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Contracts Outline – Mutual Assent Imwinkelried – Fall 2008
Formation Stage
~Mutual Assent~
Theories
Subjective:
o Meeting of the minds; but injustice in problem of proving state of mind
Objective (modern view):
o A manifestation of mutual assent – behavior and external manifestations suggest to a
plaintiff a subjectively honest belief and objectively reasonable expectation of performance
Shift from S to O cited in Lucy, where Lucy’s belief there was an offer rendered a reasonable
expectation
OFFER
Tentative working evidence for offer: a definite, conditional promise manifesting the offeror’s present intent to enter
a binding, final agreement
Conditional
o ―If‖; I request (promise/performance) given crystallized K
o I promise something in return for another promise or performance
o Distinguishable from a mere gift
Binding
o Express intent: look at seriousness—that the parties desired legal enforcement; the more
details, more serious
o Interpretive intent: intent of parties to have agreement legally enforced is not expressed
or is ambiguous, presume parties don’t want legal enforcement (family/social vs. business
settings)
Finality – intent to enter into a final agreement… facts considered by court below:
o Words used:
clear and specific; can’t be futuristic; quotes usually aren’t offers just prelim
negotiations
Owen (no K b/c no offer; ―unless‖ is not an offer to sell)
o Surrounding circumstances:
Subject-matter, third-party negotiations, business customs, other documents
Harvey (known pendency of negotiations with multiple buyers less
reasonable to think it’s intent to offer; no K b/c no offer)
o Definiteness of proposal
too much definiteness is bad if the market is moving fast***
efficiency of the market concern
Silence w/r to quantity = no K
SW Engineering (shook hands manifesting present intent but lacked
payment method; yes K b/c shouldn’t fail due to lack of one term when
everything else, including quantity was there… filled with UCC)
o Size of the group addressed:
Larger the group, less likely Ct sees an offer
Norm:
1
Craft (no K b/c no offer due to indefinite size of group of
addressees; ad was invitation for D to receives offers)
distinguished from following…
Exception:
Lefkowitz (―first come, first served‖ limits size of addressees
and takes away policy concern of multiple liabilities***; yes K b/c
definiteness in offer)
o Contemplations of subsequent execution of formal writing:
Going to attorney to draft details, indicating INTENT
Modern view: less stress on formality
Definiteness Requirement – to supply Ct w/ way to give remedy
o At common law
General standard is reasonable definiteness on material terms (i.e., price,
quantity, time and location of delivery)
Traditional view:
Walker (no K b/c only agreement to agree; ―upon business
conditions‖ is very vague/broad; no intent to enter a final
agreement)
o [No faith in valuable experts]***
Minority view (trend):
Greene (yes K b/c rent ―to be agreed upon business
conditions‖; this Ct placed expert testimony as reasonable gap-
filler)
o Aforementioned cases are not factually
distinguishable, rather suggests [court’s policy can differ
on whether expert testimony is a reliable or efficient way
to fill in gap for non-scientific material terms (i.e.,
rent)]***
o UCC – for ambiguity/ambiguous terms – laxing the common law definiteness standard
UCC 2-305, 2-308, 2-309 are gap-filling provisions
Price, time of delivery, delivery terms, duration, time of payment if
parties are silent
UCC 2-305 resolve common-law splits of authority
QUANTITY is always necessary
ambiguity in material terms – Fairmount (turn to trade custom to fill in
that gap of quantity)
o When a court finds breach of K, it grants remedy by providing P w/ specific performance
by D or damages
Needs reasonable definiteness in the material terms
TERMINATION OF OFFER
Offeror’s supervening death OR incompetency – S/A
o Prevailing view:
If offeror dies or becomes mentally insane, unbeknownst to the offeree, the offer
terminates… {vestiges of subjective theory b/c lacking meeting of the minds…
offeree doesn’t get notice, relying on offeree’s good faith injustice results}
o Minority view:
Offer terminates only when offeree knows or should have known
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Offeree’s supervening death OR incompetency
o Common law:
Automatic termination, lower risk of injustice if offeree dies
Destruction of subject matter
o Automatically terminated offer
Lapse of time
o With express duration, after that expires, the offer is terminated
o If duration is not mentioned, it expires after ―reasonable‖ time
Face-to-face or IM offers end upon conversation ending
Rule: look to the market
More volatile subject matter, the shorter the duration time
Method of correspondence used (fax or letter)
o When does the period begin?
Often the offeror specifies a term, i.e., ―good for 8 days‖ and 8 days begins
when the offeree receives the offer
If offeror calls to say he FedEx’d and offer stands for 5 days, but the offer
doesn’t arrive until after 5 days, Ct may say 5 days began at phone call
Subsequent extension of time:
Before the lapse of original period:
If before the 5 days passed, the offeror contacts offeree and
gives 2 weeks instead, Cts allow [freedom of K ]***
Even if there is not communication to the offeree, as long as
offeror intends to extend, it’s fine
After the lapse of original period:
Offeror forms intend to renew the offer after it dies—must
contact offeree again—back to square one
If offeree has waited past the period and then calls to accept,
he is making a counteroffer
Revocation by offeror
o lax standard for finding revocation, compared to strict standard for making an offer
[policy consideration in favor of freedom of K of the offeror, tough to surrender offer but
easier to revoke]***
o Basic RULE: Offeror can REVOKE at any time BEFORE an acceptance and it’s
effective at time of receipt
o Two types – direct and indirect
Direct revocation
General Rule: Wishy-washy revocation will suffice; all you need is
manifestation
Hoover (―might not want to go through‖; no meeting of the
minds in subjective theory; no K, words were sufficient to revoke
the offer)
Revocation of ads and media:
Must be clearly directed if specific ppl were addressed (if
offeree contacts offeror, offeror should contact to revoke)
3
If large group of addressees (newspaper), must have
revocation notice up for same time period as offer
Indirect revocation (hear from a third party)
If offeree learns of offeror’s intent to revoke from a reliable source, it is
sufficiently revoked—no need for direct revocation by offeror
Dickinson (P heard from third party that D sold property to
someone else; no K b/c offeror can revoke any time before offeree
accepts; also offeree knew of offeror’s subjective intent to revoke)
5 elements of indirect revocation
1) offeree must hear of the revocation
2) the source must be considered reliable by the offeree
3) the tenor of the information given must destroy the
offeree’s reasonable expectation
4) the report must be given before the attempted acceptance
5) the revocation reported must be accurate and actual
o ~~Limitations on Power to Revoke~~
Limitation have been progressively limited by the courts and legislatures – most
courts view that the revocation takes effect only when received by the offeree.
Types of limitations:
Imposed by act of the parties:
Option K supported by consideration:
o This promise effectively limits offeror’s power to
revoke
o Option Ks are transferable to 3rd party (e.g., estate
owners)
o Usually, an option K will override death of
offeror/offeree, offeree’s rejection prior to change to
acceptance, offeror’s revocation
Variation #1: $100 to not revoke offer; if
revocation, then remedy is only $
Variation #2: offer accepted with $100
consideration, on the condition of payment by
certain deadline/time; if revocation, remedy is
specific performance
By seal – no longer used; UCC replaced it
Statutory substitutes for seal: UCC 2-205 – firm offers for
merchants only, layperson can’t make firm offer; merchants signs
off in writing and it won’t be revoked for 3 months (max of
irrevocable), despite lacking consideration
Imposed by operation of law:
Part performance and unilateral Ks:
o Good faith reliance and part performance triggers a
[reliance interest the law ought to protect]***
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o Restatement § 45
Only sufficient if offeror invites part
performance
Offeror invites an offeree to accept by
rendering performance option K is created
when offeree tenders or begins the invited
performance
o Marchiondo (P broker argued that it was partial K but
court said no; broker had not produced a buyer; ―specified
buyer‖ in this case terminates the policy in favor of D
landowner’s ―exposure to multiple liabilities‖, and P
broker’s efforts/reliance interest prevails)
D Landowner’s power to revoke =
Landowner’s freedom of K [find in favor of
Landowner]
P Broker’s reliance > D Landowner’s
freedom of K [find in favor of Broker]
If landowner’s offer is non-exclusive, then
Landowner’s possible multiple liabilities >
Broker’s reliance [find in favor of Landowner]
If specified buyer, then no more multiple
liabilities concern, then Broker’s reliance >
Landowner’s freedom of K [find in favor of
Broker]
Promissory Estoppel
o 4 elements to trigger this doctrine:
1) D made promise
2) D should have reasonably foreseen that P
would rely on it
3) P does rely on promise and changes
positions (acts in a way he otherwise wouldn’t
have/forgoing opportunity economic
disadvantage for P)
4) Court characterizes the reliance as
reasonable and substantial and [finds it would be
an injustice to not enforce D’s original
promise]***
o Reliance on the part of the P starts even before
performance, rather at the point of preparing for
performance; detriment to P even before D begins to
receive benefits of performance
o Social policy: [protects people who have acted in a
substantial and detrimental way due to reliance on a
promise]*** (from charitable orgs)
o S/A – in P.E. b/w charitable organizations and
business/market (Hand/Traynor debate)
Hand: gov’t should stay out of business so
no PE extention to marketplace
Traynor: [gov’t ought to protect reliance
interests; offeree could have protected himself in
the terms of the K]***
[offeror can be specific in langue, offeror is
the master of terms, ]
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Today, Traynor’s way prevails… less laissez
faire
o General contractor (P) sues subcontractor (D)
Baird (Hand) versus Drennan (Traynor)
Baird (Hand refuses to extend PE to
marketplace; no K b/c revocation happened
before acceptance, regardless of reliance by
general contractor)
Drennan (Traynor extends PE to
marketplace; yes K b/c the promise induced
reliance of the general on the sub’s mistaken
calculation bid; sub should exercise reasonable
care in preparing bid; sub could foresee the harm
in the general’s reliance)
o Subcontractor (P) sues general contractor (D)
SoCal Acoustics (Traynor) vs. Swinerton
SoCal Acoustics (sub’s reliance on the paper
listing his name is insufficient; paper listing
didn’t induce his change of position; Traynor
doesn’t buy sub’s argument that listing was
acceptance…)
Listing was not acceptance; no change in
position no promissory estoppel use of
statutory interpretation of a violation of a statute
protecting subs from generals’ bid-shopping
Swinerton (sub sued general when the 2nd
lowest bid won instead of itself, the lowest bid;
yes PE b/c reliance based on the solicitation
promising contract to lowest bidder)
Rejections, Counteroffers and Qualified Acceptances by Offeree
o Responses terminating offer:
Outright rejection – ―no‖
Exceptions:
Offeror insulates against outright rejection by saying ―I know
you’ll say no at first, but think it over.‖
Offeree can delay outright by saying ―I’ll keep it under
advisement‖
Outright counteroffer
Once made, the counteroffer terminates the existence of the original
offer, replacing it with a new offer
Minneapolis RR (offeror quoted 2000-5000 at certain price,
but offeror put order for 1200 [counteroffer] and changed back to
2000 when it was rejected by offeror; no K, b/c the quantity here
was a material difference, while counteroffer voided the original
offer)
Exceptions:
Offeror can insulate by using above words
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Offeree can prolong offer by saying ―keep under advisement‖
even after counteroffer
Qualified acceptance
Says something other than ―I accept‖/changes terms/doesn’t occur to
the offeree to say ―keeping under advisement‖; ―I accept‖ plus a conditional
asking for change in terms
Destroys offer, though parties often think a K has been formed
Exception: Insulated by offeror
o Non-rejections (grumbling acceptance) – DO NOT terminate an offer
Questions: ―Would you consider?‖
Request: ―Would you lower the price?‖
Mere comment: ―You should be ashamed of that price!‖
Supervening illegality – also terminates the offer
o If a material term of an offer becomes illegal before the acceptance or if there is
sufficiently important public policy that renders the offer illegal, the offer is automatically
terminated
ACCEPTANCE
Tentative working guide: an eligible offeree, with knowledge of the offer and intent to accept, gives the requested
return unconditionally.
Eligible offeree
o General rule: only the person who the offeror addresses the offer to.
o Exceptions:
Option Ks – if offeror has entered into an option K, then he can’t revoke. Most
courts say offeree can transfer to a 3rd party who can accept the offer
Mistake – of the identity of offeree, preventing formation of K (only if
materially important) – S/A
Majority: mistake prevents formation only if mistake is materially
important (but for the mistake, the offeror wouldn’t have made offer to that
offeree)
Minority: any mistake by offeror w/r to identity prevents formation of
K
Knowledge of Offer
o General Rule: offeree must have knowledge of the offer to accept
Recurring problems:
Offeree learns of the offer only after completing the requested return –
S/A
Majority: Broadnax (no acceptance, thus no K b/c P’s award
wasn’t induced by offer since he had no knowledge of reward for
capture of prisoner)
Minority (trend toward): enforcing rewards regardless of
knowledge of offer in [favor of public policy: would be ridiculous
to let prisoner go and then recapture]***
Offeree learns of offer mid-performance valid acceptance
o Cross-offers: buyer in SF and seller in NY, after discussing deal, both draft their own Ks;
both their offers are revocable assuming neither party knows of the other’s offer
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Intent to Accept – usually, the manifested intent to accept is easily identifiable with a simple ―I
accept,‖ but when this does not happen, look to…
o Offeree’s subjective motivation
Intent to accept doesn't have to be the offeree’s primary motivation, as long as it
was a plausible motivation
If the offeree is aware of the offer and intent to accept is in the back of his mind,
then he accepts with performance
o Offeree’s ambiguous statement or act
Silence
General rule:
silence alone is not an adequate manifestation of intent to
accept b/c that would entail restricting personal freedom of the
offeree;
need silence + a plus factor objectively reasonable belief
that silence is an acceptance
Exceptions (Silence +):
Preliminary negotiations indicated that silence was a means of
acceptance, then yes, it can be
Prior dealings formed a pattern of silence as acceptance
leads offeror to the reasonable expectation that offeree accepts
despite silence
o Hobbs (each prior time, silence was followed by
delivery of goods and then check payment; yes K b/c
there was acceptance implied due to pattern of prior
intent)
Offeree solicits offer – insurance context, where written
application returned by offeree becomes the new offer; here,
silence plus unreasonable delay = acceptance
Silence after the receipt of goods (business norm):
o Duty to speak if goods arrive in your hands; w/o
speaking, there is implied acceptance b/c of offeror’s
reasonable expectation
o Sale on approval address in UCC
2-326: unless otherwise agreed, if delivered
goods may be returned by the buyer despite
conforming to the K, the transaction if (a) sale on
approval and b) sale on return.
2-227: offeree has option to accept or reject
goods after receipt
under sale on approval, failure to
notify seller of election to return goods
is acceptance
Silence after acceptance of services or exercise of dominion
over goods
o Norm: even in the case of mistaken delivery, it is
acceptance
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Indiana (buyer possessed refrigerators
delivered that he did not order; yes K b/c buyer
had duty to contact seller upon receipt, thus his
dominion implied acceptance and thus formed
K)
o Exception: difference between these cases is the
conversion of the goods inferred intent
LA Rams (player got check from Rams, who
knew he couldn’t accept the check at the time;
player did not endorse check; no K b/c player
didn’t exercise dominion over check and
received it when he was unable to accept)
Gives the Requested Return
o Methods of giving requested return
Making a promise (dispatch required)
R1st 31 – ambiguous offer as to method of acceptance, we assume it
contemplated acceptance by making promise, thus making a bilateral K in
which 2 parties have legally protected expectations of future performance
Performing an Act (dispatch not required, but suggested)
Offeror can say that offeree can indicate willingness of promise by
performing an act
A choice of either of the prior
R2d § 32 – If ambiguous, offeree has the choice, any reasonable
method of acceptance
UCC 2-206 – Any reasonable method
Ever-Tite (language in doc by ET’s lawyers said that
acceptance was written OR commencing performance—protecting
ET’s incurring detriment by investing in a project if Greenes
terminate offer of work; yes K b/c ET commenced performance
before revocation… ruled in favor of the drafters of the K)
o Legal status of the method – for acceptance to be limited, specific words must be used
(i.e., must & will—not should & may)
Required
Offeree has to do that method of acceptance (rare)
Suggested
Didn’t use the suggested method, other commercially reasonable
methods are OK
Reasonable
Use commercially reasonable method
Unreasonable
If you use snail mail, it’s only in effect upon receipt
o Analytic approach – 3 questions
Q1: Must the offeree communicate the acceptance?
Bilateral K: communicated commitment usually required, unless
language indicates otherwise
General Rule: offeror must be notified of acceptance [don’t
want to prevent offeror to make offers to others in the marketplace
if offeree is unclear or slow to reply]***
o White (P asked D for specs for lumber, D gives
estimate and says ―consider it‖, later changing the
estimate saying ―can begin at once upon agreement‖, P
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purchased lumber and D revoked; no K b/c P had to
notify intent to accept prior to revocation)
Exception: notice not needed if this was explicit in offer
o International Filters (offer said ―this becomes a K
when accepted by the purchaser and approved by exec.
officer‖, which terms were met; yes K b/c offer was
explicit about no notice needed)
Unilateral K:
General Rule: no need for notice; beginning performance is
manifestation of acceptance if it will naturally and normally come
to the offeror’s attention
Exception: when performance does not come to the attention
of the offeror, then need notice
Exception to Exception: if notification is not expected (i.e., in
the class of the size of offerees) – S/A
o Minority:
1) Notice is a necessary part of the
acceptance
o Prevailing view:
2) Notice is unnecessary
Carlill (ad if you use product and
get flu, you get $; P sued for $; yes K
b/c ad addressed public so no need for
acceptance in unilateral K)
o Prevailing & best view:
3) Notice is necessary not for formation but
to activate a duty of immediate performance
Q2: If so, which means of communication/acceptance is the offeree required or
authorized to use?
Required or prescribed – offeree must use this method
Authorized or suggested – if followed, it is an acceptance
Reasonable – evolution of common law standard
offer sent by snail mail, send back same OK
offer sent by snail mail, and acceptance is sent by email or fax
suggests need it quicker
offer sent by FedEx, email, fax in stable market, you can send
back with slower method
Unreasonable – in a volatile market, sending back by snail mail when
the offer was sent by faster means
Ambiguous – in case of doubt, offeree can choose to accept by promise
to perform or by performance
Allied (K started after Allied began work on project, despite
that the signed copy including indemnity clause wasn’t sent to
Ford; yes K b/c ―should‖ in the suggested acceptance doesn’t
preclude other forms of acceptance such as performance)
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Q3: When is the communication effective as an acceptance—on dispatch or only
on receipt?
Legal methods of acceptance:
a) Unreasonable and unauthorized: effective only upon
receipt (slow return in highly volatile market)
b) Reasonable: S/A (majority on dispatch Adams; minority on
receipt Rhode Island Tool)
c) Suggested: effective upon dispatch
General Rule:
Mailbox rule: acceptance by offeree is effective upon
dispatch, even if it is lost in the mail; rejection by offeree is
effective upon receipt
o [Public policy reason]***:
Facilitating fast market, dispatch acceptance
promotes efficiency
Fairness to offeror in the event that offeree
rejects, offeror can seek other business
Exception:
The offer specifies acceptance effective upon receipt
o Rhode Island (bid said ―successful bidder will receive
notice of award‖, thereupon constitute a K; no K b/c
actually delivery of notice needed before K formed)
Overtaking acceptance and rejection:
Legally overtaking acceptance: rejection dispatched first by
mail is valid on receipt, but acceptance dispatched before rejection
received, but rejected is still received first, thus creating offeror’s
anticipation of finding other buyers – S/A
o Minority: Some cts say acceptance effective on
receipt, neither party bound to K
o Majority: Some cts insist applying mailbox rule,
exception only if the offeror actually changes position in
reliance on the rejection
Physically overtaking rejection: mailed acceptance followed
by phone call rejection, but acceptance upon dispatch precedes the
phone call rejection
Both cases prejudice for the offeror – S/A
o Majority: if offeror does change position, the offeree
is estopped from claiming K via mailbox rule, in order to
protect offeror’s freedom of K—his right to walk away;
here, neither party is bound
o Minority: if offeror doesn’t change position, the court
still rules in favor of the offeror
Unconditionally (unconditional acceptance)
o Common law requirements (for services and realty/property)
Must be mirror image to the offer: any difference is fatal to K formation
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Do the terms of the acceptance differ from those of the offer?
Difference should be real, not just apparent
If so, is the offeree insisting on the different term?
versus inquiry, requests, or comments (precatory language)
If so, what are the legal consequences? – S/A
Majority: any different is fatal/mirror image rule
o No legal K if there’s additional terms not in the offer
o Offer is void
o Qualified acceptance – counteroffer means original
offer is no longer on the table
Minority: material/substantive differences (with real-world
economic significance) are fatal
o Poel (insistence in boilerplate language that ―prompt
acknowledgment‖ must follow for acceptance, and it
failed to; no K b/c ―prompt acknowledgment‖ was
material)
o U.C.C. § 2-207 drafted to rid K problems of common law
Legislative remedy to prevent last shot and escape hatch problems that arise
from ineffective acceptances:
―Escape hatch‖: if there is a change in the market that means you’ll lose
money from the K and using the mirror image rule, you can find a
discrepancy between the offer and acceptance, though not the important
negotiated/dickered terms, and either part can escape K {closed by (1) &
(3)’s 1st sentence}
―Last shot‖: even if one party acts as though there is a K, non-mirror
return docs serve as counteroffers that changes the terms, and the party
performing manifests intent to accept by the act of performing {overthrown
by (2) & (3)’s 2nd sentence}
Policy reason: For laypersons, Llewellyn’s notion of [real
assent to decent terms]***
Clause (1): ―A definite and seasonable expression or written confirmation
which is sent within a reasonable time operates as an acceptance even though it
states different terms additional to or different from those offered or agreed upon
unless acceptance is expressly made conditional on assent to the additional or
different terms.‖
Was there a definite (i.e. agreement b/w the dickered terms—terms
unique to that K and negotiated, substantive) and ―seasonable‖ expression
of acceptance or written confirmation w/in a reasonable time?
No go to clause (3)
Yes continue
Were there different or additional terms?
No mirror image of offer, thus acceptance and K
Yes continue
Was the acceptance expressly made conditional on assent to
different/additional terms?
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No go to clause (2) – S/A
o Whether (2) applies to ―different‖ terms when text
only mentions ―additional‖ terms
Majority: in effect go to clause (3)’s 2nd
sentence (―different‖ terms don’t automatically
go into K)
Minority: treat additional and different terms
the same (can use clause 2 for ―different‖ terms
like ―additional‖ terms)
Yes go to clause (3)
Clause (2): ―Additional terms are to be construed as proposals for additions to
the contract. Between merchants such terms become part of the contract unless (a)
the offer expressly limits acceptance to the terms of the offer, (b) they materially
alter it, or (c) notification of objection to them has already been given within a
reasonable time after notice of them is received.‖
Are both parties merchants?
No additional or different terms become ―proposals‖ of the
K that require assent
Yes continue
Did the offer expressly limit acceptance to the terms of the offer?
No continue
Yes terms do not become part of K
o Itoh (expressly conditional term offeree doesn’t give
real assent to, seller performed anyway creating K
through (3); terms are only what both parties agreed upon
before arbitration clause added, clause is tossed)
Did the terms materially alter the K?
No continue
Yes terms do not become part of K
o Marlene (K found under (1) and arbitration clause
materially altered the K under (2); not binding unless both
parties agree)
Note: S/A for arbitration clause inclusion b/c
policy reason to ease massively backlogged
litigation dockets
Was there an objection to the terms given w/in reasonable time?
No terms become part of K
o Construction Aggregates (P called D objecting only
to the payment method, thus silence implied intent to
accept other terms; yes binding K including warranty
disclaiming liability clause)
Yes terms do not become part of K
Clause (3): ―Conduct by both parties which recognizes the existence of a
contract is sufficient to establish a contract for sale although the writings of the
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parties do not otherwise establish a contract. In such cases, the terms of the contract
consist of the terms on which the writings of the parties agree, together with the
supplementary terms incorporated under the particular provisions of this act.‖
Was there conduct that recognizes existence of a K?
No no K
Yes continue
Do the terms of the writings agree?
No terms consist of what was agreed upon in writing and
supplementary terms taken from the UCC
o Southern Idaho (difference of Oct. 15 vs. Dec. 15 is
discrepancy in dickered terms, no K under (1), but
performance begins K under (3), date terms knocked out,
and Ct goes to UCC 2-309, which suggests that Dec. 15
was indeed a reasonable termination date)
Yes terms included in K
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Contracts Outline – Consideration Imwinkelried – Fall 2008
CONSIDERATION
CONVENTIONAL CONSIDERATION
Definition: legal detriment to the P bargained for by the D and given by the P in exchange for the
D’s promise
Determines which promises can be considered legally sufficient to enforce
CONSIDERATION ANALYSIS
Identify the promise that the P wants enforced:
o What promise did the D fail to perform?
Identify every act, forbearance, or promise by the P, which the P might treat as
consideration for D’s promise
Test each act, forbearance, or promise by the P to determine whether it
constitutes legally sufficient consideration
o Look for the bargained component
Focus on D’s state of mind – did the D bargain for ―it‖ (P’s performance,
forbearance, or promise) in exchange for D’s promise?
Focus on P’s state of mind – did P give ―it‖ (act, forbearance, or promise) in
exchange for the D’s promise?
o Look for the legal value component
Does it entail a legal detriment to P?
Does it confer a legal benefit to D?
If components of conventional consideration are not there, look for a substitute:
o Moral obligation
o Promissory estoppel
APPROACH
Identify the overarching issue
Identify functional P party asking ct to enforce a K
What promise by the D does P want to enforce?
o Analyze each act, promise, forbearance separately
Identify every act, forbearance, or promise by the P which the P might treat as consideration for
D’s promise
o Look at why D made the promise and why P incurred the detriment
o Surrender of the claim
o Surrender of the right to enter into rescission K
o Additional or different consideration
o Test each act, forbearance, or promise by P to determine whether it constitutes legally
sufficient consideration (a legal detriment to P, bargained for by D, and given by P in
exchange for P’s promise)
BARGAIN COMPONENT
Did the detriment induce the promise? D must desire detriment before incurring it
o The detriment must at least purport to be at least part of the inducement; ―bargained for
by D‖
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o Not necessarily the sole inducement—just a substantial part
o ―At least‖ vs. ―actually‖ inducement – S/A
Trend is toward real economic advantage/value in the bargain (despite the wife
bargaining for an economically invaluable bank note in the Newman case)
Did the promise induce the detriment?
o The D’s promise must at least purport to be at least part of the P’s inducement and given
by P in exchange for D’s promise
Looks at P’s state of mind
It is not necessary to be the sole inducement
Conditional gifts
o Gratuitous promises, not bargained for by the P not considered conventional
consideration
Kirksey case (brother writes sister-in-law offering her a place to live after her
husband died; after 2 yrs living there, he kicks her off the property; no K b/c
gratuitous promise P didn’t bargain no consideration for enforcement; Ct. says
P’s detriment may was not purported to be induced by D’s promise; but Ct. could’ve
looked at D’s intent to have P tend his land to be part of the inducement)
Feinberg case (D’s father promised P employee $200/month upon retirement b/c
of her good work at the company; promise was made at board meeting, brought to
the attention of P, and P continued to work for a while and then retired; after a while
the pension ceased; no K b/c past consideration = no consideration b/c she incurred
detriment w/o knowledge of forthcoming promise—that is, her continued work was
not induced by promise; D didn’t bargain for P’s retirement promise was
gratuitous… Ct. then invokes promissory estoppel as an alternative)
Nominal or formal consideration – ―consideration of $1‖ written in the contract and tendered
o S/A on the merits of this type of consideration
Majority (prevailing): NOT consideration, rather a ―cloaked‖ gift
There must be some real economic benefit/detriment
Thomas case (husband left house to widow as long as she paid
a small amount $ each year toward maintenance of house; yes K
b/c formal consideration is real in this case; P’s agt to upkeep of
house is detriment to P and benefit to D, for which D bargained)
o ―cloaked gift‖ – in this case, the donative gift agt was
disguised as a K using the wording ―in consideration‖ to
make it seem like a real K
Minority (older): ―peppercorn‖
Any consideration, even as seemingly valueless as a peppercorn, will
suffice
Sham consideration – ―consideration of $1‖ written into the contract and NOT tendered
o Nominal consideration that is only stated and not really given
o Few jxs accept this as consideration
Dovetail b/w Mutual Assent and Consideration
Mutual Assent Consideration
Offer – definite, conditional promise manifesting Did D bargain for ―it‖ in exchange for P’s
present intent to enter into a binding final promise?
agreement
Acceptance – proper offeree, w/ knowledge of the Did P give ―it‖ in exchange for D’s promise?
16
offer and intent to accept, gives the requested
return unconditionally
LEGAL VALUE COMPONENT
Does ―it‖ (act, forbearance, promise) entail a legal detriment to the promisee (P) and a legal
benefit to the promissor (D)?
The P must either act in a manner or promise to act to do something he is not already legally
obligated to do, or he must refrain or promise to refrain from doing something that he is legally
privileged to do.
o New duty to the P (obligation, duty, etc.)
o New benefit to the D (rights)
o Variations of past consideration = no consideration
o Legal component is not necessarily economic
Newman case (widow gave valuable note to bank in exchange for late husband’s
bankrupt worthless note; bank wanted to enforce her promise to pay out on her note;
no K b/c bank didn’t incur detriment by giving up a worthless note; Ct is wrong b/c it
should’ve seen that bank giving up economically worthless note is indeed incurring
legal detriment by giving up its legal right to note AND she did in fact bargain for
the note)
Problems with legal value – what D can claim to attack legal sufficiency of consideration
given by P
o Illusory promises
Wording
―can‖ = ability; ―desire/want‖ free way out no consideration
Strong case (P agreed to not deposit D’s check of security of a
debt owed by the D’s husband ―until he needed to‖ and also that he
does not put it in regular bank channels; no K b/c P had a free way
out from the wording ―until he needed to‖ = indefinite whenever…
Ct. was wrong b/c the real legal detriment incurred by the P was
promise to not put it in regular banking channels)
Implied promises
Even if a promise on one side is not express/explicit, consideration can
still be found
Wood v. Lucy (P got to use D’s name in return for using
reasonable efforts to market clothes w/ D’s name and keep records;
D’s breached promise was the promise to solely share her designs
to P; yes K b/c P’s duty = reasonable efforts made to find clothes
to market by which D benefited from; keeping records for D is also
a new tax accountant-like legal duty incurred on P)
HYPO: Inventor A enters into a deal with businessperson B to
provide a patent for business purposes. Businessperson C comes
up with a better deal, and inventor A goes his way instead.
Businessperson B sues for breach. But the catch is that
businessperson could not have incurred a legal detriment without
the patent in the 1st place. The court will find that B incurred a
new legal duty, and that B did not have a legal
17
Requirement and output Ks – S/A
Requirement K: I agree to buy all that I need from you.
Output K: I agree to buy all that you can output/produce.
1st view: under CL, illusory and fatally indefinite no consideration
Some cts say if no quantity K not enforceable at all
2nd view: under CL, OK. If buyer had established needs or the seller
had established output, ct finds an implied promise to keep that general
quantity yes consideration
3rd view: under CL, OK. A conditional promise will suffice as long as
you don’t have complete, unfettered way out
UCC 2-306(1) view
Modern view: the consideration that the buyer has given up a right to
buy elsewhere, but only if a reasonable level of requirement or output can
be determined
McMichael case (requirement K stated D agreed to furnish all
sand that the P ―can‖ sell; yes K b/c P gave up his legal right to
buy elsewhere, which affords a competitive benefit to the D; also
Ct. decides that P’s track record being in the business of selling
sand implied promise he’d continue selling at his regular rate
{reasonable level of requirement} consideration)
Termination clauses
If P has access to unrestricted termination clause, gives P a free way
out can invalidate consideration b/c if the P can terminate the K at any
time, then there is no real legal benefit to the D***
5 exceptions:
1) Clauses won’t invalidate consideration if it is outside (either
partially or totally) of P’s control
o DiBenedetto case (P had an option K to buy property
w/ a clause that said if the buyer couldn’t make the
settlement $$ he could cancel the agt; yes K b/c there was
not a full termination clause—only if the P couldn’t come
up w/ the money, thus not wholly in his control; ―can‖
indicates ability, not desire, thus not a ―free way out‖; P
had a good faith duty to come up w/ the $$)
2) If the termination clause requires a written notice to the P
consideration still valid. Even if it is not immediate.
o Legal benefit conferred is notice of termination
o Requirement of written notice is a legal duty (UCC
implica)
3) If the termination requires notice but is effective immediately
consideration is still valid (modern view)
o The requirement to give notice is still there, it is just
less valuable
4) If clause is silent w/r to notice, consideration will still be valid
o Cts usually hold that notice is still required for
fairness
o Sylvan case (P to supply rocks to D, but could cancel
at any time; yes K b/c there was sufficient consideration
b/c cancelling within a reasonable time despite silence
to notice is a new legal duty)
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5) As a matter of interpretation, ct concludes that termination
clause gives absolute power to terminate at any time w/o written
notice
o Pre-existing duty
If a party does or promises to do what he already has a legal obligation to do,
then he has incurred no legal detriment no consideration
This prevents Ks formed by economic extortion (i.e., threat, coercion)***
Alaska Packers case (workers go to Alaska to work on a K, they said
they wouldn’t work unless they got more $$; owner agreed to pay more and
then reneged; 2nd K agt to raise their wages was invalid b/c packer workers
had a preexisting duty to work no new legal detriment no
consideration)
To see if there is preexisting duty, look to see if the duty existed before the K
was formed…
If yes no consideration
Cts will often circumvent the preexisting duty rule once a K is in the
performance phase to protect good faith actors
It is still necessary for the formation stage
6 ways to circumvent the rule:
Ct will find additional or different consideration
1) Any small feature added, such as change of date or payment
(method/location), but it must still have been bargained for –
remember S/A on nominal consideration
2) Ct can hold that the promisee surrendering a legal power to
breach the K is consideration – rare and there must be legal power
and not just actual power to breach… DO NOT PUT ON EXAM
3) Ct can rescind the original K and thus there was no longer a
preexisting duty in existence at the time the new K was formed
o Express rescission: 3 Ks—old K, K of rescission, &
new K, w/ all cts recognizing new K
o Simultaneous rescission – S/A
Some cts say that it must not be
simultaneous, must be a time lapse, or else the
preexisting duty was always there
Some cts will recognize it
Schwarzreich case (tearing up of
old K and signing a new K
symbolized rescission that
circumvented the preexisting duty rule
yes consideration)
o Purported modifications – S/A
Majority: modification not enough;
rescission must be express to negate pre-existing
duty rule
Arzani case (P subcontractor
worked on a K, then workers went on
strike; D agreed to pay more $$ to
subcontractor; work was finished and D
refused to pay; 2nd K of raised wages
was invalid b/c modification of K didn’t
make new K still had preexisting
duty from 1st K … distinguished from
Schwarzrich b/c no rescission)
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Minority: implied rescission from
modification is sufficient to invoke pre-existing
duty rule
Watkins (P agreed to excavate a
house for a specified amount of $$; then
he found hard rock, approached D who
agreed to pay more $$; work was done
and D refused to pay; 2nd K valid b/c
rescission can be implied by a
modification; Ct. distinguished this
from Arzani by making a business
practice argument that commercial
practice allows business ppl to effect
these modifications)
4) Ct can hold that the party surrendered his right to a K of
rescission
o Applies pre-existing duty rule in 3 party situations
DeCicco case (held that K to an engaged
couple had sufficient consideration; the couple
surrendered their legal right to decide together
not to get married, to rescind engagement, this is
detriment consideration)
5) Refusing to apply pre-existing duty rule to three-party situations
– S/A
o (See McDevitt (Jockey case) and lawn mowing
example)
o Same promise to 2 different parties does not make it
preexisting
Winkie’s lawn mowing hypo of his
neighbor’s wanting to sell their house. He needs
to keep his lawn clean to improve the house
value.
o Rights and duties are correlative; however, they are
also personal
The court in the McDevitt case found a pre-
existing duty
6) A voluntary modification prompted by unforeseen difficulty or
expense – S/A (minority view)
o Why allow this? Future agreements, business
reputation, etc.
o If the motivation of the request is due to something
unforeseen, the promise to pay more should be enforced
even if there is no mutual mistake
o An example is above, Watkins
UCC § 2-209(1) eliminates the PED Rule – allows modification of existing K w/
no consideration and uses different provisions to prevent coercive situations
o Claims settlement: only purported consideration was surrender of a legally invalid claim
Valid claims: as consideration for promise, P may purport to release D from
claim; thus P suffers from legal detriment sufficient consideration to support a
counter-promise. Incur legal detriment when you have an honest belief that you
have a legal claim.
Invalid claims: Five views – S/A
View 1: Surrender of an invalid claim cannot be sufficient
consideration
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D would almost always take to trial, thus shifting burden to
court system – not acceptable alternative b/c law should encourage
settlement out of ct
View 2 (Minority view): If P honestly (subjectively) believes
surrendered claim is valid, its surrender is sufficient consideration
Fiege case (P believes the claim is valid, she would have a
right to sue; D promised to pay child support if P doesn’t make
bastardy proceedings; surrender of claim is surrender of P’s legal
right; not enough evidence to show ―objectively
reasonable‖;THATthat’ Ct said consideration doesn’t necessarily
require reasonable belief of claim’s validity; her belief was real at
the time promises were made, regardless of later paternity test)
o Policy consideration: [3rd party interest of children in
need of support]***
View 3 (Majority view): If P’s belief in validity of claim is
subjectively honest AND objectively reasonable, then consideration is
sufficient – To invoke P must show:
P honestly believed claim was valid
P belief was reasonable
P released claim
P agreed not to sue on claim
View 4: Restatement 2d § 76(b): ―Forbearance to assert or the
surrender of a valid claim or defense which proves to be invalid is not
sufficient consideration unless:
Claim or defense is in fact doubtful because of uncertainty at
to the facts or the law, or
―Forbearing or surrendering party believes that the claim or
defense may fairly be determined to be valid.‖
Use of ―or‖ makes this too broad to be acceptable; would give
consideration in case where person acting in bad faith
View 5: Promisee’s surrender of any invalid claim is sufficient
consideration
Too broad, not accepted: promisee has power to assert an
invalid claim in the same sense that he or she has the power to
breach a K
The Restatement says a surrendered claim is valid consideration if:
(1) The claim is in fact doubtful as to uncertainty to fact or law or,
(2) The surrendering party believes it was valid
This view has not gained favor in the courts because it rewards
people who proceed in bad faith
Related problems w/ claims settlements
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Unliquidated claims (amount in dispute): generally valid as
consideration when they become liquidated because there is a legal
detriment involved in settling.
Giving up the right to go to court and the right to have the
amount determined later
Composition with creditors (multiple creditors): an agreement b/w
debtors and creditors where the creditors get less money, it surrenders the
pre-existing duty because usually the debtor is bankrupt and the creditor is
getting less money but now at least getting the benefit of controlling how
much less money it gets (in bankruptcy, may not get any at all)
Yes there is consideration despite paying less than full amount
D debtor is surrendering the right to pay one creditor in full
and ignoring the rest; surrendering of this power of preference
consideration
Check cashing cases: depends on if disputed or undisputed
Disputed: consideration is mutual assent on how much money
is owed
Undisputed: owed $1000, check for $500 says ―cashing this
check is equal to full payment‖ – S/A
o Majority: ignore words: ―payment in full‖
o Minority: by cashing check you gave up your right to
the rest of the $
o Kibler case (D issues check to P w/ statement in fine
print saying check (for unliquidated claim) is full and
final payment, which P disputes; Ct analyzes as mutual
assent – policy consideration: they want to protect
creditors from fine print on checks depriving them of their
payments; ct says if such language is to be enforceable, it
must be specifically brought to P’s attention – rejects
formalist notion and looks for real assent***)
The fine print was so small that nobody
noticed it until the trial. This was language on
all checks.
The subjective theory of mutual assent
comes into play. This case is just like Fiege, 3rd
party equities explain the outcome of the case.
22
Contracts Outline – Substitutes to Conventional Consideration
Imwinkelried – Fall 2008
SUBSTITUTES FOR CONVENTIONAL CONSIDERATION
MORAL OBLIGATION
Moral obligation: no bargain component, but legal value component
When D’s promise was not induced by the P’s detriment
HYPO: Man saved drowning woman and the woman promises to pay him $. The $ was not the
inducement to save her life; P saved D’s life by deflecting an axe; P mutilated hand in the act and the D
promised to pay and reneged; Held: no K; no expectation of payment was made at the time of the act.
o This is the majority view
The general rule:
o Courts do not usually recognize past consideration or moral obligation as consideration
If the duty is wholly moral and is not connected to any legal liability or material benefit
HYPO: D’s son is sick and P nurses him. Father says he will pay for some of the
expenses incurred by the P and then reneges. Held: no K; past consideration is no
consideration.
Mills v. Wyman (All out of pocket expenses had been made before P got the letter.
Timing is fatal here—past consideration won’t work. No PE either because P changed
position, not because of the promise that was forthcoming, but because he was a Good
Samaritan. What D did was morally wrong, but court says moral obligation is not enough)
Exceptions to the general rule
o There is a minority view that where there is a material benefit that leads to a sense of moral
obligation that prompts a promise
HYPO: P saved man’s life and was injured. Man promised to pay $ to P for rest of his
life, executor of P reneged. Held: K conferred to the man and the P received the promise in
return. This ignores that there was no expectation of payment at the time. Webb v.
McGowan – yes there was M.O.
o If at the outset promise was void, voidable, or unenforceable and promisor subsequently
renews the promise
If duty was void, courts will not enforce renewal of promise
If promise was voidable or unenforceable and is renewed, most cts will enforce (e.g., a
case of fraud where innocent party decides to proceed). However, new promise must not be
subject to same defense (e.g., infancy, insanity, duress, or the Statute of Frauds)
o If at the outset the promise was enforceable, and later because unenforceable:
Promise barred by Statute of Limitations:
Subsequent express promise, acknowledgement, or part payment will revive
the promise
Promise or acknowledgement must be in writing in most jxs
Promise discharged in bankruptcy
Some courts require that promise be made after filing of petition or
adjudication
Only an express promise will suffice
Promise need not be in writing
Promise voluntarily discharged by act of parties
Voluntary discharge destroys both moral and legal duty
o Promisee previously conferred an economic or material benefit upon promisor, and the
promisor then promises to pay the promisee
If promisee conferred benefit gratuitously w/o expectation of payment, there is no
moral obligation
If promisee’s intention was not donative but circumstances do not create a quasi-
contract, some courts enforce the subsequent promise
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Initial conferral of benefit created a quasi-contract – S/A
View 1: promise is nugatory; unenforceable
View 2: subsequent promise is admissible evidence of value of benefit
conferred
View 3: subsequent promise is enforceable to the extent that the amount
promised is not disproportionate to the actual value of the benefit conferred
(California)
View 4: subsequent promise is enforceable according to its terms
Initial conferral of benefit created an implied-in-fact contract requiring promisor to pay
reasonable value
Same split of authority as (iii) above
o For moral obligation to work, there always needs to be a plus factor (+), such as material
benefit to promisor. Moral obligation alone will not suffice for consideration.
Material Benefit Doctrine: if P performs an act materially benefiting D and D
subsequently promises to pay P for act, promise is enforceable
Antecedent conferral of benefits substitutes for bargained-for consideration
Some jx apply even when P conferred benefit without expectation of
compensation
To trigger application of rule, P must show:
P performed act
Act conferred material benefit upon D
Act generated sense of moral obligation to P in D’s mind
Sense of moral obligation prompted D to make a promise to P
Webb v. McGowin (Webb fell with a block to divert the direction of the same block,
which was about to hit McGowin; Webb saved McGowin’s life, and McGowin promised to
pay for Webb’s injuries (who was thereafter incapacitated) and continue payments for the
remainder of his life but after McGowin’s death, his executor reneged; Webb sued; timing
is fatal to the argument that you have conventional consideration. The case is parallel to
Mills, the timing is essential to this case.)
What does the P have to allege in order to make out a case enforced under
moral obligation?
P conferred a material benefit on D
Created a moral obligation on D’s mind
Prompted moral obligation on D to make a promise
Was there a consideration in P to make this split-second decision? No,
material benefit was not in P’s mind.
Harrington v. Taylor (Represents the prevailing view in the U.S. The court says:
detriment or not, you are not going to get compensation for a humanitarian act.)
When there is a mistake, and there is an expectation of compensation, the courts will
enforce the expectation. It is essential to find the expectation, though.
Implied-in-law duty when the hospital saves a family’s life.
PROMISSORY ESTOPPEL
Equitable estoppel in pais – based on reliance on a misrepresentation of fact
o Prima Facie Case of Promissory Estoppel
D made a promise to P
At the time D should have foreseen that P would rely
P did rely (detrimentally changed position)
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P’s reliance was substantial
P’s reliance was objectively reasonable
Expanded to promises in 4 Lines of Authority
1) Family Promises
2) Promises to Convey Land
3) Promises Coupled with Gratuitous Bailments
4) Charitable Subscriptions
Charitable organizations which were relied on by the organization
Expansion to family cases:
o Ricketts v. Scothorn (to provide a trust for granddaughter; grandfather says none of children
should have to work for family pride reasons, promising granddaughter an allowance; Ct makes a
blunder ruling for equitable estoppel – his promissory note is NOT factual representation—it was a
promise)
a transitional case which fortuitously pushes doctrine of PE forward
Equitable estoppel requires a representation of fact. If you have all five elements of prima facie case
of promissory estoppel, we must enforce the contract as made, per Williston. This case had such an estoppel.
Expansion to marketplace:
o See debate between Hand and Traynor under revocation of offer
o Traynor is de facto winner of debate and PE is now almost universally recognized in commercial
transactions
o Restatement (First) § 90: broader principle emerging; not limited to factual misrepresentations
or 4 narrow areas
o Remedial Flexibility: Substitute for conventional consideration
CURRENT LAW: Hybrid independent Cause of Action (not just K or Tort)
o All of elements of mutual assent do not necessarily need to be established – key terms which
were left to be decided later, and would be fatal to enforcement of a K, do not need to be established
for PE cause of action
o East Providence Credit Union v. Geremia (91): (a change of position v. tort ―but-for‖ causation
(they are not the same); P-lender sues on original written agreement saying you owe us balance on
note; D counterclaims for recovery of policy of car b/c if insurance (which P promised to
maintain/pay) had been in effect, D would have received policy and could then at least cover amount
of loan; this is a counter-claim case. The credit union is suing the Geremias on the balance of the
premium, but the Geremias are suing the credit union on the proceeds of the insurance of the car,
since the credit union erred in not paying the monthly insurance premium, causing the insurance to
be canceled; P made promise to keep insurance policy in effect; P’s breach was a but-for cause of
the injury P suffered if D had kept insurance, P would not have suffered the loss
Keep in mind the word ―COULD‖ as opposed to ―WOULD.‖
Is acquiescence consideration? The P had the right to make this payment, they were
simply informing the Ds that they would do it. The Ds simply acquiesced, there was no
bargaining in that conversation.
In respect to the counter-claim, we need to find something that the Ds (really the Ps in
this case) gave away that they had to withhold, and in this situation, they simply acquiesced,
no bargain, no consideration.
Reliance: Detrimental change of position. This has a causation action, but this is a K
case, not a tort case. The Ds would have been in the same position if they had not asked the
credit union to cover the premium, the policy would still have lapsed, since they did not
have the money to pay it.
25
What is measure of recovery? Court can decide, in the interest of justice, how to compensate P. It is
flexible as to the amount and type of recovery.
Expectation interest:
o Put P in economic position P would have been in if D had performed K
o Measure of damages: benefit of bargain, prospective profits
o Normally protected in true K actions
Feinberg v. Pfiffer: (Employment K: What if D reneges after 1 year? Has she
suffered an out of pocket loss? No. In actuality, she does detrimentally change position; the
court decides that she did in fact rely on the company’s promise and because of this, they
are going to enforce the $200 a month that the K stated, for life. She most definitely
suffered an out of pocket loss in this case; She has had a loss recoverable in promissory
estoppel)
Goodman v. Dicker (339): (If K can be terminated at will the moment it’s signed, then
there is no expectation interest; Judgment was in the amount of $1,500, expected profits
included. Generally, expectation is more favorable than reliance. The court is saying that
they are not concerned with the terms of the franchise, not K. Since there is no K, the court
is saying that we should follow the logic of promissory estoppel. Since there is no K, there
cannot be any loss of profits.)
In this case, D has access to termination clause (as opposed to P, which would
make it an illusory promise issue); question is not whether there was a valid K but
whether there was a breach
See p. 340, paragraph 1: this is not just promissory estoppel replacing
conventional consideration, it is a new way of looking at and deciding cases the
Hybrid that Traynor wanted
Restitution interest:
o Compensate P for the economic benefit P conferred upon D
o Measure of damages: value of benefit P conferred upon D
o Compensate the P for benefit of that conferred to the D suing FMV
o Normally protected in quasi-K actions
Reliance interest:
o Compensate P for economic losses P sustained
o Measure of damages: P’s out-of-pocket losses
o Courts often protect when they invoke doctrine of Promissory Estoppel
Hoffman v. Red Owl: (Franchisee case – P wanted to open a supermarket and the D
company wanted more money. P sues D for FMV loss; This court pushes too far:
Promissory Estoppel is not only substitute for Conventional Consideration but also for
mutual assent; The parties never got around to agree upon the size, design, rent, etc. of the
Red Owl store; They never got into the details of the K; As a matter of law, there are so
many terms left up in the air, there is no mutual assent; Red Owl would win for lack of
finality and lack of definiteness; The court is explicitly announcing that they are bringing in
a new doctrinal area, a hybrid cause of action; Court also considers prospective profits –
however, if only basis for recovery is PE (and hence reliance) should not consider this,
right? One of the things that the P is entitled to recover with the sale of the grocery
store is the loss of the profits as it applies to good will under fair market value. Profits
are included in good will, which added with the book value of a sale equates to the fair
market value of the store. FMV minus proceeds from the sale of the store equals the
loss on the sale of the store.)
The moral of the story: this evidence was not admissible for direct recovery
of profits; however, it is logically relevant and necessary to proving good will
(which along w/ book value comprises FMV, which in turn is needed to calculate
loss, which is what is being sued for)
26
After D makes promise to P then P relies and detrimentally changes position; usually is enforced by court
Sometimes promise is made first and then reliance interest gives rise to finding consideration in a fair
number of considerations
D’s promise then P later acts in detrimental reliance on promise (this is distinguishing characteristic
between PE and conventional consideration)
Innocent person’s legitimate good-faith reliance is worthy of legal protection
Factual Predicate for PE (Commercial context: Restatement § 90) must show:
o D made relatively definite promise to P
o At time of promise, D should have foreseen that P would rely on promise
o P in fact relied on promise; Causation: P must show that he changed position and that D’s
promise was factual cause of change
Similar to tort analysis (reasonable foreseeability); however, don’t equate change in
position w/ but-for analysis
o P’s reliance was definite and substantial
o Needs to be objectively reasonable
For (d) and (e): only if injustice can be avoided only by enforcement of promise
27
Contracts Outline – ENFORCEABILITY Imwinkelried – Fall 2008
~~PROBLEMS WITH ENFORCEABILITY ~~
STATUTE OF FRAUDS
Analyzing an S/F case – Four-Step Analysis:
1) Do any of clauses of S/F apply to K?
2) If so, did the parties comply w/ S/F by preparing a note or memo?
3) If not, what are the consequences of non-compliance?
4) Are there any mitigating doctrines available? Estoppel? Restitution?
Five Alternative Arguments Available to P (when D uses S/F as defense):
Step 1: None of S/F clauses apply to this K
Step 2: Even if one or more S/F clauses apply, parties complied with S/F, for example, by
preparing a note or memo OR under UCC
Step 3: Even if one or more of S/F clauses apply and parties did not comply with S/F, D waived
S/F by not properly pleading S/F
Step 4: Even if one or more S/F clauses apply and parties did not comply with S/F and D properly
pleaded S/F, an estoppel lifts bar of S/F
Step 5: Even if one or more S/F clauses apply and parties did not comply with S/F and D properly
pleaded S/F, P is entitled to a quasi-K or restitutionary remedy
WHAT IS THE S/F?
Requirement that certain types of Ks be IN WRITING. The courts were concerned about oral
perjury.
What are its functions?
o Evidentiary function: simplifies process of decision making for court; proves the promise
– allows for reliable fact-finding
o Cautionary function: people careful as to what they agree to; they take agreements more
seriously, cautiously if written; sober 2nd thought
Courts are hostile to it – many courts will find a reason not to apply it, which undermines
separation of powers; since courts don’t like it, it is likely to be construed very narrowly. Nonetheless,
that court has a constitutional duty to apply this statute in good faith (unless it violates substantive due
process).
It can give D a free way out of a K that had honest mutual assent and consideration. D can say: ―If
we did not reduce it to writing, I can walk away because of S/F.‖
TYPES OF Ks WITHIN THE S/F?
Is this K within the purview/scope of S/F?
Do any of the clauses of the S/F apply to this K?
M.Y.L.E.G.S.
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Marriage no longer valid
Year-Long If it takes longer than one year to perform
Land executory Ks for purchase of realty
Executory Special promises of executor’s in wills, etc.
Goods > $5,000 need to be in writing
Surety special promise to answer for the debt of another
Ks in consideration of MARRIAGE
o Statute applies to Ks in consideration of marriage – either an actual marriage or promise
to marry
DiCicco case (supra)
o Marriage must be part of consideration; not applicable if:
Promise is merely made in contemplation of marriage
Marriage is a condition of a promise supported by other consideration
o Exception: Mutual promises to marry
Ks which by their terms cannot be performed within ONE YEAR of their making
o Must be impossible to perform within a year – if there is any way it can be performed
within a year, S/F doesn’t apply
Promises conditional upon an uncertain event
Cancellation and termination clauses
o Period of one year: One year is FROM making of K and the completion of performance
o Employment K HYPOS (130-131)
A agrees to work for B for 5 years – within S/F
A agrees to work for B for A’s life – not within S/F because B could die within
a year
A agrees to work for B for A’s life, but not exceeding 5 years – not within
S/F
A agrees to work for B for 5 years, if A lives that long – not within S/F
because A could die within 1 year
A agrees to work for B for 5 years, but if A dies the K is to be terminated –
courts divided on this example:
View 1: K is both performable and terminable within a year – S/F
doesn’t apply
View 2: Termination clause means nothing since if a party dies a K is
no longer valid. Reach same result as view 1
A agrees to work for B for 5 years, but A can cancel the agreement at the
end of 1 year – If K is terminable but not performable within 1 year, courts divide
on whether S/F applies, but most courts say S/F does not apply.
Executory Ks for sale of real property (LAND)
o Applies only to executory Ks: that is, only agts prior to exchange of the deed/title; once
title has been conveyed or K executed, it is too late
o What constitutes real property? Structure fixed to the land might qualify.
Common Law:
Improved/unimproved land
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Standing timber, perennial crops, and minerals in place – S/A
as follows:
o Approach #1: When did buyer become owner of
property?
o Approach #2: Did parties deal with property as realty
or personalty?
o Approach #3: Was buyer supposed to remove
property promptly?
Annual crops, fructus industriales were considered personalty since so
much labor went into them
UCC:
2-107(1): considered personalty if severed by seller
2-107(2): either purchaser or seller can sever – if it can be severed
without material harm (without disrupting the land) to realty, its still
personalty
Special promises of EXECUTORS or administrators to answer for decedent’s debts out of
personal representative’s own funds
o Specialized application of next clause (see 2. below)
o Let’s suppose one of the administrators goes to the creditor and tells him that he is going
to use that credit to pay a debt of the estate, is this a special promise? No. Only if the
administrator uses his/her own funds to pay the debts, then there’s a special promise if the
creditor agrees to pay the administrator back.
Executory Ks for sale of personal property (GOODS)
o Applies to Ks for sale of personal property in a certain amount ($5000 or more)
Ex: A $2 Billion construction deal can be completely oral and completely oral,
whereas a $400 deal for personal property must be in writing.
o Sale of goods – UCC § 2-106 – present or future sale
o Labor and materials – e.g. construction – can be taken outside statute because of high
degree of labor involved
o Special, custom goods
Common law – S/A:
Would K ultimately result in transfer of title to a chattel?
At time of contracting, were goods in existence in substantially the
needed form?
Even if goods were not in existence at time of contracting, would seller
make this type of good in ordinary course of business?
UCC 2-201(3)(a) attempts to resolve S/A:
Once a seller makes a commitment or purchase of materials, K is
enforceable anyway. Substantial beginning or commitment for procurement
of the material.
o Determining value is easy when it is $ for goods, harder to figure out otherwise – if there
is a question look to FMV and valuation experts
Special, secondary, or collateral promises (SURETY)
o If one promises to answer for debt of another (to act as surety or guarantor) the agreement
must be in writing
o Principal debtor (PD) must have at least voidable duty to creditor (C), usually the P. PD,
usually the D, might have duty at the time surety (S) and C contract. PD must at least come
under duty before time S is to perform
1) Relationship between PD and S must be a suretyship relation;
2) S must be secondarily liable for debt;
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3) C must know that S is only secondarily liable for debt;
4) S must make promise directly to C
o In the landowner HYPO, there is respectable authority to comply with the statute.
o This does not apply if main purpose of acting as surety is to further one’s own advantage
– e.g., a controlling shareholder guarantees a loan to a corporation to protect value of his stock
METHOD OF SATISFYING S/F?
If so, did the parties comply with S/F?
If yes, how can S/F be satisfied? (ANY ONE OF THESE WILL SATISFY)
[Corbin – a variable function; the rigor with which you apply the S/F should be correspond w/ the RISK of
FRAUD…] ***
Note or memorandum – Satisfies ALL clauses
o Common law: Have to include type of goods, quantity, quality, and a method of
identifying parties. Must be complete, correct, and signed by Ds.
Does not have to be all one document
Crabtree v. Arden (there was a note referring to term of employment
vaguely minus signature, 2 payroll cards, one signed; Ct held that several
documents comprising all of the material terms is OK for purposes of
memo; must clearly refer to same subject)
S/A:
1) you may not include other writing unless the initialed or
signed doc REFERS to the WRITING, not just the subject matter
2) don’t need a reference to a writing, but it must be clear on
the face of the writings that they refer to the same SUBJECT
MATTER
Futuristic language OK
In this case, helpful that all 3 documents were prepared by D –
evidentiary value
Parol evidence can be brought in to explain writings or an oral
agreement/evidence of assent, but not to supplement it substantively.
NOTE: It can only be brought in by the D.
P cannot bring in oral evidence, but D can, and this is why the courts are not
willing to use the S/F, this is a one-way street.
o Signature
Can be omitted; Initials are OK
Intent of signature does not have to be to make writing enforceable – only
authenticate the writing
Careless cancellation – a letter to the other side stating the material terms meant
to inform the other side of cancellation can make K enforceable (i.e., don’t send
anything that indicates K exists)
Subscription – needs to be at the end of all essential terms
Makes enforcement a one-way street – K can only be enforced against a party
who signed
You physically affix the unsigned memo to the signed one. The Crabtree court
tells us that this is a great case to apply this rule, but this is not true. The payroll
cards do not identically identify the specific language of the first memo, it talks
about ―contractual arrangements‖ instead.
o UCC § 2-201(1) – ―A contract has been made‖ (past tense)
―Except as otherwise provided in this section a contract for the sale of goods for
the price of $500 or more is not enforceable by way of action or defense unless there
is some writing sufficient to indicate that a contract for sale has been made between
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the parties and signed by the party against whom enforcement is sought or by his
authorized agent or broker. A writing is not insufficient because it omits or
incorrectly states a term agreed upon but the contract is not enforceable under this
paragraph beyond the quantity of goods shown in such writing.‖
Requirements for enforcement are:
Signature of party against whom enforcement is sought
Quantity term
Sufficient to indicate a K has been made (past tense – future tense not
ok)
Original statute required much more complete memo, but now even incomplete
memo is acceptable.
If a term is wrong, K is enforceable up to quantity in the writing
Can use documents that came into existence prior to K even if have futuristic
language
Talks in past tense ―has been made‖
Textualist: primacy of text now have authority for proposition that
inclusion of futuristic language is fatal to note/memo. Present tense carries
more weight.
o UCC § 2-201(2) – ―A writing in confirmation‖
―Between merchants if within a reasonable time a writing in confirmation of the
contract and sufficient against the sender is received and the party receiving it has
reason to know its contents, it satisfies the requirements of subsection (1) against
such party unless written notice of objection to its contents is given within 10 days
after it is received.‖
Both parties are bound if a writing in confirmation is sent (past tense) and the
party receiving the writing does not object. That language means that if P generates
a memo that will be satisfactory to D, and D does not do anything, the memo
becomes valid, and both parties are bound.
Harry Rubin & Sons v. Consolidated Pipe Co. (3 different agts for
Hoola-Hoops; the D claims that 2 of the 3 Ks violated the S/F; 1 st K is a
purchase order; 2nd K is a letter from Rubin to Consolidated, using the word
―order,‖ but you do not complete orders, you complete Ks; 3 rd K is a letter
from Rubin to Consolidated that states ―this order is to be entered… in
which you agreed…‖ 3rd letter’s past tense indicated prior written
correspondence was in fact mentioning an agt
The main thing that has to be shown is that it is a ―writing in
confirmation;‖ can show that there was an agt by referring to
documents outside of the writing but only if they refer to an agt
that they ALREADY had
Acceptance and receipt – goods/personal property clause
o Common law: if part of K is performed, the whole thing was enforceable. If D took part
of delivery, then bound to take whole thing
Trojan Textile case – n. 3, 150 (oral agreement involving 83,000 yards of cloth;
as soon as accept 15 of 83,000; under S/F there is enforceable K; all or nothing
choice for buyer)
o UCC 2-201(3):
A contract which does not satisfy the requirements of subsection (1) but which
is valid in other respects is enforceable
(a) if the goods are to be specially manufactured for the buyer and are not
suitable for sale to others in the ordinary course of the seller's business and the seller,
before notice of repudiation is received and under circumstances which reasonably
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indicate that the goods are for the buyer, has made either a substantial beginning of
their manufacture or commitments for their procurement; or
(b) if the party against whom enforcement is sought admits in his pleading,
testimony or otherwise in court that a contract for sale was made, but the contract is
not enforceable under this provision beyond the quantity of goods admitted; or
(c) with respect to goods for which payment has been made and accepted or
which have been received and accepted (Sec. 2-606).
Part (c) makes the common law less draconian… enforceable only w/
respect to goods for which payment has been made and accepted, or which
have been received and accepted
Part payment – goods/personal property clause
o Common law: ―earnest money‖ – e.g. Lucy slapping down $5 – was considered to be
for binding purposes only, not part payment
o Modern view: considered part payment credited toward final cost
o Making part payment DOES NOT make whole agreement enforceable – under UCC § 2-
201(3)(c) [same as above]
Part performance – one-year clause
o If one party who could actually performs within 1 year, the K is no longer within S/F and
is enforceable – some courts have extended this to part performance [SEE NOTE 5, 133]
o The courts will give them their expectation interest.
Part performance – realty clause
o If K has been partly performed, court may enforce because there is no other way to
provide relief for person who relied
o If deed has been given to buyer by seller, oral or not, agreement will be enforceable
Buyer has to do more than just put money on the table; buyer must move on to
the land and make improvements (conduct is persuasive corroborating evidence as to
existence of K; also courts not comfortable with valuation once improvements
made). If the buyer just gives a payment, he could just get the money back. If he
also moves onto the land, he could just move out. Taken one step further, this
satisfies the S/F.
If the seller goes as far as giving the deed, has he done enough? Yes.
Admission – goods clause - § 2-201(3)(b)
o If D admits a K was made, it is enforceable to quantity of goods admitted (i.e., P has lost
S/F defense). Pleading testimony or otherwise in court. The admission does not need to be
voluntary. If the P encourages the D to admit, D has just established the existence of the K.
o Downside – encourages lying (perjury) – if D doesn’t admit they still have a complete
defense. (CA doesn’t have this provision)
Effects of Non-Compliance:
If not, what are the effects of non-compliance?
Executed K: if K has already been performed, S/F has little effect. Performance has same effect
as if K were in writing
Executory K:
o Affirmative enforcement of K – P sues on K or D files counterclaim based on K – S/A
View 1: Oral K is unprovable – S/F is merely rule of evidence; effect of no
writing is that oral K is inadmissible
View 2 (Majority view including California): Oral K is unenforceable even if
there is mutual assent and consideration – S/F is limitation on court’s authority to
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provide a judicial remedy. This has to be raised in an affirmative defense in the
pleadings.
View 3 (Minority view): Oral K is void – S/F has a substantive operation; as if
K had never existed
o Practical importance is procedural
In ―void‖ jx: S/F need not be plead as an affirmative defense (general demurrer
will suffice) – it could be raised for first time on appeal
In ―unenforceable‖ jx, it must be plead as an affirmative defense
More available remedies in ―unenforceable‖ jx – e.g., if a K is void there cannot
be an action for tortious interference with K (substantive) while in an unenforceable
jx there could be one.
MITIGATING DOCTRINES
Mitigating Doctrines:
Are any mitigating doctrines applicable?
Quasi-K Restitution Interest:
o To establish quasi-K liability, P must show that:
P conferred material benefit upon D
P did so w/ expectation of payment
D was acting officiously
o P must not be in default on K; D must be the one who has breached or repudiated oral K
o Court will also deny recovery if granting recovery would thwart statute’s policy
Ex: real estate brokers are not allowed to recover on oral commission Ks; if
statute in jx requires such Ks to be in writing, Ct will not grant quasi-K recovery
o Measure of recovery: if party performs under oral, unenforceable K, that party normally
has right to quasi-K recovery—can recover FMV of benefit conferred
Specific restitution:
o Sometimes P can obtain equity decree forcing D to return property in kind
o Courts will do this if D used fraud, duress, or undue influence to make original
conveyance
o Court may also do this if D breached fiduciary duty to P; D abused some confidential
relationship with P
Equitable estoppel:
o Requires deliberate misstatement of fact; P can sometimes invoke this to overcome S/F
defense
Ex: D lies about fat that he had signed document and P proceeds to perform; lie
must relate directly to S/F
o Since D lied, courts will often grant P full expectation interest (full K remedy)
Promissory estoppel:
o Most controversial area of mitigating doctrine for the S/F
o What should be factual predicate for applying PE?
Loss must be something besides prospective profit.
If P could have made another K with no loss, there is no PE—would make S/F
nugatory
If market changes and P cannot reenter the market to make another K, PE CAN
be invoked
If the subject matter of K deteriorates (i.e., crops), PE can be invoked
Very extreme cases of reliance over a long period of time; when a quasi-K
recovery would not be enough
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Services have been consumed and all cts will take this into account
STATUS DOCTRINES
Minority/Infancy – status alone is the focus, not the effect of that status of the substance of the agreement
How to define infancy – chronological age
o Unless there is a statute, it is based on common law, where most states recognize age 18,
where it used to be age 21
o Content of K is irrelevant, no matter how fair or reasonable K is
Effects of minority
o Some Ks are valid – cts will recognize some Ks made by minors (e.g., bail bonds obv.
Public policy reasons)
o Some Ks are void – such as sophisticated surety agts
o Most Ks are voidable at minor’s election
Kiefer case (minor misrepresented, by signing form, that he was over 21 when
he bought a car; after becoming of age he returned the car and sued to recover the
price; Ct held the K voidable due to P’s minority status at time of purchase; suggests
to appellant car company that they must go to the legislature if they want reform in
status doctrine)
Minor’s options
o Ratification
When? K can be ratified by minor only after he reaches majority/maturity as
specified by statute
Express – oral or written is acceptable but rarely happens
Implied – person who contracted w/ minor will usually argue for
implied ratification; arguments include:
Minor received a new benefit under original K (e.g., brining
car in for warranty service)
When both parties assume further benefit, this becomes an
implied ratification
Length of time – can be claimed that minor implicitly ratified
by waiting too long; must be fairly long time; cts grant minors a lot
of leeway; argument will be helped if party can show depreciation
or some other prejudice (change in the state of the market)
o Disaffirmance
Minor as P: minor has to return whatever he has in whatever condition it is in—
this is not full restitution to D
Minor as D: same; cts will tend to be even more protective of minor
Can party who contracted w/ minor get quasi-K recovery? – S/A
o Majority: Recovery in quasi-K – a majority of jxs say only for necessities (e.g., food and
clothing); both majority and dissent in Kiefer are wrong
o Minority: New Hampshire says full recovery for all benefit conferred
Can the party who contracted w/ minor recover in tort?
o Minority is not a tort defense
o If boiler-plate provision, minor must be aware of it
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Keser v. Chagnon case (Chagnon was 20 yrs old when he bought a care from
Keser; a few month later, after he turned 21, he decided to return the car; the judge in
this case is being dishonest, b/c the amount that the P was awarded ($655.78) is the
exact amount of money that the P owes the Public Finance Corp., his lending
institution.)
Reconcile Keser with Kiefer? Chagnon himself misrepresented his age
at the time of purchase, while Kiefer only signed the form with the
boilerplate text about being 21 or over and didn’t know he was
misrepresenting.
Insanity
Who is deemed insane?
o Common law:
Cognitive test – if person lacked capacity to understand the nature and
consequences of their act or their effects during the transaction considered insane
for purposes of the status doctrine defense
Ortelere v. Teachers’ Retirement Board (60 y/o teacher retired
and took out a huge part of retirement pension, leaving nothing for
her husband and children; at time of K, she was on medical leave
and the Board knew of her medical condition; husband sued the
Board claiming she was mentally incompetent; Ct. uses volition
test, not cognitive test, finding in favor of P; the Board did not
changes position; also considered the relationship b/w the
retirement system and its member)
o Modern view:
Volitional test – if a person understands by is unable to control their behavior
considered insane for purposes of the status doctrine defense
o Prevailing view:
―Either/Or‖ test – either cognitive or volitional will qualify for insanity defense
o Limits of the R2d § 15:
Other party knows or should know of mental illness
Mental illness must be serious
Ct can limit recovery/right to terminate if other party did not know of condition
and K is made on fair terms
Consequences of insanity
o Some Ks are void
If there is a formal adjudication of incompetence, any K made after are void
If a general guardian or receiver has been appointed, K is void
o Most Ks are voidable
Ratification
Person’s guardian can ratify
Person can ratify if they are no longer insane and has regained mental
capacity
Disaffirmance
If K is disaffirmed, other party must be put back in full status quo ante,
the position they were in prior to entering into the K (different from minors)
o Relevant circumstance
Person’s capacity at the time they entered into agt needs to be proven
Person seeking to set aside K does not need to show that insanity affected agt,
but it is persuasive circumstantial evidence
o Quasi-K recovery?
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FMV conferred only for necessities
Cundick case (59 y/o farmer contracted w/ Broadbent to sell him farm
and proceeds w/ agts of sale; wife, as guardian ad litem, brings suit against
Broadbent, claiming he was mentally ill; Ct held Broadbent didn’t defraud
or overreach in the agt b/c no notice of Cundick’s psychosis)
Intoxication – Restatement 2d § 16 – closely parallels insanity rule
Person incurs only voidable K duties by entering into a transaction if the other party has reason to
know that person entered into a K while intoxicated:
o He is unable to understand in a reasonable manner the nature and consequences of the
transaction, OR
o He is unable to act in a reasonable manner in relation to the transaction
CONDUCT DOCTRINES
Duress – Affirmative defense
Pre-existing duty rule – policy reason for rule was to prevent economic extortion
o See Alaska Packers vs. Thompson case
o Pre-existing duty rule does not change the status quo
o If party has already performed X, and wants damages, then party can invoke economic
duress
Austin case (Navy radar sets subcontracting case; Austin officer refused to
accept Loral’s order for less than all 40 of the gear parts and told Loral that Austin
would cease deliveries of the parts due under existing subcontract unless Loral
consented to increased prices; recognizing econ duress a question of law; whether
Loral contacted 10 alternative suppliers matter of fact {narrow scope of review};
ct. can’t use the preexisting duty doctrine b/c Loral has ALREADY made the
payment to Austin; need to use econ duress; a trier of facts find that during a four
week period Loral contacted to alternative suppliers; trier concludes that Loral acted
unreasonably in contacting only 10 alternative suppliers)
Economic duress
o No real assent to decent terms (Llewellyn’s reason for writing UCC Article 2)
o Elements of economic duress:
1) P committed an illegal act or made an illegal threat
2) P’s illegal act or threat placed D in a dire economic situation
3) P knowingly capitalized on D’s desperate economic situation by making an
improper demand to D
4) Subjective element: D yielded to demand b/c of P’s illegal act or threat
5) Objective element: D acted reasonably in yielding to the demand
6) Some cts – D had no other adequate, available means of preventing or
avoiding the loss other than yielding to the demand (redundant)
Physical duress
o Criminal or tortuous means were used to persuade innocent party into entering agt
o Threat of physical injury to party or a family member
o Common law required innocent party to resist with ―average courage and vigor‖—
modern law does not require this
o Subjective standard: but-for the threat, innocent party would not have entered K; does not
have to be objectively reasonable
Consequences of duress:
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o Voidable: similar to insanity and minority – innocent party gets to decide to void the K or
proceed
o If innocent party is the D, they can use duress as a complete defense
o Delay can be taken as an implied ratification, which would deprive right to recover
Misrepresentation
Fraud in factum or execution
o Types:
Misrepresentation about character of document to be signed
Physical interference w/ a party’s opportunity to read a document
o Legal consequences: agt is void no K
o Innocent party’s belief does not have to be reasonable – ―pure heart, empty head.‖ Most
cts view foolishness is more forgivable than fraud
Fraud in the inducement
o Elements:
1) One party made a statement of fact to the other party before or at formation
of K
2) Statement was false
3) Party who made the statement knew or believed that it was false
4) Party who made the statement intended to deceive other party
5) Statement induced other party to enter into K; Other party would not have
entered K but-for the false statement
6) Other party’s reliance on the statement was reasonable
Trend subjective ―pure heart, empty head‖; but-for fraud, he would
not have entered into K
o When is relief granted?
For active suppression of truth, affirmative conduct hiding the truth
For misleading half-truths
Cts do not grant relief for nondisclosure
Swinton case (P sued D Whitinsville Savings Bank to recover damages
for alleged fraudulent concealment by defendant in sale of a house to
plaintiff; Ct finds in favor of the D invoking rule of nonliability for bare
nondisclosure)
o What is the legal consequence?
K is voidable at innocent party’s option
As P, innocent party can sue for rescission and gain restitution of everything P
gave D under the K
As D, this is a defense
Ratification can be implied from timeliness of rescission
Negligent (Innocent) misrepresentation (similar to mistake)
o Elements:
1) Statement of first party was false
2) Statement was material—if not material, it will have no legal consequences
3) Second party relied on the statement
o Innocent party’s behavior must be objectively reasonable
o What is the legal consequence?
K is voidable
Second party can rescind/defend against enforcement
Second party has the choice to ratify or disaffirm
Can use negatively or defensively to defend a suit OR can use
affirmatively or offensively as in Kannavos
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Kannovos case (Ds had failed to inform Ps that the multi-
family houses purchased were prohibited by local zoning; Ct held
that reliance on fraudulent representations did not bar rescission of
the purchases merely because plaintiffs did not use due diligence
when they could readily have ascertained from public records the
true facts.)
Breach of express warranty
o From seller of goods under UCC § 2-213 – if an express warranty about goods sold is
breached, innocent party can recover
Mistake
In general, mistake renders K void or voidable; 2 general norms
o Unilateral mistake, even if material enforceable K (no relief to mistaken party)
Exceptions:
Mistake induced by other party unenforceable
Mistake known to the other party unenforceable
Exception to the exceptions:
If mistaken party assumed the risk enforceable (R2d § 154)
Jardel, infra
o Mutual, material mistake void or voidable K
Both parties made a mistake, not necessarily the same one
When assessing materiality, ask what the mistake relates to (i.e., delivery date,
etc.)
Exception: If one party assumed the risk of the mistake (more than mere
negligence) enforceable
Assumption of risk (gambling state of mind) – party must be conscious
that they do not have sufficient knowledge of the pertinent fact and still
disregard it knowingly > negligently
Expertise
Duration of opportunity for investigation
Awareness of custom (trade)
o Common law: custom must be virtually universal
o UCC: ―normally‖ (>50%) may be sufficient to
establish custom
Beachcomber, infra
Intrinsic Mistakes (inherent in the bargaining process)
o Mistake about what the speaker said orally
Ex: Speaker said 30 and hearer heard 13
if caused by hearer’s inattention unilateral mistake enforceable K
for the term 30
If caused by speaker’s poor enunciation, either voidable or hearer can
enforce for 13 term under R2d approach
o Mistake about contents of the document/writing evidencing agt
Ex: writing includes some term that wasn’t bargained for or omits one that was
bargained for
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2nd party knew 1st party was mistaken unilateral mistake voidable
by 1st party
Both mistaken mutual mistake voidable
Mutual material mistake unenforceable
o Mistake in choice of words (e.g., slip of tongue, pen, or typewriter)
Enforceable unless 2nd party sees mistake
Ct can grant creative remedies like changing to what was really meant
o Intermediary causes mistake by changing terms of a message – S/A
If agency relationship (e.g., trustee, fiduciary, etc), the principal agent
mistake imputed on one who hired the agent enforceable K
If an independent contractor mutual mistake voidable
Majority view: intermediary is an agent unilateral mistake enforceable K
Ex: telegraph company is an agent; when buyer/seller uses this agent,
they assume the risk of failed communication
o Speaker uses ambiguous words
Speaker assigns one meaning and hearer assigns the word another
Subjective intents differ and parties equally innocent or at fault mutual
mistake
Raffles case (2 ships both named Peerless; mutual mistake even though
mistaken about different things; Ds thought they would be getting their
cotton in Oct. and the ship arrived w/o cotton and assumed that P breached
K; then cotton arrived in Dec. w/ another Peerless ship and Ds refused to
pay; Ct says no K b/c no assent on the meaning of the term ―Peerless‖
mutual mistake voidable)
Extrinsic mistake (related to the application of the bargain to the extrinsic realities)
o Subject matter
If unilateral no relief, unless induced or known
Sherwood case (pregnant cow; barren cow is less valuable than a
breeding cow; mutual material mistake b/c the seller was confident he knew
the truth; no risk of ignorance b/c he was the expert in that he had owned
the cow for years)
Wood case (mistake of taking the stone to the jeweler and selling it for
$1; stone was uncut diamond; P didn’t know anything about precious gems
but didn’t bother to take it to an expert unilateral mistake and assumed
risk)
Beachcomber case (coin dealer had a 15-45 min. examination of a
valuable dime but didn’t send it to an expert to make sure it was Denver-
minted; Ct agrees w/ P’s expert who asserts it’s possible to send the coins
off-site and people ―normally‖ do this, but it’s not necessarily ―universal‖
not knowledgeable assumed risk voidable)
Sears v.Jardel case (general contractor was not satisfied with appellee's
work and eventually the parties entered into a settlement K by which, in
exchange for an agreed upon sum, the contractor appellee from all liability
on the project; following the settlement, a portion of one of the buildings in
the mall collapsed and the tenant brought suit against the general contractor
who then instituted a third-party action against appellee. The appellate court
affirmed;.contractor for building released the sub after differences arose;
building then collapsed and contractor sued sub for breach of K; Ct finds
that Robins assumed risk when they released Hirsch; found that Jardel
assumed the risk by entering into a sweeping settlement K; even if mistake
was unilateral, R2d § 154 says K is enforceable if party assumed risk) …???
o Collateral assumption of fact (computational errors) – NOT GOVERNED BY
GENERAL RULES
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Generally: cts are more willing to grant relief to the mistaken party
Policy: [more likely to have documentary corroboration in this type of mistake
less chance of fraud]***
Typically unilateral mistakes by subcontractors
Minority of cts liberally allow D to avoid K; an equitable defense is allowed if
D can show that
(Requirements for granting relief to mistake party (D)):
D made mistake in collateral assumption of fact
Good faith mistake (innocent, but not grossly negligent)
Material mistake severe hardship resulting to D
After discovering mistake, D promptly notified P
No prejudice suffered by P (only loss is the benefit of the
bargain)
o P must be put in the status quo ante
Crenshaw (computational error in bids; notification after acceptance is
given promptly; unilateral mistake; not known or caused by the other party
enforced on D grants relief for P) CT IS WRONG IN THIS CASE
when it says breach of K despite good faith, inadvertent error, w/o gross
negligence, and promptly communicated to the Board
VS
Elsinor (inadvertent mistake; finds mistake after bid has been accepted;
there was documented evidence that there was an honest mistake; notified
the Board in ample time; Ct held the material difference mattered and
rescinded in time voidable for D no relief for P)
When this type of mistake is made, documentation is available [one reason relief
is more liberal if conditions are met]
Mistakes as to economic valuation – NOT GOVERNED BY GENERAL
RULES
Generally: cts are less likely to grant relief to the mistaken party
Policy: [b/c economic value is subjective, there is an inherent element
of assumption of risk]***
Exceptions: cts will grant relief if party is dealing w/ :
fiduciary (e.g., trustee) at the time of agt OR
layperson deals w/ an expert
Economic inadequacy of consideration (in equity)
Equity courts
o Special remedies available for P – will be held in contempt of court if noncompliance;
affects personal liberties of D
Specific performance decrees
Prohibitory injunctions
o Special equitable requirements for P to satisfy
P must show she has an inadequate remedy at law
Possible reasons for inadequate remedy at law
Difficulty of ascertaining market value (e.g. a Picasso; Greenacre, etc.)
Difficulty of ―recovering‖ (e.g., on waiting list for a car)
41
o Special equitable defenses for D
D can show that P gave economically inadequate, albeit, legally sufficient
consideration
Q1: As of what point in time do we assess economic adequacy of
consideration?
All courts agree – At the time of K formation
Q2: How do we measure adequacy?
McKinnon case (P assisted D in purchasing Bent’s Camp next
to his land; in exchange, D promised not to improve/cut trees/land;
business was slow and D added trailer park and tent camp; P
sought injunction to prohibit D from continuing improvements for
25 yrs; Ct says consideration of $5000 loan from P to D for a 25-yr
land restriction was inadequate b/c D wouldn’t have the property
but-for P’s loan, thus the terms of agt were grossly unequal)
Tuckwiller case (farm for nursing services not inadequate; P
agreed to provide nursing purposes in exchange for title to farm;
but Mrs. Morrison died before she added it to the will but asked 2
ambulance attendants on the way to hospital to sign as witnesses; P
asked for specific performance of the agt; Ct decides consideration
was adequate and she intended to give title to farm despite
precariousness of health and possible shortness of services
rendered due to pending death)
Q3: Standing alone, is the economic inadequacy of P’s consideration a
defense? – S/A
Majority: need more than just economic inadequacy (e.g.,
fraud, duress)
Minority: economic inadequacy can be a complete defense
(see McKinnon)
2 assumptions needed for equitable remedy
Amount of compensation can’t be fairly fixed
Another transaction can’t be substituted
Only looked at for enforceability—not legal sufficiency
Note: remember NEVER look at economic inadequacy in consideration
analysis
Unconscionability
Doctrine is case study in institutional competence of courts, especially considering failure of
economic inadequacy
The legal forte of the branches of the gov't (116)
o The Courts: gradual evolution of legal doctrine
o The Legislature: swift radical shifts in public policy
o Administrative Agencies: expert implementation of legislative policy judgments
Black v. Bush (P as middleman to get considerable profit for services; D
claiming that P is going to receive ridiculous amount of profit for their ―services‖
and this is against public policy; Ct finds nothing illegal in agt and all P did was
drive a tough bargain; D claimed admin agencies should’ve stopped in and corrected
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agt b/c they have expertise in public policy… go to legislature for revolution… cts
are evolutionary and slower)
Development of doctrine
o Stage 1: no relief granted for philosophic and pragmatic reasons
o Stage 2: indirect attack on adhesian Ks by manipulation of traditional doctrines of mutual
assent and consideration – Llewellyn
Klar case (agent left package for wrong person; charged 10 cents for package
worth $1000 and owner sued for damages; ticket on front said ―Contract‖ near top,
bold and red, saying ―loss or damage, no claim shall be made in excess of $25 for
loss or damage; Ct found customer had no bargaining power, thus manipulates
mutual assent instead of propelling unconscionability doctrine)
o Stage 3: R2d § 234 and UCC § 2-302
UCC § 2-302: If the ct as a matter of law finds the K or any clause of the K to
have been unconscionable at the time it was made, the ct may refuse to enforce the
K, or it may enforce the remainder of the K w/o the unconscionable clause, or it may
so limit the application of any unconscionable clause as to avoid any unconscionable
result
Development of Stage 3:
o Procedural unconscionability (unreal assent): show assent was apparent rather than
real; need to prove at least one of the following:
Unknowing assent
Did not realize he was entering into K at all; should prove that belief
was genuine and reasonable (e.g., recept from parking lot attendant) OR
Show that clause in question was physically inconspicuous; did not
notice clause b/c size of type was small OR
Clause’s language was too sophisticated to be understood by lay party
Involuntary assent – K of adhesion
Other party had vastly superior bargaining power, such as when market
condition approaches monopoly (then business person has the bargaining
power)
Establish there is no competition among the various producers w/
respect to the clause in question
Ex: auto manufacturers use same disclaimer clause even
though they compete against each other; same effect as a
monopoly
o Substantive unconscionability – clause has harsh, oppressive effect; will dramatically
change the normal allocation of risks under the K
Ex: manufacturer normally bears risk of personal injuries caused by defects in
products marketed; negligence, strict tort liability, or warranty; if manufacturer
permitted to disclaim that liability, it shifts risk from manufacturer to consumer
Strong feeling in the US against such disclaimers
UCC § 2-719(3): makes such disclaimers prima facie unconscionable by
proving the following:
Statutory presumption
Would have unconscionable effect on typical consumer
Did have an unconscionable effect on this particular party
Show economic loss party will suffer if judge sustains clause
o S/A in evolving doctrine -
o Paradigm: unknowing assent + invol assent + substantive uncon
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Henningsen case (P had no choice but to accept warranty clause, but it was
buried in small text and never pointed out; language means that if part of car fails,
anything that happens b/c of the defect is not the responsibility of the manufacturer;
adhesion K since 95% of the manufacturers used same clause; Ct held
unconscionability b/c of [procedural uncon. = unknowing assent + involuntary
assent] + substantive uncon)
o Majority view: unknowing assent OR invol assent + substantive uncon
Williams case (rent to own furniture clause was too complex to understand;
conditional sales K w/ a dragnet repossession clause stating you waived your legal
rights to possession of every item you’ve ever financed if you defaulted on monthly
installment payments; Ct says unconscionability b/c unknowing assent OR
involuntary assent + substantive uncon.)
o Minority view: substantive uncon standing alone
Jone case (P bought $300 retail value freezer for $900; paid installments up to
$600; Ps were illiterate and on welfare, no indication they knew what they were
getting themselves into; Ct held unconscionable on substantive uncon alone)
Cts have remedial flexibility
o Can declare entire K void
o Strike the unconscionable clause
o Limit application to avoid harsh result
Doctrine extended to Ks b/w merchant
o Wilson v Ferguson (sales K for yarn saying no claims relating to yarn if made after using
the yarn or after 10 days after receipt of shipment; but defects in yarn were latent; corporate P
sued for breach of warranty; contractual limitations upon remedies are generally to be
enforced unless unconscionable; Ct says the time provision eliminated remedy for defects not
discoverable before knitting, thus substantive uncon, despite hardship of corporate P to prove
procedural uncon)
Cts may refuse to apply doctrine when subject matter is a luxury item
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Contracts Outline – Conditions Imwinkelried – Fall 2008
CONDITIONS
Before P can have a cause of action for breach, P must establish that D had the immediate duty to perform
Two ways to show this immediate duty of the D:
o 1) D’s duty was unconditional; OR
o 2) D’s duty was conditional AND
The condition was fulfilled OR
The condition was excused
Condition defined: any uncertain fact or event, other than the mere passage of time, which determines whether a
duty is activated of immediate performance
Any uncertain fact or event judged from the perspective of the parties
Does not need to be a performance by one of the parties
Legal effect of a condition vs. a duty
o If a condition fails, there is no duty of immediate performance for either party
o If D fails a duty, then P has a cause of action for breach for at least nominal damages
Possibilities of provisions:
o ―I will sing provided you pay.‖
―provided‖ = condition
o ―I promise to sing.‖
―promise‖ = duty
o ―I promise to sing, provided you pay.‖
Promissory condition: both a promise and a duty
3 types of conditions: expressed, implied-in-fact, implied-in-law
o Luttinger v. Rosen (P contracted with D to buy property if P got a mortgage with
particular terms; if P couldn’t get the mortgage with due diligence, D would refund the
deposit; P went to one bank (reasonably relied on advice of attorney that this was the only
bank that might give him a mortgage) and was turned down; P asked for deposit back and D
refused; Ct held D in breach; P fulfilled condition of due diligence, giving rise to D’s duty of
immediate performance; P’s duty to pay the entire amount was extinguished by the failure to
of the condition to get the mortgage)
Step 1: Identify the duty on the part of the D that P wants the court to enforce
Step 2: Determine whether the duty is conditional
There has to be a manifestation that a certain promise by one depends on something else
If the duty is conditional, go to Step 3
If the duty is unconditional it is a duty of immediate performance
Step 3: Identify all possible conditions to D’s duty of immediate performance
Determine the method of creation for the condition
o Did the parties make an express condition (including implied-in-fact)? – Created by
words or conduct of the parties, but not always written into the K
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Precise wording of the provision (most important factor) Implied-in-fact OR
implied-in-law are done by the court
―provided that‖
―unless‖ (conditional) vs. ―until‖ (temporal)
―subject to‖
―contingent upon‖
―on the condition that‖
Peacock case (D was contractor for condo; P was a sub; clause
said ―payment within 30 days after completion of the work… and
full payment by the owner.‖ Owner went bankrupt, didn’t pay D;
so D won’t pay P; Ct decided in favor of P; clause is not a
condition, ―after‖ only sets a reasonable time for payment; duty to
pay still exists)
o [Policy]: don’t want subs assuming these risks and
bearing these losses; as most subs are small businesses***
Purpose of the provision (next most important factor)
If the purpose of provision is interpreted to impose a condition, the
language of the provision can be overridden
Masconi case (P was sub, D was contractor; K provided
―payment to be made and received by owner.‖ Owner failed to pay
D; P claimed clause was ambiguous and tried to use PE to show
that most of the work was done and D had orally assumed an
absolute obligation to pay; D used PE to show P has assumed risk
of non-payment as a material part of the exchange (b/c P had
looked into the net worth of the owner before signing the K); Ct
held in favor of D; P made fatal error of getting PE in, otherwise
decision would’ve been same as Peacock; wording indicates
setting time for payment, but b/c of evidence of the purpose of the
clause, the interpretation was overridden.)
Materiality or important of the provision
The more material an event, the more likely ti will be construed as a
condition; courts will hold something as a condition only if it’s an important
part of the deal
HYPO: sale of house on June 30th is on condiotn of termite
inspection by April 3rd; but the buyer turns in the inspection on
April 4th; no failure of condition would be found here b/c the date
of the inspection wasn’t material; rather the inspection itself was
material)
Source of the language – i.e., who wrote the clause
Courts look at who wrote the language and make these presumptions:
1) Party who wrote the clause and talks about an act = a duty
2) Party who wrote the clause and talks about the actions of
the other party = a condition (to activate draftsman party’s duty)
General Credit case (GC extended credit to a mortgager for 2
cars; mortgager wants money from Imperial; Imperial has 2
arguments:
o 1) In the clause, GC assumed a duty to pay the
delinquent premiums owed to Imperial
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Ct rejects this; not only did the doc use the
word ―provided‖, but Imperial drafted the
language itself and was talking about the other
party’s actions
o 2) The clause made GC’s payment of the premiums a
condition to Imperial’s duty to pay policy proceeds
Given the chronology, this would have to
operate as a condition subsequent, which is
extremely rare and require explicit language,
which was missing here
Presumption of duty
Ambiguities are resolved as duties—doing so gives both parties
reasonable expectations of performance
Used as a last resort is to rule against the party who introduced
ambiguity duty (contra proferentem)
o Did the parties make a constructive condition (implied-in-law)?
These are created by the court in the interest of justice
[They maximize the likelihood that the bargained for exchange will occur—
increase the incentive to perform]***
At common law, duties were wholly independent; there were no conditions—
like finding 2 separate Ks; this was overruled by Kingston
Types:
CC precedent: where the K indicates that one party’s performance will
precede the other’s, the 1st party’s performing is a condition precedent
If one party’s performance will take a substantial period of
time and the other’s is instant, the first party’s performance is a
condition precedent (like A builds a house and then B will pay)
Ex: A will pay for the stereo Jan. 15th; B will deliver the stereo
on Jan. 16th; paying for the stereo is a condition precedent for
delivery
CC subsequent: if concurrent performance is continuous, the actual or
prospective failure of one party’s performance will discharge the duty of the
other
Ex: insurance company’s duty to pay will often be discharged
if a claimant does not make a claim within a prescribed period of
time
CC concurrent: if a K indicates that parties will perform at the same
time, one party must tender performance to put the other in default
The result of reading in Constructive Conditions of Exchange is the creation of
Alternating Promissory Conditions, both a condition and a duty (Stewart v.
Newberry)
Ex: express duty to work, constructive condition express duty to
pay, cc etc.
The initial duty is unconditional; duty to pay last installment is not also
a condition
But if there is no express agreement for installments, payment is due at
the conclusion of all work
Exceptions: Aleatory Ks and mutual surety Ks
Aleatory Ks – at least one party agrees to assume the risk of a
fortuitous event (ex: casualty policy)
47
No CC here b/c payment is based on a fortuitous event and not on
action of the other party (fortuitous even occurring does not equal
performance);
There is no reason to imply conditions b/c this will not maximize the
likelihood of the bargained for exchanged occurring w/o the event taking
place
Determine the legal/operative effect of the condition (affects burden of proof)
o Condition precedent – must happen before activation of duty, one party extends credit to
the other
Fail or fulfill completely before the performance of a duty
Burden on P to show that CCP was fulfilled or excused
o Condition concurrence – performance are concurrently performable
Ex: exchange of $ for deed
All the P has to do is tender; demonstrate/assert that you have the ability to
perform and demonstrate that ability and demand immediate counter-performance
Burden on P
o Conditional subsequent
Ex: loss, notice of loss, proof of loss are conditions for insurance company to
pay policy proceeds, usually accompanied by private S/L; failure to make
demand/file suit extinguishes duty to pay
Burden on D to show that P did not make a demand
Step 4: Determine what happened to the condition
Question 1: Was the condition fulfilled?
Conditions of satisfaction—interpretative tendencies
o If the condition of satisfaction is ambiguous, it can be interpreted
Objectively: reasonable person point of view
Subjectively: D’s own subjective satisfaction
Dissatisfaction must be in good faith (DeVoine)
o Satisfaction can also belong to a 3rd party (ex: owner’s duty to pay general conditioned on
the satisfaction of an architect)
They usually require good faith, but not reasonableness (S/A) (it’s thought that
3rd parties will have less bias to begin with)
o All this can be avoided when drafting the agreement in the first place—just be explicit
about what the satisfaction standard will be
Promissor Third Party
Artistic subject matter Subjective satisfaction Strongest case for subjective
Gibson satisfaction
Commercial subject matter Strongest case for objective Subjective satisfaction
satisfaction S/A – Second Nat’l
DeVoine -3rd party less likelyt o lie
subjective
-commercial s/m, ascertainable stds
objective
o Gibson case (P was asked to paint a portrait of D’s deceased daughter and to be paid only
if D liked it; D didn’t like it; Ct held no breach b/c the agt called for subjective satisfaction as
a condition to D’s duty to pay P)
o DeVoine case (P sold cherries to D with a ―quality satisfactory‖ to the D as a condition
for D’s duty to pay P; D accepted some and then refused the rest; P introduced evidence
48
showing that D couldn’t sell the cherries; Ct held yes breach b/c the evidence and fact that D
had accepted already showed that D was not backing out in good faith dissatisfaction)
o Second Nat’l case (P had a K with D to furnish steel and payments were to be made as
the work progressed and upon certification by an architect; after the steel got to the 6 th floor,
architect changed the # of holes it wanted in the steel; P refused to change and D refused to
pay; Ct held for D, no breach b/c P must show that the architect withheld certificate in bad
faith)
o Rizzolo case (D’s architect refused to give a certificate after P filed suit against the D for
not paying; Ct held in favor of P yes breach b/c D got the benefit of the bargain such that the
architect’s certificate would only be evidentiary; there was also fraud on the part of the
architect in withholding the certificate)
Conditions concurrent – can be fulfilled with tender, where tender is the physical ability to
perform and offer to perform IF the other performs
Demand as a condition precedent
o General rule: a promisee must make demand for performance at activate promisor’s duty;
no duty of immediate performance arises until the demand is made
Ex: in a warranty K, the car owner must ask the car company to repair the car
before a duty to repair becomes immediate
o Exception: if promisor is under an otherwise unconditional duty to pay a sum of money
on demand, the promisee can sue to collect w/o first making demand; suit = the demand
Question 2: Did the condition simply fail?
If even one condition is neither fulfilled nor excused the duty never becomes a duty of immediate
performance
Thus there is no breach of K and no cause of action
Question 3: Was the failure of the condition excused? Identify every possible excuse
Specific excuse doctrines – for P to invoke to say the excuse of condition D’s duty to perform:
Substantial performance by P
o Defined: virtually all of the bargained for performance is already conferred, but there is a
deficiency in the substance of the performance
Policy consideration: [Policy of penalizing misconduct and encouraging
performance of the bargain; If we don’t excuse, one party will get 100% and the
other will get 0%--fairness issue]***
o Question 1: What types of conditions does this excuse apply to? SCOPE
Majority: doctrine applies to all Ks, but only for constructive conditions of
exchange (not express conditions)
Minority: only recognized in construction of Ks with constructive conditions
of exchange
Small minority: don’t recognize the doctrine at all
o Question 2: What are the elements of the prima facie case for invoking the excuse?
Elements:
Objective: the deficiency must be ―trivial‖
Broad standard – must not frustrate K’s essential purpose
o Plante case (P deviated from D’s building plans; D
claimed a long list of problems, including a misplaced
wall, and P stopped work; Ct held for P yes breach b/c
49
there was substantial performance that met the essential
purpose of the K)
Categorical rule that you have no structural defect (i.e.,
weakness in the foundation)
Rule of thumb – 10% of the K price
Subjective: the deficient fulfillment of condition must have been
―innocent‖
General rule: Can’t be willful or in bad faith; can’t be to cut
corners
Exception: De minimis non curat lex: ―the law doesn’t care
about the trivial‖; if cutting corner saved you $5 of a $5M K
o Jacob case (P’s sub used the wrong brand of pipe
through D’s house; P showed that the pipe was
functionally identical to the one D specified, and that it
was an innocent mistake; P sued D for breach of K when
D refused to pay; Ct held for P yes breach b/c the
deviation was trivial and the evidentiary condition of
getting architect’s approval is excused; policy of
preventing economic waste)
o Question 3: What is the effect of invoking substantial performance excuse doctrine?
S/A
Majority:
K price—the cost to bring the building up to the specs
o Cost of completion
Minority:
K price—diminished market value
o Used when the completion of the deviation would be
equal to economic waste
Waiver by D
o D’s conduct may have the effect of waiving P’s fulfillment of a condition
o Estoppel waiver
D’s voluntary conduct BEFORE the failure of condition
Elements:
1) D voluntarily engaged in some conduct
2) That conduct led P to reasonably believe that D was not
going to insist on fulfillment of the condition (objective reasonable
belief standard)
o D can revoke this waiver with timely notice by
destroying P’s expectation
3) If D had insisted on strict fulfillment, P could have done it
4) P actually relies on foregoing the opportunity to fulfill the
condition
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Equitable estoppel: a representation as to a fact
Promissory estoppel: a promise that the other party relied on
If there is no reliance, it is NOT irrevocable—can reinstate the
condition in a timely fashion when it’s still fair and possible for the other
party to strictly fulfill the condition
McKenna case (D made 6 out of 7 payments made to P w/o P
providing an architect’s certificate; P wants 7th payment; Ct held
for P yes breach b/c P relied on D not demanding the certificate
when P could’ve gotten the certificate if needed.)
o Election waiver
After there is a technical failure of condition (usually P’s earlier, material
breach of duty that puts D to election), D has a choice b/w two inconsistent rights:
Choice 1: treat as a material breach, terminate the K, and immediately
sue for breach
Choice 2: proceed with K and waive condition
D may knowingly and voluntarily continue to perform his
duties and treat as a minor breach
D may knowingly and voluntarily accept performance of
benefits under the K that D wouldn’t otherwise be entitled to
D’s irrevocable waiver of condition D’s immediate duty to perform
Acceptance of compliant and non-compliant goods:
Common law waiver as to all
UCC 2-601 no waiver
Ex: landowner says he doesn’t have the money, but the construction workers on-
site know this; this fork in the road leads to the construction workers saying they’ll
start work anyway, thus electing the waiver of payment on-the-spot as a condition
o Intentional waiver
After failure of condition, D voluntarily relinquishes a known right
Majority: persuasive evidence of intent to relinquish; inaction is not
enough to show waiver
Minority: fictitious interpretation of intent (mere stupidity)
Ex: a # of conditions; D complains about one condition; by expressly
complaining about one condition, D is satisfied with the other conditions; enough for
courts to find intentional waiver
Scope of the doctrine
Majority of courts recognize the doctrine
For intent, need to have facts which prove ACTUAL intent
Other courts read in more lax intent requirement, only
requiring fictitious interpretation of intent
Some courts don’t recognize the doctrine
Some courts recognize doctrine but only for relatively minor conditions
Different from estoppel waiver: this waiver occurs AFTER the failure
Different from election waiver: no inconsistent rights to choose from
Phoenix case (P insured with D; D conditioned liability on a protective
security system for a vault and an itemized inventory; P was burglarized,
but both conditions were broken; D refused to pay at first b/c P failed to
fulfill security system condition, but then D offered in a letter to pay for
merchandise stolen outside the vault; P wants the entire amount; D refuses
b/c P didn’t fulfill the inventory condition; Ct held for P yes breach b/c D
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saying that it would pay for what was outside the vault = intentional waiver
of the inventory defense; no subjective intent by P to waive this in the
letter)
Dahl case (employees worked for D who sold to another company; the
employee manual said that employees were entitled to severance pay if they
were laid off w/ no comparable jobs available; 2 yrs after the sale, the
company sold goes bankrupt and the employees sue D for severence; D tries
to argue that P (employees) had waived the duty of D to pay; Ct held for P
yes breach b/c there is no duty to speak and failure to do so will not result in
a waiver; also the D could not prove detrimental reliance; not really a
waiver of a condition—a waiver of duty; there is a strict standard for waiver
of noninsurance cases)
Prevention by D
o General rule: D’s wrongful conduct was a but-for cause of P’s failure to fulfill the
condition; and it is consequently unfair to require P to fulfill the condition
o Exception: If P could’ve foreseen the conduct, then the court is likelyt o say P assumed
the risk
Wrongfulness:
If D’s conduct was intentional or negligent, it is wrongful—subject to
qualification, did P assume the risk?
Interference: must be a recognized type of interference
Active conduct absolutely preventing fulfillment of condition
All cts say this is prevention
This can be negligent or intentional
Active conduct substantially hindering fulfillment of condition
Majority of cts say this is an excuse
Passive non-cooperation absolutely preventing fulfillment of condition
Most cts recognize this as an excuse, this imposing an
affirmative duty of cooperation
Passive non-cooperation substantially hindering fulfillment of
condition
S/A – trend is toward recognizing it as excuse
Causation: show that D’s wrongful interference was the cause of P’s failure to
fulfill the condition; and it is consequently unfair to required P to fulfill the condition
[policy of fairness]***
Kehm case (P and gov’t contracted to build bombs; gov’t loses interest and
doesn’t uphold its end; Ct held that P gets price and extra compensation for breach of
an affirmative duty of cooperation; not only was there an express duty to perform,
but there also was an implied duty of cooperation—the breach of which is powerful
enough to support the recovery of extras (cost of delay by gov’t)
Avoidance of forteiture by P – minority doctrine
o Allows P to override express condition in case of severe forteiture
o Elements:
P’s forteiture would be severe
Jacobs (once the innocent party is facing a loss of 15% of the cost, it
will justify overriding the terms of the K)
Condition being excused is relatively immaterial
52
Ex: when do pay (not whether to pay at all)
P’s conduct is relatively innocent and inadvertent
o Often the question is: is time of the essence?
Mortgage payments: don’t want the mortgager to lose all the interest in the
property b/c the payment was a minute too late—time NOT of the essence here
(equity ct will rewrite the K in the interest of justice)
Installment land Ks: you make payments over a period of time, but the owner
doesn’t convey to you until all payments are made—time is NOT of the essence here
Option Ks: one party pays a fee annually so he can exercise power to buy a
piece of land—time IS of the essence here
Holiday Inn case (Option K for land; P sent money to the wrong party
and sent it late; D wants to cancel the option; Ct held for P yes breach b/c
Traynor wanted to use the forfeiture doctrine using dynamic interpretation
of a CA statute; otherwise P would’ve lost the $$ from the last four yrs,
which would’ve been severe)
Slip of the tongue – minority doctrine (minority view makes the K go away)
o D’s statement of an unjustifiable reason for refusing performance
o There is a condition to a duty, and the condition fails, so D would have a perfectly good
reason for not performing the duty
When D opens his mouth and explains why he hasn’t performed the duty, but
doesn’t mention the right reason why the condition failed
o Majority: slip of the tongue is not fatal, must establish a true estoppel waiver—P must
have detrimentally relied on D using just this one reason for failure
New England case (P sub had K with D contractor; K called for conditions of
complying with plans/specs AND maintain satisfactory progress; D terminated K b/c
P failed to satisfactory progress (as required by the K), thus waiving the condition of
complying with the palns/specs; K provided for a 5-day termination period after D
terminated P’s right to proceed with the work; at trial D wanted to assert other
failures; Ct held for D no breach b/c 5-day period was interpreted as a quitting period
for P, not a fixing period, meaning P couldn’t show reliance on just the mention of
one failure on a condition and then try to get the others excused.)
o Minority: slip of the tongue IS fatal and D loses the right to use that failure of condition
as an excuse—based on intentional implicit waiver (D is implicitly saying he’s satisfied with
everything other than the excuse that he did give)
UCC § 2-605(1)(a): excuses a failure of condition for buyer’s duty to pay under
two circumstances: 1) the defect was ascertainable by reasonable inspection, and 2)
the seller could have cured it was stated seasonably by the buyer
Failure to mention a failure of condition under UCC § 2-605(1)(b)—between
merchants
1) Seller can demand full and final written list of defects
2) If buyer does not furnish list or omits defect, the seller is excused
from that condition
UCC § 2-607(3)(a): buyer accepted defective goods
Unless buyer gives proper notice of defects to the seller, the buyer will
be barred from any remedy
Notice can be very general
Impossibility as an excuse – widely recognized
o A supervening event after K formation made it actually or virtually impossible for P to
fulfill a condition
o Elements:
Something has happened that renders strict fulfillment of the condition to be
impossible
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Supervening event was not reasonably foreseeable at the time of K formation
If it was foreseeable, then P assumed the risk
Immaterial condition: D must still receive the benefit of the bargain
You can discharge any duty on the basis of impossibility, BUT you
cannot excuse a condition on the same basis if that condition is material to
the bargain
The condition is such a minor part of what D bargained for that it
would be unfair to deny P what she bargained for
Unless excuse is applied, P will suffer extreme forfeiture
o Policy of [fairness]***
o HYPO: construction K where you have to comply to the plans and specs as well as
fulfilling the evidentiary condition of getting an architect’s certificate of approval; the
architect die; thus impossibility as an excuse
D’s prospective non-performance of the conditional duty
o Most important and Winkie’s favorite excuse doctrine!!!
o If it becomes clear (or probable) that D will not fulfill his duty, the P is excused from
fulfilling the condition that will give rise to the duty
It would be economically wasteful to make P fulfill if D will never perform***
o Elements P must show:
Something happened that made it objectively reasonable for P to believe that it
was improbable (not impossible) that D would perform duty
1) D explicitly repudiate his duty
2) D voluntarily disabled himself from performing
3) D became insolvent
4) The duty became illegal to perform
5) D’s defective performance in other Ks or other installments of the
present K
This could go either way; In Northwest, Ct found that
violation of a separate K is not reasonable grounds for insecurity;
at best, P should’ve asked for written assurance
P had the ability to fulfill the condition to D’s duty
o Legal consequence to flow from a prospective non-performance?
If certain that D will not perform condition immediately and permanently
excused
If improbable that D will perform condition temporarily excused
P can suspend or delay performance
If D regains ability to perform, condition is reinstated (as long as time
limit has not passed when time is of the essence
o Situations affecting temporary excuse
Timely retraction by D eliminates excuse if:
1) Done before P detrimentally relies
2) Done in time to permit P to fulfill conditions
Innocent party reasonably changes position (ordinarily must check with D first
to see if D has changed mind and decided to perform) temporary excuse becomes
permanent
Lapse of time: if D does not remove uncertainty of performance in time for P to
fulfill condition
1) Temporary excuse becomes permanent if time is of the essence
2) If time is NOT of the essence, court may extend time for P to fulfill
condition
o Note: cause of action is at normal due date for performance (not accelerated cause of
action as under anticipatory breach)
54
o UCC § 2-609: a K for sale imposes an obligation on each party that the other’s
expectation of receiving performance will not be impaired; when reasonable grounds for
insecurity arise, the other may, in writing, demand adequate assurance and until he receives
such assurance, may reasonably suspend performance
Must not overreact—fatal if you do; that’s why you ask for written assurance
Whoever invokes the doctrine has the burden of proof with regard to reasonable
insecurity
o Restatement § 251: when a promisee reasonably believes promisor will breach, he may
be entitled to demand an assurance of performance
Northwest Lumber case (3 contracts between P and D; P sent pinewood and D
refused to pay until P sent studs ordered earlier; P refused to send studs until
pinewood paid for; Ct held for D b/c P can’t refuse performance on one contract
because of a breach of another; at best P could have asked for written assurance)
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Contracts Outline – DUTIES Imwinkelried – Fall 2008
DUTIES
If the duty was unconditional from the outset or all conditions have been fulfilled or excused, now
determine what happened to the duty of immediate performance
Performance can be:
o Performance no cause of action
A matter of interpretation
o Discharged no cause of action
This doctrine was developed by R2d in response to early literalism like
Paradine
o Breached cause of action
Actual, present breach of duty
Anticipatory breach of duty
DISCHARGE BY OPERATION OF LAW
General impossibility
o D is entitled to a discharge if an unforeseeable contingency occurring w/o D’s fault
makes the performance of D’s duty objectively impossible and D has not assumed the risk
of the occurrence
Only discharges a duty; can’t be used to recover restitution
o Elements:
At the time of K formation, the contingency was unforeseeable
The contingency occurred w/o D’s fault
Doesn’t matter if D was acting intentionally or negligently—as long as
there was causation
The contingency renders the specific performance called for by the K actually
impossible (―I can’t do it‖) interpretation!
Ex: K asking for file cabinets vs. K asking for file cabinets from a
specific warehouse that later burns down
The contingency rendered performance objectively impossible (―It can’t be
done‖)
Ex: subjective impossibility like financial inability doesn’t count as ―it
can’t be done‖
At the time of K formation, D did not assume the risk of the occurrence of the
contingency
Particular applications of impossibility
o Death of serious illness of an essential person
Is K premised on the services of a particular person?
For personal services:
Death of an employee discharges duty
Death of an employer may discharge if there is a close relationship b/w
employer/employee such that it would be unfair to require employee to
work for someone else (e.g. confidential secretary)
Cutter v. Powell (P contracted w/ D to be 2nd mate; K said ―I promise to pay 30
guineas provided he proceed, continues, and does his job as 2nd mate.‖; P died
halfway on the ship; his estate sued for his pay)
P v. D:
Duty: D pays $$ to P for journey completed
Condition: P must be 2nd mate for entire journey
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o Fulfilled? No, b/c P died
o Excused? No, impossibility can’t excuse a material
condition
Conclusion: D’s duty was never activated P had no cause
of action
D v. P:
Duty: P must be 2nd mate to D
Condition: D must provide P w/ ship, food, water
o Fulfilled? No, b/c P died
o Excused? Yes, by PNP
Duty discharged? Yes, by impossibility
Gold v. Salem (D has an old age home; P contracted to be in this home;
P died before he is admitted; P’s estate wants the money back (restitution);
Focus on D’s condition to P’s duties; Ct held in favor of D b/c P can’t
evoke impossibility as a discharge b/c both parties assumed the risk that P
might die, as P was 84.)
o Destruction, material deterioration, or unavailability of an essential object
Both parties realized that existence of an object was essential to K
The destruction/unavailability was no foreseeable at K formation
Without fault of D
Risk of loss was not on D
Generally, risk is allocated to the person who’s insurance is
most likely to cover the loss
Object destroyed before risk passes to buyer seller can
invoke impossibility discharge UCC 2-613
Object destroyed after risk passes to buyer buyer must pay
Taylor v. Caldwell (D contracted w/ P to let P rent music hall; hall burned down;
P sued for breach and $$ spent on ads; Ct held for D)
P v. D
Duty; D has to provide P w/ music hall for first date
Condition: none for the first date, but later dates were
conditioned upon P paying for the 1st date
o Fulfilled? No
o Excused? Yes, for the later dates by PNP
Duty discharged? Yes, by impossibility
International Paper case (D was going to deliver wood to P, but a fire destroyed
all the wood except a small amount on the top of the hill that would’ve been much
more expensive to harvest; Ct interpreted the K to mean that would from this land,
not just any wood)
Duty: D must deliver wood to P
Condition: P must pay D for wood
Fulfilled? No
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Excused? Yes, by PNP
Duty discharged? Yes, but only for the wood that burned down—the
rest must be harvested and delivered
~Partial discharge~: to the extent that it is at all possible, D
has to perform
o Early common law: no matter how expensive it is to
deliver the rest
o R1st § 463: ―if performance is not made materially
more difficult or disadvantageous than it would have been
if there had been no impossibility‖; antecedent to
financial impracticability
Canadian Industries v. Dunbar Molasses (D contracted w/ P to provide P w/
1.5M gallons of molasses from a certain refinery; the refinery produced less than
500K gallons)
Duty: D must deliver molasses to P
Condition: none
Duty discharged? No b/c it was D’s fault for assuming the risk of being
middleman; should’ve ensured that the refinery would make enough or find
alternative suppliers
o Impossibility in construction Ks
General rule: allocate risk to contractor b/c of expertise
Stees v. Leonard (D contracted to build on P’s lot; specs were provided
by independent contractor architects; twice the structure collapsed partway
b/c the foundation was on quicksand; P promised to drain, but this parol
evidence was not admitted b/c the promise was made before the K, which
was completely integrated, and there was no consideration for this promise)
Duty: D must build house on P’s lot
Condition: P must let D on his land
o Fulfilled? Yes
Duty discharged? No, impossibility won’t work as a discharge
b/c D assumed the risk
Exception: implied warranties can shift risk to party providing the plans and
specs – S/A when 3rd party provides plans and specs
K requires contractor to comply w/ the plans and specs
The plans speak of the specific problem that materializes
Objectively reasonable for contractor to rely on the plans – S/A on
whether the doctrine applies only if the landowner has in-house expertise
US v. Spearin (P contracted to build drydock for gov’t; a
sewer had to be diverted; D made the plans; one year after sewer
was diverted, it burst from heavy rain and drydock work had to be
evacuated; P stopped work until D made work site safe)
o Duty: D should pay P for work done
o Condition: P must progress w/ work
Fulfilled? No
Excused? Yes, prevention by D
o Duty discharged? No, impossibility wont’ work as a
discharge b/c D assumed the risk of any problems w/ the
sewer when D provided the plans
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o Impossibility in repair Ks
General rule: repairman will get a discharge if object to repair is destroyed
(follow the title)
Look at the role of the person in the market—repairman, not contractor
Young v. City of Chicopee (P contracted to repair D’s bridge; K says P
can’t begin work until part of the wood for the bridge is at the site; fire
destroys bridge and lumber at site; P wants recovery for work done
(restitution) and for the wood destroyed; Ct held that P can recover for work
done (quasi-K relief), but not for lumber at the site; though having wood
there was a condition precedent to performance, the title of the wood
remained w/ P)
Duty: D must pay P $$ for work
Condition: P must repair bridge
o Fulfilled? No
o Excused? No
Thus, no duty of immediate performance
Look to quasi-K relief (look at P’s duties and D’s conditions):
o If we don’t give P a discharge, then P will have to put
the entire bridge back up—converting the repair K into a
construction K
o Impossibility in technological Ks
General rule: no discharge, for even unanticipated technological difficulties
(assumed risk)
But what if other party specifies the designs and requirements?
Note: difference b/w K for sales and K for R&D (here, the Research & Design
IS the performance, so not required to produce an end product)
US v. Wegematic (D promised a revolutionary computer to gov’t P; part
of K stressed early delivery and had penalties for days late; D found it
technologically impossible to make them and said it would have to spend an
extra 1.5M and a year’s delay)
Duty: D must build computer for P
Conditions: none
Duty discharged? No, impossibility doesn’t work as a
discharge b/c D assumed the risk; Ct also rejects financial
impractibility excuse b/c D would’ve been able to pay w/ the
profits from the patent…???
o Impossibility of contemplated means of performance
Full discharge if:
Both parties contemplated a particular means of performance
At the time of K formation, it was unforeseeable that the contemplated
means would be destroyed or become unavailable
The contemplated means of performance was destroyed or became
unavailable
D was not at fault
At this point, D can get a partial discharge, but must be a
commercially reasonable substitute
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No commercially reasonable substitute
Employee strikes
General Rule: factory strike subjective impossibility; no discharge.
Exceptions: industry-wide strike, violent strike objective
impossibility, discharge
Affect of divisibility of K on recovery
Not divisible: no recovery for P on the K, but can get quasi-K recovery
Divisible: K rate until the point of the discharge, and then quasi-K for
the restitution
Transatlantic v. US (P agrees to carry D’s wheat to Iran; P can’t take its usual
route b/c Suez Cancel is blocked by sudden war and has to take a more expensive
detour; P says it was negatively discharged from its original duty under the K and it
has an affirmative restitutionary right to recover for the additional $$ it expended in
taking the longer route)
Duty: P must deliver wheat
Condition: D had to provide P with wheat
Fulfilled? Yes
Duty was performed (and this activated D’s duty to pay, which it did)
This question: is P entitled to more pay for the longer route?
No, this is not a divisible K—D just wanted to the end
product, not individual lengths of travel
Is P entitled to an impossibility discharge?
No, P assumed the risk (could have insured against it)
Also, there was no actual impossibility (there were other
routes) and the contingency was actually foreseeable
~Partial discharge~ as to the means of performance
o Legal impossibility
After K formation, law goes into effect, making subject matter of the K illegal
Performance is physically possible, but legally impossible
Law should give a discharge to parties who did not consider or anticipate this
change in the law, but only if normal elements of the impossibility discharge are met
1) Domestic government enacts general law that renders performance of the K
legally impossible discharge
2) Domestic court or agency issues a judgment, decree, or order that targets a K
party
D gets a discharge if the decree isn’t for the intentional misconduct or
negligence by D—objective vs. subjective impossibility
Foreign law
Traditional common law view: never get a discharge b/c you assume
the risk
Modern view (UCC § 2-615): discharge as long as law is applicable to
foreign or domestic government regulation
Swift v. Canadian (P in Canada contracted to sell pelt to D in the US w/ ―FOB
Toronto‖; US then passes restriction on pelt importation; D says this discharge his
duty to pay for pelts; ―FOB dictates who is responsible for shipment, when title
shifts, and when risk of loss shifts, overriding shipping instructions
Duty: D must accept pelt and pay
Condition: P must deliver FOB in Toronto
60
Fulfilled? No
Excused? Yes, by D’s PNP
Duty discharged? No, legal impossibility doesn’t work b/c FOB means
title would pass in Canada where US restrictions do not affect the K
o Financial impracticability (minority view at CL)
D arguing that their cost of performance has skyrocketed (distinguish from
frustration, where D argues P’s performance is worthless)
Full discharge if:
1) An unforeseen contingency occurred
2) The contingency occurred w/o the promisor’s fault
3) The contingency increased the expense or difficulty of performance
4) The increase is extreme and prohibitive (10-12X)
Policy: [to discourage economic waste]***
Criticism: too vague—no bright line for when financial impracticability
begins
UCC § 2-615 recognizes this doctrine, with perhaps a more liberal standard than
10X
Mineral Park case (D had duty to remove gravel; P’s condition was to
grant D access to land; P fulfilled this condition; but D’s duty is discharged
b/c as a practical matter, performance was impossible b/c of the cost had
gone up 10-12X; technically performance was not impossible)
o Frustration of purpose (majority view at CL)
D is arguing that the value of P’s performance is now minimal, almost non-
existent
Performance is possible, but it has become impossible for the parties to achieve
the purpose they had in mind when contracting
1) At the time of K, both parties had a foundational purpose in mind:
1) D had purpose in mind
2) D communicated purpose to P
3) P charged D an enhanced price b/c of the purpose
4) D agreed to pay the enhanced price
5) Does the subject matter have to be specially suitable? (Krell required
this, but later courts ignored it b/c requirements 1-4 sort of imply it)
2) An unforeseen contingency occurred
3) The contingency totally or substantially frustrated D’s foundational purpose
4) D was not at fault
5) D did not assume the risk of contingency’s occurrence
Krell case (D rented his room at extra high price b/c P wanted to watch
coronation; King got sick and coronation was postponed)
Duty: P must pay for room
Condition: D must provide access to room
o Fulfilled? No
o Excused? Yes, by P’s PNP
Duty discharged? Yes, by frustration of purpose; the duty
wasn’t impossible, but the point of paying so much $$ was lost
now that the king wasn’t coming.
Affirmative restitution: Cutter, early common law (0%) Prof. Seavey (equally
innocent parties) R2d § 277 (100%)
61
Partial discharge
o Means of performance is rendered impossible, but if there is an alternative means of
performance that is reasonably available, D will get only a partial discharge
See International Paper (extent) and Transatlantic (means)
o Is time of the essence?
o Three types: partial discharge w/r to the extent of the performance, the means of the
performance, and the time of the performance (temporary discharge, as opposed to a
permanent one)
BREACH OF DUTY
Present breach
o Delay in performance (is time of the essence?)
Generally: time is not of the essence (construction Ks, personal services, etc.)
Exceptions:
Option Ks for real estate
Unstable markets – Ks for goods, personal property
o Deficiency in performance – perfect tender: ―give me exactly what I contracted for.‖
Common law required perfect tender; any deviation was a material breach
As a condition – Exception is UCC § 2-508: absolute right to cure if time for
performance has not expired—requires substantial impairment and a revocation w/in
a reasonable time (this failed in Hays)
As a duty
UCC § 2-612: abolishes perfect tender rule for installment Ks
1) Buyer can reject any installment, only if it cannot be cured
and there is substantial impairment in its value
2) Only if nonconformity with one installment substantially
impairs whole K is there a material breach
3) Revocation of acceptance in whole or in part
o Buyer may revoke his acceptance of a lot of
commercial unit whose nonconformity substantially
impairs its value to him
o Revocation must be within a reasonable amount of
time
UCC § 2-608: revocation of acceptance in whole or in part
1) Buyer may revoke his acceptance of a lot of commercial
unit whose non-conformity ―substantiall impairs‖ its value to him
2) Notice of revocation must be given w/in a reasonable
amount of time
Note: P cannot claim PNP if P’s earlier breach justifies what D said
Anticipatory breach
o P files their action before the due date of the K—not a present breach situation where the
due date for performance has already arrived and D is refusing to perform; Here, the breach
occurs before the due date
o This gives an accelerated cause of action (gives you more than what you were entitled
to), unlike PNP, therefore the standard for AB is higher than the standard for PNP
Hochster
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D’s conduct impairs P’s legally protected expectation of future
performance of paying him for being a courier
Unless the Ct recognizes the AB doctrine, the innocent P will have to
remain ready and willing to perform her conditions and perform her duties
If can’t use AB doctrine, P can use PNP to excuse her
conditions
Ct has misgivings about recognizing the AB doctrine—fear of
speculative damages that will overcompensate P
o Common law requirements:
D repudiates his duty under the K (express repudiation for voluntary
disablement)
At time of D’s repudiation, P had remaining conditions to fulfill and/or duties to
perform – S/A
D did not retract his repudiation before P’s election
P elected to treat the repudiation as a present breach of duty
o Three types of restrictions imposed by the courts:
1) At the time of the alleged anticipatory breach
What D said or did:
D must repudiate or voluntarily disable his duty or himself
from performing his duty—―I won’t perform, and I can’t perform‖
What P has yet to do:
At time of breach, P has to have remaining conditions to
fulfill, or some jxs require remaining duties to perform
o This is required b/c of Hochster, but not required
under UCC
Common law: positive and unequivocal statement or acts
UCC § 2-609: reasonable reason for insecurity of performance (laxer
standards that converts PNP into AB)
2) Interim b/w the alleged anticipatory breach and trial
P’s election:
P must elect to treat AB as present breach:
o Detrimentally changed position (both material and
reasonable), OR
o File suit, OR
o Tell the other party flat out that you elect to treat this
as an AB
P needs to do all this before D retracts or expressly reacquires
ability – S/A on recovability of election
D’s retraction
Required form of retraction: depends on initial form of AB
o If the AB was verbal retraction must be verbal,
express acknowledgement of the duty repudiated
o Voluntary disablement (like selling the goods to a 3rd
party) have to regain ability to perform (get the goods
back) and then notify P you have regained the ability
3) The time of trial
Did P lose the ability to perform his or her part of the bargain?
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If you lose your ability to perform you lose your cause of action
If duty was breached, was the breach material or minor?
o Specific types of breach
Time of the essence automatically material
Ct begins w/ the assumption that time is not of the essence, but if it’s
found and there was a delay, that is automatically a material breach
Internatio-Rotterdam (D was to deliver rice to P; P was to tell
D where to ship it and shipment was to be made ―Dec. 1952 w/
two weeks call from buyer.‖; payment was to be made by a letter
of credit that mentioned the Dec. delivery; P didn’t call; D
repudiated the K on Dec. 18 (Dec. 17 was the last day for P to
call); Ct held for D b/c it found time of the essence and breach was
by P, therefore there was an automatic material breach and D could
repudiate; Ct implied time of essence from the K and the letter of
credit.)
o P v. D
Duty: D was to deliver rice to P
Condition: P had to call D w/ shipment info
Fulfilled? No
Excused? No
D’s duty was never activated
o D v. P
Duty: P had to call for delivery by Dec. 17
Condition: None
Duty discharged? No
Perfect tender automatically material under common law
Continental case (P contracted to buy soybeans from D; D called for
shipping instructions and didn’t’ receive them until over 48 hrs later; D
repudiated and said no more soybeans delivered; price of soybeans had been
rising; Ct held for P b/c combination of deviation from perfect tender and
time of essence automatic material breach; D had no right to repudiate)
o An AB is almost always material
o Other situations (balance)
The probability that P will get essentially what she bargained for if breach is
treated as minor; factors from P’s perspective:
Extend to which the P has already received the benefit of the bargain
Probability that the P will receive the balance of the benefit
Adequacy of $$ damages as a substitute for the performance that P will
not receive
VS.
The probability that D will suffer an unfair forfeiture if breach is treated as
material; Factor from D’s perspective:
Extent to which the D has already performed the duty: if in limine
(early breach), some jxs automatically treat as material breach
Character of D’s breach: if intentional, some jxs automatically consider
material (minority view)
Extent of net hardship that D will suffer if the ct finds a material breach
o The first party to materially breach cannot maintain an action against the other
Walker v. Harrison (P contracted to install and maintain a sign for D; tomatoes
and cobwebs on sign, which P doesn’t clean; D repudiates contract b/c P was in
breach for not maintaining the sign; P sued for damages saying that D could only
repudiate if the breach was material)
64
Duty: D must pay P for sign (installment payments)
Conditions: P must install and maintain sign
Fulfilled? Party (installed, yes)
Excused? What was not fulfilled was excused by PNP (after
D’s repudiation)
Duty discharged? D says yes b/c P breached first. If P materially
breached, then D would be allowed to discharge his duties
But Ct says no, it was a minor breach; tomato on sign was not
enough, and D could have cleaned it himself—no reason to
repudiate; delay in cleaning was not material b/c time was not of
the essence; D’s repudiation is now a material breach b/c he
overreacted
Wrinkle in PNP: before, it was the unforeseen event or intervening
third party that inhibited D’s actions; here it’s P’s failure of condition that,
if deemed a material breach, would discharge D’s duty
Legal consequences of the breach
o Minor breach
K continues
So innocent party may:
Temporarily suspend performance until problem is cured
Retain cause of action for actual economic damage caused by breach
In some jxs, they may deduct the actual economic damages from any amount
owed under K (self-help)
UCC § 2-717
K & G Construction v. Harris (P hired D as a sub w/ progress
payments; D damaged P’s property w/ a bulldozer; P refused to pay until D
paid, but let D continue working; D walks off the project; D makes a
counterclaim)
Duty: P must pay D
Condition: D must do the work
o Fulfilled? No
o Excused? No, PNP doesn’t work b/c P had a right to
suspend payment until the breach was cured, whether the
breach was material or minor; Ct says the breach was
material, but P had a right to treat it as minor
P’s duty was never activated, D materially breached
By walking off the worksite, D materially breached
Stilington v. Fulton (P and D entered into a K for the sale of property;
D breached when he didn’t deliver possession; P treated the breach as
minor; When D did deliver possession, P said D had to pay extra before P
would close the deal; D refused, so P repudiated the K; Ct held for D b/c P
had a choice of treating the non-delivery as a material breach and cancelling
the K OR continuing the K and suspending performance and suing for
damages caused by the dely; P chose the latter, so he can’t repudiate now; P
also had no right to self-help.)
o Material breach
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Generally innocent party can:
Treat breach as minor (temporarily suspend), continue w/ K, retain
action for actual damages, OR
Immediately terminate K and sue for breach
Affirmative – recover full expectation damages
Negative – terminate his or her own duties
Exceptions to innocent party’s right to actually terminate:
Aleatory Ks: duties are independent
Ex: A commits a material breach of duty; can B walk away if
it’s a truly aleatory K? No, b/c B’s duty is not conditional on A’s
performance; we treat the 2 duties as independent from each other;
so A breached her duty, but can still enforce B’s performance of
duty
Divisible Ks:
Look at performance on each side and ask if it’s divided into
three parts
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Compare performances on each side and see if they are paired
(unit prices)
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Does each portion of the K give a proportionate benefit to
each side? (each pair represents a mini-K)
Total damages for material breach of K = (out-of-pocket expenses) + P
(prospective profits)
This formula puts you int eh net economic position that you would’ve
been if sans breach
Gill v. Johnstown Lumber (P was driving logs down D’s
booms; unit prices for each log and tie; flood of the century
damages the logs and sweeps some of them away; P wants
recovery for what it did deliver; Ct held for P b/c of divisibility)
o Duty: D must pay P for delivery
o Condition: P must deliver logs to specified
destinations
Fulfilled? Some logs were delivered
P argues that the conditions can be treated as
divisible:
Given the units, can divide
performance so that P can recover for
the logs that actually reached the
destinations
Pennsylvania Exchange Bank v. US (P fulfilled the first 3 parts
of a 4-part K; P then went bankrupt; Ct held for D b/c P
anticipatorily breached part 4 by selling all its assets; P wanted to
divide the K to get paid for the first three parts it did perform; but
Ct holds that the 4th part duty of being ready and willing standby
was essential to the K—essential to D’s proportional benefit—and
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was not divisible if an essential element of the K hasn’t been
performed)
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