damages. D asserted the defenses of impracticability and frustration of
purpose.
The defenses of impracticability and frustration of purpose were not recognized by the court because a business
becoming unprofitable is not a reason for nonperformance. Also, there were options for the D other than simply breaking
their contracts. Also, the D put themselves in the position (were kind of at fault).
Policy: These are equitable doctrines which are meant to fairly apportion risks between the parties in
light of unforeseen circumstances. It is essentially an implied term which is meant to apportion risk as
the parties would have had the necessity occurred to them.
Policy: What’s the policy rationale to have doctrines that excuse performance under some
circumstances where the future is different than what the parties anticipated? Why isn’t that just a risk


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a party offering the performance took? How much time and trouble should [the law encourage]
parties take in trying to anticipate what might go wrong?
Hypotheticals
You promise to parade in a Godiva chocolate coating through town in the Godiva parade. The parade is to be held in
July. It turns out that due to freak weather conditions, it’s incredibly cold; they’re not going to cancel the parade, and
there’s no outfit you can wear that will make you comfortable during the parade’s long route through town. You don’t want
to do the parade, but they don’t want to let you out of it. What if the agreement is silent?
Probably not sufficiently ‘impracticable’ unless you’d risk life and limb (or maybe limb is sufficient).
What if you expressly agree in the agreement that your participation shall only be excused if it’s declared illegal or
obscene by the government?
Makes it worse because seems like you agreed on the excuses and that’s not one of them.
What if you expressly agree that your participation shall be excused if it’s declared illegal or obscene by the government?
Probably same as first case, although might argue that there’s an implicit “only” here, making it more like the 2d case.
Same facts as above, except that it’s not cold, the agreement just contains your promise to parade, and the government
does declare your participation illegal and obscene?
Government objection often works- probably impracticable if not (also) impossible or against public policy.
What if you warrant that there are no legal or other impediments to your performance?
You likely would be liable.
Issue is, who bears the risk that it will be impossible or impracticable to parade in chocolate?
Two possibilities: Godiva or you. In either case, you might have expressly allocated the possibility, or you might have
been silent and the court might make a judgment as to where the liability ‘had been allocated.’
Express allocation to Godiva: The parties hereby agree that X is to march in the parade, so long as doing so doesn’t
violate any laws or isn’t materially more difficult than the parties reasonably anticipated at the time of contracting.
Allocation to you:
Contract says “I will parade wearing chocolate. I hereby agree that the risk of my performance being impossible or
impracticable for any reason, including any physical impossibility or change in law, is allocated to me.”
Same as warranty as above.
Or: I will parade wearing chocolate, notwithstanding any impossibility or impracticability.][there are actually clauses in
leases that are called ‘hell or high water’ clauses- that’s the concept here, ‘I’ll do it no matter what’
Turns out that on the day of the parade, I develop some weird skin condition that makes chocolate not adhere to my body.
My performance is impossible, but I’m still liable.
Or else, turns out that the law changes and says “any person who marches in chocolate is a public nuisance and will
immediately be thrown in jail and declared a person unfit to keep a cat.” (or the law always said this but I didn’t know it).
                                         I’m still liable.
Think of what I’m doing as being like insurance; I’ve agreed that if I’m wrong about the state of the world, I pay. If there’s
just the agreement to parade without the allocation, court would decide on allocation of risk of
impossibility/impracticability.
You’ve booked a ticket to Australia to see the Olympics, but the Olympics are canceled. Can you get your money back
from the airline? Why or why not?
May frustrate your purpose but not the purpose ‘as both parties understood.’ even if you told airline…
What if the airline was promoting a special Olympics fare for people who show tickets to Olympics events, and that’s what
you got?
Closer case for frustration of purpose. Likely that airline has fine print that protects it, but if it doesn’t, you might have a
case.
You’ve booked a ticket to Australia for date X, but on that date, all planes have been grounded. Can you sue the airline
for not flying you when it promised? Why not?
It’s impossible. (and in real world, airline has ‘out’ on the ticket for this)
You promised to participate in a bake-off of ancestral macaroni and cheese recipes, expecting to be able to access your
grandmother’s recipe. (She was famous for her secret recipe for macaroni and cheese). You’re to be paid for your
participation, and tickets have been sold, advertising your participation. Before the bake-off, your mother does a big
house-cleaning and throws out your grandmother’s recipe. Can the bake-off organizers sue you for not participating in the
bake-off?
Yes, it’s impossible for you to perform, but the court might very well allocate this risk to you, on the theory that it was up to
you to prevent the recipe from being destroyed. Might be a slightly better case for you to get off the hook if tornado
destroys the house where the recipe was. But even tornado doesn’t necessarily give an out (why didn’t you keep such a
valuable thing in the bank’s vault?)
Same bake-off. This time you have the recipe but the bake-off was to be held to benefit Moe’s Tavern, which was in
danger of foreclosure, and between the time the bakeoff is scheduled and the time it’s to occur, Moe wins the lottery. The
bakeoff organizers just want to call the thing off and not pay you. What result?


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Well, their purpose has been frustrated. They might have a plausible case if you knew all about the purpose when you
contracted. But if you didn’t, then it wasn’t something ‘both parties understood to be a basic assumption.’
Modifications [when are modifications enforceable?]
Duress and Undue Influence
The standards for duress and undue influence with respect to modifications is the same as
with broader duress and undue influence above.
If the modification is under duress or undue influence then the party is not bound by the
modification and can perform and hold other to performing under original contract.
The Consideration Issue
The traditional “pre-existing duty rule” said that a modification must contain further
consideration.
The more modern rule enforces modifications without requiring consideration unless an
exception applies.
Review Alaska Packers and Galtaco above.
Statute of Frauds Issues
Private Statute of Frauds = Parties’ agreements that modifications of their agreements have to
be in writing.
At common law this was not allowed. It is not allowed under modern rules.
If contract is within the statutory statute of frauds, is the modification within the statute as
well?
Many courts say yes; many commentators say no.
Question will be whether an exception applies (the analysis will be very much like that of the
statutory Statute of Frauds).
There is a debate about whether reliance on an oral modification will deem it enforceable even
if it is not in writing.
Brookside Farms v. Mama Rizzo’s Inc, United States District Court, 1995
Brookside and Rizzo have contract; Rizzo to buy minimum amount of basil, 91,000/yr. Contract provides for ‘no oral
modification’. Parties agree on modifications; R vp is supposed to put (at least some of ) these in writing (those as to
taking off the stem of the basil) into the contract, and doesn’t. Subsequently agreed price changes are invoiced, and
largely paid for.
Both UCC exception to S of F re: goods accepted and paid for, and promissory estoppel re: reliance on modification get
this modification out of statute of frauds. Both theories are applicable here. (estoppel because R vp promised to put
modification in writing and didn’t)
Restatement 2nd § 2-209 (2) – (4), Modification, Rescission and Waiver
A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or
rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately
signed by the other party.
The requirements of the statue of frauds section of this Article (Section 2-201) must be satisfied if the contract as modified
is within its provisions.
Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate
as a waiver.
Recall that the Parole Evidence Rule governs prior or contemporaneous
understandings/agreements, not subsequent ones.
Other Party’s Actions
Anticipatory Repudiation
Anticipatory Repudiation = Clear and unequivocal manifestation of intent not to make
performance when due.
One party expresses to another party, OR
Unwilling OR Unable to perform
Expressed Orally, in Writing, or By Conduct
Restatement 2nd § 250, When a Statement or an Act is a Repudiation
A statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give the
obligee a claim for damages for total breach under § 243, or
A voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach.
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Circumstances give one party reasonable belief for insecurity of other’s performance.
If one party has a reasonable insecurity of the other’s performance s/he may demand
adequate assurance of due performance and, if commercially reasonable, suspend any
performance for which he has not already received the agreed return until he receives
assurance.
Although rules require a writing to request assurance courts do not strictly uphold this…they
usually require a clear and direct demand.
Demand must be made in good faith.
Factors to help determine whether there is reasonable insecurity:
Words or actions of other party.
Course of dealing or performance.
Nature of sales contract and industry.
Significant financial difficulties.
Failure to perform obligations under related contracts.
Reasonable grounds for insecurity can arise from the sole fact that a buyer has fallen behind
in his account with the seller, even where the items involved have to do with separate and
legally distinct contracts, because this impairs the seller’s expectation of due performance.
UCC § 2-609, Right to Adequate Assurance of Performance
A contract for sale imposes an obligation on each party that the other’s expectation of receiving due performance will not
be impaired. When reasonable grounds for insecurity arise with respect toe the performance of either party the other may
in writing demand adequate assurance of due performance and until he receives such assurance may if commercially
reasonable suspend any performance for which he has not already received the agreed return.
Between merchants the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be
determined according to commercial standards.
Acceptance of any improper delivery or payment does not prejudice the aggrieved party’s right to demand adequate
assurance of future performance.
After receipt of a justified demand failure to provide within a reasonable time not exceeding thirty days such assurance of
due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.
If adequate assurances are given then the party is bound to proceed with the contract
obligations.
Adequate assurance may range from a mere verbal guarantee to the posting of a bond,
depending on the circumstances.
Must be given within:
Reasonable time not to exceed 30 days under UCC, OR
Reasonable time under Restatement.
If adequate assurances are not given, then repudiation.
Hornell Brewing Co v. Spry, Supreme Court of New York County,1997
P sought declaratory relief after D, who had an exclusive right to distribute P’s beverages in Canada failed to provide
adequate assurance of due performance.
One party’s failure to respond to a request for adequate assurance of due performance constitutes a breach of the
agreement, entitling the other party to suspend performance and terminate the agreement.
Restatement 2nd § 251, When a Failure to Give Assurance May Be Treated as a Repudiation
Where reasonable grounds arise to believe that the obligor will commit a breach by non-performance that would of itself
give the obligee a claim for damages for total breach under § 243, the obligee may demand adequate assurance of due
performance and may, if reasonable, suspend any performance for which he has not already received the agreed
exchange until he receives such assurance.
The obligee may treat as a repudiation the obligor’s failure to provide within a reasonable time such assurance of due
performance as is adequate in the circumstances of the particular case.
Anticipatory Repudiation can be retracted before the other party:
Relies on the repudiation (materially changes position), OR
Indicates that repudiation is taken as final.
Restatement 2nd § 256, Nullification of Repudiation or Basis for Repudiation
The effect of a statement as constituting a repudiation under § 250 or the basis for a repudiation under § 251 is nullified by
a retraction of the statement if notification of the retraction comes to the attention of the injured party before he materially

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changes his position in reliance on the repudiation or indicates to the other party that he considers the repudiation to be
final.
The effect of events other than a statement as constituting a repudiation under § 250 or the basis for a repudiation under
§ 251 is nullified if, to the knowledge of the injured party, those events have ceased to exist before he materially changes
his position in reliance on the repudiation or indicates to the other party that he considers the repudiation to be final.
UCC § 2-611, Retraction of Anticipatory Repudiation
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.
Retraction may be by any method which clearly indicates to the aggrieved party that the repudiating party intends to
perform, but must include any assurance justifiably demanded under the provisions of this Article (§ 2-609).
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.
Party’s Options after Other Party Anticipatorily Repudiates
Treat the contract as rescinded or terminated,
Treat the anticipatory repudiation as a breach by bringing suit or otherwise changing position,
OR
Await the Time for Performance.
Restatement 2nd § 253, Effect of a Repudiation as a Breach and on Other Party’s Duties
Where an obligor repudiates a duty before he has committed a breach by non-performance and before he has received all
of the agreed exchange for it, his repudiation alone gives rise to a claim for damages for total breach.
Where performances are to be exchanged under an exchange of promises, one party’s repudiation of a duty to render
performance discharges the other party’s remaining duties to render performance.
UCC § 2-610, Anticipatory Repudiation
When either party repudiates the contract with respect to a performance npot yet due the loss of which will substantially
impair the value of the contract to the other, the aggrieved party may:
For a commercially reasonable time await performance by the repudiating party, OR
Resort to any remedy for breach (§ 2-703 or § 2-711), even though he has notified the repudiating party that he would
await the latter’s performance and has urged retraction; AND
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 (§ 2-704)
Other Anticipatory Repudiation Rules
A suggestion for modification of the contract does not amount to a repudiation.
Truman L Flatt & Sons Co v. Schupf, Appellate Court of Illinois, 1995
P backed suggested a modification (price change) to a contract to purchase land from D when a condition that a rezoning
request be granted was not satisfied, but later changed his mind and sued for specific performance of the contract.
Court stated the P’s suggested modification was not a repudiation and even if it had been the P retracted the repudiation
before the D relied or indicated the action was considered repudiation.
Language that under a fair reading amounts to a statement of intention not to perform except
on conditions which go beyond the contract constitutes a repudiation.
For mere conduct to constitute an anticipatory repudiation it must indicate that performance
is a practical impossibility.
Financial difficulty, even to the point of insolvency does not constitute an anticipatory
repudiation.
However, insolvency does constitute a ground for demand of adequate assurance of
performance.
Hypotheticals
My neighbor Maria is supposed to cater a big party for me on Christmas Day. Do I have reasonable
grounds for insecurity if:
In mid-December, I see her bringing in huge quantities of food to her apartment. I say ‘business must be going well.’ She
says ‘yes, I have the Smith party, the Jones party and the Brown party, all on Christmas Day.’ She doesn’t mention my
party. Do I have reasonable grounds for insecurity?
What if, instead of the above, her best friend Raymond tells me that she’s really looking forward to a long-deserved
vacation in Bermuda – what a treat it will be on Christmas Day not to cook for others, and instead be cooked for herself!
Humane Society asks me to sign a contract when I get my cat that I’ll always feed her ‘premium food’ and take her to the
vet once a year. There’s a further assurances clause in the contract – that I’ll do what they reasonably ask to further the
purposes of the contract. It’s now been 10 years. They hear a rumor that in fact, I haven’t taken my cat to the vet nearly
once a year. They suspect that maybe it’s because I don’t have enough money; their statistics suggests that that’s why
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most people who are supposed to take the cat to the vet don’t. Can they ask for my bank statements as part of their
request for ‘reasonable assurance’?
Probably not, the bank statements will not reasonably assure them of my taking my cat to the vet. Also, they do not have
a reasonable source in order to be reasonably insecure.
Bank gives Imelda a revolving credit line of $200,000 so she can take immediate advantage of Manolo Blahnik sales.
When she borrows money, she’s supposed to pay it back in 3 months. She’s had the credit line for 20 years. About 15
years ago, when her husband was being hounded by creditors, the two of them ended up going to jail, and didn’t make
payments for a few years. Since then, she’s been a fine bill payer, but she’s recently lost her job and had a few things
repossessed. Can the bank ask for assurances? Of what form?
The bank might have reasonable grounds for insecurity due to non-payment in the past and jail time. She has recently
lost her job and had a few things repossessed which suggests default and therefore would most likely be reasonable
grounds for security.
What kind of assurances could the bank ask for?
A showing that she has some level of funds and is not insolvent at this time. (It is questionable whether they can ask for
information on employment as soon as she gets a job, etc).
Problems with Other Party’s Performance
Contract Contains Express Promise (Implied or Constructive Condition)
Did the party “Substantially Perform”?
If yes, then damage is only diminution in value/replacement cost.
The owner is entitled to the money which will permit him to complete, unless the cost of
completion is grossly and unfairly out of proportion to the good to be attained. When that is
true the measure is the difference in value.
If no, then other party is off the hook for performance. Although, the party who did not
substantially perform may be able to recover under restitution.
Doctrine of Substantial Performance = Each party’s duty of performance is implicitly
conditioned on there being no uncured material failure of performance by the other party.
Minor or immaterial deviations from the contractual provisions do not amount to failure of a
condition to the other party’s duty to perform.
Jacob & Youngs, Inc. v. Kent, New York Court of Appeals, 1921
P was hired to build a $77,000 country home for D. When the dwelling was completed, it was discovered that through an
oversight, pipe, not of Reading manufacture (though of comparable quality and price), which had been specified in the
contract, was used. D refused to make final payment of $3,483.46 upon learning of this.
Because the omission was not material the court found that the P had substantially performed. Judgement absolute for P.
Restatement 2nd § 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:
The extent to which the injured party will be deprived of the benefit which he reasonably expected.
The extent to which the injured party can be adequately compensated for the part of that benefit of which he will be
deprived.
The extent to which the party failing to perform or to offer to perform will suffer forfeiture.
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 assurance.
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.
Hypotheticals
A and Bank negotiate terms of a loan; agreement says that it’s a condition to Bank’s obligation to make the loan that A
show certified financials dated the day before the closing. At the closing, A has 3 week old financials and Bank doesn’t
want to close. What result?
Alternatively, what if the condition at issue is that A must show financials certified by the XYZ accounting firm, and in fact,
in the interim the firm has merged with another perfectly reputable firm and is now the XYS accounting firm? Again, Bank
doesn’t want to close. What result?
What if the firm with which XYZ has merged is actually the Spry firm?
(What if there’s just a general condition that A show financials as of the date of the closing, with no specification of the
firm, and A turns up with properly dated financials of the XYZ/Spry firm?)
Contract Contains Express Condition
If express condition breached then the other party likely does not have to perform.
Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co, New York Court of Appeals, 1995

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When an express condition precedent was not satisfied D declared a sublease agreement void and P sued for breach of
contract, claiming substantial performance.
Substantial performance is not applicable to excuse the nonoccurrence of an express condition precedent.
Restatement 2nd § 225, Effect of the Non-Occurrence of a Condition
Performance of a duty subject to a condition cannot become due unless the condition occurs or its non-occurrence is
excused.
Unless it has been excused, the non-occurrence of a condition discharges the duty when the condition can no longer
occur.
Non-occurrence of a condition is not a breach by a party unless he is under a duty that the condition occur.
Restatement 2nd § 235, Effect of Performance as Discharge and of Non-Performance as Breach
Full performance of a duty under a contract discharges the duty.
When performance of a duty under a contract is due any non-performance is a breach.
Restatement 2nd § 242, Circumstances Significant in Determining When Remaining Duties are
Discharged.
In determining the time after which a party’s uncured material failure to render or to offer performance discharges the
other party’s remaining duties to render performance under the rules stated in § 237 and § 238, the following
circumstances are significant:
Those stated in § 241.
The extent to which it reasonably appears to the injured party that delay may prevent or hinder him in making reasonable
substitute agreements.
The extent to which the agreement provides for performance without delay, but a material failure to perform or to offer to
perform on a stated day does not of itself discharge the other party’s remaining duties unless the circumstances, including
the language of the agreement, indicate that performance or an offer to perform by that day is important.
However, the breaching party may be able to recover under quantum meruit (restitution).
Contract Links Performance of One Party to Performance of Another Party
Court may interpret contract as having an express condition or as not having an express
condition.
If interpreted as having an express condition then follow (ii) below.
If interpreted as not having an express condition then follow (i) above.
Performances are independent
Courts likely will still follow the Implied or Constructive Condition test.
Restatement 2nd § 237, Effect on Other Party’s Duties of a Failure to Offer Performance
Except as stated in § 240, it is a condition of each party’s remaining duties to render performances to be exchanged under
an exchange of promises that there be no uncured material failure by the other party to render any such performance due
at an earlier time.
Hypotheticals
Independent promises and A finishes everything but the doorknob?
This is a constructive condition in which substantial performance doctrine is going to apply and this sure looks like
substantial performance.
Independent promises and A finishes everything but the roof?
This is a constructive (implied) condition. There is no substantial performance on behalf of A. But, under quantum meruit
(unjust enrichment) B would probably have to pays A less the cost to get someone else to finish the rule.
Independent promises and A lays the foundation and then disappears?
Probably the same as above but a little less easy to decide.
Contract Specifies that One Party Perform to Another Party’s Satisfaction
The reasonable person standard (objective test) is applied when the contract involves
commercial quality, operative fitness, or mechanical utility which other knowledgeable
persons can judge.
The objective test should be preferred when it is practicable to determine whether a
reasonable person in the position of the obligor would be satisfied.
Restatement 2nd § 228, Satisfaction of the Obligor as a Condition
When it is a condition of an obligor’s duty that he be satisfied with respect to the obligee’s performance or with respect to
something else, and it is practicable to determine whether a reasonable person in the position of the obligor would be
satisfied, an interpretation is preferred under which the condition occurs if such a reasonable person in the position of the
obligor would be satisfied.
The standard of good faith (subjective test) is applied when the contract involves personal
aesthetics or fancy.
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The subjective standard should be used only where the agreement leaves no doubt that it is
only honest dissatisfaction that is meant and no more.
Where personal services are involved, the court may be more likely to approve the use of a
subjective test.
Where the contract conditions performance by one party on the other’s performance to the
satisfaction of an independent third party, such as an architect or engineer, there is greater
tolerance for the application of the subjective test, on the assumption that a third party is less
likely to be affected by the ‘selfish interests’ of the obligor.
Morin Building Products Co. v. Baystone Construction, United States Court of Appeals, 1983
GM refused, for aesthetic reasons, to approve aluminum siding installed by P, which was subsequently not paid.
Acceptance of performance in a contract whose purpose is primarily functional will be based on an objective standard.
Hypotheticals
I hire a photographer to take my passport picture. My deal with him is that I don’t have to pay unless I’m ‘satisfied.’ Under
what standard is my ‘satisfaction’ judged?
Notice that satisfied does not necessarily mean subjective. Should be objective here b/c it is more of a functional
transaction, it is not extremely expensive, etc. Can you argue for a subjective standard?
I hire Maria the caterer to make the birthday cake for my cat’s birthday party; again, I don’t have to pay unless I’m
satisfied. The cake will be eaten by a bunch of cats who don’t care at all what they eat. Under what standard is my
satisfaction judged?
Clearly objective. There is no ground for me to care. It will be objective unless I very specifically state subjective.
I hire somebody to serve the food at the cat’s birthday party. In the Agreement, he says he may not be able to do it, but if
so, he’ll find a “suitable replacement.” The new guy is his twin brother, who’s very much like him in many respects, but has
much, much worse taste in clothes. Can I object to the twin brother?
Arguable. Yes, because if you are hiring him to serve then his clothing is a material part of his performance. But, maybe
no b/c he is serving to cats?? Can the brother who served get paid in any way? Yes. He will probably be able to recover
under restitution.
I hire a carpet cleaning service to steam-clean my rugs in preparation for the cat’s birthday party. They also reserve the
right to send over a ‘suitable replacement’ if they can’t make it. If I just don’t like the clothing of the new cleaners, or the
color of their vaccuum cleaners, can I say they’re not ‘suitable’? What if there’s no provision reserving their right to send
over somebody else and they do? Am I required to take the substitute cleaning services?
The clothing or color of vacuum cleaners are not material to their performance, therefore you cannot object. You most
likely will not be able to object to the substitute cleaners either…the party you had a contract with substantially performed
by finding a comparable replacement and hiring them to perform.
Equitable Relief Based Upon Weighing Forfeiture and Harm
Express is express but there are times when equitable relief will be provided if there is
something such as forfeiture and there is no prejudice to the other party. (This happens often
with lease renewals).
JNA Realty v. Cross Bay Chelsea, New York Court of Appeals, 1977
D negligently failed to give lessor, P notice of intent to exercise a lease renewal option but still wants to renew.
Equity will protect a tenant who negligently fails to exercise a renewal option if failure to do so will result in a forfeiture.
Restatement 2nd § 229, Excuse of a Condition to Avoid Forfeiture
To the extent that the non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-
occurrence of that condition unless its occurrence was a material part of the agreed exchange.
In cases involving options to purchase real estate (as opposed to options to renew leases)
courts almost uniformly have denied equitable relief to an option holder who fails to comply
with the time period set forth in the option.
Waivers of Conditions
An obligor whose duty is expressly dependent on a condition may be under a duty to perform
despite the nonoccurrence of that condition, if a court finds that he has, by word or conduct
“waived” the right to insist on fulfillment of the condition before performing the duty.
A waiver is effective without either consideration or reliance, but only if the condition waived
was not a material part of the performance that the obligor was to receive in exchange or a
material part of the risk assumed.
Damages


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In many types of standard contracts, all you get if the other party violates a condition is the
right to walk away (not perform) whereas if the other party violates a covenant, you get
damages for breach. But this characterization works best where there’s in effect two
‘agreements’ or ‘sets of transactions’ (agreeing to buy a company and buying it, for instance);
where there’s only one transaction (having something constructed or delivered, and paying
for it, say) the characterization works far less well.
Hypotheticals Comparing Representations or Warranties with Express or Constructive Conditions
with Covenants or Promises.
There are no termites in this house I’m selling you
Representation or Warranty
There are no lawsuits pending against this business I’m selling you
Representation or Warranty
I’ll send you certified financial statements each month
Promise
My earnings each year will be at least $10,000
Promise
I’ll keep my major equipment insured through the term of this loan
Promise
You don’t have to buy my business unless the earnings for the year ending in 2001 were $10,000
Express Condition
All government approvals will have been obtained prior to the consummation of our transaction
Constructive Condition
Your obligation to purchase my house is subject to your ability to obtain financing from a bank at no more than 7% interest
Condition
Can you buy the house if the financing you get is at 8%?
Yes, it is a condition for your benefit so it is for you to waive.
You’ll use your best efforts to try to get financing to buy my house
Promise
Your obligation to purchase my house is subject to your receipt of a certification by the termite inspector that there are no
termites
Condition
Can the seller refuse to close if the buyer doesn’t receive the termite certificate?
No. The benefit is for the buyer, not the seller.
Condition Policy Issues:
Freedom of Contract vs. Equitable Relief and Efficiency
Find something to enforce if possible. Avoid ‘waste’. Among blameless parties allocate loss to
minimize aggregate costs thereof.
Enforcement by, and Against, Third Parties
Assignment (of a right) permitted unless contract prohibits it or it changes nature of duty of
obligor; assignor no longer has right once she’s assigned it.
Restatement 2nd § 317, Assignment of a Right
An assignment of a right is a manifestation of the assignor’s intention to transfer it by virtue of which the assignor’s right to
performance by the obligor is extinguished in whole or in part and the assignee acquires a right to such performance.
A contractual right can be assigned unless
The substitution of a right of the assignee for the right of the assignor would materially change the duty of the obligor, or
materially increase the burden of risk imposed on him by his contract, or materially impair his chance of obtaining return
performance, or materially reduce its value to him, OR
The assignment is forbidden by statute or is otherwise inoperative on grounds of public policy, OR
Assignment is validly precluded by contract.
Restatement 2nd § 322, Contractual Prohibition of Assignment
Unless the circumstances indicate the contrary, a contract term prohibiting assignment of ‘the contract’ bars only the
delegation to an assignee of the performance by the assignor of a duty or condition.
A contract term prohibiting assignment of rights under the contract, unless a different intention is manifested,
Does not forbid assignment of a right to damages for breach of the whole contract or a right arising out of the assignor’s
due performance of his entire obligation;
Gives the obligor a right to damages for breach of the terms forbidding assignment but does not render the assignment
ineffective;

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Is for the benefit of the obligor, and does not prevent the assignee from acquiring rights against the assignor or the obligor
from discharging his duty as if there were no such prohibition.
Restatement 2nd § 336, Defenses Against an Assignee
By an assignment the assignee acquires a right against the obligor only to the extent that the obligor is under a duty to the
assignor; and if the right of the assignor would be viodable by the obligor or unenforceable against him if no assignment
had been made, the right of the assignee is subject to the infirmity.
The right of an assignee is subject to any defense or claim of the obligor which accrues before the obligor receives
notification of the assignment, but not to defenses or claims which accrue thereafter except as stated in this Section or as
provided by statute.
Where the right of an assignor is subject to discharge or modification in whole or in part by impracticability, public policy,
non-occurrence of a condition, or present or prospective failure of performance by an obligee, the right of the assignee is
to that extent subject to discharge or modification even after the obligor receives notification of the assignment.
An assignee’s right against the obligor is subject to any defense or claim arising from his conduct or to which he was
subject as a party or a prior assignee because he had notice.
Duties can be delegated unless contract so prohibits or obligee has stake in performance of
duty by original obligor, but original obligor remains liable, unless contract provides
otherwise.
Restatement 2nd § 318, Delegation of Performance of Duty
An obligor can properly delegate the performance of his duty to another unless the delegation is contrary to public policy
or terms of his promise.
Unless otherwise agreed, a promise requires performance by a particular person only to the extent that the obligee has a
substantial interest in having that person perform or control the acts promised.
Unless the obligee agrees otherwise, neither delegation of performance nor a contract to assume the duty made with the
obligor by the person delegated discharges any duty or liability of the delegating obligor.
Third party has right to enforce contract provision between parties 1 and 2 if she’s ‘intended
beneficiary’.
Intended beneficiary determination is facts-and-circumstances;
In government cases, focus is often on how identifiable and tractable the potential class of
beneficiaries is.
Restatement 2nd § 302, Intended and Incidental Beneficiaries
Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if
recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either
The performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary, OR
The circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.
An incidental beneficiary is a beneficiary who is not an intended beneficiary.
Hypotheticals
I owe Ms. Procyk $1 million; she owes Mr. Meyers $1 million. If she and I agree that I’ll pay him instead of her, can he
enforce the promise?
Yes. The intent is for him to get the money.
Mr. Meyers and I agree that Ms. Procyk should give us a million dollars. Can anybody enforce?
No. There was no intention by the party to be enforced against.
If Lyndon LaRouche agrees with his wife that his personal papers should be donated to the New York Public Library, and
his wife instead tries to sell the papers on Ebay, can the library enforce the promise?
Yes, probably. This is a pretty good case. The library was supposed to benefit.
If the government agrees with eminent Dr. AntiCancer, who, as his name suggests, is an anticancer researcher, to fund a
lab and research and then renegs, can cancer patients sue the government to force it to make good on its promise?
No. Too broad of a group of people. We are not trying to benefit the entire public. They are not intended to have rights.
How about people with a genetic predisposition to getting cancer?
Still probably no. They were not intended to have rights.
I hire a maid to clean my apartment. I then assign the me-maid contract to Dean Perritt, whose house is much bigger and
messier than mine. Is the assignment valid? Why or why not?
No. This materially changes the nature of the duty of the obligor.
Alternatively, the Dean’s apartment is precisely the same as mine, but my contract with the maid prohibits assignment. Is
the assignment valid?
No. Probably not.
I go too often to Filene’s basement and buy reduced-price turtleneck sweaters. I charge them on my Filene’s charge card,
and presently am in arrears for $75,000. Can I assign 100% of my future paychecks to Filene’s until the debt is paid in
full?

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Public policy casts a very weary glance on a deal like this. What would I live on? Filene’s is probably a little out of luck on
this.
I’m suing Petco for advising me that at the age of 7, my cat needed ‘geriatric’ cat food. I told her about this, and she was
so traumatized that the trauma itself will clearly shorten her lifespan appreciably, according to the vet. My lawsuit is a big
winner, but I need money now; can I sell to an investor the rights to my lawsuit winnings?
This is considered a very sensitive public policy issue b/c you are supposed to have the specific individuals involved on
each side to have a good argument. Though, champerty (selling possible winnings) is becoming a little easier to do –
freedom of contract.




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III) Remedies
     A) Expectation Measure: Benefit of Bargain; Put nonbreaching party in position she
        would have been in had contract been fully performed.
Expectation Damages = (Loss) + (Incidental or Consequential Damages) – (Loss avoided or
mitigated)
Consequential (“special”) damages are ‘measured, not by the value of the promised performance
alone but by the gains such performance could produce for collateral reasons or the loss that its
produced by the absence of such performance’ {“lost profits”}
Incidental damages are additional expenses incurred as a result of the breach.
Restatement 2nd § 347, Measure of Damages in General
Subject to the limitations stated in §§350-53, the injured party has a right to damages based on his expectation interest as
measured by
The loss in the value to him of the other party’s performance caused by its failure or deficiency, plus
Any other loss, including incidental or consequential loss, caused by the breach, less
Any cost or other loss that he has avoided by not having to perform.
UCC § 2-715, Buyer’s Incidental and Consequential Damages
Incidental damages resulting from the seller’s breach include expenses reasonably incurred in inspection, receipt,
transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or
commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach.
Consequential damages resulting from the seller’s breach include
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, AND
Injury to person or property proximately resulting from any breach of warranty.
Expectation Formulas
If one party has performed and the other simply has not paid the remedy will be to make the
other pay.
Market Price – Contract Price; (sometimes in real estate)
Question becomes: How do we determine ‘market price’?
With real estate, “listings” are usually not determinative of market value b/c they are often
overstated.
This formula can also be used to determine the damages for sale of goods.
If buyer breaches seller gets difference between contract price and resale price.
If seller breaches buyer gets cost of substitute goods minus contract price.
Turner v. Bensen, Supreme Court of Tennessee, 1984
When D failed to close on a home they had agreed to purchase from P, damages were awarded for P’s actual resulting
losses.
The proper measure of damages available to vendor as against a breaching vendee in a real estate transaction is the
difference between the contract price and the fair market value of the property at the time of the breach.
Diminution in Value vs. Cost of Completion
In the usual case where the contractor’s performance has been defective or incomplete, the
reasonable cost of replacement or completion is the measure.
For Diminution in Value:
The breaching party must have substantially performed in good faith, AND
If covenant breached is incidental and cost to complete would be costly then diminution in
value, OR
If high economic waste then diminution in value.
American Standard, Inc. v. Schectman, New York Supreme Court, 1981
D contended that the correct measure of damages for his failure to complete grading P’s land was the diminution in value
of the land, rather than the cost of completion.
Where the cost of completing the contract would entail unreasonable economic waste then the measure of damages for
breach of a construction contract may be diminution in value.
Hypothetical: Anastasio (real artist- I ‘introduce’ him in a later problem) and I had specified that his painting of George
Bush would include red suspenders visible using a special light under the jacket. In fact, the suspenders are blue. The
market value of the painting is the same with blue or red suspenders. It would cost $500 for him to repaint to make the
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suspenders red. As before, the contract price is $750 and here, market price=contract price. How likely is the court to let
me have the completed painting for $250? Is it dispositive that there’s no difference in the two market values? What if I’ve
pre-sold the painting to a gallery, and the gallery is eagerly waiting to take delivery, and doesn’t care at all if the
suspenders are red or blue?
Replacement Cost
Handicapped Children’s Education Board v. Lukaszewski, Supreme Court of Wisconsin, 1983
D reneged on a contract to provide speech therapy services on behalf of the P. P hired another teacher but could only
find someone with a few more years of experience than D. P did not want anyone more experienced but needed to hire.
P had to pay more for D’s replacement than what they were paying D.
Replacement cost damages were awarded. P had a duty to mitigate and fulfilled this duty. There was no one to hire with
the same experience so they recover the extra amount required to replace D.
Limitations on Expectation Damages
Must Be Foreseeable – Within the reasonable contemplation of both parties at the time the
contract was made. (This is usually in issue w/ special damages)
The loss must be foreseeable, not necessarily the way in which the loss occurred.
This foreseeability is objective.
If the circumstances of the contract are communicated between the parties then results based
upon breach during those circumstances are foreseeable.
Hadley v. Baxendale, Court of Exchequer, 1854
P, a mill operator arranged to have D, a carrier, whip his broken mill shaft tot he engineer for a copy to be made. P
suffered lost income when D unreasonably delayed shipping the mill shaft, causing the mill to be shut down longer than
anticipated.
Court says there is no way for D to reasonably contemplate this result. If P had specifically communicated the
circumstances then it would be within reasonable contemplation. According to the court these circumstances were never
communicated.
Restatement 2nd § 351, Unforeseeability and Related Limitations on Damages
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.
Loss may be foreseeable as a probable result of a breach because ift follows from the breach
In the ordinary course of events, OR
As a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know.
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.
Hypotheticals
Builder is supposed to finish my gazebo on date X. On the next day, I have a photo shoot scheduled; I’m going to launch
a new line of decorating products in colors that coordinate with those in the gazebo. Out of the photo shoot, I expect to
get many orders for the products- I envision being the new Martha Stewart. The builder is late by a few days, and our
contract contained a ‘time is of the essence’ clause. I have to cancel the photo shoot, and can’t reschedule it for another
few months, when a whole season of product ordering will be over. What argument do you make as the builder to argue
that you don’t owe me any lost profits? What argument do you make as me to argue that I am owed lost profits? Is it
conceivable that I might win?
Bank is supposed to lend me money. Bank and I have been doing business for quite a while; I’ve taken out other loans
under this ‘facility’ and have timely repaid. The loan agreement provides that the bank shall make me a loan upon my
request so long as I provide documentation to the bank “as it shall reasonably request, that is in form reasonably
satisfactory to the bank.” The bank says that the financial statements that I provide to support my latest loan request are
unsatisfactory to the bank, and refuses to make the loan. It’s later determined that the bank wasn’t reasonable in finding
my financial statements unsatisfactory. I have a very advantageous business possibility that I’d wanted to get the money
for. All the other banks in the neighborhood, and the other business possibility, become aware that the first bank turned
down my loan. I’m able to get a substitute loan and the business opportunity, but both at less advantageous terms than I
could otherwise have gotten. What damages can I get from the bank that turned me down, and on what theories?
Same hypo except that terms on which I can take advantage of the new business opportunity aren’t worse; instead, I fail
in that business, and I want to claim it’s because the higher debt service on account of the higher priced loan did me in. It
didn’t help, either, among customers, that bank #1’s turning me down was generally known. What result?
Can’t Recover for Speculative Losses – Must be proven with reasonable certainty.
Florafax International v. GTE Market Resources
P sued D for breach of contract and claimed damages for lost profits it stood to make from a collateral contract P had with
a third party, but allegedly lost because of D’s breach.

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For recovery of lost profits, sufficient certainty must be shown that reasonable minds might believe from a preponderance
of the evidence that such damages were actually suffered. Here there was reasonable certainty due to expert testimony
and testimony from the CEO of the corporation with which D had the collateral contract.
Restatement 2nd § 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.
Duty to Mitigate
After one party has received knowledge of the other party’s breach that party must cease
performance if it will increase the damages due to breach. (There may be cases where
finishing performance will actually decrease damages – completion of a house that is 90%
done, but this will be rare).
Rockingham County v. Luten Bridge Co, United States Court of Appeals, 1929
P continued a construction contract after D had wrongfully notified it that the contract was being repudiated.
After an absolute repudiation or a refusal to perform, the other party may not continue his performance if it will increase
damages
If contract is employment related the employee must take a job that is comparable or
substantially similar if there is one available. Even if s/he does not take this job the salary will
still be deducted from damages.
If contract is employment related the employee is not required to take a job that is not
comparable or substantially similar but if s/he does then the salary will be deducted from
damages.
Boehm v. American Broadcasting Company, United States Court of Appeals, 1991
D alleged that P’s refusal of a job offer constituted a failure to mitigate, and therefore precluded any damages awarded for
wrongful termination.
D did not properly show that the job offer was comparable or substantially similar (and the burden is on the D) and
therefore, the P was not required to take the alternative offer.
Hypotheticals
Assume X is wrongfully terminated from Dr. job.
If another Dr. job is available:
Recovery is promised Dr. salary less this Dr. salary regardless of whether Dr. job is taken (or indeed, whether dishwasher
job is taken)
Dishwasher job available (Dr. job not available):
Recovery is promised Dr. salary less dishwasher salary if dishwasher job is taken (dishwasher job does not have to be
taken).
No job available:
Recovery is full Dr. salary.
Smith, a highly trained airline pilot, is wrongfully terminated. He’s offered another job that pays him more money, as a
baker. He’s afraid, though, that baking will rob him of skills he needs as a pilot, so that he’ll never be able to return to the
cockpit. His pilot salary was $100,000. The baker salary is $125,000. What result if he doesn’t take the baker job? What if
he does?
What if there’s a pilot job for $20,000-does he have to take that (or, more precisely, is his recovery reduced by the amount
of that salary whether he takes it or not?
What if he takes a job as a baker for $60,000?
If contract is a rental lease the lessor has a duty to mitigate damages by finding comparable
renters.
Hypothetical: You have a lease for 12 months, and after 3 months you leave, letting the landlord keep the security
deposit. The landlord sues you for the remaining 8 months’ rent. He advertised the apartment for rent, but got only
scuzzy punk rockers with no references from their prior landlords. He therefore turned them all down. Does he get the
rest of the rent from you or not? Why or why not?
The party who is in default may not mitigate his damages by showing that the other party
could have reduced those damages by expending large amounts of money or incurring
substantial obligations.
The doctrine of avoidable consequences does not apply where both parties have an equal
opportunity to mitigate damages (flagpole, either could hire lawyer).



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If the injured party could and would have entered into the subsequent contract, even if the
contract had not been broken, and could have had the benefit of both, he can be said to have
‘lost volume’ and the subsequent transaction is not a substitute for the broken contract.
If the contract is for personal services, a new contract entered into after the breach will
generally be considered to be a mitigating one since an individual has a limited capacity to
perform personal services.
In some cases, however, it may be possible for the employee or other provider of services to
perform both contracts; in that case the second contract will not be considered a mitigating
one.
When the contract does not require personal services a second contract entered into after
breach of the first contract will not be considered to be a mitigating one if the provider of the
services has the capacity to perform both contracts.
If the new contract is viewed as an additional rather than a mitigating contract, the P is entitled
to her ‘lost profit’ from the original contract without deduction of the amount received from
the new contract.
Jetz Service Company v. Salina Properties, Kansas Court of Appeals, 1993
P, which installs and maintains coin-operated laundry equipment, was awarded damages to cover its lost profits when D
breached its lease. D argues that P reused the machines and therefore those profits should be subtracted from damages.
P did reuse the machines but they would have had that contract and been able to use other machines in their warehouse
if they had still had the contract at issue.  D is a lost volume seller and the profits are from an additional contract, not a
mitigating contract. No profits will be subtracted from damages.
Restatement 2nd § 350, Avoidability as a Limitation on Damages
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.
The injured party is not precluded from recovery by the rule stated on Subsection (1) to the extent that he has made
reasonable but unsuccessful efforts to avoid loss.
Hypothetical: Baby grand piano, most valuable possession of Mr. X, destroyed when neighbors upstairs leave water on
on the balcony; water seeps through the wall, and destroys the piano. Mr. X needs replacement piano. Old piano is
Baldwin, a company presently in bankruptcy. Mrs. X is happy to call everyplace to get the best price possible on a new
piano- she’s never heard of opportunity cost of time-but is reluctant to deal with a bankrupt company, so doesn’t call
Baldwin. She finds a Steinway – she can get a terrific deal on the Steinway, but is still out $2000 more than the
neighbors’ insurance is prepared to pay. Can she get the difference from the neighbors? Insurance wants to pay
$14,000. Steinway she finds is worth about $18,000 or maybe up to $20,000, but Steinway is selling it to her for $16,000.
This is an example of what you have to do to mitigate. She would have had to call Baldwin if they were not bankrupt. But,
b/c they were she had an argument of why not to call them.
Damages Not Recoverable
No Punitive Damages
Restatement 2nd 355, Punitive Damages
Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for
which punitive damages are recoverable
No Damages for Emotional Distress
Exception: When contract involves personal rights of dignity and are incapable of adequate
compensation by reference to the terms of the contract.
Gagliardi v. Denny’s Restaurants, Inc, Supreme Court of Washington, 1991
P who was discharged by D for disobeying rules included in the employee handbook, sued for damages for breach of her
employment contract including emotional distress b/c she could not work in the same environment again.
Emotional distress damages are not recoverable for wrongful termination (under contract breach). It is disputed whether
D breached, but even if they did there would be no recovery for emotional distress.
Restatement 2nd § 353, Loss Due to Emotional Disturbance
Recovery for emotional disturbance will be excluded unless the breach also caused bodily harm or the contract or the
breach is of such a kind that serious emotional disturbance was a particularly likely result.
Policy: We do not want an emotional distress claim with every breach of contract.
No Attorney Fees
Exception: If it is a suit that public policy wants brought attorney fees may be recoverable.

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When successful in recovering wages and salaries P may recover attny fees if wages recovery >
amount admitted by employer.
Exception: If statute makes attorney fees recoverable in certain situations.
Exception: If the purpose of the contract is to provide attorney fees they may be recoverable
(such as insurance contracts).
Preferred Mutual Insurance Co. v. Gamache, Massachusetts Supreme Judicial Court, 1997
When a civil tort action was brought against D by a police officer for injures received, P obtained a declaratory judgment
claiming that it had no duty to defend or to indemnify D, its insured.
Attorney fees will be awarded because an insurance contract specifically provides for attorney fees.
Hypotheticals:
Maria is my employee; she caters my weekly parties. (What I do with all the time I have left over from teaching contracts).
I fire her as she’s bringing in the food for a party; indeed, I do so right in front of my guests, telling her that her food just
isn’t up to snuff anymore. She gets so upset that she doesn’t leave her apartment for weeks.
Am I breaching her by firing her? Can she recover for damages for emotional distress? Can she recover damages for
her attorneys’ fees in suing me for wrongful termination?
    B) Reliance: Detriment to Promisee; Put relying party in same position as if there’d
       been no contract.
In order to recovery reliance damages there must be:
Reasonable Reliance by P
A Loss Due to This Reliance
Expectation Damages Cannot be Shown with Certainty
Hypothetical: What limit does the court say is applicable for reliance damages? Review: If I breach a contract with Maria
to pay her for the cake she made for my cat’s birthday party, the contract price was $1000, and she spent $1500, what
can she recover?
Expectation damages? Why not reliance damages? Because the expectation damages are measurable. Reliance
damages are usually given when expectation damages cannot be calculated with reasonable certainty.
What if she was making a cake for me for $750, her expenses would be $1000, but she and I both acknowledge that my
payment doesn’t cover her costs, and that she’s agreeing to the price because I’m serving her cake at a function in which
she can be expected to get a lot of business (and that’s stated in a recital to the agreement)?
We cannot measure what the lost profits would be and  cannot measure the expectation damages.  the D should get
the reliance damages ($1,000).
A pianist, Mark, is renting a hall in which to play his comeback concert. The rental price of the hall is $500;his intention
to play the comeback concert is set forth in the recital to the contract for the hall. It’s hard to figure out just how many
tickets Mark would sell – his style is ‘one of a kind’ and it’s been years since he was a big ‘draw’ on the recital circuit. The
hall is represented to Mark as being deluxe, in perfect condition, perfectly maintained with regular cleaning services, and
fully insured. He’s rented the hall for several months, so he can rehearse in the same place as he’ll be playing in. He’s
even brought his own special piano, worth about $10,000. And he’s hired a full-time masseuse to be available to
massage his shoulders in case he gets tense while he’s practicing; the masseuse also prepares special power shakes he
likes to drink to stay at ‘peak performance’ level. He’s planning to start advertising the concert next week; he paid $750 to
plan the campaign and design the brochures (and the advertising company may get to keep the rest of the retainer he
paid them even if he doesn’t go ahead with the concert. He turns up one morning to rehearse and finds to his horror that
the hall is infested with piano-eating and wall-eating rats. The piano is destroyed, and the hall isn’t in any shape to give a
concert in. It turns out, too, that the hall is “self-insured” rather than insured. What measure of damages would he prefer,
and why? What’s recoverable under the respective measures of damages?
Reliance b/c he cannot show expectation damages with reasonable certainty. (Note: If D hired the advertising agency
before signing the contract to rent then he cannot say that he relied on anything when hiring the advertising agency.
Gus the shoemaker has been leasing the same space to fix shoes for 30 years. He makes a comfortable living with
regular customers who wouldn’t trust anybody else with their manolo blahnik stilettos and other comparable shoes. His
lease is about to come up for renewal. He’s having discussions with the agent for the landlord about the terms of the
renewal; the landlord seems to be dragging his heels (sorry) but assures Gus that they’ll be able to work everything out,
as they have the preceding 30 years. The week before the new lease would have come into effect, the agent for the
landlord is informed by the landlord that the space is actually needed for the landlord’s rock-star-wannabe nephew. Gus
is left out in the cold pounding the pavement; his business collapses. Are expectation damages available to Gus? Would
you advise Gus to pursue expectation or reliance damages? What expectation damages would you attempt to prove, and
how would you go about making your case?
Expectation damages could probably be maintained by looking at previous years of business. There is not much in terms
of reliance damage here.

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Maria’s best friend Raymond is a flower arranger. I promise to hire Raymond to make the exam room in which you’re
going to take your exam beautiful, to create a soothing atmosphere for all of you so you do your best on the exam. He’s
going to spend $350 on the flowers. Raymond clears his schedule for the day before the exam (to get the flowers) and the
day of the exam. He otherwise would have earned $500 for working on both of those days. Furthermore, because he’s
unavailable on those days, a regular customer of his stops using him and starts using somebody else – he loses about
$10,000 (net) of business from that customer. I call Raymond the morning of the exam and tell him ‘the deal’s off, no
flowers.’ We hadn’t finalized anything; he’d trusted me, because of my long acquaintance with his best friend Maria. What
damages might Raymond be able to claim from me, and on what theory?
(Remember many courts will say that reliance damages have to be reasonable and foreseeable.  the $10,000 will most
likely not be recoverable under reliance damages).
Does your answer change if we have finalized a deal, and I’ve agreed to pay Raymond $250?
Expectation damages should be used if they can be shown with reasonable certainty. Expectation damages = 0.
Someone may try to come up with creative arguments to show why reliance damages should be used instead.
If D can prove that P would have had a loss if the actions had been carried through then this
amount will be subtracted from damages.
Restatement 2nd § 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.
Realize that if a court enforces a contract under promisory estoppel they are saying that a
contract exists. Then the injured party may claim any damages possible (even expectation
damages, if they can be shown w/ certainty) under the rules of damages.
If a party cannot prove expectation damages with reasonable certainty, she may still recover
damages measured by her reliance interest.
Wartzman v. Hightower Productions, Ltd, Court of Special Appeals of Maryland, 1983
P hired D, a law firm, to incorporate it, and when D forgot a vital part of the process, P, forced to cancel its project, sued D
for damages.
Because this was a skeptical endeavor (flagpole decent at New Years) damages were not certain. no expectation
damages. P can recover reliance damages though.
The court may, at its discretion, limit recovery to reliance damages (not allowing expectation
damages).
Walser v. Toyota Motor Sales, United States Court of Appeals, 1994
P alleged that the district court erred in instructing the jury that damages were limited to the out-of-pocket expenditures
made in reliance on D’s promise of a dealership.
Because the damages are not reasonably certain the court acted correctly in limiting them to out-of-pocket expenditures
(reliance damages).
    C) Restitution: Benefit to Promisor/Other Party, or Unjust Enrichment
Elements of Unjust Enrichment
Party is enriched.
Restatement 2nd § 370, Requirement That Benefit Be Conferred
A party is entitled to restitution under the rules stated in this Restatement only to the extent that he has conferred a benefit
on the other party by way of part performance or reliance.
The enrichment is unjust.
This situation is not covered by a contract.
Ventura v. Titan Sports, Inc, United States Court of Appeals, 1995
P was awarded quantum meruit recovery of royalties for videotape exploitation of his television performances while
employed by D.
During the pre-Bloom period all elements existed because Titan sports was enriched, this enrichment was unjust, and
there was no contract covering this. During the post-Bloom period all three elements existed because Titan Sports was
enriched, this enrichment was unjust, and there was a contract that covered this (in which Ventura waived his rights) but
the court says this waiver was induced by fraud. (Titan says they never give royalties to anyone when in fact they do).
Modern contract law allows a nonbreaching party to elect recovery of restitutionary rather
than expectation damages for breach of contract.
Not available if all breaching party hasn’t done is paid determinate sum.

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The measure of recovery for quantum meruit is the reasonable value of the performance and
recovery is undiminished by any loss which would have been incurred by complete
performance.
The standard for measuring the reasonable value of the services rendered is the amount for
which such services could have been purchased from one in the P’s position at the time and
place the services were rendered. (Most common = Market Value).
Restatement 2nd § 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.
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
The extent to which the other party’s property has been increased in value or his other interests advanced.
Both the breaching and nonbreaching parties have a right to claim restitutionary damages.
Cap on damages to breaching party is expectation damages.
United States Ex Rel Coastal Steel v. Algernon Blair, United States Court of Appeals, 1973
D, as general contractor, was sued by its subcontractor in the name of the US (P) to recover for the labor and equipment
that had been supplied before the subcontractor ceased work on the project due to a breach of contract by D.
A subcontractor who justifiably ceases work under a contract because of the prime contractor’s breach may recover in
quantum meruit the value of labor and equipment already furnished pursuant to the contract irrespective of whether he
would have been entitled to recover in a suit on the contract.
Lancellotti v. Thomas, Superior Court of Pennsylvania, 1985
P backed out of an agreement to purchase a business from D who had been paid $25,000.
A party breaching a contract may be entitled to restitution to prevent forfeiture. Remanded to lower court.
Restatement 2nd § 373, Restitution When Other Party Is in Breach
Subject to the rule stated in Subsection (2), on a breach by non-performance 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.
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.
Restatement 2nd § 374, Restitution in Favor of Party in Breach
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 excess of the loss that he has caused by his own
breach.
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 is liquidated damages is reasonable in the
light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.
Available sometimes where there’s no enforceable contract (implied in law; contract voided
for impracticability, fraud, incapacity, etc; statute of fraud blocks enforcement).
Restatement 2nd §375, Restitution When Contract Is Within Statute of Frauds
A party who would otherwise have a claim in restitution under a contract is not barred from restitution for the reason that
the contract is unenforceable by him because of the Statute of Frauds unless the Statute provides otherwise or its
purpose would be frustrated by allowing restitution.
Restatement 2nd § 376, Restitution When Contract is Voidable
A party who has avoided a contract on the ground of lack of capacity, mistake, misrepresentation, duress, undue influence
or abuse of a fiduciary relation is entitled to restitution for any benefit that he has conferred on the other party by way of
part performance or reliance.
Restatement 2nd § 377, Restitution in Cases of Impracticability, Frustration, Non-Occurrence of
Condition or Disclaimer by Beneficiary
A party whose duty of performance does not arise or is discharged as a result of impracticability of performance,
frustration of purpose, non-occurrence of a condition or disclaimer by a beneficiary is entitled to restitution for any benefit
that he has conferred on the other party by way of party performance or reliance.
Restatement 2nd § 384, Requirement That Party Seeking Restitution Return Benefit
Except as stated in Subsection (2), a party will not be granted restitution unless
He returns or offers to return, conditional on restitution, any interest in property that he has received in exchange in
substantially as good condition as when it was received by him, or
The court can assure such return in connection with the relief granted.
The requirement stated in Subsection (1) does not apply to property
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That was worthless when received or that has been destroyed or lost by the other party or as a result of its own defects.
That either could not from the time of receipt have been returned or has been used or disposed or without knowledge of
the grounds for restitution if justice requires that compensation be accepted in its place and the payment of such
compensation can be assured, or
As to which the contract apportions the price if that part of the price is not included in the claim for restitution.
Hypotheticals
Smith hires Jones to clean up his yard. Smith doesn’t pay. Contract price was $10. Any other person in the
neighborhood would have charged $15. (alternatively, $5). Jones buys cleaning equipment for this job for $2. What’s the
expectation damage for Jones? Reliance?
Restitution? (If it were available).
Expectation = $10; Reliance = $2; Restitution = The value to Smith, $15 (may be able to argue $10 here). But, restitution
is not available because he has finished performance.
I hire Maria to create a sculpture for me out of fake (nonperishable) food. (What can I say- I have strange decorating
ideas.) The sculpture is to consist of two identical fake 15 layer gateaux affixed to my wall. The contract price is
$15,000; her expenses will be $10,000; the fair market value of each is $9,000 (an apartment with a wall-gateaux sells for
$9000 more than an identical apartment without one). After she finishes one gateau (it’s affixed to my wall, by the way),
she decides to quit the catering business and become a rock star. I say I don’t want to pay her, since my design idea
contemplated the two gateaux. Do I have to pay her? How much? On what theory?
Restitution = $9,000.
Mary, who has been diagnosed with a mental disorder that makes her incompetent to enter into a contract, has been hired
to build a gazebo for X, who hired her in good faith. After working for several weeks, she goes to court to get the contract
voided. Can she get paid for the period she worked? On what theory?
Yes. Based on restitution. There is no contract but you still want damages.
Jill rented out her hall to Mark, the pianist. He was going to do a benefit concert for penguins; it turns out that Sid Bass, a
multibillionaire, has died and left all his money to penguins, so nobody would consider going to such a concert. Mark’s
hall rental was for 5 weeks; he was going to practice in the hall for 4 weeks and 6 days, and then give the concert. The
penguin legacy occurs 2.5 weeks into the period of time. What can Jill recover from Mark?
Notice here that the purpose of the contract has been frustrated so Mark is off the hook for performing.  no expectation
damages. Mark has gotten the benefit of being able to practice in the hall for 2.5 weeks… he has been unjustly enriched
and Jill should receive the amount for 2.5 weeks of rent.
Edna hires Bert to be her talent agent. The term of the contract is 3 years. It’s an oral contract. They’ve agreed that Bert
is supposed to get paid once every 6 months. At the end of 6 months, Edna doesn’t want to pay Bert. What theory or
theories can Bert use to get paid? What’s the measure of how much he can get paid?
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Bert is the one to quit, on the 5 month. Can he recover from Edna? How much? What if Edna needs to hire somebody
else on short notice and has to pay a premium wage? How about if she gets a specially good deal on somebody’s labor?
Fred builds Barney a house. Fred finishes as specified in the contract. Barney refuses to pay. He finds out that Barney
has gotten an appraisal of the house, and the house is worth more than the contract price. Is there any theory on which
he can get more than the contract price?
Ethel builds Lucy a house, to Lucy’s particular specifications, on Lucy’s land.The contract has an express condition that
says Ethel must install doorknobs with lions on them; instead, she installs jaguar doorknobs. Can Lucy get the house for
free? (of course not). On what theory can Ethel recover?
   D) Key when choosing between these formulas, etc: What benefits the party the most?
Hypotheticals
A spends $200 on paint chips to use to figure out which color he wants to paint the house he expects to buy from B. If the
$200 is recoverable, is it part of A’s expectation, reliance interest or restitutionary interest?
Reliance
A and B enter into a contract for A to buy B’s house. The sales prices they agree on is the same as the market price. B
had planned to paint the house before selling it, but never quite got around to it. A, who has more money than sense,
decides that she’ll paint the house now, before the closing, so it can be ready by the time she moves in. She does so, it
doesn’t take much trouble, but the paint costs $75, and the house could now be sold for $150 more. It would have cost B
$100 to hire somebody else to paint the house. After they enter into the contract, B doesn’t turn up at the closing. A
decides not to pursue specific performance. What are her expectation, reliance and restitutionary damages?
Expectation: $150 b/c that is not the difference between the sales price and market price.
Reliance: $75 for the paint.
Restitution: $100 or $150 based on how you argue.
Your Uncle is a great believer in the health benefits of red wine. He tells you that if you drink a glass a day for 5 years,
he’ll pay you $10,000. You have to drink wine that costs $1,500/year (equal value per bottle you drink) – you pay. You
both sign a contract to this effect. 4 years into the deal, Uncle decides red wine is actually bad for you, and wants to
renege. He tells you he won’t pay you any more.
He owes you $10,000 less the costs you saved of $1500. You spent $6000, he pays you $8500, so you get $2500 net.
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Building contract price =200,000; Cost of construction = 180,000; Owner unjustifiably terminates when work is half done;
owner has paid 70,000 and builder has spent 95,000; builder can resell part of materials for 10,000.
Builder gets: 200,000(K price)-70,000 (amt received) [or, 130,000, “loss in value” where value is what owner is paying] –
85,000 (costs avoided, 180,000-95,000)-10,000 (amt from sale of materials – what he’s able to salvage, given that he
didn’t use the materials on the original job)=35,000
Employee has 2 year contract for 50,000/yr, payable monthly. Fired after 6 months. Employee can’t find job even though
she looks for 3 months. Pays agency $1000 fee. Then gets job 3 months later for $45,000
100,000-25,000 [loss in value- difference between what she was paid and what she was promised] +1,000 [extra loss]
+45000 [amount she gets on substitute job, credited against her recovery – what she’s able to salvage given that she
didn’t have to be at the original job here, get a new job]=31,000
Building contract price =200,000; Cost of construction = 250,000
Owner unjustifiably terminates when work is half done; owner has paid 70,000 and builder has spent 95,000; builder can
resell
part of materials for 10,000
Builder gets: 200,000(K price)-70,000 (amt received) [or, 130,000, “loss in value” where value is what owner is paying] –
155,000 (costs avoided, 250,000-95,000)-10,000 (amt from sale of materials – what he’s able to salvage, given that he
didn’t use the materials on the original job)=-35,000
Do the computation if the Uncle is paying you $20,000 to drink a glass of wine every day for 5 years, you have to spend
$1500/year on the wine, and he decides he wants to renege after year 3.
Each year: you get 2500/yr plus $1500 expense reimbursement. You’re entitled to the full 12,500 plus $4500=17,000.
(or, 20,000-3000, costs saved) .
I hire Maria to bake a cake. Our deal is that I’ll pay her $1000. When she presents me with the cake, I refuse to pay, but
don’t give any grounds. Her costs were $1500. What are her expectation damages? What result if I tell her halfway
through that I don’t want her to continue baking the cake?
Expectation damages are $1000. The fact that her costs were higher isn’t my problem. As to halfway through, say she’s
only spent $750. This is a harder case, since she wasn’t making any profit. Hard to know…she’d probably try to get the
$750 on some kind of costs incurred theory.
I hire Anastasio the artist (a real guy) to paint me a portrait of George W. Bush – I’m very impressed with his performance
thus far, and want to see his kind face whenever I’m at home. The contract has no ‘satisfaction condition’ – I have to pay
him no matter what. The contract price is $750. He finishes painting and I don’t pay. It turns out that the market value of
the painting is actually $500. What result? What if the market value is $1000?
I’m stuck with the market/contract disparity, either way. I’m supposed to pay him, and he’s supposed to convey. If he
somehow ends up keeping the painting, I’d have to pay him his ‘net profit’ but I’d get to adjust by the difference between
contract and market. Note that since I’m the breaching party, focus is on satisfying expectation of non-breaching party.
His expectation is $750 less his expenses.
Assume his net profit is $500
The painting cost him $250 to make. He’s supposed to end up with $500. So if he keeps the painting and it has a market
value of $500, he’s at $500, less the $250 he paid out, which yields him only $250. So I should pay him $250.
Conversely, if the painting is worth $1000, he’s at plus $750, $250 more than he’s entitled to, so he should pay me $250.
Of course, in the real world, I don’t default under this circumstance, because I’m getting a right to get something worth
$1000 for $750. He probably couldn’t be forced to paint if he didn’t want to, but if he did want to I’d presumably be forced
to accept the substitute painting and pay him full price.
Another example: Maria and I have a deal that she bakes me a cake for $1000. I need the cake for a party to celebrate
my parents’ new piano. I knock on her door to pick up the cake and she hasn’t made it. I have to buy a substitute cake
from “Last Minute Ludicrously Expensive Gourmet” for $1500. As it turns out, the cake is much bigger than the cake
Maria would have made for me. What result?
Depends on how hard I tried to mitigate. If LMLEG is the first call I made, I may have to pay the excess out of my own
pocket. But otherwise, Maria may be stuck for it.
    E) Specific Performance
When is it granted?
Real Estate or other “Unique” item.
UCC § 2-716, Buyer’s Right to Specific Performance or Replevin
Specific performance may be decreed where the goods are unique or in other proper circumstances.
The 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.
The buyer has a right of replevin 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 security interest in them has been made or tendered. In the case of
goods bought for personal, family, or household purposes, the buyer’s right of replevin vests upon acquisition of a special
property, even if the seller had not then repudiated or failed to deliver.
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Where money damages cannot compensate for some other reason.
Restatement 2nd § 359, Effect of Adequacy of Damages
Specific performance or an injunction will not be ordered if damages would be adequate to protect the expectation interest
of the injured party.
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.
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.
Factors to help determine if damages should be specific performance:
The possibility that the contract was the product of mistake or unfair practices, or that the
exchange it calls for is grossly inadequate o the terms of the contract are otherwise unfair.
(Equity will not aid someone who comes to the court with unclean hands).
Restatement 2nd § 364, Effect of Unfairness
Specific performance or an injunction will be refused if such relief would be unfair because
The contract was induced by mistake or by unfair practices.
The relief would cause unreasonable hardship or loss to the party in breach or to third persons.
The exchange is grossly inadequate or the terms of the contract are otherwise unfair.
Specific performance or an injunction will be granted in spite of a term of the agreement if denial of such relief would be
unfair because it would cause unreasonable hardship or loss to the party seeking relief or to third persons.
Whether specific relief would cause unreasonable hardship or loss to the party in breach.
Difficulty of supervision issue (Does the court have to supervise to make sure the specific
performance is carried out? If so, less likely to be specific performance).
Restatement 2nd § 360, Factors Affecting Adequacy of Damages
In determining whether the remedy in damages would be adequate, the following circumstances are significant:
The difficulty of proving damages with reasonable certainty,
The difficulty of procuring a suitable substitute performance by means of money awarded as damages, and
The likelihood that an award could not be collected.
Other Specific Performance Rules
The court will not deny specific performance simply because the breaching party would have
a better opportunity if they did not have to specifically perform.
Courts won’t order specific performance of personal services.
Restatement 2nd § 367, Contracts for Personal Service or Supervision
A promise to render personal service will not be specifically enforced.
A promise to render personal service exclusively for one employer will not be enforced by an injunction against serving
another if its probable result will be to compel a performance involving personal relations the enforced continuance of
which is undesirable or will be to leave the employee without other reasonable means of making a living.
Specific performance remains the ‘exceptional’ (equitable) remedy when a remedy at law
(money) isn’t adequate.
Courts may elect specific performance even when there is a liquidated damages clause.
Restatement 2nd § 361, Effect of Provision for Liquidated Damages
Specific performance or an injunction may be granted to enforce a duty even though there is a provision for liquidated
damages for breach of that duty.
Courts will not provide specific performance if it is in conflict with public policy.
Restatement 2nd 365, Effect of Public Policy
Specific performance or an injunction will not be granted if the act or forbearance that would be compelled or the use of
compulsion is contrary to public policy.
Courts are reluctant to limit ability to earn one’s livelihood, although there are circumstances
in which it would order somebody not to work.
Court might order somebody to hire somebody, although there’s sensitivity here – practically
speaking, reinstatement orders are very often handled via money settlements amount the
parties (hardly ever specifically enforce employment contracts).
American Broadcasting Co. v. Wolf, New York Court of Appeals, 1981
D breached a good faith negotiation clause with P and contracted to work for its competitor.
Due to constitutional and policy considerations, employment contracts will not be affirmatively enforced by the courts.
However, negative injunctions are sometimes used to prevent the employee from working for a competitor during the
contract term. But in the instant case, the contract term between P and D had expired at the time P sought relief. After an
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employment contract has expired, negative enforcement will be granted only when necessary to prevent injury to the
employer from unfair competition (usually involving the theft of trade secrets or customer lists) or to enforce an express
and valid anticompetitive covenant. Since neither of these extraordinary factors are present in the instant case, equitable
relief if denied.
It must be possible to determine what the specific performance would be.
Specific relief will not be denied merely because the parties have left some matters out of their
agreement, or left some issued to be agreed on in the future, particularly when the parties
have agreed on all material terms and other equitable factors are present.
On the other hand, failure to agree on material terms may result in the denial of specific relief.
Restatement 2nd § 362, Effect of Uncertainty of Terms
Specific performance or an injunction will not be granted unless the terms of the contract are sufficiently certain to provide
a basis for an appropriate relief.
Hypotheticals
Easley is the only guy who can possibly play some extremely hard modern piano music. A series was put together of
extremely hard modern music, some of it piano music. Easley was to play all the piano concerts. He plays a few but, just
before the last one, he refuses to play- he wants to stay home and spend quality time with his cat. There will be a huge
loss of revenue and prestige to the promoter if he does this. The promoter wants specific performance. What result?
This is a personal service and therefore the courts will most likely not enforce specific performance.
The promoter learns that Easley is actually not staying home with the cat, but is actually playing some other gig across
town, an all-celebrity very well publicized benefit for homeless piano-loving cats. What result in that case?
Promoter may be able to get an injunction to stop him from playing at the benefit. This depends on how much the benefit
will effect the final deal. He would probably succeed in the injunction.
Alternatively, Easley is fired from the concert series after making nasty remarks about the promoter; this firing is within the
terms of his contract. His contract had said that after the termination thereof, he couldn’t be in another modern music
concert series for a year. Can the promoter enforce the prohibition? Is the better or worse for the promoter if he quit
instead of being fired?
This is kind of like a non-compete clause and may be upheld. On the other hand, the contract may permit him from
making a living and therefore enforcement of this may be problematic. Promoter would have an easier time enforcing if
employee quit…although probably still not a winner. IF YOU SEE A QUESTION LIKE THIS ON THE EXAM THE BEST
THING TO DO IS SET FORTH THE TENSIONS ON EITHER SIDE. THIS IS USUALLY MORE IMPORTANT THAN THE
OUTCOME UNLESS THE OUTCOME IS REALLY OBVIOUS.
Types of Specific Performance
To Convey
Typically granted only where item is unique (such as real estate)
The courts will almost never order specific performance by an employee of the services
promised in a contract of employment.
To Enjoin
Enforcing covenants not to compete/not to disclose trade secrets, etc.
    F) Agreed Remedies
Liquidated Damages (vs. Penalties)
Court will enforce agreed remedies provisions if they are liquidated damages (aim to
compensate) but not if they are penalties for breaching.
Restatement 2nd § 2-718, Liquidation or Limitation of Damages; Deposits
Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the
light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or
nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as
a penalty.
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 payments exceeds
The amount to which the seller is entitled by virtue of terms liquidating the seller’s damages in accordance with subsection
(1), or
In the absence of such terms, twenty per cent of the value of the total performance for which the buyer is obligated under
the contract or $500, which ever is smaller.
The buyer’s right to restitution under subsection (2) is subject to offset to the extent that the seller establishes
A right to recover damages under the provisions of this Article other than subsection (1), and
The amount or value of any benefits received by the buyer directly or indirectly by reason of the contract.


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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 goods
received in part performance, his resale is subject to the conditions laid down in this Article on resale by an aggrieved
seller (§ 2-706).
To determine whether liquidated damages or penalty look at reasonableness of the provision.
Depending on jurisdiction look at reasonableness:
When the contract was entered into, OR
When damages arise, OR
Both when the contract was entered into AND when damages arise, OR
Either when the contract was entered into OR when damages arise.
Rules to Help Determine Reasonableness
Factors
The greater the difficulty of estimating or proving damages, the more likely stipulated
damages will appear reasonable.
Comparison of actual damages with damages required by the provision.
A number of courts have held that the lack of actual loss or injury will make a clause invalid as
a penalty.
A term fixing damages that undercompensate will usually be upheld.
Policy: We are trying to avoid in terrorem effect (clauses compelling a party to perform) this is
not in issue in undercompensation. undercompensation is usually not an issue.
Wasserman’s Inc. v. Township of Middletown, Supreme Court of New Jersey, 1994
P successfully sued (in trial court) to enforce a stipulated damages clause in a commercial lease it had with D. D appeals.
A court should rely on the circumstances of the case and not on the words used by the parties in determining the
enforceability of stipulated damages clauses. The modern trend is towards assessing reasonableness either at the time
of contract formation or at the time of the breach. Generally, liquidated damages provisions are prima facie valid, and the
party challenging the contract carries the burden of proving that the stipulated amount of damages is grossly
disproportionate to the actual harm, and thus unreasonable. Evaluating damages based on gross income is problematic
party because such damages would be too speculative or uncertain. The decision whether a stipulated damages clause
is enforceable is a question of law for the court. This matter is remanded to the trial court to consider the reasonableness
of the clause.
Other Agreed Remedies Rules
Gross receipts are generally not a reasonable measure of damage.
No expenses are accounted for.
Could award a windfall to the P.
If a liquidated damages provision is attached to a non-compete clause in an employment
contract, the provision will not be enforced if the clause is unreasonable in scope time or area.
A provision for liquidated damages in an employment contract or covenant not to compete
will not preclude a court from granting injunctive relief if the facts warrant.
Agreed remedies make mitigation difficult to deal with. Some courts will allow agreed remedy
even when there are mitigation values to be subtracted from damages (this means agreed
remedy is paid and mitigation is not subtracted).
Justification is usually that this is reasonable because there are other intangibles (reputation,
etc) that may offset possible mitigation.
Restatement 2nd § 356, Liquidated Damages and Penalties
Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the
light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably
large liquidated damages in unenforceable on grounds of public policy as a penalty.
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.
Hypotheticals
Fred and Bert have a contract in which Fred will supply to Bert all the ice cream Bert needs to host kids’ parties. Bert’s
reputation for having the best quality ice cream, and the best selection of flavors, is a big part of why he does so well in
his business and gets to charge a premium price. Fred asks for $250/week from Bert for the ice cream. Bert makes
$1000/week (net) from his parties. The parties agree on a liquidated damages provision as follows: If Fred has supplied

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crummy ice cream or ice cream in not enough flavors (these are specifically defined terms in the contract) even once, he
has to pay Bert $10,000. Would this provision be enforceable as liquidated damages?
This looks like a penalty. Argue for not penalty: This will ruin his reputation, etc. (Consider consequential damages of
loosing other deals or going out of business, etc). There is more to consider than just money. This seems arguable either
way.
How about if, instead of the $10,000 payment, Fred just needed to give Bert a refund for the weeks he’d supplied the
nonconforming ice cream?
Could argue that this is reasonable because it is not excessive and definitely not a penalty. On the other hand, could
argue that damages are not reasonable because they are so small and cannot possibly reimburse for lost business, etc.
Although, usually an unreasonable damages clause due to Small amount of damages is only unenforceable if it is
unconscionable. And, these cases are very, very tough to win.
Fred and Bert again. They make the deal, $250/week, $10,000 liquidated damages, and it turns out that after Bert has
does astonishingly well for awhile, the new trend becomes frozen yogurt parties, and Bert goes bust. Then, Fred
breaches. Does this affect whether the liquidated damages provision is enforceable? (if you were Bert in this
circumstance, what might you do to Fred’s ice cream truck…)
This depends on the time at which the reasonableness will be judged. When entered (pass) or when damages arise
(does not pass) or both (does not pass) or either (pass)….see rules screen in powerpoints.
How about if the liquidated damages provision is $10,000, agreed upon when Bert’s operation is just starting up and he
has no reputation at all? He then begins to do quite well, and business is booming when Fred breaches.
Go through the same analysis as the question above.
Agreements to Arbitrate
For a mandatory arbitration to be enforceable
The court must determine whether the parties entered into a valid arbitration agreement.
It must determine whether the dispute between the parties falls within the scope of the
arbitration clause.
If federal statutory claims are asserted, the court must determine whether Congress intended
the claims to be nonarbitrable.
If the court concludes that some, but not all of the claims in the case are arbitrable, it must
then determine whether to stay the balance of the proceedings pending arbitration.
The issue is whether both parties intended to enter an agreement to arbitrate.
This is determined using normal formation principles.
One important aspect of trying to determine intent is if the mandatory arbitration is in conflict
with another legitimate expectation.
Phillips v. Cigna, United States District Court, 1998
When P alleged employment discrimination by her former employer, D, D claimed there was a valid agreement to
arbitrate, and filed a motion to compel arbitration under the FAA.
P is not compelled to arbitrate because she did not agree to arbitration because she did not intend to enter the agreement
to arbitrate. This is shown by pointing to her legitimate expectation to bring suit for discrimination, etc. The mandatory
arbitration is not consistent with this legitimate expectation and, therefore, the P had no manifested intent to become
bound to arbitrate.
Competing Policy Issues: Lower legal costs and time spent litigating vs. Provide best avenues for the
injured party (& educate the public about laws).
Done




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