1) Policing the Bargain:
a) Unconscionability and Adhesion Contracts:
i) Adhesion Contract: an adhesion is a form K that cannot be modified by the less
powerful party. Some adhesion Ks, however, are unconscionable.
(1) Form Contracts: adhesion contracts, contracts that give you no choice.
(a) Arguments for:
(i) Mass production can serve the interests of both parties by utilizing
previous experience, reducing uncertainty, simplifying planning and
administration, and by making risk calculable.
(ii) They can be an important means of excluding or controlling the irrational
factor in litigation- unforeseeable contingencies such as strikes, fire, and
transportation difficulties can be taken care of.
(b) Arguments against:
(i) It may be the means by which one party imposes its will upon another
unwilling or even unwitting party:
1. Bargaining over terms may not be between equals.
2. There may be no opportunity to bargain over terms at all.
3. One party may be completely, or at least relatively, unfamiliar with the
(c) When society grants the freedom to contract it does not guarantee that all
members of the community will be able to make use of it to the same extent.
(i) In O’Callaghan v. Walker: the court upheld an exculpatory clause that
barred the tenant from recovery in a negligence action against the
1. This could be seen as a case of adhesion in that the tenant had to live
somewhere and if all landlords have the same form clause they have
effectively eliminated tort liability. The limited choice in the housing
market allows the landlord to put more conditions on the tenant.
2. The court however believes this to be a freedom to contract issue.
There are no legal rights to housing and the legislature had not ruled
that such clauses were illegal.
(ii) In Henningson v. Bloomfield Motors the court found a liability clause void
because unlike O’Callaghan, where the court did not find that all the
landlords had the same clause, the manufacturers explicitly got together
and agreed to the terms effectively denying consumers a chance at
(2) Tickets, Passes and Stubs:
(a) In Klar v. H & M Parcel Room Ellis did not read the ticket stub which limited
the recovery amount to $25, but his package had been worth $1000.
1. Ellis’s normal expectation was that if ∆s lost his package they would
pay for it.
2. Terms unavailable: When the K was formed it is possible there were
no terms, he couldn’t read it, as they had not given him his stub until
after he had given them his package and paid his 10 cents.
(ii) The stub contract should be blown up and obvious or it should be pointed
out to patrons to avoid these types of suits.
(3) The Duty to Read and the Right to Understand
(a) A very general rule is that one who signs a contract document without reading
it runs a risk.
(b) This goes towards mutual assent- have they read it? Presenting a form
contract for assent entails a certain obligation to make it intelligible. The
UCC occasionally demands that a provision be conspicuous.
(c) In Darner Motor Sales v. Universal Underwriters: Darner was able to recover
when the insurance agent told him not to worry about his limit when in fact
his policy did not provide full coverage.
(d) Failure of a signer to appreciate the effect of a writing is not a mistake that is
ordinarily excused. Someone who cannot read can express consent to a
(e) Where other evidence of unconscionability is present and the standard form is
not intelligible the signer has a weakened duty to read.
ii) Unconscionability (oppression or unfair surprise): so unfair and bad that it won’t
be tolerated, shocking to the conscious, something about the K is so awful that the
law should not enforce it.
(1) Unconscionable if (no one factor is determinative, they are distinct):
(a) Deprived of a choice of terms;
(b) Deprived of the ability to know and understand the terms (software, airline
(c) K hides damaging terms in small print trickery, obscure language, deceptive
sales practices (doesn’t rise to the dignity of a K);
(d) Inequality of bargaining power is gross (may be monopoly or active
(e) K is for a necessary purchase (apartments, cars)
(f) Terms are extremely unfair in light of current business practices;
(g) Injurious to public policy. Deprives consumer protection that legislature
sought to protect (hospital exculpation clause).
(2) Arguments Against Unconscionability:
(a) Notice was clear and well-posted;
(b) Not unfair, just economic leverage;
(c) Weren’t forced to sign anything;
(d) Form may have benefits (liability clause may reduce rent);
(e) Public policy for legislature, not courts.
(3) Restatement § 211: Standardized Agreements
(a) If other party has reason to believe that party manifesting assent would not do
so if he knew the writing contained a particular term, the term is not part of
(4) Unconscionable Contracts under the UCC:
(a) UCC 2-302 authorizes a court to refuse enforcement or to limit the application
of a K or clause that it determines to have been unconscionable.
(i) The principle is one of the prevention of oppression and unfair surprise.
(ii) The cannery lost to a grower in Campbell Soup Co v. Wentz because the
court found it was too hard a bargain to entitle the ¶ to relief in a court of
(5) O’Callaghan v. Walker: Exculpatory clause relieves landlord of all liability for
negligence. All LLs have same clause. Structural behavior and disparity of
bargaining power. Housing as a basic need but the court sides with freedom of K.
(6) Williams v. Walker-Thomas: the court found a K unenforceable where the credit
scheme made it so that the lender could repossess all items bought, even when the
customer defaulted on only one item.
(a) There was a lack of bargaining power.
(b) When a party of little bargaining power, and hence little real choice, signs a
commercially unreasonable K with little or no knowledge of its terms, it is
hardly likely that his consent was ever given.
(7) Warranties and the UCC 2-719:
(a) It is okay to limit your warranty, however limitation of consequential damages
for injury to the person in case of consumer goods is prima facie (at first
glance) unconscionable but limitation of damages where the loss is
commercial is not. You/the Court assume it is unconscionable; the seller has
to prove that it is not.
(i) Henningsen: all dealers disclaim all implied warranties of merchantiblity.
Industry wide form. Gross disparity and active collusion to undermine
warranty law- must take purchase K as it is or for go the car.
1. The law is saying that there are some things that you just can’t do.
The government protects individuals from big business. Big business
is the only institution that has power that can rival the state (banks,
auto manufacturers, etc).
(8) Two Views of Unconscionability:
(a) Eisenberg: Reconciliation with the bargain principle: the element of unfair
surprise (negating assent)
1. Procedural: fault or unfairness in the bargaining process
2. Substantive: fault or unfairness in the bargaining outcome- unfairness
a. Doesn’t believe these are different. Saying that the law should
only regulate procedure is easier said than done- they over lap and
hence substance must be regulated at some times.
(ii) Freedom of K is not an end in and of it self, it is a tool by which we
achieve good deals. Freedom of K is instrumental.
(iii)Unequal bargaining power. Some people have more freedom of K than
others. If every manufacturer has the same exculpatory clause then those
private parties are in a sense making the law
1. Imperfect competition: As in the case of cars where there are few
manufacturers that could get together in one room and agree.
(b) Epstein: In the substantive context the doctrine of unconscionabilty serves
only to undercut the private right of K in a manner that is apt to do more
social harm than good.
(i) (1) Freedom to K is the important thing- the result is not.
(ii) (2) The courts can police by looking to a defect in the process of
formation, or to incompetence.
b) Contracts that Violate Law or Public Policy:
i) With hot public policy issues the court will step back and leave the parties as they
were rather than interfere.
ii) Illegality: K involving activities that are illegal or that violate public policy are void,
even if they seem perfectly valid in terms of K formation. Don’t enforce even though
outcome may be unfair, both parties must have clean hands.
(1) The courts will look to their own formulations or case precedent or statutory laws
in determining what public policy is.
(a) Criminal sanctions are far more likely to be effective than are threats of the
unenforceability of private agreements.
iii) Public Policy as a reason for enforcing:
(1) Laclede v. Amco: if the K was broken the people would freeze- public policy
reason to order the injunction (public policy as a reason to enforce- this is not
policing the bargain)
iv) Public Policy reasons for not enforcing:
(1) Marvin v. Marvin: ordered palimony payments for people who were not married.
(a) The courts had previously looked at these types of cases as meretricious
relationships that should not be enforced. Based on a presumption that a
sexual relationship outside of marriage was immoral.
(i) The court here felt that to equate this type of relationship with prostitution
was to do violence to those relationships. There was no basis for the old
thinking anymore- society’s mores were changing.
1. Movement for freedom of K for anything (even a K for a relationship
that doesn’t conform to the ideas of marriage).
(2) Thomas v. LaRosa (1990): the court ruled that since the parties’ relationship was
adulterous support agreements that had been entered into were unenforceable.
(a) The court did not like that recovery for Thomas would be injurious to
LaRosa’s wife. The court also did not like that Thomas had presented herself
as Mrs. LaRosa- common law marriage was not part of the law of West
1. When two people enter into a bad K, and both are behaving badly, the
court will not bring the law into it.
2. The 3rd party: if you are living in sin in an adulterous relationship the
3rd party is causing harm to the wife’s marital property rights
3. The other problem is that they are creating something not allowed by
law- the subject matter is illegal- common law marriage, adultery, or
v) Surrogate Parentage Contracts: Reproduction
(1) Johnson v. Calvert, 1993; gestational surrogacy; enforced the K
(a) The majority felt that to say that a woman cannot knowingly and intelligently
enter into this type of K to carry a baby is demeaning to women.
(b) The dissenting justice wanted the decision to be based upon the best interest
of the child. This brings up questions as to what criteria would be used.
(c) Moschetta: the CA struck this case down (it was more like the Baby M case)
b/c the surrogate was the genetic mother.
(i) The genetic connection is very important to the court in this case, contrary
to the Johnson cases where they cared who intended to be the mother. The
court however said they struck the K down based on a CA adoption rule.
(2) In re Baby M, 1988; traditional surrogacy
(a) In this case the surrogate mother was a genetic parent. Promised to pay her
$10K to carry the child.
(b) The court invalidated the surrogacy K b/c they felt it was illegal and contrary
to public policy: In disregard of the agreement, the court concluded that
custody should be assigned according to the best interest of the child.
2) Remedies for Breach:
a) Measuring Expectation: where I would have been if you would not have broken the
contract. Calculated from perspective of the breached against party.
i) Might expect to have some out of pocket expenses and get paid- the expectation
damages were not the total of what the party was to get paid- the expectation is the
difference between what you expected to get paid and what you expected to
spend on the contract out of your own pocket.
(1) Loss in value: What I should have received from you – what I received from you
(a) Value of performance; pay expected (not profit) (offset by any performance
received before breach)
(2) Other loss: physical harm to that party’s person or property or expenses incurred
in an attempt to salvage the transaction after breach. (physical harm,
inconvenience, cover costs, transportaion)
(a) Not always other damages.
(3) Cost avoided: the saving of further expense that would have been incurred had
performance been continued. How much was I going to spend but did not. i.e.
would cost $400K to finish the project.
(a) In Formula B: Cost of complete performance minus cost already incurred in
(b) i.e. Cost of building the entire building minus costs so far
(4) Loss avoided: the saving of expense by the avoidance of some loss by salvaging
and reallocating some or all of the resources that otherwise it would have had to
devote to performance of the K.
(5) Expected Profit: K price minus all costs.
(6) Reliance: cost expended to carry out so far (total cost minus the cost to complete)
(7) Formula A: expectation damages = loss in value + other loss – cost
avoided – loss avoided
(a) Example: $1 million (loss in value)- $400K (cost avoided) = $600K
(b) Sullivan v. O’Connor: $20K (loss in value) + $10K + $100 + $3K (other
losses) = $33,100 expectation damages
(i) Promised improvement in appearance - $20K
(ii) Loss in appearance/disfigurement - $10K
(iii)Fee for 3 operations - $100 each
(iv) Pain for 3 operations - $3000 each
(8) Formula B: expectation damages = cost incurred in reliance +
expected profit + other loss – loss avoided
(a) Joo’s version: Expected Profit + other loss + cost incurred in reliance – losses
avoided = expectation damages
(i) This is just a different way to get at the same answer from Formula A; use
when given different numbers/info that doesn’t fit into categories for
(ii) Loss in value + other loss – (cost of complete performance + cost already
incurred in reliance) – loss avoided
1. Loss in value – cost of complete performance = expected profit
(b) Example: $500K (cost of reliance) + $100K (expected profit) = $600K
ii) Contracts for the sale of goods: substitute transactions the UCC and market price
(1) Buyer’s Remedies:
(a) UCC § 2-712: Cover; Buyer’s Procurement of Substitute Goods
(i) A buyer may “cover” (purchase) goods that should have been delivered.
(ii) The buyer may recover from the seller as damages the difference between
the cost of cover and the contract price together with any consequential
damages, but less expenses saved in consequence of breach.
(iii)Buyer’s damages should be based on the difference between a presumably
greater price that the buyer will have to pay on the market and the lesser K
(iv) Failure to cover does not bar buyer from remedy; but there is a good faith
requirement to try.
1. Laredo Hides v. H & H Meat Products: Laredo was allowed to recover
the cost of additional cow hides it was forced to purchase when H&H
failed to deliver hides under their K.
(b) UCC § 2-713: Buyer’s Damages for non-delivery or repudiation
(i) The measure of damages for non-delivery or repudiation by the seller is
the difference between the market price at the time when the buyer learned
of the breach and the contract price together with any consequential
damages, but less expenses saved in consequence of the seller’s breach.
(ii) The seller fails to deliver goods and the buyer fails to cover its damages
are based on the difference between market price and the K price.
(2) Seller’s Remedies:
(a) UCC § 2-706: Seller’s Resale (analogous to cover)
(i) Seller’s damages should be based on the difference between the
presumably greater K price and a lesser price it will receive on the market.
(b) UCC § 2-708: Lost Profits
(i) When the buyer fails to take a pay for goods and the seller fails to resell its
damages are based on the difference between market price and the unpaid
1. Davis v. Diasonics: the court allowed recovery under 2-708 if
Diasonics could establish that the breach did cause a lost volume sale.
Diasonics would have to prove that it had the capacity to make the sale
to Davis as well as the sale to the resale buyer and that it would have
been profitable to make both sales.
iii) Losing Contracts:
(1) If you were going to be $100K in the hole then you should only be able to recover
up to the point where you are still $100K in the hole. This would be expectation
damages for a losing K.
(2) If preventing you from getting any money violates another doctrine then you may
get more than expectation. The court may use reliance or unjust enrichment as
the measure of damages.
(a) A builder is not likely to say they were going to be in the hole. If it is really
hard to say what is going on then you may want a different measure of
(b) US v. Algernon Blair: the general contractor breached its contract with the
subcontractor. The subcontractor wants to recover for the breach although it
would have lost money on the job ultimately. If the general contractor pays
them $37K the subcontractor will be better off than expected.
(i) The subcontractor will argue for reliance damages.
(ii) Expectation damages was not applied in this case b/c it would violate
another principle of Ks- unjust enrichment.
(iii)The court chose to measure damages based on market value of the
materials and labor.
(c) Security Stove: lost an opportunity to show off their stove at a trade show
when ∆ did not deliver all the parts as the K specified. They expected to lose
money on the show but expected it to be an opportunity to showcase their new
(i) The problem is how to calculate what a lost opportunity is worth. The
court elects a reliance measure of damages- ¶s relied on ∆s delivering the
parts. They recover for incidental and consequential damages- damages
that flow from the breach.
b) Limitations on Damages:
(1) There is a duty to reasonably mitigate damages. If you don’t mitigate then you
don’t recover for your loss. You can recover the amount up to where you should
(a) Rockingham County v. Luten Bridge: L was notified that R no longer wanted
the bridge, a breach of K. L built the bridge anyway and brought suit to
recover. The court did not allow recovery b/c L failed to mitigate its damages,
there is a duty to avoid losses if possible.
(i) L would have been better off to stop building and then could have
recovered using Formula B: the cost of reliance + expected profit.
(b) Parker v. Twentith Centruy Fox: the court allowed P to recover damage from
breach of an employment contract. They found she could recover when she
did not mitigate her damages by accepting substitute employment that was not
equivalent or substantially similar.
(i) The substitute employment must be reasonable/comparable and
substantially similar- this is a very fact specific inquiry.
(ii) Generally a wrongfully discharged employee cannot deliberately rack up
damages by not finding other employment; they can only recover damages
that cannot be avoided. If you can get another job you should.
(2) Contracts for the sale of goods: if the breached against party reasonably believes
that damages can be mitigated by completing production of the good, then the
party may complete the good, and full damages are recoverable even if the
attempt to resell fails.
(a) Can choose to cover and make a substitute purchase and then damages are
based on the cover price minus the K price.
(i) People will most likely cover to avoid being sued by another party they’ve
(b) Or Can choose not to cover and then seek damages based on the market price
minus the K price.
(c) Tongish v. Thomas: Farmer breached K with the Coop when the price of
sunflower seeds went up. The court awards the Coop the market price ($9K)
of the sunflower seeds instead of the lost profit ($455) caused by the breach.
In this case the UCC 2-713 (market price) is used as a way to modify the CL
rule of expectation damages in order to deter breaches.
(i) If cover is possible and you choose not to cover then you shouldn’t get
damages based on lost profit which could have been avoided, but you can
still get the market price. You should get incidental and consequential
damages that came from your decision not to cover.
(ii) If cover is not possible then you may get to recover market price damages
with incidental and consequential damages. The loss or gain of profit on
the resale could be consequential damages.
(3) Avoidability and Cost to Remedy Defect:
(a) When Cost of Repair is Greater than the Value of Repair: cost of
remedying a defect or full completion may be far greater than the decline in
market value caused by the defect. Court may say that the breached-against
party has substantially performed, which means that the breached-against
party will only get the loss in market value, not the cost of replacement.
(i) Jacobs & Young v. Kent: ¶ did not install the specific pipes ∆ requested,
but the installed pipes were of the same grade and quality. The court
would not award the cost to repair in such a case.
1. The purpose of the K was to build a country house which is what the ∆
got. The purpose was not to install Reading pipes; there was no
purpose to wanting that brand of pipe.
2. The measure of ∆s damages would be the difference in market value-
in this case the difference would be nothing or nominal.
3. It would be economic waste to tear down the walls and replace pipe
that is essentially the same. Expectation would not be an appropriate
remedy. Of course if could be argued he got what he expected
(ii) Peevyhouse v. Garland Coal: P leased their farm land to G to strip mine
with the condition that G return the land to its previous state. G did not do
so- it would have cost $29K to fix the land and the market value of the
land would have increased $300. The court did not allow P to recover the
cost to repair.
1. The purpose of the K: The court found that the special provision
pertaining to the remedial work was incidental to the main object
a. The dissent points out that P had said explicitly that G could not
mine without returning the land to its previous condition.
2. The court sets up a rule for coal mining leases that precludes recovery
where the cost of performance would greatly exceed the value. This is
a very lenient rule for coal companies.
(iii)Bob Villa and the New England Cottage:
1. The owners put in a pool for their daughter. The pool itself decreases
the value of the cottage property. If the pool company had tried to
breach their contract, they might argue that finishing the pool would
actually decrease the market value of the property. However, since the
purpose of the K is a pool for their daughter, an interest society
recognizes, the purpose is valid. The market value is not equal to the
loss of a pool for their daughter.
a. Unlike the pipes where the purpose of the pipes was found invalid.
b. The Peevyhouses may have felt that the market value was not
equal to the loss- the land where they lived and ranched was torn
(iv) Groves v. John Wunder: W contracted with G for G’s property and
promised to level the ground when done. It would have cost $60K to level
and the property would have been worth $12K. The court allows recovery
of the cost of repair.
1. The purpose the K was to put the land back as it had been.
2. The court found the W breached in bad faith- this probably colored
3. The court reasoned that the land might increase in value in the future if
the land was leveled.
(1) Consequential damages are limited to what is reasonably foreseeable (in
contemplation) at the time the K was formed (flowing from the K).
(2) Possible spectrum of everything possible that flows from the breach to only what
the parties were told. Can be better than direct K damages.
(3) Foreseeability is related to mutual assent. If you knew you’d be liable for a large
sum of damages then you may not have gotten into the K.
(4) Unfair to hold a party liable for damages they could not have foreseen.
(a) Hadley v. Baxendale: damages for extended mill shutdown not awarded b/c
shipper did not know (didn’t communicate) reopening depended on timely
(i) Held to know things contemplated: sort of narrow, only responsible for
things that you actually though about or discussed.
(b) Spang v. Aetna: Damages to bridge builder who had to rush from supplier’s
delay where foreseeable b/c supplier should have known delays would cause
complication with the weather.
(i) Based on the particular parties – a steel contractor should foresee what
they delay would do.
(ii) Builder tried to keep a lid on possible damages by rushing – fair to hold
iii) Certainty (for lost profits):
(1) Lost profits or predicted gains may be included as “other losses” after a breach
only if it is proven with reasonable certainty that the prospective profits/gains
would have materialized had the breach not occurred.
(a) Fera v. Village Plaza: ¶s were refused the space they had contracted to lease
from ∆ for their new business.
(i) New business may recover lost profit damages for breach of the mall lease
if the profits are not excessively speculative.
(ii) In this case there was a good deal of testimony on both sides as to future
profits. There must be some evidence/testimony to support a damage
estimate – the jury is not allowed to guess.
c) Liquidated Damages and Penalties:
i) Stipulated Damages Clause: a K provision which pre-estimates damages to be paid
in the event of a breach. Must constitute a reasonable forecast of provable injury
resulting from breach, otherwise, the clause will be unenforceable as a penalty and
the non-breaching party will be limited to conventional damage measures.
(1) Liquidated Damages Clause: Enforceable if it is a reasonable estimate of harm,
and actual damages are difficult to prove/calculate.
(a) The sum a party agrees to pay if she breaks some promise that was reached at
in good faith.
(2) Penalty Clause: unreasonably high estimate of harm, used to deter or punish a
(a) A the sum the party agrees to pay in the event of a breach which is meant as a
punishment, the threat of which is designed to prevent breach.
ii) Courts don’t want to penalize as a result of differences in bargaining power. Must be
fair and constitute a legitimate attempt to predict actual damages.
(1) Wasserman’s v. Middletown: the court held that a damage clause stating that if
M breaches it has to pay part of the cost of renovation plus 25% of W’s annual
receipts was a penalty. 25% of gross is not a reasonable estimate of what W
(a) Two questions asked by the court to determine enforceability of the
(i) If the actual damages are hard to calculate;
(ii) If the stipulated amount is reasonably related to actual damages.
3) Finding the Law of the Contract:
a) The Parol Evidence Rule:
i) Rule: No extrinsic evidence (prior oral agreements, memos, faxes, letters,
negotiations) may be introduced to vary the terms of a final and complete
(integrated) written agreement.
(1) Is extrinsic evidence being used to clarify or to vary the substance?
(a) Prior communications may be mere bargaining that do not reflect the final
(2) In determining whether extrinsic evidence may be allowed, it is necessary to first
determine whether the written agreement is fully integrated (final and complete)
or only partially integrated (final but not complete).
(a) A K is fully integrated if it is final and exhaustive with regard to all terms
related to the K. No outside evidence may be admitted to add any missing
contract term to a fully integrated K.
(b) A K is merely partially integrated if it is final with regard to terms included in
the K. Evidence of prior agreements may be admitted to add missing terms in
a partially integrated K.
(i) Gianni v. R. Russell: (strict older view) oral promise for exclusive right to
sell soda in exchange for not selling tobacco was not allowed into
evidence b/c it was natural for such terms to be included in the written
lease. There was no reason to believe anything was missing – that type of
promise should have been included in the lease.
1. Integrated unless obviously incomplete on its face, presumption that it
is final and complete. (Williston)
2. What is natural is really intent. Look to see if the parties intended the
document to be a final integration. Hard under strict older rule.
(ii) Masterson v. Sine: (looser, modern view) allow parol evidence to evaluate
whether document is complete. Allow when the fact finder is likely to be
misled. A writing cannot prove its own completeness – some evidence
must be admitted to establish its completeness.
1. A wide latitude must be allowed for inquiry into circumstances bearing
on the intention of the parties. (Corbin)
2. The court had to admit certain evidence to figure out what the terms in
the K meant – clarify the meaning. Can use outside evidence to clarify
the substance of the K.
(3) If the K is partially integrated, to determine whether the extrinsic evidence is
allowed we must next determine whether the parties would have naturally
included such information as part of the written agreement.
(a) If the outside evidence would have naturally been included (related to the
subject matter), it is considered excluded evidence and not allowed.
(b) However, if the evidence is of the type that wouldn’t have been included in
the written agreement by the parties, it is considered a prior independent
agreement and permitted under the parol evidence rule.
ii) Exception for Mistake, Accident, Fraud: even in a fully integrated K, a prior
agreement / term that is mistakenly, accidentally, or fraudulently omitted from the
written K may be admitted later if mistake, accident, or fraud is proven.
(1) Bollinger v. Central Pennsylvania Quarry: Oral condition that company cover
waste with topsoil was omitted from K by mistake. Company started restoration
and then stopped, and followed same procedure on neighbor’s property. This is
good evidence that the mistake was mutual and both wanted it to be part of the K.
iii) No-Oral Modification Clauses: K cannot be varied by an oral agreement after a
written K is made.
(1) CL: these clauses are not effective b/c even a no-modification clause may later be
(2) UCC 2-209: A signed agreement which excludes modification or rescission
except by a signed writing cannot be otherwise modified or rescinded.
iv) UCC and the Parol Evidence Rule: relaxes the parol evidence rule; under the UCC
an agreement goes beyond the words on a piece of paper.
b) Interpreting Contract Language (find the ambiguous terms)
i) Problem: First locate what the problem is. Words in a K may be unclear, and may
cause confusion as to what the parties intended the agreement to be.
ii) Plain and Clear: if K language is plain and clear, then no extrinsic/outside evidence
iii) Reasonably Susceptible to Alternative Meaning: If K language is reasonably
susceptible to alternative meaning, then extrinsic evidence should be considered to
determine what the parties intended. Objectively reasonable meaning of language
will usually prevail (information that the court would find relevant to finding out the
(1) Trade usage/ custom
(2) Prior dealings of the parties
(3) Parties actions and communications (PER, can use extrinsic evidence to clarify
but not to change terms)
(4) Frigaliment Importing v. International Sales: party who seeks to interpret terms
of K in a sense narrower than everyday use (subjective) bears the burden to prove
this use. K would have been loser if chicken only meant broilers.
(a) The court will start with the common sense meaning and then look to see if it
means something else.
(b) In this case the trade usage of the word chicken was used to figure out the
objectively reasonable meaning.
(5) Raffles v. Wichelhaus: Two ships with same name, no objectively reasonable
meaning of Peerless.
(a) Exception to general rule: if ambiguous, if both parties give same meaning
then K, but if parties give different meaning, then no K b/c it was a material
(b) There was no objectively reasonable interpretation of the K they had made.
(6) Oswald v. Allen: two coin collections, no objectively reasonable interpretation of
the K they had made. The court ruled there was no K.
c) Filling Gaps:
i) Three Step Approach to Filling Gaps:
(1) Identify Gap: Parties disagree, yet the K says nothing about the matter and no
parol evidence to figure out what parties intended.
(2) Fill Gap: Explain that gaps are usually filled by some interpretation of “good
faith” (always a duty) or sometimes “best efforts.”
(3) Define Gap Filler Term: by examining objective information such as:
(a) Industry Practice
(b) Prior dealings and course of performance
(d) What is normal between parties and what is normal in the industry without
imposing an obligation that would be unreasonable.
ii) Eastern Airlines v. Gulf: Fuel freighting. Good faith means following reasonable
industry practices. Fuel freighting was a reasonable industry practice and they had
been doing it for some time.
iii) Dickey v. Philadelphia Minit-Man: Minimum rent clause makes best efforts to max
car washing efforts irrelevant. It is unreasonable and wholly undesirable to imply an
obligation that would necessarily be vague, uncertain, and impracticable (no need to
operate business at a loss).
(1) The business was in a down turn and the LL was protected by the minimum rent
clause so there is no reason to declare they breached the K when they stopped
washing in an effort to increase revenue.
iv) Market Street Associates v. Frey: Party may not intentionally exploit other party’s
oversight of a crucial fact. Did not bring up the buy back clause that would become
operational when negotiations broke down. This departs from good faith. (but can
use superior knowledge to drive an advantageous bargain)
(1) Good faith in performance of the duty, not it making the K.
(2) Need to fill in a gap b/c we need to know if M’s behavior is acceptable. We fill
the gap with a duty of good faith.
v) Bloor v. Flastaff Brewing Company: K clause obligating “best efforts” to maintain
high volume of sales of certain product is breached when company emphasizes profit
w/o fair consideration of the effect on sales volume of brand. (No need to go
(1) Best efforts curtail a party’s ability to go after their own best interest. Parties to a
K are like partners. Have to try to maximize both sides.
vi) Nankuli Paving v. Shell: Gap – does the K require S to give price protection to N?
Price protection was part of trade usage and course of performance (past practice),
and will be read into Ks where such are so prevalent that the parties have meant to
4) Performance and Breach:
a) Conditions: an event that is not certain to occur that must occur before performance
becomes due (if not met, performance is excused).
i) Cannot act to foil a condition that is under your control.
ii) Approach to conditions:
(1) What is the performance that is due?
(2) What is the condition?
iii) Implying conditions:
(1) Who bears the risk of the condition not occurring? Look at the whole context.
(2) What are the policy reasons to imply a condition?
iv) Effects of conditions:
(1) Luttinger v. Rosen: If we find an 8.5% loan we will buy house. Don’t meet
condition even though attorney is willing to provide functional equivalent.
(a) Performance: buying the house
(b) Condition: Getting a mortgage at 8.5% by using due diligence
(2) Internatio-Rotterdam v. River: We will deliver rice to your docks if you give us
two weeks notice.
(a) Performance: R’s delivery of the rice
(b) Condition: two week’s notice (shipping instructions by 12/17)
v) Problems of Interpretation (duty v. condition): It is not always clear whether a
performance is conditional, or whether there is a duty to perform. Courts, however,
often interpret language in a way that avoids forfeiture:
(1) Peacock v. Modern Air Conditioner: A contractor agrees to pay a subcontractor
within 30 days of owner’s final payment. P argues condition; M argues duty and
wins: 30 days merely sets the timeframe.
(a) Who bears the risk: the K does not say how the risk is allocated so the court
interprets the 30 day language as a way to prevent P from ripping off M. It
makes sense to have P bear the risk b/c as the general contractor P has more
control over the owner. Looking at the whole situation.
vi) Good Faith Duty to Perform Condition: If promise is conditional, then a “good
faith” attempt must be made to make the condition occur. A party is not allowed to
sabatoge the condition. Good faith is defined by industry custom and practices,
objective reasonable person standard, marketability, utility.
(1) Mattei v. Hopper: Businessman must make a good faith effort to find satisfactory
leases. Buyer’s duty is conditional on getting satisfactory leases. Objective good
(2) Gibson v. Cranage: Father of deceased girl promises to buy a painting from an
artist who “forced it upon him” if it is “satisfactory in every way.” The painting
is good, yet the highly subjective nature of the conditions gives the father wide
latitude to be dissatisfied. Personal, maybe not even a K, illusory, no
(a) Objective (implied) good faith > Subjective (more latitude to say condition is
vii) Parol Evidence is Admissible to Prove Oral Condition Precedent: Parol evidence
is admissible to prove oral condition precedent to a written K’s legal effectiveness as
long as evidence does not “in a real sense” contradict with the terms of the written
agreement. (not discussed in class)
b) Constructive Conditions: dependency of covenants/promises
i) Defined: exists when the parties intended a promise to be conditional, yet they didn’t
use explicit language in the agreement.
ii) Condition, Duty or Both:
(1) Presumption Favors Independent Condition Unless Implied Otherwise: A
promise is presumed to be independent (not conditional) unless language or
circumstances imply that the parties intended the promise to be dependent
(conditional). Dependence or independence of covenants is to be determined
from the intention of the parties.
(a) Kingston v. Preston: A merchant agrees to convey his business to an
apprentice “upon good and sufficient security.” Merchant’s promise must be
conditional upon the apprentice’s security deposit b/c merchant would never
give up business w/o some protection. The performance of the 1st covenant
was an implied condition precedent to the duty to perform the second
(i) To make this duty only: state that ¶’s attainment of security it not a
condition of ∆ giving over his business. If merely a duty ∆ must sell and
∆ can then sue ¶ for damages for failing to give security.
(ii) To make this a condition: if ¶ fails to give security then ∆ doesn’t have to
sell the business. ∆ cannot sue for damages. ¶ has not broken the K.
(iii)Condition and Duty: the agreement is to give security and the
performance is conditioned on that. If ¶ doesn’t give security then ∆
doesn’t have to sell and ∆ can sue for damages.
(2) On an exam talk about:
(a) Whether it’s a condition.
(b) Which one is a condition?
(c) Is it merely conditional or a condition and a duty?
(d) Should assume a conditional relationship. Look to the purpose of the K in the
broader picture to determine which one is the condition.
iii) Performance Presumed Before Pay: Payment is presumed to be conditional upon
completed / tendered performance. Parties can K around this rule unless otherwise
stated (e.g. progressive payments or installments)
(1) Stewart v. Newbury: K to do excavation work, but silent on payment process and
¶ bills first installment after completion of the first floor. ∆ refuses to pay. The
court decides that work should come before pay.
(a) The order of performance is an allocation of the risk.
iv) Concurrent Conditions and Tender: sales of goods or land
(1) The conditions are mutually dependent: duty to supply the good is conditional
upon payment and duty to pay is conditional on supply of the good – happen at
the same time.
(2) When the K doesn’t say who goes first the assumption is that it happens at the
c) Mitigating Doctrines Regarding Partial Performance:
i) Substantial Performance: If the purpose of the K is substantially achieved then there
is a duty to substantially pay. Duty to pay is not based on perfect performance, but
substantial performance. If you perform substantially or did everything but not
perfectly then it is not always treated as a breach.
ii) The ∆ should recover the K price minus the damages caused by ∆’s incomplete
iii) Look for the purpose of the K and see if it has been achieved to find substantial
iv) A Trivial Breach:
(1) Intent of the parties is mostly satisfied and the purpose of the K is not frustrated.
(2) Economically wasteful to correct a small defect w/o substantial increase in value.
(3) Beaching party acted in “good faith”
(4) Expectation damages would be harsh.
(a) Jacob & Young v. Kent: builder finished the house but not with Redding
pipes. This was trivial b/c the purpose of the K (to build a house) was not
frustrated. Specific piping was not held to be a condition or essential to the K.
(i) To not enforce the K would create a forfeiture problem. Instead the owner
can subtract from the K price if the trivial breach affects the market value.
(b) Plante v. Jacobs: a wall was misplaced by one foot and other small omission
made by the builder. The court found substantial performance that met the
main purpose of the K. Cost of repair applies to small defects, but
misplacement of wall has no economic value and ∆ cannot recover the cost of
replacement for it (would be economically wasteful to move the wall).
(i) Diminished Value Rule: the difference between the value of the house as it
stands with faulty and incomplete construction and the value of the house
if it had been constructed in strict accordance with plans and
v) Exception to Substantial Performance: Perfect Tender Rule (UCC, goods):
(1) UCC § 2-601: a K for the sale of goods must be performed exactly/perfectly. No
substantial performance mitigation is available for goods. But the UCC does give
some time for the seller to correct performance if there is time to do so.
(a) Forfeiture Issue: the seller can at least keep the good, as opposed to
(b) Moulton v. Lyn-Flex: ∆ refused to accept certain innersole molds made by ¶
on the grounds that they differed from what ∆ had agreed to buy. Under the
perfect tender rule ∆ did not have to accept the molds.
5) Failure of Basic Assumptions: Mistake, Impracticality and Frustration: create an excuse
(defense) not to perform
a) If a basic assumption of the K has failed then you might be able to get out of the K. This
is about when you can not perform and still get off the hook.
b) Mutual Mistake:
i) A party can get out of the K if (Restatement § 152):
(1) The mistake was to a basic assumption regarding a condition that existed at the
time the K was made;
(2) The changed condition had a material effect on agreed performance;
(3) The risk of that mistake is not assigned/borne by the party seeking excuse
based on Restatement § 154:
(a) Assigned by the K;
(b) Knowingly acts on insufficient information;
(c) The court thinks it’s reasonable.
ii) Stees v. Leonard: building falls down twice b/c of poor soil and the K was silent.
Someone had to bear the risk and this court rules for the owner. The builder knew
that they had limited information about the soil, reasonable that the builder would
have inspected. (Counter: owner had access to the lot and could have found out about
the soil – least cost avoider)
(1) Could look to trade practice in 1874 to find out who would have been responsible
for testing the soil.
iii) Dover v. Brooking: Buyer of land was allowed to void the K b/c both parties
mistakenly assumed that the zoning laws allowed the buyer to use the property as the
buyer had planned. The parties did not know about the pending law. Would be
economically wasteful for the buyer to have to hold onto the land – the seller can find
another buyer who could use the land appropriately under the new zoning law.
iv) Mutual mistake is a failure of assent such that the K doesn’t make sense.
c) Impracticability of Performance:
i) A party can get out of the K if:
(1) There has been a change in circumstances of a basic part of the K;
(2) Performance has become commercially impractical;
(3) The risk is not borne by the party seeking excuse.
(a) Allocation of the risk: foreseeability is a key element
(i) Foreseeability does not tell us who the risk was allocated to but does give
a good indicator.
ii) Taylor v. Caldwell: There was a change in circumstances due to the basic assumption
that the music hall would not burn down. Would be commercially impractical to
require ∆s to construct a new hall by the K date or find another venue.
iii) Transatlantic v. US: Shipper was not allowed to use the defense of impracticability
b/c the longer route (the shorter route was foreclose by closure of the Suez Canal) did
not cause the shipper commercial impracticability. The shipper should have had
insurance and known of the risks.
(1) Commercially impractical does not mean just more expensive.
iv) Wedding Cake Hypo: it is foreseeable that if the caterer waits too long to order the
cake he might not be able to get the cake. Not only was the risk foreseeable but there
is nothing that the bride could have done to protect herself b/c the baker would only
deal with the caterer.
v) Eastern v. Gulf: price controls are negatively affecting Gulf. The court says that not
only were the price controls foreseeable but Gulf could have protected itself by
putting in a clause that dealt with it.
d) Frustration of Purpose: minor doctrine
i) A party can get out of the K if:
(1) The value or purpose of a K is frustrated by
(2) An unexpected occurrence or circumstance, and
(3) The risk of such unexpected occurrence or circumstance was not allocated
(explicitly or implicitly).
ii) Unexpected change the risk of which was not allocated with destroys the value of
performance. A hybrid of mistake and impracticability.
iii) Krell v. Henry: The letting of the rooms has not value b/c the procession was
postponed. The renter still has value b/c they can always rent to someone else. The
renter did not have to pay for the rooms.
6) Assignment and Delegation: transferability of K rights and duties
a) Assignment: assignment of rights to another party
b) Delegation: personal property and leases
i) Robson v. Drummond: where the essence of the K is a personal performance the right
can not be delegated/assigned to someone else.
(1) Sally Beauty v. Nexxus: when a business is being bought and sold we are talking
about the assignment and delegation of K rights. S was owned by a direct
contributor of N. N had contracted for Best’s best efforts. Couldn’t trust S to
give best efforts.
ii) British Waggon Co. v. Lea & Co: in a wagon repair K the court ruled that the right
could be delegated. This was a K for rail cars rather than a K to take care of a
handmade article in Robson.