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I. POLICING THE BARGAIN: Reason (e.g. protect individual’s rights, economic efficiency,
public policy) to not enforce a promise. Ct will focus on 3 categories: (1) Status of
parties (i.e. minor, diminished capacity); (2) Behavior of parties (i.e. duress, fraud); (3)
Substance of bargain.
a. Kiefer v. Fred Howe Motors: Kiefer bought a car from F as a minor, although he
signed the K saying that he was over 21. Held: K is voidable b/c Kiefer made the
K when he was under 21. Stick to BLR.
(1) Rationale: Protect minors from their mistakes.
(2) Criticism: Are standards better? e.g. Allowing capable minors to be able to
2. Diminished Capacity: If a party is unable to understand a transaction due to mental
illness, then the K is voidable.
a. Oretelere v. Teachers’ Retirement Bd: Teacher cashes out her retirement plan
and then dies. Her husband sues to recover the lost money on the grounds that
she didn’t have the mental capacity at the time to make the decision. Held: K
voided b/c teacher didn’t possess the capacity to act reasonably and to
comprehend/appreciate the nature of her transaction.
1. PRESSURE IN BARGAINING
a. Alaska Packers: Fish packers from SF get to Alaska and demand more money or
threaten not to work. Employer agrees. They return to SF and Er refuses to pay.
Held: Er doesn’t have to pay workers additional money b/c there was no Co for
the new K.
(1) Based on the PRE-EXISTING DUTY RULE: The additional promise of more
money was not supported by Co—No benefit to company or detriment to the
workers. The legal duty to work already existed.
a. Performance of an existing legal duty ≠ Co
b. Rationale: Protects parties and acknowledges K they had to begin w/.
Prevents blackmail, misbehavior, coercion.
c. Criticism: If Er agreed voluntarily, then MA was present. Why should the
law step in to void the mutually agreed upon K?
(2) BUT voluntary modification is ok by way of rescission + modification
a. Watkins v. Carrig: W agrees to excavate C’s cellar. The ground ended up
being 2/3 rock. W wanted more money and C agreed to pay more. W
finished the job and C did not pay. Held: C must pay W in accordance w/
the new agreement. No PED. Both parties agreed to the new K.
i) Modification fair b/c there was an unanticipated change in
circumstances after the parties begun to perform AND b/c new K
terms was voluntary.
ii) Need rescission + modification of new K
iii) Modern trend: To recognize the sincerity of promises as long as
they are voluntary. (Thus, need to show (1) promise was freely
made; AND (2) new promise is fair and equitable in light of the
b. Rest: A promise modifying a duty under a K 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 K was made.
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a. Austin v. Loral: Navy awards L a K. A supplies 23 of 40 gears required. L gets a
second K from Navy and A says that it will stop delivering parts on the existing K
unless L gives them more $$ + agrees to make A the new supplier of the new K.
L agrees to A’s demands b/c it cannot find another supplier. Held: L can recover
money paid to A on grounds of coercion.
a. Policy: During the Vietnam war, and risk was high if L did not perform its K
to the navy.
3. CONCEALMENT & MISREPRESENTATION
a. Swinton v. Whitinsville Savings Bank: Sale of termite-infested house. Seller
didn’t disclose the problem, but buyer didn’t ask. Held: Seller has a duty not to
lie, but also no duty to disclose (i.e. Old C/L rule).
(1) Ct fears overburden on sellers to disclose ALL information; Will impact the
price in favor of the buyer. Based on idea that seller “owns” the information.
(2) Modern approach: If you know + don’t share + it’s hard for me to find
out, then it’s concealment.
b. Kannavos v. Annino: Owner converted house into apts, knowing that it was in
violation of zoning regulations. Broker advertised property as an income
generating property. After purchase, city brings suit against new owner over
zoning issues. Held: Owner has partial duty to disclose. If you bring up a
point, then you must disclose everything about that point. By advertising
the building as income-generating, you are implying that it was legal. Buyer
relied on seller’s assurances that the building could be used as an income-
generating property, so no duty to get the info himself.
C. PROBLEMS OF ADHESION CONTRACTS
A. Form/Adhesion Ks: Where a “stronger” party presents terms to “weaker” party such
that the “weaker” party can only accept ALL terms or reject ALL terms. No
1. ***Just b/c it’s an adhesion K does NOT mean that it is unenforceable***
2. O’Callaghan v. Waller & Beckwith Realty Co. Tenant injured on L’s property b/c
of L’s negligence. In lease, T signed an exculpatory clause that stated T wouldn’t
sue if injured due to the negligence of the landlord. Held: Clause should be
enforced as long as not per se against public policy. Here: Exculpatory clause is
not per se against public policy.
a. Rationale. Freedom of K (Co, MA, definiteness present) + free market (can
go elsewhere; market fluctuates so that tenants and LL @ different times may
have more bargain power). Let the legislature decide.
(1) Exculpatory clauses eventually benefits all tenants in the long run b/c
brings costs down.
b. Dissent: But if all LL use this K, then there really is no where else to go (i.e.
lack of choice.) Housing shortage creates unequal bargain power.
c. Conclusion: Must balance value of freedom of K and p.p. Here: LL didn’t
abuse bargain power to force tenant into the clause, so the ct shouldn’t get
3. Boilerplate Ks: Test is reasonable expectation of a normal consumer.
a. Klar v. Parcel Room—Ellis left a package for storage at the parcel room and
received a ticket stub but didn’t read it. Stub was a k containing terms that
limited coat room’s liability to $25. Ellis’ package, worth $1000, was lost and
he sued for that amt. Held: $25 limit is not enforceable. π never assented to
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the terms by reading and signing it. No proof that π knew that the stub was a
K—more than just a claim number.
b. e.g. Parking garages: Garage will post signs to give adequate notice to car
owners that the ticket is also a K.
c. e.g. Acme car rental case—satellite monitoring speed if go over speed limit,
then fined by Acme. Customers signed the rental agreement. Held: Speed
limit violation clause not enforced b/c customers not aware that clause was
part of the k. It is normally expected that renters would have to fill up the gas
before returning the car, etc. but the satellite/speed clause was strange and
(1) In this case, it was not reasonable to expect that the entire K would be
(2) Usual terms are enforceable, but unusual terms require explicit disclosure.
d. Henningsen v. Bloomfield Motors: π bought a car. Wife injured only 10 days
after receiving car b/c of defective steering mechanism. π gives up right to
sue by signing the purchase agreement—contained a confusing warranty
clause in K that relieved Δ from liability. Language was printed in 6 pt. font
on the back of the form. Held: Release clause is unenforceable.
(1) Ct found “implied warranty of merchantability”(UCC 2-314)→implicit
promise that the good is fit for the purpose of which the seller sells it to
you. Π argues dealer breached implied warranty of merchantability b/c
defective only after 10 days of use.
(2) Rationale: Standardized forms don’t necessarily make a clause
unenforceable. What makes it unenforceable depends on the
circumstances of the signed k:
- Status—one consumer vs. big automobile manufacturing union
- Behavior—clause on back of k was in 6pt font. Rest of document was in
12pt. Deliberately made it difficult to read. The lang of the warranty is
tricky, can’t easily be understood reflecting seller’s bad behavior. Seller
didn’t make buyer aware of clause, which is usually the custom.
- Substance—even if π read/saw the clause, can’t understand it to mean
that π was giving up the right of IWM. The k w/ the warranty clause
purports to erase the law. This stn leaves consumers w/ no other choice
b/c everyone needs cars.
e. Hill v. Gateway: Couple orders a computer over the phone. Terms arrive w/
the computer (including arbitration). Consumer doesn’t like the computer and
wants to sue. Held: Couple is bound by the arbitration clause. K formation is
“rolling” and doesn’t happen @ the time of the transaction.
1. Two Views
a. Epstein—If ppl have freely entered into something by k then k should be upheld.
Law only regulates procedure to ensure no duress, fraud, etc when k made. If the
procedure of the K is ok (i.e. freely bargained for), then the refusing to enforce a
bargain infringes on the fundamental right to K in society. Should NEVER look
b. Eisenberg—Unequal bargaining/imperfect competition exist. Freedom of k is
only a tool to get fair and efficient results. When tool fails to produce good
substantive deals, then law should protect ag bad deals.
(1) Procedurally unconscionable: (e.g. status, behavior)
(2) Substantively unconscionable (i.e. “meat” of K is unfair)
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2. Graham v. Scissor-Tail: G wanted to put together Leon Russel concert and signed a
std form used by Am Fed of Musicians w/ arbitration clause. Disagreement over the
K. G argues unfairness. Held: K is not enforceable. Although the G was aware of
the K terms, and terms were w/in the his reasonable expectation, the K was
unconscionable. The fact that disputes are arbitrated by a member of the union is
a. HYPO: What if G had seen the term and crossed it out? Factors to consider:
(1) Whether other party knew of the change (b/c it is rsbl for the seller to assume
that the form would simply be signed);
(2) w/ Whom G is dealing w/ (i.e. a little guy w/ no power to change the K);
(3) Common practice (whether its usual to haggle over terms)—will it effect the
a. UCC 2-719: permit companies to limit their warranty. The warranty on its face
may seem unconscionable but it isn’t necessarily. Cannot limit warranties for
4. Williams v. Walker-Thomas Furniture Co.: π purchased a number of items from Δ.
Payments for furniture were applied pro-rata to all items. If π defaulted on payments,
∆ had the right to repossess all items purchased @ Δ’s store. No way to pay off item
by item. π defaulted and ∆ repossessed all items. Held: Case set back to lower cts
to decide whether K is void b/c unconscionable. π is low-income w/ little chance of
obtaining credit elsewhere. Δ knew of her situation—that she wouldn’t be able to pay
5. Jones v. Star Credit: π bought a freezer for $900 (really worth $300) but w/ taxes
and credit charges it totaled to $1000. πs already paid $620 and ∆ claims that they
still owe $819. Held: Call the debt even @ $620—i.e. ct rewrites the K. πs not
required to pay anymore for the freezer b/c the terms of their k was found
6. Unconscionability in commercial Ks—
a. If two big corporations involved, then absurd to claim unfair bargaining power
since both parties are high-profit corps.
b. Can be applicable in franchises—Small guy v. big company
Unconscionability is very fact specific. Must show that the party with lesser
bargaining power had little or no knowledge of the terms. Must explain WHY
party has no knowledge (i.e. substance is unreasonable) and lesser bargain
Unconscionability is mostly based on unequal bargaining power. Duress or
misrepresentation may be involved, but not to the level where the K can be
voided solely b/c of duress or misrepresentation.
E. Contract That Violate the Law or Public Policy: Cts will void Ks for violating public
1. Rationale: Protect the public interest (vs. other “policing” cases where the focus is on
protecting the weaker party).
2. Illegal subject-matter: Ks with illegal subject-matter (e.g. drugs) are void and
3. Protect the public interest
a. Bovard v. American Horse Enterprises: Δ agrees to buy AH, a store that sells
jewelry and drug paraphernalia. Δ failed to pay on his promissory notes, so π
sued. Held: K is void b/c it is against public policy (i.e. to have a store that sells
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bongs and roach clips). Although it is not explicitly illegal to sell bongs, there is a
substantive law (i.e. statute that prohibits the use of marijuana)—shows that the
K violates the policy of express law.
(1) CA code: K is not lawful if contrary to the policy of express law.
b. e.g. VCR mfrs sued by the movie industry. Held: Although there is an illegal
purpose involved (i.e. bootlegging), VCRs can also be used for lawful purposes.
Just b/c there may be an illegal purpose, it doesn’t make the product illegal and
c. Commercial bribery:
(1) HYPO: Wholesale car salesman trying to sell cars to dealers. Dealership
doesn’t really need the cars. Wholesale car salesman says, “If you agree to
take my cars, I’ll give you $500.” Here: Illegal policy involved, although not
tied to substantive law. K probably void.
d. Hopper v. All Pet: H worked @ All Pet Clinic. H signed an agreement:
Termination w/ 30 days notice; Non-competition covenant—3 years, w/in 5 mi.
radius; “This agreement is reasonable.” H wants to start own clinic. All Pet sued
for an injunction + damages. Held: Covenant not to compete is enforceable.
Boils down to p.p. (Availability of services in rural Wyoming, no injury to public if
covenant enforced, etc.)
(1) P.P. needs to balance freedom to work v. freedom of K.
(2) Rest: To determine reasonableness: (1) Interests of the Er; (2) No undue
hardship on Ee; (3) Public interest.
e. Simeone v. Simeone: π, 23-year old unemployed nurse, got engaged to 39-year
old neurosurgeon. On the night before the wedding, π presented w/ prenuptial
agreement—limited π to a maximum payment of $25,000. Parties divorced 9
years later. Held: the prenup was upheld as enforceable. Old rule to protect
women is outdated, and new rule assumes that all women have equal bargain
power as men.
(1) Also a public policy argument in favor of the institute of marriage—Placing
trust in the idea of mutual confidence b/t 2 people who were about to be
f. Baby M—π paid woman $10k to carry their baby. Cts invalidated surrogacy k.
The father and surrogate mother were deemed the legal parents of the child &
father awarded custody. “Mother” didn’t get parental rights and wife couldn’t
adopt the child. Ct held that paying $ to the mom was degrading to women.
(1) Ct’s decision also based on what is best policy for the 3d party (i.e. the child)
F. ANALYTICAL OUTLINE
1. Is it a K of adhesion?
2. Are the terms within the reasonable expectation of the party? Was π aware of
3. Is the K unconscionable (i.e. really unfair)?
Is the K substantively unfair?
Is the K procedurally unfair (i.e. π didn’t really know what was going on)?
4. Are there any other principles to be addressed?
Status (Relative relationship of the parties)
Behavior (Duress, Concealment, Misrepresentation)
5. Should the K be void as a matter of public policy?
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A. SPECIFIC PERFORMANCE (rare)
1. Only given when $$ is insufficient to give a remedy or if damage by b/k is a viable
public interest (e.g. Needing propane to heat the trailer park during the oil crisis,
2. Personal services rarely ordered, even if a rare service is provided.
a. e.g. opera singer case—she is ordered not to sing for other company
3. Must have clean hands to get an equitable remedy
B. MEASURING EXPECTATION: LV (loss in value) – CA (cost avoided)
1. What is expectation? Where the injured party expected to be if other party didn’t
a. Formula A: Loss in Value (what I should’ve received – what I actually received)
[+ other loss]
- Cost Avoided (how much I saved from the k not going thru)
[- loss avoided]
= Expectation Damages
(1) Example: Sullivan v. O’Connor—nose jobs gone awry.
- Promised improvement $20,000 (i.e. what the K was worth to π)
Fee for 3 operations 100 x 3
Pain for 3 ops 3,000 x 3 **π only expected 2 ops
-Formula A: (loss in value) $20,000 + (other loss) $10,000 + $100 +
*Promised improvement + lost appearance + 3d op hosp. fee + pain of 3d op
b. Formula B: Expected profit
+ other loss
+ cost incurred in reliance
- loss avoided
= Expectation Damages
(1) Expected Profits = [loss in value]- [cost of complete performance]
(2) Costs avoided = [cost of complete performance]- [cost of reliance]
(a) Cost of reliance = Cost incurred b/c π thought K would be honored
(3) Builder hypo: Builder and Owner K to builder to build. B starts, but owner
K price = $1M
Cost of completed construction = $900,000
Cost of work done so far = $500,000
Expected profit ($100,000) + Other loss + Cost of reliance ($500,000) – Loss
Avoided = Damages ($600,000)
**Expected profit = (K price – Cost of completed construction)
2. Substitute transactions—“cover” in the purchase of goods
a. Bike HYPO: 1/1/03: Joo Ks to sell 20 bikes to R for a totally of $5000, the mkt
price @ the time. Delivery on 2/5/03. On 2/5, I inform R that I will not deliver. R
hasn’t paid any money yet. Mkt price has gone up to $5600.
(1) 2 ways to calculate expectation damages
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(a) Go out on the mkt and get the mkt price
(b) Go out and buy 20 bikes. If it is more than mkt price, cts will reward the
person for actually going out and getting the bikes.
b. BUYERS REMEDY WHEN SELLER BREACHES
(1) UCC 2-712: Substitute Goods.
(a) Buyer may “cover” by making in good faith & w/o unreasonable delay
any reasonable purchase of or k to buy goods in substitution.
(i) The buyer can go out and buy items, but still recover under the mkt
price remedy if it will allot more damages. (e.g. if buyer bought
cheaper item @ lower quality and had to resell the items at a lower
cost, then would buy cheap items/sell for less. If buyer buys cheaper
items, not exactly covering b/c not the same remedy.
(b) Example of what is NOT “cover”: I need 40 bikes and I k w/ Lolu. Lolu
breaches but can give me 20 bikes at most. 20 bikes is not a cover,
substitute transaction. Need 40 bikes, not 20.
(c) Bike HYPO: 2/5/03, R needs the bikes immediately, so he buys the bikes.
He goes to pay the cover price ($5600) + transaction/incidental costs
($100 rush delivery fee).
(i) Damages = Cover price ($5600) + Other loss ($100) – K
price/Expected costs ($5000)
(2) UCC 2-713: Buyer’s Damages for Non-Delivery (MKT PRICE).
(a) Market price determined as of place for tender.
(b) Bike hypo: R “lost” 20 bikes (@ price of $5000). But R was “expecting”
20 bikes, and now this is for $5600. Thus his lost value is 20 bikes =
$5600 (mkt value)
(i) Mkt price (@ time R learned of the breach) ($5600) – K price ($5000)
(ii) Rationale: Not fair for R to receive a windfall—i.e. more than the K
was worth. R also took the risk on 1/1/05 that the mkt price would
go down. If, on 2/5/03, the value of the bikes went down, R would still
have to pay $5000 for the bikes per the K.
c. Laredo Hides v. H & H Meat Co: L = Buyer; H = Seller. L made K w/ H to buy
hides, then L made K w/ tannery in Mexico. When H breached, L forced to buy
hides in the open market (“spot” market) which cost more than the K price. Held:
L entitled to damages under UCC 2-712: [Cost of substitute hides + incidental
damages] – [K price of hides]. L acted promptly and reasonably when it
purchased hides in substitution in the spot market.
d. SELLER’S REMEDY WHEN BUYER BREACHES
(1) UCC 2-708 “Lost profits.”
(a) Damages: diff b/t mkt prce at time and unpaid k price together w/
incidental but less then costs avoided.
- If first amt is inadequate to put seller in position as performance would’ve
done, measure of damages is profit which the seller would’ve made from
full performance by buyer.
(2) UCC 2-706 “Seller’s Resale.” (cover)
(a) If resale in good faith, may recover diff b/t resale price & k price.
(b) Seller isn’t accountable to buyer for any profit made on any resale.
(3) Loss in Volume
(a) e.g.: Buy sax for $275. Sell for $300. K to buy sax. Breach. Expected
profit=$25. After breach, a 3rd party buys a sax from me for $300. W/o
breach, would’ve sold two saxophones, not just one. This is NOT a
substitute transaction. Breach was loss in volume.
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(b) If only had one saxophone, party breached & 3rd party bought it, no loss in
volume b/c only had one to sell anyway. This stn IS a substitute
(c) Davis v. Diasonics: Davis and D&V—k to establish med facility where
equipment will be used. Diasonics and Davis—k for equipment. D&V
breach k w/ Davis. Davis breach k w/ Diasonics. Diasonics resold
equipment at same price. Held: Diasonics could recover “lost volume
seller” damages under UCC 2-708(2) if it could prove that it had the
capacity + would’ve made a profit from selling 2 machines.
(d) Lost volume sellers must prove:
1) Could’ve sold another item; AND
2) At a profit
4. Losing ks (expectation is negative)
a. Just b/c party wasn’t going to make $$ ≠ no damages. Put party where he’d
be if K completed.
(1) If they were to lose $$, then put him where he expected to lose (not more).
b. Sometimes expectation damages are not appropriate measure of damages b/c it
could provide a windfall to the breaching party, or b/c it is difficult to put a price
on expected opportunities now lost. Turn to restitution & reliance damages.
(1) Example. I promise to build a house for $500,000 but house really costs
$600,000. Other breaches. Expectation damages are: -$100,000. Awarding
me entire $4000 would over compensate me but giving me nothing would
undercompensate me. Don’t calculate damages based on expectation. This
is unjust enrichment. Award restitution.
c. U.S. v. Algernon Blair : ∆ & US—k to construct a naval hospital. ∆ & Coastal—
subk to perform steel erection & supply equipment. Coastal completed 28% of
subk but ∆ didn’t pay. Coastal stopped performance. Held: Although subK was a
losing K and was breached, Coastal can still recover something from B for using
and benefiting from C’s work. Unfair to give General the benefit of subKs work &
equipment + profit from the breach if no damages awarded.
(1) Expectation is NOT applied here even if it easy to calculate. Expectation
would be unfair to the sub & would lead to the general being unjustly
(2) Unjust enrichment= market value of materials & labor. This is difficult to
determine b/c Coastal may not be a good worker, may have done a bad job,
expected to lose but also to increase its reputation in the industry.
(a) Ultimately, unjust enrichment is based upon fairness
(b) Calculate these damages by looking @ how other pty’s been
d. Security Stove case: Stove was to be in a trade show. Paid courier to deliver its
exhibit but courier forgot important parts of exhibit. Company would’ve lost
$$ from show itself b/c no products would have been sold. Profits would come
after the show. Store lost showing its exhibit at the show & publicity opportunities.
Held: Store awarded reliance damages b/c easier to determine. Too difficult to
use expectation damages and put a price tag on lost opportunities.
(1) Stove co awarded reliance damages b/c relied that the stove would be there.
(Cost of reliance = the thing the party is actually going to get paid for b/c you
think the other party is going to perform)
(a) Here: Cost paid for delivery (i.e. performance so far)
(2) Foreseeable b/c stove told the delivery co of the importance of the show and
of the parts
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C. LIMITATIONS ON DAMAGES
1. AVOIDABILITY—duty to mitigate damages by substitute transactions. If refuse to
substitute, can’t recover at all.
a. HYPO: Joo promises to take B to the airport for $50. B cancels trip and tells Joo.
Joo takes B to the airport anyways and demands $50. Trip would’ve cost Joo
$30. Damages limited b/c Joo put himself in position where he didn’t need to be.
Joo lost $20 (profit) by not being in the K, so he gets $20.
(1) $30 spent, but didn’t need to be. This loss could’ve been avoided.
(2) Formula B’s cost of reliance was incurred, but Joo didn’t need to incur these
(3) If Joo offered another job & turns it down, perhaps no damages b/c Joo may
have a duty to mitigate damages by taking the substitute job.
b. Rockingham v. Luten : K to build bridge. County told builder to stop & builder
incurred $1900 in labor & materials. Builder worked until finished bridge. Now
asking for $18k. Held: Builder cannot recover the entire price of the K if notified
of the breach beforehand. Builder had the duty to mitigate its damages once it
learned of breach. After receiving notice, builder should have ceased building.
(1) No unjust enrichment b/c bridge is useless to the county.
c. Parker v. 20th Century Fox: Parker—Ks for “Bloomer Girl” w/ 20th Century.
Movie cancelled. 20th Century offered her alternative “Big Country” western
drama in Australia. Parker rejected alt & sued for breach on 1st k. Held: P can
collect damages of entire K (Bloomer Girl) b/c alternative was materially different
and inferior. Thus, P had no duty to take the new offer, thus, mitigating damages.
(1) CA rule: If obtain/can obtain other employment, you must take it unless it is
d. Tongish v. Thomas: T contracts to sell seeds to Coop for $9000. Coop had a k to
resell to B to make $455 profit. Market price of the seeds skyrocketed b/c of bad
weather and fewer seeds. Tongish breached k w/ Coop to sell to a higher bidder
(Thomas). Trial ct awarded Coop $455—based on [loss in value] – [cost
avoided]. Held: Coop entitled to damages based upon loss in value = seeds, not
the K price.
(1) Issue here is how to define loss in value
(2) Mkt value: $18,000 v. K price: $9,000. Big difference, but award the mkt
(a) Rationale: Ppl contract to mitigate the risk later that the price of the seeds
may rise or fall. Want to encourage K stability, and don’t want to create
an incentive for ptys to break a K. Shouldn’t reward pty that enters a K
and risk turns out disfavorable to them, so they breach the K.
(b) Ultimately, B is pushing the price risk onto Coop to obtain seeds. Thus,
can’t say that the seeds only worth $9455 to Coop is wrong b/c B will turn
around and sue Coop for not producing the seeds.
(c) Use UCC rules (“cover” or mkt value), but ultimately use policy
judgements to ensure a fair result.
2. Avoidability & Cost to Remedy Defect—cost in remedying the defect may be far
greater than the decline in market value caused by defect.
a. Jacob & Youngs v. Kent: π contracts w/ Δ to build a house. The k specifies a
specific brand of piping to be installed. π, in good faith, uses a different brand.
Bldg is completed but Δ refuses to pay b/c π failed to install the requested brand
of piping (Reading). π wants $$ but Δ says B/K by putting in the wrong pipe.
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Held: Too wasteful to tear all the walls down & remove pipes, so will give an
allowance. Mistake is innocent and trivial, so remedy is an allowance. Was a
“good faith” breach—no evidence of foul play. Mkt value of the house was not
(1) Rule of allowance: If a defect, owner get the cost of allowance for the defect.
If he can remedy the defect, then do it. But if not, it will cost too much.
(a) Here: Is the damages to be paid unfairly disproportionate for the good to
(2) Allowance is figured out in 2 ways:
(a) Replacement (cost to remedy the defect)—here: high; OR
(b) Mkt value—here: nominal or nothing
b. Groves v. John Wunder Co.: K to extract gravel from land. At end of lease term
land must be at a uniform grade. Wunder (Pr) doesn’t leave land at uniform
grade. Groves sues for cost of repair (over $60,000). Market value of the
repair=$12,160. Held: Groves awarded the cost of repair to the land ($60k).
(1) B/k was not trivial (i.e. getting rid of the waste was essential part of the K +
amt of waste high AND not innocent (i.e. b/k was willful)
c. Peeveyhouse v. Garland Coal Mining: P leased his land to G for strip mining coal.
In K, ∆ promised to complete remedial work by end of lease but failed to do so.
Cost of remedial work=$29,000. Market value of land would only increase by
$300. Held: G only liable to P for the mkt value of damages (i.e. $300).
(1) Cost of repair is disproportionate to the value of the repair.
(2) Restoration of the land was merely incidental to the purpose of the K
(3) Probably the only way to prevent this is by strategic behavior. P should add
$29k to the original K in case G doesn’t come through w/ promise to restore
3. FORESEEABILITY—Damages limited to foreseeable damages. FORESEEABLE TO
THE PARTY WHO BREACHED THE K. Rationale: Only liable for what can be
foreseeable liability @ time of the K. Factors:
Breaching party (experienced subk aware of consequences of delay)
Size of the damages (big—less likely to foresee, small—most likely will
Avoidability—did victim party try to mitigate damages? (crash program)
a. Hadley v. Baxendale: Mill shut down b/c of a defective shaft. It was shipped to
the manufacturer to be repaired. Delivery was delayed, so mill was shut down for
a longer period of time than was expected. Mill sued deliverers for 1 week’s lost
profits. Held: Damages are limited to those that “naturally arise from the
breach” OR “are now reasonably believed to be contemplated @ time the K
(1) Foreseeability turns upon communication. Here: facts suggest that deliverer
didn’t know of the “special circumstances” (i.e. the importance of delivering
(2) Re: Damages that “naturally arise from the breach”: Something SO obvious
that you would be held to it—whether contemplated or note. What should be
(3) For damages beyond the natural consequences: Ask whether it was
(a) Rationale: If not contemplated, then not put on notice.
(b) NOT px cause (torts)—Just b/c it’s caused, doesn’t mean that Δ is liable.
(4) Formula: Loss in value (i.e. delivery) – cost avoided + other losses
Contracts Spring 2002 Outline Page 11 of 21
(a) This rule keeps damages w/in limits.
b. Kenford v. County: π promised to give land to Δ in exchange for Δ’s promise to
build a stadium and to lease stadium operations to DSL. π buys peripheral land
to the proposed stadium. Δ realized stadium cost too much, so decides not to
build it. π sues for damages, including devaluation of the land surrounding the
proposed stadium site. Held: π entitled so some damages (i.e. land given back),
but not the devaluation of the surrounding land.
(1) π gets land back b/c it is a “natural damage” from the breach
(2) Re: surrounding land. It is expected that the value of property would go up +
K actually speculated that it would. BUT, it was not reasonably contemplated
by the parties @ the time of the K. Also…too attenuated of a chain to
(3) General Rule (in absence of any provision for an event): Consider what the
parties would have concluded had they considered the subject.
(a) Here: Δ probably wouldn’t have agreed to be liable b/c then damages too
c. Hypo: Men come into music store and buy instruments requesting delivery for
Saturday. Store owner fails to deliver. Men were from Mick Jagger’s band and
bought instruments for their Saturday concert. Probable holding: Store owner is
liable for market price of the instruments only—NOT liable for consequential
damages (i.e. cancelled concert) b/c didn’t know who the men were. Test is what
the owner should’ve known, not what he actually did know.
(1) Rest 2d: Damages limited to those foreseeable to the breacher @ the
time of K. Damages are foreseeable if they follow from the breach:
(a) in the ordinary court of events (UCC: consequential damages—i.e.
actual/direct loss + consequences)
(i) Remember, the non-breaching party may have duty to cover. If they
fail, then may not receive consequential damages
(ii) Hadley: Not entitled to all px results (i.e. loss in profits)
(b) due to special circumstances, that party in breach had reason to know.
4. CERTAINTY—Rest 2nd Contracts § 352: Damages aren’t recoverable for loss beyond
an amount that the evidence permits to be established w/ reasonable certainty.
Damages for breach must be based on reasonable certainty (based on sufficient
a. Fera v. Village Plaza: Fera leased mall space for a liquor store. Lease was lost &
space was leased to another tenant. An alt space was offered but was
unsuitable for Fera’s business. Fera sued for b/k. Held: Fera allowed to recover
lost profits—even though the store did not exist before. There was enough
specific evidence for the court to arrive @ figure for lost profit damages.
5. Recap: Limits on damages:
(1) Avoidability—Duty to mitigate
(3) Certainty (Fera)
Contracts Spring 2002 Outline Page 12 of 21
D. “Liquidated Damages” and “Penalties”
1. Stipulated Damages Clauses—When parties establish damages clause in K. It
can’t be a penalty and the damages must be reasonably related to the actual
damage expected. For SDC to be enforceable:
a. “Liquidated damages” Actual damages must be difficult to calculate + reasonable
good faith effort to calculated damages.
b. Stipulated amount must be reasonably related to actual damages.
c. Penalty/punishment = not related to the actual cause of damages
(1) The principle against penalty outweighs freedom of K. Thus, even if parties
agree on amount beforehand, the ct may invalidate the clause (e.g.
2. Wasserman v. Township: W leases to T for 30 years. @ outset of the K, if T
breaches (i.e. cancels the lease), it will pay W: Value of W’s improvement + 25% in
avg. annual gross receipts. T breaches, but refuses to pay the agreed damages b/c
T claims they are a penalty, not liquidated. Held: If damages clause is not
reasonable forecast of compensation, then not enforceable. Remanded to trial ct.
a. Purpose of SDC: Deter breach & Compensate Pe for non-performance—not
compel the Pr to perform.
b. Here: Ct concerned w/ “gross receipts”. Don’t reflect actual losses incurred. May
give π a windfall
3. Gustafson v. State: making state highway. K states that for every day late, deduct
$210/day. Held: SDC reasonable under the circumstances – hard to estimate actual
damages. Appeared to be a reasonable effort to fix fair compensation.
III. FINDING THE LAW OF THE CONTRACT—What information do we use to determine what
parties meant when forming their k?
A. PAROL EVIDENCE RULE—Extrinsic evidence may not be used to vary the substance
IF there is a final and complete written K.
1. Rationale: Limits evidence of the K to what is in writing. Dictates what source of
evidence is controlling when there are conflicts in the sources.
2. No parole evidence where there’s a written agreement IF the written agreement
is final and complete. Ct will allow parole evidence IF:
a) (Strict) K IS FINAL, BUT NOT COMPLETE (parol evidence can be used to
complete the K, but not contradict it.
b) (Liberal) K IS FINAL, BUT ARGUABLE WHETHER OR NOT IT IS COMPLETE
(i.e. evidence of prior negotiations indicates the language on the face of the K is
not what it seems to mean.)
a. Rest 2nd § 209: INTEGRATED AGREEMENTS—A writing constituting a final
expression of one or more terms of an agreement.
b. Rest 2nd § 210: COMPLETELY & PARTIALLY INTEGRATED AGREEMENTS—
completely integrated=complete & exclusive statement of the terms of the
agreement; partially integrated=final but not complete.
4. Gianni v. Russell : Vendor in office building promised not to sell tobacco. Vendor
claims LL gave him the exclusive rt to sell soft drinks in the shopping ctr in exchange
for his agreement not to sell tobacco. L rented a space to a store that sold soft
drinks. T sued for breach. Held: K was complete and final. K already determined T’s
use of the space [can’t sell tobacco]. K did not state that T had “exclusive right” to
sell soft drinks. Parol evid rule bars oral evid from varying the terms of the complete
Contracts Spring 2002 Outline Page 13 of 21
a. Parol evidence includes ALL forms of negotiations and agreements
b. Modern trend: Allow evidence to show that agreement was not complete (i.e.
including other agreements)
5. Parol evid rule will allow extrinsic evid to clarify the terms of the k.
a. Bollinger (Construction company failed to follow its routine of restoring topsoil
after depositing waste on π’s property. This condition was omitted by mistake
from the written K. Held: Δ must replace topsoil. Evid from similar situations
showed that removing, waste, and restoring was a normal routine of the
construction company’s conduct. Evid was allowed to clarify that the “routine”
term was part of the k, and suggests that replacing topsoil was part of the
agreement actually intended by the parties.
(1) Behavior after the K signed (i.e. NOT parol evidence) suggests that the
clause was supposed to be put in there
(2) Intent of the parties can be discerned by parties behavior pursuant to the
6. ANALYTICAL ANALYSIS:
a. Step 1: Can extrinsic evidence be used to contradict terms of the agreement (i.e.
is the K integrated)?
(1) Ask: Have parties adopted a writing as the final expression of one or more
(a) If so, agreement is “integrated,” meaning parol evidence (i.e. evidence of
prior agreement or negotiations) may not be admitted to contradict terms
in the agreement.
(i) If agreement is less formal, then it is a weaker argument that the K is
to be a complete/final expression of their terms.
b. Step 2: If integrated, can extrinsic evidence be used to add terms to the
(1) Ask: Did parties intend the integrated agreement to be the complete and
exclusive statement of the terms?
(a) If so, agreement is a “complete integration,” meaning parol evidence may
NOT be admitted to add any terms.
B. INTERPRETING K LANGUAGE: TRADE USAGE, SUBJECTIVE & OBJECTIVE MEANINGS
1. If a gap b/t thought and expression, must turn to what is a reasonable interpretation
of the language? Can bend language to reasonable extent.
a. Premise: Assumes that language is clear.
(1) But language occurs in a cultural setting (i.e. culture b/t parties)
2. Frigaliment v. BNS—Chicken case. BNS to sell “Grade A, govt inspected chicken”
chicken to π. Meaning of “chicken” was ambiguous – “young chicken,” “any chicken”?
π: young chicken (i.e. broilers/fryers). ∆: any kind of chicken. Held: π did not
produce enough evidence that “chicken” used in the narrower sense to mean
a. Language of the K itself:
(1) Weight specified—Does it imply young chicken? Ct: No b/c can be
reasonably interpreted that weight meant you wanted old and new chicken.
(2) Price—Note that mkt price was really low for broilers
(3) “Govt inspected chicken” → USDA std.
Since used “govt,” implies using USDA definition
b. Extrinsic evidence:
(1) Trade usage (i.e. what people in the industry understand “chicken” to mean)
Contracts Spring 2002 Outline Page 14 of 21
(a) Experts admit that more specific rules used when referring to specialized
(b) No evidence that BNS actually knew of the trade usage
(2) Look @ other definitions (i.e. USDA terms)
(3) Parties communication/actions outside the K itself
(a) Language barrier
(b) Parole evidence applies to prior negotiation only.
(i) Ok here b/c used to clarify/interpret the ambiguous terms of the K
c. Ultimate ??: What did the parties mean/reasonably believe would constitute this
3. If parties have two interpretations that are reasonable:
a. Raffles: Cotton to be delivered to the ship Peerless. Cotton arrives, and Δ
refuses to buy b/c he was talking about another ship called Peerless. Δ argues
that K is not binding b/c no MA (i.e. terms were different). Extrinsic evidence
showed that it was indeterminable + nothing in the K to suggest one Peerless
over another. Held: K void b/c no MA.
(1) Try to discern objective meaning. Anything in K itself? K is about getting
cotton. Assume that you want the goods sooner rather than later.
(2) Extrinsic evidence: What were parties thinking @ time of the K? Did they
know of 2 ships in existence?
(3) If NO objective/objectively discernable meaning, no K.
b. PG&E v. Thomas Drayage & Rigging Co.: T Ks b/ PG&E to fix its engine. T also
promises to indemnify against all loss/damage/injury that might result. (“∆ will
indemnify PG&E for all loss, damage, and injury.”) T agreed to get extra
insurance. ∆ damages π property & π sues. (∆: Under the k, T only indemnifies
property damage to 3rd parties (but k doesn’t state this). π: ∆ pays us for all
property damage.) Held: Industry practices & similar ks showed meaning of k
was 3rd party indemnification only.
(1) Language of K says “ALL”
(2) But trade usage of “indemnity” refers to 3d parties only
(3) Criticism: Is this ignoring the parol evidence rule, and allowing extrinsic
evidence to create an ambiguity?
C. FILLING GAPS: DUTY TO PERFORM IN GOOD FAITH & INDUSTRY PRACTICE
1. Idea that when you write a K, dealing w/ idea that the future is uncertain. K may
have gaps if the future situation was never anticipated
a. e.g. NBA Collective Bargain Agreement & John Starks. Collective bargain
agreement: “You are a free agent when your K ends.” Starks bought out his K to
leave the Bulls. Is he a free agent—i.e. free to go elsewhere?
b. e.g. Real World: Cast originally paid for the show only. But what about when the
show is unpredictably popular, and re-runs get shown? No provision in the K if
the show gets syndicated.
2. Look @ implied covenant of “good faith” and “fair dealing” to fill a gap. (i.e. You
must perform the K in good faith.)
a. Rationale: Want to be able to trust ppl you contract w/, and trust gives parties
b. Strict interpretation: Don’t have the duty of good faith while making/negotiating
the deal b/c everyone wants the best deal for themselves. Negotiations are ok if
they aren’t fraud or manipulated.
(1) This rule: Once you are IN the K, then must perform in good faith.
Contracts Spring 2002 Outline Page 15 of 21
c. Dalton v. ETS: D’s 2nd SAT score increased over 400 points. ETS’ had policy
that they were suspicious at the jump in score. They did a handwriting analysis
and no match. Registration: “ETS has the right to cancel the score if there is
reason to doubt the score.” Also have 5 options to the test taker (includes
reviewing addl info). ETS finds addl info not relevant. Held: D is entitled to have
the information reviewed. Failure to review info = a breach in the duty of good
(1) Specific performance ordered—NOT that score be released, but that
information will be reviewed.
(2) Duty of good faith defined here: Cannot deny the other party the fruits of the
K (Here: K gives D the benefit/protection against ETS’ discretion by allowing
him to submit addl information. If D submits relevant information, then ETS
must consider it.)
d. Burger King Corp v. Weaver: Franchise owner sues corp. b/c corp put another
BK in the same small town as π. π argues a breach of good faith. Held: No
breach of good faith b/c K doesn’t say that they can’t do this. Can’t use the
implied duty of good faith to create a duty that is not in the K.
(1) Florida rule: Can’t make a claim for breach of implied covenant of good faith
IF Δ has performed all express provisions of the K in good faith.
(2) Differs from Dalton b/c in D—Applying good faith to what is already there (i.e.
doesn’t literally say that you must look @ the stuff). Here: No provision of
exclusivity—can’t use the gap to create the existence of the gap.
e. Eastern v. Gulf: Requirements K where G promises to sell E the fuel that E
requires. Implied: E will buy requirements in good faith. Gulf argues that E
violated the K by practice of fuel freighting (i.e. buying fuel where it’s cheaper).
Issue: Whether or not fuel freighting is a breach of implied good faith of the K.
Held: Fuel freighting is common practice/industry custom that airlines engage in.
(1) Industry custom → indicator of fairness & expectation of the K. (i.e. if
everyone in the industry does it, then can reasonably expect that these
parties would also follow industry practice.)
(2) Also relied upon other evidence: Course of performance: What these parties
interpreted the K as before the alleged breach.
(a) This is NOT parol evidence b/c they are interpreting the K itself—not
introducing evidence that would add to or contradict the K.
IV. PERFORMANCE & BREACH
A. CONDITIONS – an event not certain to occur, which must occur, before performance is
due. Condition usually benefits the side that has more bargaining power.
1. What performance is due?
2. What is the condition that performance depends on?
1. Effects of Conditions: If a condition is NOT met, performance on the k is excused.
One person cannot control the condition.
a. NFL Player Contract: If player is not in shape, then team can fire you. Team’s
duty: Employment, but is conditioned on staying in shape. OR team’s right to
kick you off the team is conditional upon the player not being in shape.
b. Luttinger v. Rosen: π promised (i.e. perform) to buy a home from Δ if π can
obtain the specified mortgage rate. π couldn’t obtain the mtge rate & rejected an
Contracts Spring 2002 Outline Page 16 of 21
offer to make up the difference by seller’s atty. Buyer requested for a refund of
his deposit. Held: π used due diligence, like “good faith,” in fulfilling k’s
requirements. The condition (i.e. obtaining the specified mortgage rate) was not
(1) Implied duty of good faith (i.e. “due diligence”). If no due diligence, then
promise is illusory b/c buyer has no obligation to do anything.
(2) Irrelevant that seller offered to make up the difference
c. Internatio-Rotterdam v. River : R promises to sell rice to I (FAS—will drop the rice
off @ the ship next to the dock). K: Delivery in December w/ 2 weeks notice.
Notice not given by December 17 (the last possible day in December to have the
contents shipped in December w/ 2 weeks notice given). R didn’t hear from I by
Dec. 17, so on Dec. 18, R cancels the K. Held: π did not meet the condition of
the K & ∆ is not bound to ship anymore rice after Dec. 17. Ct infers the condition
(i.e. that 2 weeks notice must be provided upon delivery.
(1) Timing was key. Delivery couldn’t have fallen into January b/c rice must be
shipped in December b/c of the busy season for rice.
(2) Condition: Shipping instructions to be received by 12/17; Performance:
Delivery of rice
(3) Issue: Can R get out of selling the rice? (NOT can I get out of buying the
(4) I can’t intentionally fail to give notice b/c may violate implied covenant of good
faith. Otherwise, K is illusory.
2. Problems of Interpretation—Condition, Duty, or Both?
a. Condition or duty only—e.g.
(1) e.g. “I promise to pay you $30 IF you take me to the airport”
(a) Duty to pay is conditional upon you coming by and taking me.
(b) Can also be interpreted as a duty alone—You have a duty to take me, I
have a duty to pay you. thus, if not conditional, then even if you don’t
come, I still have to pay $30—then I can turn around and sue you.
(2) e.g. Mortgage case: No duty to obtain the 8.5% mortgage—only a duty to try
(3) e.g. “I’ll give you $30 if you find my dog.” Not interpreted as you promising to
find my dog (i.e. duty). Here: a condition only.
b. Condition AND duty—e.g.
(1) e.g. Mortgage case: It is a duty to use due diligence to get the condition
(2) e.g. @ closing of a house: I give you the deed. You take the deed and pay
$$. Each is a condition of the others’ duty.
(3) e.g. Employment: Condition of my duty to pay you is that you will actually
show up for work.
c. Historically, duties were independent (e.g. If I didn’t pick you up for the airport, I
could still sue you for $30. You breached your duty to pay.)
d. Modern trend: If you don’t do your duty, I don’t have to do mine.
e. Peacock v. Modern Air Conditioning: M is a subcontractor. P is general
contractor. M ks to work for P. P calls for final payment to sub-k’ers w/in 30
days after work is done and owners have paid P. When work was done, P did not
pay M b/c P had not received payment from the owner yet. M sues for payment
by P. Held: P must pay M—even though the owner has not paid M.
(1) (Unless expressly stated), General contractor bears the risk of
Contracts Spring 2002 Outline Page 17 of 21
(a) Rationale: General can then indemnify or put a mechanics lien/demand
collateral from the owner if the owner doesn’t pay. If subs assume the
risk, then don’t have any remedy b/c not dealing w/ the owner.
(b) General also “marks up” the price (he pays the sub) to the owner—thus,
this reflects the risk taken.
(c) Ct also assumes that Subs are the smaller businesses that survive job to
job, and that Generals can afford to take the hit.
(i) Be sure there is evidence to support this. Joo is not so sure
(2) Also try to reasonably interpret what the parties meant. Here: Assume that
the Sub would never take the risk of the owner not paying, and thus, wouldn’t
have entered into the K if he had known.
f. Gibson v. Cranage “If I am not satisfied w/ the photo, I don’t have to pay for it.”
Man didn’t like the photo & refused to pay for it. Held: Seller agreed to make
man the sole judge of “satisfaction,” and if man not satisfied he doesn’t have to
(1) A buyer’s subjective feelings can be a condition of a K & seller is bound to
(2) B/c this is a personal K. The SM suggests that “satisfaction” based on the
subjective feeling of the buyer.
C. MITIGATING DOCTRINES RE: INCOMPLETE PERFORMANCE: SUBSTANTIAL
1. You work, I pay. Work is condition upon my duty to pay. But what if the work is
defective? Do I still have a duty to pay? Perhaps, if substantial performance
completed that goes towards the purpose of the K.
a. Rule: There can be no recovery on a K unless there is substantial performance
b. My duty to pay is conditional on you substantially performing
c. If substantial performance, damages = K price – defect (either: diminished
mkt value price OR cost to repair defect)
2. Incomplete performance is not always treated as a breach of k.
a. Jacobs Youngs v. Kent (Reading pipe case.) Held: buyer is still bound to buy the
home b/although the specified pipes were not installed into the home. Why?
Specifications were clear but ct did not understand the importance of the reading
pipe over an equivalent quality pipe.
3. Plante v. Jacobs : Builder builds house w/ defects (missing gutter, cabinets, sidewalk,
bench). Does owner have to pay workers?) Held: The purpose of the k was to build
a home & a home was built. Owner still has to pay workers but pay k price minus the
cost of the defects.
a. Diminished Value Rule – difference b/t value of the house w & w/o defects.
(1) Used when the cost of repair is too much for the remedy to be done. Here:
misplaced wall changes the mkt price $0. Thus, no damages.
b. For smaller repairs, get the cost of repair
c. Contrast this to the boathouse case—builder built the boathouse not lined up with
the dock. Builder must pay the cost of repair b/c boathouse is not usable.
Purpose of that K was to get a boathouse, and didn’t get it.
(2) v. here: purpose was to get a house, and the buyer got it.
Contracts Spring 2002 Outline Page 18 of 21
4. UCC: Perfect Tender Rule: For the sale of goods, the goods must be perfect (i.e.
match all specifications). Thus, no payment unless perfect performance
a. Rationale: No unjust enrichment if you don’t keep the good. The seller can give
the bike back and resell it.
(1) Also wish to avoid forfeiture: i.e. lost labor, materials. Idea is that for a
service, once it’s gone, it’s gone…(e.g. If I build a house, and you don’t pay
me, then the builder forfeits all the labor + materials to make the house)
b. Can argue that something is a service rather than a good.
c. vs. Substantial performance—based on purpose (If you promise to paint my
house blue and you paint it white, still have to pay b/c purpose of K was to have
a painted house. But can still collect unjust enrichment.)
(1) Essentially, perfect tender = substantial performance (UCC)
V. FAILURE OF BASIC ASSUMPTIONS (basic assumption is like a condition: if it fails
it will get you out of the k—i.e. an excuse)
A. MISTAKE - assumption of the state of things when the k was made & assumptions turn
out to be inaccurate
1. Mutual Mistake of both parties makes a k void
a. Mistake is about the “basic assumption” of the k,
b. It has a “material effect” on the exchange of performances, and
c. Risk was not borne by the party seeking to be excused.
i. Party will bear risk if risk was assigned to party in the k.
ii. Party will bear risk if he knowingly acts on insufficient information. (e.g.
builder didn’t know soil conditions and knew he didn’t know yet he pushed to
iii. Party will bear risk if ct thinks it is “rsbl” to assign risk to that party.
2. Renner v. Kehl: KM ks to transfer leases to R. R wants to get out of K and sues for
recission. R argues that K was based upon a mistake b/c he wanted water to grow
his plant and he figured both parties believed there was sufficient water on the land.
R had already put down a payment and taken a conveyance. Held: Was assumed
that buyer wanted water and was a material effect b/c KM giving land that he thought
to have water. KM gets land back, but R must pay for the drilling.
a. Don’t want buyer to bear entire risk b/c both buyer and seller made the error.
b. NOT based on idea that KM broke the K. No broken K here—no fault, no
compensation. No one did anything wrong. MA was present when the K written.
c. Ct: trying to avoid unjust enrichment.
3. Unilateral mistake—then issue is of fairness
a. e.g. Estate sells paintings for $60, but turns out they are worth $1M. Held:
Mutual mistake b/c estate assumed/took the risk b/c didn’t find out the value.
(1) Could be a unilateral mistake if the buyer knew the value of the paintings.
Seller may get out of K b/c buyer is taking advantage of him—buyer had
reason to know the seller was mistake OR if unconscionable to enforce the K.
B. IMPRACTICABILITY OF PERFORMANCE – changing circumstances after k was made make
the K substantially difficult to perform. “I can’t do what I promised you I’d do.”
1. Rest. : I am excused from performing, if, after K is made:
a. my performance becomes “impracticable.”
b. w/o my fault
c. by an event whose nonoccurrence was a basic assumption of the K
d. [as long as language or circumstances don’t indicate otherwise]
Contracts Spring 2002 Outline Page 19 of 21
2. Taylor v. Caldwell: Δ owned music hall & K’s w/ π for π’s parties. Hall burns down
before the first party by no fault of the Δs. Held: Ct implies a condition of the hall
actually existing (i.e. “we will rent the hall only if it is still existing.”) Δ’s performance
a. Also: can perform the K, music hall doesn’t need to rebuild the hall. Only need to
pay damages. Ultimately, the court is deciding who it is most fair to take the
b. Perhaps different result if Δ had insurance to allocate the risk of fire.
c. Holmes: You can always imply a condition, the question is when you will do it…
3. HYPO: Milkman is supposed to deliver milk, but a tiger escapes from the zoo.
Milkman doesn’t deliver. Ct: Although it is impossible for delivery to happen,
milkman can still perform the K by paying damages.
4. Selland Pontiac GMC v. King: S was going to buy busses from King to resell to
school. King, the middleman, would get busses from Superior. Superior goes out of
business, so King can’t supply bodies. S loses deal on busses, and has no use for
the parts bought. Held: King is not liable for failing to provide the busses b/c of
a. Ct allocated the risk to S. S knew that Superior named as a supplier. Ct
interpretation = bus bodies must come from Superior. It is now impossible from
(1) Ct reads an implied condition b/c King was to supply Superior bus bodies.
b. Other interpretation: Purpose of K was to get bus bodies from King. If Superior
can’t supply, then it’s King’s problem. Not adopted here.
5. Allocating the risk
a. Foreseeability: Idea that something is not impracticable if it is foreseeable
(1) Wedding cake hypo: You are getting married on June 1. I am caterer. There
is a special bakery that makes special cakes, and only supplies to caterers.
On May 27th, I call the bakery to make the cake. Bakery is busy and can’t
supply the cake. Should the caterer be excused from impracticability? (i.e.
who is the risk allocated to that the cake is not available?)
(a) If it is foreseeable that bakery would be busy, so caterer should have
b. If the risk is foreseeable to both parties, need more info
(1) Who has control over the conditions?
(a) In the wedding cake hypo, the bakery only deals w/ caterers, so caterer is
the only one who could have prevented the situation.
(2) Is the purpose of the K to allocate the risk?
(3) Which party is best suited to bear the risk?
c. Eastern v. Gulf: Requirements K. G is trying to get out of K b/c they argue that
the price was messed up (i.e. artificially depressed by govt price control) which
makes the K commercially impracticable. Held: Not impracticable b/c it was
foreseeable that the prices would fluctuate and that was the purpose of the K.
(1) Impracticable ≠ loss in profits
d. If situation is foreseeable, then put it in the K and expressly allocate the risk.
(1) NFL Player’s K: Injury to player makes performance difficult. K foresees
injury to a player: “If the player is injured, his salary will be paid for the
remainder of the season…”
(2) Iowa case: Ins co had 99-yr lease on building in Des Moines. K: “Rent @
$23,000/yr, but all payments by gold coins equal to present std in weight in
finance.” In 1999, how much is the rent? Tenant: $23,000; LL: $300,000
($23k worth in gold today). Ct: LL b/c gold clause was to account for inflation.
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(a) Rise in the cost of gold = event whose nonoccurrence was a basic
assumption of the K.
6. Mistake v. Impracticability
a. TIME: Mistake is about an error in existence @ time of the K. Impracticability
changes after the K made.
(1) Impracticability: Not something you could have known. Thus, need to decide:
who could have protected it from happening (or who could have insured
against this from happening?)
b. EFFECT: Mistake effects the nature of performance, but doesn’t make it more
difficult to perform. Impracticability = difficult/impossible to perform.
C. FRUSTRATION OF PURPOSE – destroys value of performance. Performance excused b/c
something changes after the K was made. “I can perform; I just don’t want to.”
1. (Rest) I am excused from performing my remaining duties if, after K is made
a. My “principal purpose” is “substantially frustrated.”
b. without my fault
c. by an event whose nonoccurrence was a basic assumption of the K
d. [as long as language or circumstances don’t indicate otherwise]
2. Krell v. Henry (∆ rented a room to see a procession but procession got cancelled.)
Held: ∆ doesn’t have to rent out room anymore b/c value of renting rooms has been
destroyed b/c the coronation has been postponed on those dates that ∆ was going to
rent the rooms. Purpose of the K was for H to see the coronation.
a. Parol evidence rule applies here: Not specifically in the K that H rented the rooms
to see the coronation. But outside evidence shows that H wanted the room for
that purpose and that the LL knew of H’s motivation.
b. Frustration is a DEFENSE—NOT A C/A. H: “I don’t have to pay b/c the purpose
is invalid.”—NOT…”I can sue you b/c the purpose is invalid.”
(1) Frustration is a shield, not a sword. Can shield you from suing me, but I can’t
c. To apply the restatement: H is excused from performing his remaining duties, but
won’t get his deposit back.
(1) Assuming that the deposit is for 50% of the total cost, the risk of the
coronation not happening is evenly distributed b/t tenant and LL.
(2) Purpose of this K: Allocation of the risk.
3. Swift Canadian: Keystone (US Co) agrees to buy lamb pelts from S (Canadian Co).
K: “FOB via Buffalo-Pennsylvania RR to Penn.” Keystone prevented from bringing
lamb pelts into the US b/c of US Govt’s new rule, so Keystone tells S not to ship the
pelts. Held: No frustration of purpose for S b/c the pelts are still valuable—although
the purpose of the K was to send the pelts to Pennsylvania. Value of performance
not sufficiently destroyed.
a. Modern rule: Purpose of K must be destroyed AND the value of the
(1) To recover: S must prove that Penn. is the only mkt for these pelts (to
demonstrate value of performance destroyed).
(2) vs. Krell v. Henry: H lost value b/c apt not worth much w/o the coronation
b. NB: S can allege breach even if they don’t physically bring the pelts to Keystone
since Keystone told them that they wouldn’t accept them.
4. Not enough to say an event is foreseeable. Must address to whom the risk is
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