Contracts

PART 1: IS THERE A CONTRACTVOID-an agreement that has no legal effect

VOIDABLE—one party may at his option either enforce or not enforce

UNENFORCEABLE—a contract that does not give an immediate right to judicial relief but which nonetheless has some legal status. (E.g. an oral contract where the statute of frauds requires a written one.) An enforceable contract may be converted into a fully binding contract by the act of one of the parties, whereas a void contract may not.

Mutual assent: both parties must intend to contract, and they must agree on at least the main terms of their deal. Usually takes place through offer and acceptance.

1. Assent is measured by objective manifestations from which a reasonable person would interpret the other party’s intention.

a. Subjective intent is irrelevantb. Embry v. Hargadine (Mo. App. 1907): Appellant’s employment contract ran up. He

saw the president and said he would quit if it was not renewed. President said, “Go ahead, you’re all right; get your men out there and don’t let that worry you.” A took this as an indication that his contract was renewed and did not look for another job. He was fired in March and sued for breach of contract. Respondent says that he did not intend to imply that the contract had been renewed. Ruling: have to look at actions, A understood R’s words reasonably to imply a renewal of the contract, so they constituted a valid contract.

c. Lucy v. Zehmer (Va 1954): D, Zehmer, sold farm to P for $50,000, but claims he was only joking and told P that as soon as he realized that P thought the transaction was serious. P continued to insist he had bought the farm and proceeded with getting money and having attorney verify the title. Ruling: The mental assent of the parties is not requisite for the formation of a contract. If the words or other acts of one of the parties have but one reasonable meaning, his undisclosed intention is immaterial except when an unreasonable meaning which he attaches to his manifestations is known to the other party.” Does not accept joke defense.

d. Lonergan v Scolnick (CofA CA 1954): D places ad in LA paper to sell some land. P writes him asking where land is. D sends a form letter back. P writes again saying he might be interested in the land. D writes saying he had better hurry because other people are interested. P gets D’s letter, sets up escrow account and writes saying he accepts that offer. D has in the meantime already sold the land. P sues for breach. Ruling: the correspondence does not indicate the D was making a specific offer to P, the acceptance of which would constitute a contract. P was plainly told that D intended to sell to the first comer. P’s interpretation was not reasonable.

e. Cobaugh v Klick-Lewis (1989): sign on golf course advertising low priced car for hole-in-one.

2. Parties do no have to agree on all points but only on major or essential ones, but must still intend to have a contract.

a. Essential points are: parties, subject matter, time for performance, price.3. If there is objective mutual assent, but no subjective intent that the contract be legally

enforceable?a. Pre-1950s view: need a meeting of the mindsb. Modern view: importance of intent that K be legally enforceable depends on

context of the agreement

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i. Business agreements have presumption of legally enforceability1. unless made in jest and offeree knows or should have known

this2. manifest intent not to have legal enforceability on part of both

partiesii. Social and domestic agreements presumed not to be legally

enforceable.1. Cohen v Cowles Media (SC MN 1990) appeal. Court can’t enforce

industry custom.4. If mutual assent is reached orally and parties intend to memorialize agreement in

writing, when is contract formed?a. Courts will find enforceable K even if written document never drawn up, if

parties manifest through words or actions their intent to be bound based upon oral agreement

b. Oral contract is not enforceable before written document is drawn up where parties manifest an intent NOT to be bound.

c. Where no intent manifested, courts usually hold that a K exists as soon as the mutual assent is reached even if no document is ever drawn up.

5. Letter of intent/agreement in principle: memorializes basic terms but anticipates further negotiations. When is it binding?

a. Intent as shown in document, terms of the agreementi. “subject to” clauses indicate intention NOT to be bound

ii. if issues subject to further negotiation are not trivial, suggests intention NOT to be bound

iii. reference to procedural formalities one or both parties must go through first (e.g. shareholder approval) suggests intention NOT to be bound

iv. the larger or more complex the agreement, the less likely courts will bind parties.

v. Empro Manufacturing v. Ball-Co (7th Cir. 1989): Ball-Co floated its assets; Empro showed interest. After preliminary negotiation, Empro sent Ball-Co a letter of intent which included release clauses. Parties signed letter of intent, but Ball-Co not satisfied on one issue. Negotiations continued. Empro found out Ball-Co was negotiating with another party and filed suit for TRO. Empro contentds that binding effect of a document depends on the parties’ intent. But, intent has to be measured by action. RULE: parties who make their pact “subject to” a later definitive agreement have manifested an (objective) intent not to be bound. The letter of intent was not written with such care that all the formal contract would be was a memorial of the agreement. The letter included several release clauses. If Empro was not going to be bound by it, can’t bind Ball-Co. Illinois law: agreements reached in stages so that parties can negotiate without fear that they are binding themselves before they have worked out the specifics.

I. Offer and AcceptanceA. Is there a valid offer

Def.: A statement or act that creates a power of acceptance. When a person makes an offer, she is indicating that she is willing to be immediately bound

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by the other person’s acceptance without further negotiation. Restatement 2d §24.

Offeror is master of the contract.1. Unilateral contract [Restatement 2d §45(1)]: A K in which one party promises to do

something and the other party is free to act or not without making a promise in return. (A promises to pay B $1000 if B walks across bridge.)

2. Bilateral contract : An exchange of promisesa. OPTION: offeror is bound to keep offer open for a certain amount of time

3. Validity of offersa. Made in jest: not valid if offeree knew or should have known it was a jestb. Expression of opinion, not an offer.

i. Use reasonable person testc. Solicitation of bids that cannot be accepted but serve as basis for preliminary

negociations, not an offer (I would like to sell my house. I would sell it for $40,000. B cannot create a K by accepting.)

i. Reasonable person testii. Subjective intent of offeror is irrelevant

d. Statement of future intention to contract, not an offer.4. When is a price quote an offer? It is usually an offer if:

a. Quote makes quantity clear (not just a per unit price, unless quote is in response to a request for a per unit price for a particular quantity)

b. Quote is addressed to a specific person, not just a general mailingc. If quote says “I offer you” rather than “I quote you”d. NOT an offer if it reserves to proposer the power to close the deal (E.g. ‘no

orders will be shipped until approved by home office’)e. In ambiguous cases, courts are reluctant to find an offer

5. Advertisements as offersa. Usually not an offer because do not contain sufficient words of commitment

to sellb. There may be an offer if

i. Advertisement contains words expressing the advertiser’s commitment or promise to sell a particular number of units, or to sell items in a particular manner.

ii. Lefkowitz v.Great Minneapolis Surplus Store (MN 1957): D puts add in paper for furs available for $1 first come first served. P is the first person at the store, willing to pay the $1, but D will not sell, claiming house rule that only women can buy the furs. This happens twice. Ruling: this offer was clear, definite, explicit, not open to negociation, P met the criteria, so he was entitled to performance by D. The restrictions of D were after the fact of the acceptance. He can modify an offer until it has been accepted, but not afterward.

1. Lefkowitz RULE: “where the offer is clear, definite, and explicit, and leaves nothing open for negociation, it constitutes an offer, acceptance of which will complete the contract.”

iii. Carlill v. Carbolic Smoke Ball (QB 1893): D placed an ad promising 100lb to anyone who caught the flu after having correctly used their smoke ball. P bought and used the ball until she caught the flu. Ruling: Ad was clear and explicit. It was an express promise. The reward was offered for performance of conditions, so performance of the conditions is acceptance. The inconvenience sustained by one

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party is sufficient consideration, as is the benefit to the other party from increased sales.

6. Invitations to bida. Usually not an offer, just a solicitation of offers, unless otherwise indicated

i. Lonergan v Scolnick ii. But see: Southworth v Oliver (OR 1978): D decided to sell land and

grazing permits. He went to his neighbor P and asked if P would be interested in land. P said yes. They arranged to look into the sale further. P continued to express interest. D sent letter to 4 neighbors with sale offer. P responded that he accepted the offer. D refused to sell, saying that previous letter was just to open negociations and was not a contract offer. P sued. Ruling: P and D had an understanding that they would make arrangements regarding the sale, the proposal was definite, the addressee was definite, and the circumstances would have led a reasonable person to believe that there was an offer to sell on the stated terms.

1. Southworth test: 1) what would a reasonable man in the same situation understand. 2) language used: “If there are no words of promise, undertaking or commitment, the tendency is to construe the expression to be an invitation for an offer or mere preliminary negotiations in the absence of strong, countervailing circumstances. 3) determinateness of addressee—if the letter names a party or parties it is construed as an offer. If it is addressed to an indefinite group, it is construed as an invitation. (Except in a rewards case where the addressee is indefinite but the proposal is still considered an offer.)

b. If invitation to bid has language indicating a commitment by inviter to award contract or sale to highest bidder, invitation is an offer

7. Indefinite offers:a. Must contain all essential elements, if not and if acceptance does not fill in

missing terms, K is void for vagueness

B. Is there a valid acceptanceDef.: A statement or act that indicates the offeree’s immediate intent to enter into the deal proposed by the offer. As long as the acceptance takes place while the offer is still outstanding, a contract is formed as soon as the acceptance occurs.

1. Offer may be accepted only by person in whom the offeror intended to create the power of acceptance

a. LaSalle National Bank v Vega (IL app 1988): D signed real estate contract and revoked it. According to the Rider the contract was only complete once it had been signed by purchaser, Vega, and by the trustee for the purchaser. It was never executed by the trustee. Since acceptance of the offer was conditioned upon the signings, the offer was never accepted and there was no contract.

2. Acceptance usually only valid if offeree knows of the offer when he allegedly accepts ita. Each party manifests assent with reference to the manifestation of the otherb. REWARD: where reward is offered, and party acts without knowing about the

reward, he cannot claim it.i. Glover v. Jewish War Veterans (DC Mun Ct App 1949)

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c. Cross offers do not create K (B sends letter to A offering to sell x for $100; at same time and without knowing of Bs letter, A sends letter to B offering to buy x for $100: no K because neither letter was in reference to the other, so neither could be an acceptance.)

i. UCC §2-207(3) will recognize K in this case if through subsequent conduct, both parties recognize the existence of K

3. If offeree’s objective manifestation could lead offeror to believe he intended an acceptance, offeree’s subjective intent does not matter. (E.g. is offeree was not aware of the offer, or offeree was ignorant of certain terms.)

4. Mode of acceptancea. Offeror can prescribe method of acceptanceb. Where no mode prescribed in offer, offeree may accept by any reasonable mannerc. Acceptance of unilateral contract by full performance: Restatement 2d §45.

i. Part performance is treated as creating a temporarily irrevocable option Kii. Even offeree did not intend to fulfill K by performing, there is a K unless

offeree makes clear by words or conduct that he did not intend his performance to constitute an acceptance.

1. Industrial America v Fulton Industries (Del 1971): In 1965 B-H hired P to find a company to merge with them. After some unsuccessful negotiation attempts, BH decided not to deal with P further, but never told him this. Later in 1965, P learned of a company that might want to buy/merge BH and on his own initiative communicated the BH info to D. D had taken out an ad stating it was looking to buy a company with phrase, “Brokers fully protected.” D was interested, P put BH in touch with D, then he found out that the two companies were negociating without him. In 1966 the companies merged without Ps help. P sues for broker’s commission. Ruling: ad created unilateral contract. Ds offer invited acceptance by performance. P knew of offer. P’s performance constituted and acceptance of the offer. Therefore when he performed, he fulfilled the contract.

2. Russel v Texas Co (9th Cir. 1956): P owns section 23, but when he bought it, seller reserved mineral rights. D was drilling on section 23 and neighboring sections under lease from seller. On October 30, 1952, P sent D letter giving revocable permit to use land in connection with operations on adjacent lands for a $150/day lease, offer by performance. D continued its operations until end of November, and in December rejected the offer. P sues that action in month after receipt of letter constituted acceptance for that time. D argues it had no intention of accepting and method of acceptance was ambiguous. Ruling: if offeree is exercising dominion over something offered to him, such dominion constitutes acceptance of the offer absent showing of contrary intention. Because D continued to use the land, it manifested intention to accept the contract.

iii. Courts disagree whether offeree must notify offeror once he has completed the performance. UCC §2-206(2): offeree must give notice unless offeror has reason to know performance has been completed.

1. Failure to notify may discharge contractual duty of offerord. Acceptance of bilateral contract by promise (in words). Restatement 2d §50.

i. Offeree must attempt to communicate acceptance to offeror 1. Mailbox rule2. Where offer indicates notification is unnecessary for acceptance,

acceptance is effective as soon as it is made

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ii. Acceptance by actions if1. Offeror can reasonably assume this was the intent of the offeree2. (Account stated: creditor sends bill to debtor and defendant accepts

it as accurate estimation of charges)a. Hamer v. Sidway (NY 1891)

iii. Acceptance by silence: Restatement 2d §691. where offeror has given offeree reason to understand that silence

will constitute acceptancea. Ammons v Wilson & Co . (MS 1936): P makes agreement with

salesman of D for 60,000 lb shortening at 7.5 cents per pound. This agreement is not binding. P doesn’t have to buy, or can buy less, D doesn’t have to sell. On August 23, P orders through salesman 942 cases of shortening. On 4th of September he contacted D and was told they would not sell at the agreed upon price because price of shortening had gone up. In the past D had shipped Ps orders within a week. P sues. Ruling: Where an offeree fails to reply to an offer, his silence constitutes an acceptance if the offeror had reason through past dealings to believe that silence was intended as a manifestation of intent. Normally D shipped within a week and did not respond to the offers (orders) from P, so P had reason to expect assent and forbore from purchasing elsewhere.

2. offeree silently receives benefit of service (not goods) if he had a reasonable opportunity to reject them and if he knew or should have known that the provider of the service expected to be compensated.

3. Prior course of dealing makes acceptance by silence reasonable4. Acceptance by dominion, even if unintended

e. Where offer invites acceptance by either promise or performance. Restatement 2d §62(1)

i. Part performance creates temporary option contract: Ever-Tite Roofing Corp v Green.

ii. E.g. shipment of goods UCC §2-206(1)(b): “an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a promise to ship or by the prompt or current shipment of conforming or nonconforming goods”

1. Shipment of non-conforming goods also constitute acceptance2. Exception: Accommodation shipment. UCC §2-206(1)(b): “Such a

shipment of nonconforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer.”

a. Accommodation shipment usually treated as counter-offerb. Buyer has option to accept or reject

i. Corinthian Pharmaceutical System v Lederle (USDC 1989): D is drug manufacturer, P is distributor. They have a history of doing business. On May 1986, D decided to significantly raise the price of the DTP vaccine effective May 20. P found out about this before it was public and placed larger than normal order on May 19 to get the lower price. D shipped only 50 of 1000 ordered vials at the

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lower price and said it would ship the rest at the higher price later. P sued. Ruling: Computerized receipt of tracking order by P does not constitute acceptance, so no acceptance prior to shipment of 50 vials. D’s shipment was non-conforming, because it wasn’t what P ordered. Thus it was an accommodation, not a contract because without consideration. The shipment of non-conforming goods is treated as a counter-offer which the buyer may accept or reject.

C. Does Acceptance vary from Offer1. Common law standard: Mirror Image Rule.

a. Acceptance only if terms are exactly the same as in offerb. If acceptance varies from offer, it is treated as a counter-offer

i. Minneapolis & St Louis RR v Columbus Rolling-Mill (US 1886): P inquired of D about cost of RR ties. D answered based on amount 2000-5000. P ordered 1200. D refused to fill the order at the stated price. P reordered for 2000. D never answered. P sues. Ruling: an offer has to be accepted exactly as it was made. If offeree changes the conditions, he has made a counteroffer which the offeror can reject.

c. Battle of the Forms : party sending the last document has the advantage since it is deemed to have formed a contract if the other party accepted the goods and paid for them.

2. UCC Rule §2-207 applies in situations where buyer and seller use forms with boiler plate terms that differ. It is designed: 1) to determine whether a contract has been formed, 2) if so, to determine the terms of the contract

a. §2-207 (1): a document can constitute acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly conditional on assent to the additional/different terms.

i. Knock out rule: the conflicting clauses cancel each other out and UCC gap-filler is used if relevant, otherwise common law controls.

ii. Can apply to major terms, therefore disadvantageous to offerorb. §2-207 (2): Additional terms become part of the contract [if both parties are

‘merchants’] unless, the offer expressly limits acceptance to the terms of the offer, the terms materially alter the offer, offeree objects to terms within reasonable time.

i. Terms that materially alter the deal include bargained for factors like price, quality, quantity, & delivery terms.

c. §2-207 (3): Conduct which recognizes existence of contract is sufficient to establish a contract for sale. [Contract by conduct.]

i. Contract consists in those terms about which the writings of each party agree.

ii. Contract exists even if the offer and acceptance materially differ.1. Leonard Pevar Co. v Evans Products Co. (USDC Del 1981): P

sent D a written purchase order stating lumber, price, quantity and shipping instructions. D sent acknowledgment with boiler plate terms including that acceptance of contract was expressly contingent on acceptance of all terms, among terms was disclaimer of warranty and that goods sold as is. Wood is defective. Ruling: Follow UCC, determine whether there was an oral contract. If so, forms cannot introduce new terms.§2-207(1).

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d. Contracts not for sale of goods, where UCC does not apply, may follow common law or Restatement 2d §61: an acceptance that changes terms of offer is not invalidated unless the acceptance is made to depend on the new terms. §59: where a purported reply is conditional on offeror’s assent to new terms, it is not an acceptance but a counter-offer.

D. Duration of the power of acceptanceWhen there is any doubt whether the acceptance is timely, it is necessary to pinpoint the moment at which the purported acceptance became effective and then determine whether the power of acceptance was in effect at that moment.

1. Ways to terminate offeree’s power of acceptance of revocable offers .a. Rejection or counteroffer by offeree

i. Unless offeror says offer still standsii. Unless offeree says that although he doesn’t want to accept now, he wants

to consider it furtheriii. If offeror rejects offeree’s counteroffer, the original offer is not still openiv. If original offer is irrevocable, a counter-offer does not terminate power of

acceptance.v. Counter inquiry does not terminate power of acceptance

b. Lapse of timei. Reasonable time, depends on matter for sale

ii. A late acceptance acts as an offer which the original offeror may acceptiii. In face to face bargaining, offer continues only during the discussion

unless the parties agree by word or action to continue the power of acceptance

iv. Offer sent by letter deemed made when it is received unless it states otherwise

c. Revocation by offerori. Except in option, offeror can revoke at any time before acceptance

ii. Revocation becomes effective when it is received by offeree1. Hendricks v. Behee (Missouri CofA 1990): Behee is prospective buyer

of real estate made written offer on March 2. On March 3 offeree’s real estate agent mailed it to offerees. On March 4 offerees signed the proposed agreement, but before the acceptance was made known to Behee, Behee went to offeree’s real estate agent ca. March 5 and revoked the offer. Ruling: There is no contract until acceptance of an offer is communicated to the offeror. Communication to the agent of the offeree is not sufficient and does not bind the offeror. The offeror can withdraw offer at any time before acceptance has been communicated to him unless there is consideration.

iii. Where offeree indirectly learns that offeror is acting in a manner inconsistent with an intention to enter the contract, the offer is revoked

1. Dickinson v. Dodds (Eng 1876): P wrote D a memoranda agreeing to sell property and giving P until 9 AM Friday to decide. P heard on Thursday that D was trying to sell the land to someone else, so he gave an acceptance to Ds mother-in-law Thursday night. It never reached him. Ps agent gave D an acceptance Friday at 7 AM and P tried to give a duplicate soon after. D refused to accept saying the property had been sold on Thursday. Ruling: Document was an offer to sell.. Provision to give P until Friday was a promise without consideration. D was not required to formally withdraw the offer. Parties were

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not of one mind since D had decided to sell to someone else. P knew land had been sold; it was too late for him to accept the original offer since sale had been a binding contract.

2. there has to be an actual contract to sell to cause revocation, not an offer or negotiation.

3. Rumor is not sufficient, even if it turns out to be true4. If offereee does not learn of offeror’s actions, the power of

acceptance is not revoked5. Revocation of a general offer (e.g. a newspaper advertisement) is

effective even if a specific offeree had not known of revocation.d. Death or incapacity of offeree or offeror terminates power of acceptance

i. Even if offeree did not know of offeror’s death or incapacity when he dispatched acceptance.

ii. An offer made in an option contract is not revoked by death or incapacity and can be exercised by estate.

e. Failure of condition imposed by offer (non-occurrence of any condition of acceptance under the terms of the offer, e.g. A agrees to sell to B within a month unless A sells to someone else first. Before B buys, A sells to C, terminating B’s power of acceptance.)

f. If while offer is outstanding the contract becomes illegal due to a new statute, the power of acceptance is terminated.

2. Irrevocable offers a. Option contract

i. Under common law needed considerationii. Under Restatement, no need for actual consideration as long as the

contract recites a purported consideration for the making of an irrevocable offer.

iii. Offer is still revocable even if contract states that it is irrevocable and uses word option, unless the consideration is mentioned or given

iv. Counter offer does not terminate power of acceptance1. Humble Oil v. Westside Investment (Tex 1968): Buyer (P) and

seller entered into written contract where D gave P exclusive and irrevocable option to purchase land, P gave $50 consideration to support option. P had until June 4th to give notice + paying price or within 10 days follow notice paying earnest money. On May 2 P exercised option to buy provided D made additional changes it had agreed to make. On May 14, P paid earnest money to escrow agent and said D could disregard earlier amendment. D argues that P rejected the offer with May 2 counteroffer. Ruling: general rule that a conditional acceptance is itself a rejection of the offer does not apply to option contracts, because the creation of the option concludes the making of the contract because that is the point over which the minds have met. Optionor is bound by consideration to keep the option open for the whole time stipulated. An option supported by consideration is an irrevocable offer, so an optionee can complete the contract by communicating his acceptance during the option period even if he has previously rejected the offer.

b. Firm offers under the UCC §2-205: (an offer by a merchant to buy or sell goods is irrevocable if it is a signed writing and it gives explicit assurance that the offer will be held open. There is no need for consideration or recital of consideration.)

c. Temporary irrevocability due to part performance or detrimental reliance

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i. Offer is a unilateral contract and offeree begins performance, Restatement 2d §45(1)

1. commencement of performance creates option contracta. What constitutes partial performance will vary from case to

case.b. Marchiondo v. Scheck (N.M. 1967): D offered in writing to

sell real estate to a third party and agreed to pay a percentage of the sales price to the broker (P). The contract gave 6 days to accept. The morning of the 6th day, D communicated a revocation of the offer to the broker. That afternoon the broker obtained offeree’s acceptance. D refused to pay P his commission. Ruling: Once partial performance had begun and the offeror does not invite a promissory acceptance, the contract is no longer unilateral, but becomes an option contract. Offeror then has duty of performance upon the completion of the invited performance.

c. Ever-Tite Roofing Corp v Green (LA CofA 1955): June 10 D signed agreement with P to roof Ds house. The payment was on credit, so P had to check Ds finances. D knew this. This was done within a reasonable time, and on June 18 or 19 P loaded trucks and drove to Ds house to begin work. Contract stipulated it became valid if it was signed by the principal of the Contractor or upon beginning work. It was not signed by the principal. Arriving at Ds house, P found other men roofing the house and D told P his services were not needed. Ruling: P executed his end of the contract within a reasonable time. By loading the trucks and driving to Ds house, P commenced work and the contract was formed. Consequently, D’s revocation came too late.

2. Offeror’s duty is conditional upon complete performance by offeree, Restatement 2d §45(2)

a. But offeree is not bound to complete performance3. This is not relevant to preparation for performance but only for

actual performancea. Petterson v. Pattberg (N.Y. 1928): John Peterson, P=his

executrix, owed mortgage to D. On April 4, 1924, D gave P a written agreement that if P paid off mortgage by May 31, 1924 including the regular quarterly payment due in April, in return D would allow him to pay $780 less. P made April payment. At the end of May, P went to D’s house, knocked on the door, said he was there to pay the mortgage off. D refused to take the money because he had sold the mortgage to a third party. P ended up having to pay the other party, including the $780. Ruling: Ds letter to P regarding paying off the mortgage was a unilateral contract. An offer in a unilateral contract may be withdrawn at any time before the requested performance has been completed. D revoked his offer before P actually handed over the money. His stating his intent and desire to pay does not constitute the required performance.

4. Even if performance has begun, offer is revocable if right to revoke was explicitly reserved to offeror

ii. It is not clear whether it is a unilateral or bilateral contract and offeree begins performance

1. Acceptance occurs when offeree begins to perform

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2. So offeree is protected against revocation under Restatement 2d §62

3. Difference is that once offeree begins performance, he has accepted the contract and is bound to complete performance

4. Under UCC §2-206(2), beginning of performance constitutes acceptance only if offeror is notified of acceptance within a reasonable time.

iii. Promissory estoppel : Offeree makes preparations prior to acceptance in reliance upon offer

1. Restatement 2d §87(2): an offer which the offeror should reasonably expect to induce action or forbearance of substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injuries.

2. Can apply to bilateral or unilateral contractsa. Irrevocability limited to damages suffered due to reliance

3. Sub-contractors: where general relies on bid of sub, sub’s bid is held to be irrevocable

a. Drennan v. Star Paving (CA 1958): P, general contractor, submitted a bid for a school construction project. On day of bid, as per custom, he took bids from subcontractors. Lowest bid for paving was from D. P used Ds bid and won the total contract. The next day, P went to Ds office and D told him they made a mistake in their bid and refused to do the job for the price they had offered. Ruling: case of promissory estoppel. General relied on sub’s bid, had no reason to know of mistake. General was bound by his bid. The loss resulting from the mistake should fall on the party who caused it.

b. But, see older rule in James Baird v Gimbel Bros. (2d Cir 1933): D offered prices for linoleum to contractors bidding on a construction project. D had underestimated the project and 4 days later realizing its mistake telegraphed revised bid to contractors. By the time the telegraph arrived P had submitted its bid based on Ds estimate. On Dec 30th P got the contract. On Dec 31 P received formal withdrawl of offer from D. On January 2 P accepted the offer, then sued for damages because D refused to recognize existence of a contract. Original offer: we are offering these prices for…prompt acceptance after the general contract has been awarded.” Ruling: this is an offer for a bilateral contract which general has to accept if he wins the contract. So, there was no contract. Offer was withdrawn before it was accepted. P claims it was injured because D breached contract, but would D have been injured if P had not accepted its offer? No, bargain doesn’t work in both directions, therefore no contract. Court rejects promissory estoppel claim.

c. Electrical Construction v Maeda Pacific (9th 1985): D = general contractor, made and won bid for large construction project. Previously had solicited a bid from P for electrical work. P agreed to bid only after d had agreed that if it won and Ps bid was the lowest, P would get the job. D won the bid, then shopped around and did not hire P for job, though P was lowest bidder. The agreement was oral. Ruling: no dismissal for failure to state claim because although generally general’s use of sub’s price does not constitute acceptance of

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sub’s bid and doesn’t obligate general to use sub, D made a promise to P, the consideration for the promise was Ps agreement to make a bid, not its implied promise not to revoke the bid. Therefore there is a cause of action.

E. When acceptance becomes effective1. General Rule: acceptance is effective upon proper dispatch (Mailbox Rule)

a. Restatement 2d §63(a): An acceptance made in a manner and by a medium invited by an offer is operative and completes the manifestation of mutual assent as soon as put out of the offeree’s possession, without regard to whether it ever reaches the offeror.

i. Adams v. Lindsell (KB 1818): D were wool merchants. They sent letter to P offering wool, acceptance required by return course of post. D misaddressed letter such that it arrived late to P and the acceptance arrived at D later than course of post. By this time, D had sold wool to another. P sues. Ruling: contract made from moment P accepts: “The defendents must be considered in law as making, during every instant of the time their letter was traveling, the same identical offer to the plaintiffs; and then the contract is completed by acceptance of it by the latter.”

ii. Applies only to bilateral contractsiii. Will not apply where offer provides otherwiseiv. If offeree uses too slow a method of response or misaddresses the

response, it is effective if it is received within the time in which a properly dispatched acceptance would normally have arrived. If it arrives later than this, it is effective upon receipt.

v. If properly dispatched, acceptance is effective even if lost in transmission and never received, but courts may say that receipt of notice is necessary to enable offeror to perform.

2. Where offeree sends both acceptance and rejectiona. If rejection sent before acceptance: rejection not valid until received. If

acceptance overtakes rejection and is received first, rejection is not effectiveb. If acceptance sent before rejection: if acceptance is binding as soon as dispatched,

rejection does not undo acceptance even if it is received first.i. If offeror receives rejection before acceptance and acts on rejection

(without having received acceptance), offeree may be estopped from enforcing the contract.

3. An acceptance of an option contract is effective upon receipt by offeror.4. Revocation is not valid until received by offeree.

F. Indefiniteness: void for vaguenesso Restatement 2d §33(2) test : terms are sufficiently definite if they provide a basis for

determining the existence of breach and for giving an appropriate remedy.o UCC §2-204(3) test : even if some terms are left open, contract does not fail for vagueness

if the parties intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.

o No way to establish damages: Varney v Ditmars (NY 1916): P claims his employer D made him promises of future profit sharing if P stayed with the firm and did extra work to help D over a busy period. P stayed and did work until he got sick beginning of November until early December. Mid-November D fired him. P did not get bonus. Ruling: no explicit determination

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or agreement made between the parties. No mention of amount, nor of how it will be figured. No way to determine what amount should be. The intention of the parties is too vague. For a contract to be valid, there has to be a reasonable degree of clarity and intention of parties have to be able to be determined with reasonable amount of certainty.

1. Necessary terms (essential elements)a. Parties to the contractb. Subject matter of the contractc. Time for performanced. Price

i. If price is not included, there can still be a contract if one of the following occurs

1. the contract does not mention price2. the price is left to be agreed by the parties and they fail to agree3. the price is to be fixed in terms of some agreed pricing mechanism

and the mechanism failsa. Oglebay Norton v. Armco (OH 1990): In 1957 companies

made contract that Oglebay would ship as much of Armco’s iron ore as it wanted. The contract established primary and secondary pricing mechanisms. Armco would pay the regular contract rate as recognized by the leading shippers, or if no such rate was recognized, the parties would agree on a rate taking into consideration the rate being charged for similar transport by the leading independent shippers. During the next 25 years the parties modified the contract 4 times. The two companies were mutually dependent, intertwined directorates, Armco could dictate to Oglebay to upgrade its fleet, etc. The last amendment in 1980 extended contract to 2010. From 1957-1983, pricing mechanism worked, then the steel industry suffered a downturn and Armco wanted Oglebay to reduce its rates. In 1985 they were unable to establish a mutually acceptable rate and Armco simply dictated a rate. In 1986 they again couldn’t establish a rate and Oglebay asked court to declare a rate. Armco counterclaimed asking court to declare that the contract was no longer enforceable because the pricing mechanism had broken down. RULE: Agreements to agree are enforceable when the parties have manifested an intention to be bound by their terms and when these intentions are sufficiently definite to be specifically enforced. Ruling: parties intended to be bound by the contract even if the pricing mechanisms failed, court can establish a fair rate, court can continue to exercise equitable jurisdiction over parties and order them to use a mediator if they can’t agree on a shipping rate.

2. Court may supply missing terms ifa. parties intend to leave term to reasonable implicationb. Parties leave certain terms to be determined by future mutual agreementc. The indefiniteness has been cured by performanced. Court may use course of dealing evidence to supply missing term, Section 33,

comment a, Restatement 2d.1. Smith-Scharff Paper Co. V. PN Hirsch Co (MO CoA 1988): P supplied bags

with logos to D and had for ca 40 years. There had been one hiatus and at that point D bought out Ps stores of logo’d bags. P kept a supply of bags on hand. D was liquidated. P found out and asked if D would buy up remaining bags, D orally assured that they would and did buy out half of the supply, but not the rest. D sues. Ruling: an implied contract can be found in circumstances surrounding the course of dealing, which is the sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a

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common basis of understanding for interpreting their expressions and other conduct. Because of history between the companies, D is estopped from denying the existence of a contract and is under an obligation of good faith.

2. Metro-Goldwyn-Meyer v Schneider (NY 1976): D agreed to be lead actor in a pilot and in the tv series which might come from it. After pilot, actor refused to perform in series. Parties negotiated over course of several weeks. Basic outline and financial issues were agreed to in September 1971, additional important points agreed to over next several weeks. During this period D was filming pilot. Supplemental agreement concluded in February 1972. Only essential issue left was starting date for beginning of filming of series, but this was a term supplied by trial court based on industry practice and established custom. RULE: “Where the parties have completed their negotiations of what they regard as essential elements, and performance has begun on the good faith understanding that agreement on the unsettled matters will follow, the court will find and enforce a contract even though the parties have expressly left these other elements for future negotiation and agreement, if some objective method of determination is available, independent of either party’s mere wish or desire.

3. Lease renewals: where tenant has option to renew at end of lease, most courts have been unwilling to supply a rent figure

a. Joseph Martin, Jr Delicatessen v. Schumacher (NY 1981): Parties entered into a 5 year long lease agreement with rent increasing each year from $500/ mo to $650/mo. Provision of lease allows renter to renew lease for additional 5 years if he gives landlord 30 days written notice. P gave appropriate notice, and D said he would only re-lease at a rental starting at $900/mo. Tenant hired appraiser who determined that fair market value of rent would be $545. Tenant sued for specific performance. Appellate Division overruled precedent that clause was too vague, ruled in favor of P, and that court could set fair rent. CofA overrules and reinstates trial court verdict because the renewal clause doesn’t provide enough information to determine was the intent of the parties was and it binds the parties to no formula.

4. Partial performance may cure indefiniteness and render contract enforceable

G. MisunderstandingA misunderstanding prevents the formation of a contract at all; a mistake occurs when a contract exists but may be avoided by the mistaken party.

1. There has to be a meeting of the minds, e.g. both parties must be agreeing to the same deal.2. If there is a misunderstanding, there is no contract if:

a. concerning a material terms, and b. neither party knows or had reason to know of the misunderstanding

3. Misunderstanding due to ambiguity (if each party intends a different meaning, there is no meeting of the minds, and therefore no contract)a. Raffles v. Wichelhaus (1864): P and D agree to a sale of cotton: 125 bales from India, at 17.25

d per pound, arriving in Liverpool on the ship Peerless from Bombay. Ship arrived in December, P offered goods, D refused to buy them. Reason given: another ship named Peerless had arrived from India in October. D thought that was the ship with the goods on it. Ruling: there was a mistake because both parties had something different in mind, there was no consensus ad idem and therefore no binding contract. Assume that the name of the ship was a material term indicating when the ship would arrive.

b. Konic v. Spokane Computer (CofA Idaho 1985): Employee of D told to buy a surge protector for the company. He investigated, looking at protectors between $50-$100, but none of them were right. He called Konic, found what he was looking for, and was told the price was fifty-six twenty. He assumed this meant $56.20, but it actually meant $5620. He was told by P to get approval of his supervisor for the purchase. He made up purchase order for $56.20 and got it approved, placed order. Discrepancy was not immediately noted, protector was delivered and installed. When the company president got back from vacation, he realized the protector was worth more than the

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employee thought, had it disconnected, instructed employee to find out real price. He did not. Two weeks later, purchase order discrepancy noted, president called P told them his company did not want the protector and to take it back. P refused. Ruling: This was a failure of communication. Therefore no contract.

4. If one party knows or should have known what the other party intended, there is a contract formed on the term as the unknowing party understood it.

Rule: Restatement 2d § 20:1) There is no manifestation of mutual assent to an exchange if the parties attach

materially different meaning to their manifestations anda. Neither party knows or has reason to know the meaning attached by the other.

Rule’s limits: 1) the doctrine applies only when the parties have different understandings of their

expression of agreement2) the doctrine does not apply when one party’s understanding, because of that party’s

fault, is less reasonable that the other party’s understanding3) parol evidence is admissible to establish the facts necessary to apply the rule

Interpretation methods if courts don’t want to accept misunderstanding claim:1. Accepting a wide range of evidence relevant to determining which party’s

understanding was more reasonable2. prefer understanding against the person who wrote the contract

It may be possible to show that one party had knowledge of the other party’s meaning from another source

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II. ConsiderationA. Is there consideration?Consideration: a bargained for exchange for something of legal value.

A promise is supported by consideration if: [Cardozo in Allegheny College v. National Chautauqua County Bank (NY 1927)]:

1) The promisee must suffer a legal detriment (do or refrain from doing something he is entitled to do)

2) The detriment must induce the promise.3) The promise must induce the detriment.

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

Mutuality of consideration: each party is required to furnish consideration to the other. This is the bargain element.

The bargain element is more important is situations that don’t involve business dealings, like a promise to make a gift.The legal detriment issue is more important in business contracts, especially where it could be a question of pre-existing duty.

Langer v Superior Steel Corp (PA 1932): Langer, P, upon retiring from SSC received letter promising him a pension of $100/mo. for life as long as he was not disloyal to SSC and did not take competiting employment. After 4 years, SSC stopped paying the pension. Ruling: Conditions set forth in letter did create a good consideration because they prevented P from doing something he had a right to do and operated to the benefit of the P.

B. The Bargain ElementBargain: A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise. Restatement 2d §71(2)

1. Bargain versus gifts: a. A promise to make a gift is not a contract because it is not part of a bargain

and because the promisee suffers no detriment.i. In re Greene (SD NY 1930): claimant and bankrupt lived together in adultery.

Bankrupt was married the whole time. He gave her money to buy a house—in her own name. Ending the affair they executed an agreement under seal in which bankrupt promised to pay claimant $1000 for her lifetime, take out an insurance policy on his life for her and pay the premiums or $100,000 if he failed to keep it up, to pay rent on an apartment she had leased for 4 years. In return she had to pay mortgage interest, taxes, etc on house, released bankrupt of all claims he had on her, pay $1, and gave “other good an valuable considerations” After a few years bankrupt stopped making payments. Is contract enforceable? No, no consideration: 1) the past affair and any “interests” or “claims” arising from it do not constitute consideration because it was illegal. Release from claims is not valid consideration is there were no claims from which to be released. Can’t use illegal benefits as consideration. (These have no value in law.) 2) $1 is both nominal and not shown to have been paid. 3) the house was the claimants. The fact that the bankrupt gave her the money to buy it (a gift and therefore gratuitous) is irrelevant since she actually bought it herself. So can’t be argued that bankrupt obtained release from liability for

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mortgage and taxes, etc. 4) though parties intended to make valid contract, sealing does not make it so and intent that the presumptive consideration should be sufficient does not make it so.

b. Bargain versus conditional gifts; promisee suffers a detriment because he must meet a condition, but he did not bargain for the promise. The meeting of the conditions is not the promisor’s motive for making the promise; there is no mutuality.

i. Kirksey v. Kirksey (AL 1845): D invites widowed sister-in-law to live on his land because he feels sorry for her. She abandons her land without recompense and moves. After 2 years D kicks her off land. Ruling: promise of D was a “gratuity” because P did nothing in return for promise and D did not seek a performance in return for his promised action, defendant incurred no benefit. No quid pro quo, therefore, no consideration.

2. Test for bargains (as distinguished from preconditions)a. Is fulfillment of condition of benefit to the promisor?

i. Benefit does not have to be economic1. Hamer v. Sidway (NY 1891): Uncle promised nephew that if he

didn’t drink, use tobacco or gamble until his 21st birthday the uncle would give him $5000. Upon turning 21, nephew wrote his uncle that he had met the conditions. The uncle wrote back saying he would give the money but suggested he keep it for him. Nephew consented. Uncle died without paying out the money. Ruling: nephew’s legal rights limited by the conditions of the promise and that was enough to establish consideration; we don’t have to further inquire whether there was a benefit to the promisor, or if detriment is of substantial value to anyone.

ii. But altruistic motives are not sufficient (e.g. donations)1. unless there is evidence some bargaining took place

a. Thomas v Thomas (QB 1842): P’s husband on deathbed before 2 witnesses said he wanted his wife to have the house in which he lived or 100 pounds. This was not put in writing before the P’s husband died. P’s testators were convinced of genuiness of declaration and willing to carry out wish. Executors conveyed house to widow on condition she payed 1 lb yearly ground rent and kept the property up in rentable condition. After one testator died, the second testator refused to transfer the deed and evicted the P. D held there was no consideration in the declaration by the testators to allow the P to remain in the house. Ruling: respect for wishes of deceased does not move from P. But ground rent moves from P, and no evidence to show that it was owed before to testators. It was established for purposes of allowing P to remain in house. Not of large value, but that is not necessary because there was an express agreement. The condition to retain house in good repair could be of value and is also an express condition of the agreement. So there was good consideration. Can look to any part of the relationship (“instrument”) to find consideration.

b. But see Webb v. McGowin (CofA AL 1935): saves life, creates moral obligation obligation.

c. And see Allegheny College v. National Chautuaqua County Bank (NY CofA 1927): charitable donation.

d. But see Harrington v Taylor. Plaintiff prevents Ds wife from killing him. No moral obligation.

3. Adequacy of consideration:

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a. Sham and nominal considerations are usually an indication that there was no bargain and that the exchange was just a gift. (Question to ask: was consideration given in return for the promise or just to try to make a gift look like a bargained-for exchange?)

b. Apfel v Prudential-Bache ( NY 1993): Re: idea for a computer program, which was disclosed before contract made. Question is whether an idea can be legally sufficient consideration if it is not novel. Ruling: absent fraud or unconscionability, adequacy of consideration in terms of value is not subject to judgment. There only has to be value according to law. It doesn’t have to be equal. Buyers clearly did receive something of value—they used the system, so they must have thought it had value. There was a bargain because D got a chance to explicitly review the technique before buying it. Court distinguishes between ideas disclosed a head of time before payment; overturns cases where idea not disclosed ahead. Re: novelty, the question is whether the idea—whether novel to the buyer or not—had value to the buyer. If so, there was consideration.

4. It is not necessarily important whether recited consideration was actually paid, if there was a bargain.

5. Promisee must be aware of the promise, otherwise there was no bargaining.a. See: Bogigian v. Bogigian (IN CofA 1990): David’s (respondent-appellant- D)

marriage to Hazel (appellee-P) was dissolved with condition that H would be paid a sum under certain conditions including if the family house was sold. Following year D sells house, H is there, executed quit claim and release of her judgment against David which says that she was satisfied conditions of divorce had been met. Ruling: trial court voided her release because 1) there was no bargaining for release in exchange of benefits to Hazel for detriments to David. 2) there was no explicit agreement that a bargain would be made.

b. Where a party acts without knowing that there was a reward for the act, he is not entitled to the reward.

i. Glover v. Jewish War Veterans (DC Mun Ct App 1949): B was murdered. JWV took out ad in the paper offering a reward for information resulting in the apprehension and conviction of the murderer. Police were led to Glover whose daughter’s boyfriend was a suspect. She did not know where her daughter was but gave police the names of relatives. Murderer was found at one relative’s and convicted. P only learned about the reward a few days later. Ruling: “there can be no contract unless the claimant when giving the desired information knew of the offer of the reward and acted with the intention of accepting such offer.” Otherwise offering the info was a gratuity, a public service. There is no acceptance unless the offeree knows of the offer.

6. Once a promisor makes a gift, it is not rescindable for lack of consideration.a. Executed gifts: the gift has been made and cannot be undoneb. Executory gifts: promise to make a gift, unenforceable for lack of

consideration.C. Past Consideration (promise + antecedent benefit)

1. No consideration when promise is made in return for a detriment previously suffered by promisee. No bargain.

a. Feinberg v. Pfeiffer (St. Louis 1959)2. Pre-existing debt or promise to pay for past services rendered are not enforceable for lack

of consideration. (E.g. A owes debt to B, statute of limitations prevents B from collecting debt. A promises to pay the debt. There is no consideration for A’s promise, because promise not made in exchange for performance.)

a. Manwill v. Oyler (UT 1961): P alleges that he made payments on D’s behalf for 4 years and that in 1954 he gave them a grazing permit and cattle. Action on these transactions

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is barred by statute of limitations. P alleges D made an oral promise to him within time limit of statute of limitations to pay back the 4 year’s worth of payments. Ruling: a moral obligation alone is not sufficient to make a promise into a binding contract, must have written promise to override statute of limitations. No moral benefit created because P showed no initial expectation of compensation.

b. Mills v. Wyman (MA 1825): Son of D, age 25 long not living at home, was a seaman who arrived in a port in Connecticut sick and was cared for by P. When D heard that his son was being cared for, he wrote to P promising to pay his costs. He did not do so, P sues for promise to be upheld as creating moral obligation. Ruling: promise not binding because there was no antecedent benefit. [Might have been binding if son had been a minor such that father was responsible for him.]

c. But see Webb v. McGowin (CofA AL 1935), moral obligation to pay.

D. Detriment ElementDetriment: the promisee must do something he does not have to do, or refrain from doing something that he has a right to do.

1. Detriment does not have to be economic, but simply a circumscription of rightsa. Hamer v. Sidway (CofA NY 1891)

2. Consideration by promise or performancea. If detriment is a performance, it is a unilateral contractb. If detriment is a promise, it is a bilateral contract

3. Adequacy of consideration not important, as long as promisee suffers a detrimenta. Be aware that this only applies to detriment element; extreme lack of equivalent

value may also demonstrate that there was no bargain but only a gift.i. Thomas v. Thomas (QB 1842)

b. If exchange is grossly unequal, courts may find contract unconscionable.i. Jones v. Star Credit .

E. Pre-existing Duty Rule1. If a party does or refrains from doing what he is already legally obligated to do or not do,

he has incurred no detriment, and there is no consideration.a. Levine v Blumenthal (NJ 1936): D leases store for two years for given rent from P. At

end of first year P says he can’t pay the increased rent of the second year, asks that rent stay the same. P agrees, but at the end of 2nd year asks both for 1) last month’s rent which hadn’t been paid and 2) difference between originally agreed upon rent and subsequently agreed rent. Ruling: there was no additional consideration to support the new contract so original contract still holds.

i. But see: Angel v. Murray (RI 1974)b. Prevents hold up: A party cannot lay the foundation of an estoppel by his own

wrong, where the promise is simply a repetition of a subsisting legal promise.i. Alaska Packers v Domenico (9th Cir 1902): While still in San Francisco,

packers assoc and workers agreed upon a wage for sailing, fishing, catching salmon. Upon arriving in Alaska, workers demanded of superintendent higher wage. Superintendent said he didn’t have authority, workers threatened to abandon work and cause Assoc great harm, so Super agreed. Upon workers returning to S.F. company refused to pay workers higher wage. Ruling: there was no new consideration for the contract—which wouldn’t have been valid anyway since Super couldn’t make contract—and workers simply trying to extort.

c. Construction contracts also ripe for hold up.

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d. Rewards and bonuses not enforceable for failure of consideration if promisee already has a legal duty to perform the act being rewarded. (Policeman catching criminal for crime in his own jurisdiction.)

e. But, taking on any additional or different duty not matter how slight constitutes acceptable detriment, even if the new performance promised is less burdensome that the original.

2. Getting around pre-existing duty rulea. Giving up right to breach as detriment (minority view)b. Unforseen circumstance: a modification in the contract is enforceable if it is fair

and equitable in view of circumstances not anticipated by the parties when the contract was made.

i. Conditions allowing modification to be enforceable contract:1) must be voluntary on both sides2) the first contract is not yet fully performed3) there were new, unanticipated circumstances that

changed the ability to perform the original contract

ii. Angel v. Murray (RI 1974): City signed a garbage removal contract with a company. A few years into the contract, the company asked in public town meeting that the amount of the contract be increased because the town has seen a much larger than expected growth so there was more garbage. The town accepted and did so again the next year. Uphold agreement as meeting the conditions.

c. Promissory estoppeld. UCC has effectively abolished the rule for sale of goods, making modifications

binding without consideration §2-209(1). Restatement 2d §89(a).3. Agreement to accept partial payment of debt for whole

a. Old rule is that this was not enforceable because no consideration and pre-existing duty to pay

b. New rule less strict, debtor can make part payment if he also gives security or refrains from bankruptcy or insolvency proceedings which he could otherwise employ or arranges for a composition agreement in which several creditors agree to accept less than full payment or pays part of a claim for which there is a bona fide dispute over full amount.

F. Is There Mutuality of Consideration?In bilateral contracts, both parties must furnish consideration, must suffer detriment, and must make promises that bind them= (mutuality of obligation).

1. Illusory Promises : does not commit the promisor to anything.a. Rehm-Zeiher v F.G. Walker (KY 1913): Appellant R-Z agreed with Appellee Walker to

buy whiskey for 5 years at a stated price. Walker promises to sell x cases, unless it has a fire. R-Z can get out of buying the full number of cases for “any unforeseen reason.” In the first three years of the contract, R-Z bough much less whiskey than it had contracted for. In the fourth year of the contract, Walker refused to sell as much whiskey as R-Z wanted (the price had gone up), and R-Z sued. Ruling: there was no consideration on part of R-Z. They were no bound by contract and if it is unenforceable in one direction, it is unenforceable in the other direction too. So Walker was not bound either.

b. But see McMichael v Prince (OK 1936)—see requirements and output contractsc. Example: promisor reserves right to change his mind

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i. But could be enforced under promissory estoppelii. Promisor binds himself by some objective standards, such a promise might

be enforceable2. Alternative promises : Alternative promises only constitute consideration if each of the

performances would be consideration.3. Right to terminate agreement : not illusory if:

a. Termination is possible only after part performance because that would allow consideration to have been done

b. If contract provides for termination in the event party is unable (not unwilling) to perform

c. An unfettered right to terminate with notice is now held to be enforceable because the requirement to give reasonable notice constitutes consideration

4. Implied promises a. Wood v. Lucy, Lady Duff Gordon (NY CofA 1917), D hires P to market her goods

and peddle her endorsement with exclusive rights on condition of taking 50% share of the profits. Then she goes and gives endorsements and sells her goods without consulting him or sharing profits. Contract lasted one year and was renewable each year. P sued. Ruling: The assumption of the exclusive agency was an assumption of duties. Contract doesn’t work without plaintiff’s implied promise to make a reasonable effort.

5. Requirements and Output Contracts accepted as having sufficient considerationa. Requirements : Buyer agrees to buy all of his requirements of a particular good

from Seller at an agreed-upon pricei. Assumes exclusivity, that buyer will buy only from sellerii. McMichael v Price (OK 1936): Parties made contract where P agreed to buy all of

the sand he sells, if it is of good quality, from D at a price 60% below market for ten years. Ruling: P bound to buy all his sand from D, D bound to sell at an established price. Not enough to say that P could escape liability by going out of business. There was intent to enter into binding contract.

b. Output : Seller agrees to sell all of his output of a particular product to Buyerc. Distinguish from continuing offers, without exclusivity or mutuality of obligation.

6. Conditional promises : performance of a promise is made contingent upon a future eventa. Enforceable if the even is out of the promisor’s control, even if it turns out that he

does not have to performb. There is no consideration if the promisor knows when he makes the promise that

the condition cannot occur, even if it is out of his controlc. If condition is fully or partially under promisor’s control, implied promise to

make event happen will constitute consideration. (E.g. subject to financing clauses)

d. No consideration if one party’s performance is left completely to his discretioni. Omni-Group v Seattle First National Bank (WA 1982): Landowners

Clarks wanted to sell land. Their real estate agent worked out deal with Omni developers. Omni submitted earnest money contract, Clarks accepted with certain stipulations to be communicated to Omni. Realtor did not communicate them. One part of agreement was that Omni could hire an architect and engineer for a feasibility study. If it was acceptable to them, they had 15 days to notify sellers of their acceptance. If they did not do so, the contract became null. Later Omni decided to forgo feasibility study, they also accepted Clark’s prior stipulations. However, Clarks then refused to proceed with sale because they believed Omni’s promise was illusory. Ruling: promise is not illusory because the condition was specific and it was reasonable within industry practice.

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7. The fact that one party can void a contract at his option—his promise is voidable—(e.g. he is a minor) does not mean that the other party can also void at will on the grounds of lack of consideration: Restatement 2d 78: The fact that a rule of law renders a promise voidable or unenforceable does not prevent it from being consideration.

G. Promises binding without consideration1. Promises to pay past debts discharged by statute of limitations or bankruptcy, e.g.

a. Usually require a signed writingb. Manwill v Oyler (Utah 1961)—not binding because not in writing.

2. Promise to pay for benefits already receiveda. Benefit requested by recipient: creates implied contract to pay

i. But if benefits requested as a favor, treated as a gift and a later promise to pay is not enforceable

b. Recipient does not request benefit, provider does not intend to make a gift, recipient then promises to pay

i. Old rule is that promise was not enforceableii. Modern view might be that a moral obligation was created, especially if

benefit to recipient or cost to provider was significant1. Quantum meruit (quasi contract, unjust enrichment,restitution)

a. Defendant received a benefit: the benefit can’t be officious or gratuitous

b. Defendant had an appreciation or knowledge of the benefitc. There was no opportunity to bargaind. It would be unjust for defendant to retain benefit without

paying for ite. Recovery in quantum meruit is value of the benefit

conferred by plaintiff on defendant and not the detriment incurred by P.

f. Restitution : Dr comes upon an injured person, saves his life, Dr is subsequently entitled to payment. Promise implied in law.

2. Moral obligation a. Webb v McGowin (CofA AL 1935): considered an unusual

case. Appellant saved life of McGowin by preventing a pine block from falling on McGowin. In the process Appellant was badly injured and could no longer work. McGowin promised to pay him a stipend for life and did so until M died. A sues M’s testators for the stipend. It is relevant to decision that payments had been made, establishing a relationship

i. “where the promisee cares for, improves, and preserves the property of the promisor, though done without his request, it is sufficient consideration for the promisor’s subsequent agreement to pay for the service, because of the material benefit received.”

ii. subsequent promise is equivalent to previous request of promisor

iii. where promisor has received a material benefit, a subsequent promise is sufficient consideration

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iv. In this case, promisor benefited, promisee suffered detriment: this constituted consideration.

b. But see, Harrington v. Taylor (NC 1945): P prevents D’s wife from chopping off his head with an ax and in the process has her hand mutilated. D promises to pay her damages, but after making a paltry payment, refuses to pay more. Ruling: no consideration, no moral obligation. A humanitarian act of this kind, voluntarily performed, is not such consideration as would entitle her [P] to recover at law.”

3. Promise to perform a voidable duty4. UCC removes consideration requirement when modifying a contract, as long as

modification made in good faith5. Option contract: consideration had to be recited but not fulfilled, as long as exchange is

fair

H. Promissory Estoppel, Restatement 2d §90(1) definition:

1. A promise which promisor should reasonably expect to induce action or forbearance.2. And does induce action of forbearance,3. Is enforceable if doing so would prevent injustice.4. Remedy is limited to what justice requires (to put party back into position he would have

been in had there been no reliance)a. Hoffman v. Red Owl (WI 1965): reliance on promise of franchiseb. Ricketts v Scothorn (Neb 1898): Grandfather gives granddaughter (P) a note stating that

he will pay her $2000. He tells her this is so that she doesn’t have to work anymore. She quits her job, after one year, with consent of grandfather takes a new job. Grandfather dies without having paid the note, though he clearly still intended to. P sues his executor. Ruling: although there was no consideration because no quid pro quo, plaintiff reasonably relied on promise to her detriment.

c. Feinberg v. Pfeiffer (St Louis 1959): Company promises long-time employee a retirement pension in recognition of her service. After paying the pension for 7 years, company stopped payment saying it was a gift and not required. Ruling: no consideration but reasonable reliance to the detriment of P.

d. Grouse v Group Health (MN 1981): P is offered job by D. He accepts, quits his current job, turns down another job offer. D then without telling him, hires someone else because it couldn’t complete search on P’s background. P is out of a job and sues for damages. Defendant argues it was at will contract. Ruling: plaintiff has to be given opportunity to lose the job. Plaintiff relied reasonably and suffered detriment.

e. Cohen v Cowles Media (MN 1992): P leaked politically damaging information about a gubernatorial candidate to two Minn papers on the condition that he remain an anonymous source. The editors of each paper, over the objection of the reporters and against journalistic custom, decided to print P's name. The same day P lost his job. Ruling: find promissory estoppel because the custom of confidentiality in journalism is so absolute that P could reasonably believe the promise would be kept. P would not have acted without the promise, so the promise and his reliance on the promise induced his action. He suffered detriment due to this reliance. Enforcement of the promise would have prevented an injustice, so D is liable. Supreme Court MN decision 1990, custom of the industry not legally enforceable: the parties in this promise were not thinking of a legal contract, they were thinking of an ethical contract, and that cannot be enforced in a court. So it would be inappropriate to have a contract cause of action in this case.

5. Promisee has to show that his action of forbearance was taken in actual reliance on the promise.

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6. Promisor has to be able to foresee that promisee would rely on promise and would rely on it in a certain way.

7. Often apply promissory estoppel to enforce promise of gifts made among family members if the promisee reasonably and detrimentally relied on promise.

a. Ricketts v Scothorn (Neb 1898)8. Promissor estoppel may be used as substitute for Statute of Frauds requirement that land

transactions be in writing.9. Enforce promises of charitable donations made in writing

a. Earlier enforced by finding implied promise by donee to use gift for charitable purposes

i. Allegheny College v. National Chautauqua County Bank (NY 1927): Woman pledges in writing $5000 to Allegheny college payable after her death to fund a scholarship in her name. Two years later she gives $1000 which the college puts aside for the scholarship. Following year she repudiates pledge. After her death, college sues her executors. Cardozo refuses to see promissory estoppel because says there was benefit to promisor and therefore consideration.

b. Reliance not necessarily required in charitable donation cases

III. Statute of FraudsMost contracts are valid despite the fact that they are only oral. A few types of contracts, however, are unenforceable unless they are in writing. These are:

1. Suretyship: A contract to answer for the debt or duty of another.Main purpose rule: If the promisor’s chief purpose in making his promise of suretyship is to further his own interest, his promise does not fall within the Statute of Frauds. This is called the "main purpose" rule

Example: Contractor contracts to build a house for Owner. In order to obtain the necessary supplies, Contractor seeks to procure them on credit from Supplier. Supplier is unwilling to look solely to Contractor’s credit. Owner, in order to get the house built, orally promises Supplier that if Contractor does not pay the bill, Owner will make good on it. Because Owner’s main purpose in giving the guarantee is to further his own economic interest – getting the house built – his promise does not fall within the suretyship provision, and is therefore not required to meet the Statute of Frauds. So it is enforceable even though oral.

2. Marriage: A contract made upon consideration of marriage. (If you promise to marry me I will give you X)

a. Exception for mutual promises to marry : But if an oral contract consists solely of mutual promises to marry (with no ancillary promises regarding property transfers), the contract is not within the Statute of Frauds, and is enforceable even though oral. That is, an ordinary oral engagement is an enforceable contract.

1. Land contract: A contract for the sale of an interest in land. The Statute does not apply to the conveyance itself but rather to a contract providing for the subsequent conveyance of land.

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a. Leases for one year or more and a promise to give a mortgage on real estate usually come under Statute of Frauds.

b. But contracts that relate only incidentally to land are not within the Statute. Thus a contract to build a building is not within the Statute, nor is a promise to lend money with which the borrower will buy land.

c. Part performance : Even if an oral contract for the transfer of an interest in land is not enforceable at the time it is made, subsequent acts by either party may make it enforceable.

i. For instance, if the vendee pays some or all of the purchase price, moves onto the property, and then makes costly improvements on it, this combination of facts will probably induce the court to grant a decree of specific performance.

ii. But payment not sufficient: Usually, the fact that the vendee has paid the vendor the purchase price under the oral agreement is not by itself sufficient to make the contract enforceable.

4. One year: A contract that cannot be performed within one year from its making.a. The one-year period is measured from the time of execution of the contract,

not the time it will take the parties to perform.b. The one-year provision applies only if complete performance is impossible

within one year after the making of the contract. The fact that performance within one year is highly unlikely is not enough.i. The possibility of performing the contract within one year must be judged

as of the time the contract is made, not by benefit of hindsight.ii. It is only the possibility of "performance," not the possibility of

"discharge," that takes a contract out of the one-year provision. Thus the fact that the contract might be discharged by impossibility, frustration, or some other excuse for non-performance will not take the contract out of the Statute.

5. UCC: Under the UCC §2-201(1), a contract for the sale of goods for a price of $500 or more. Three exceptions:

a. But, no writing is required if the goods are to be specially manufactured for the buyer, are not suitable for sale to others, and the seller has made "either a substantial beginning of their manufacture or commitments for their procurement." § 2-201(3)(a).

b. A writing is also not required "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." § 2-201(3)(b).

c. Finally, no writing is required "with respect to goods for which payment has been made and accepted or which have been received and accepted." § 2-201(3)(c). (Example: Buyer orally orders three pairs of shoes from Seller for a total of $600. Buyer then sends a check for this amount in advance payment.

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Once Seller takes the check and deposits it in the bank, Seller loses his Statute of Frauds defense.)

SATISFACTION BY A MEMORANDUM A. General requirements for: Even if there is no signed "contract," a signed

"memorandum" summarizing the agreement may be enough to meet the Statute of Frauds. A memorandum satisfies the Statute if it:

(1) reasonably identifies the subject matter; (2) indicates that a contract has been made between the parties; (3) states with reasonable certainty the essential terms of the contract; and (4) is signed "by or on behalf of the party to be charged."

IV. Terms of a ContractA. Parol Evidence Rule

1) The parol evidence rule limits the extent to which a party may establish that discussions or writings prior to the signed written contract should be taken as part of the agreement. In some circumstances, the rule bars the fact-finder from considering any evidence of certain preliminary agreements that are not contained in the final writing, even though this evidence might show that the preliminary agreement did in fact take place and that the parties intended it to remain part of their deal despite its absence from the writing.

2) The rule prevents admission of evidence that contradicts a partially integrated documentUCC §2-202(b) def Inconsistent: “the absence of reasonable harmony in terms of the language and respective obligations of the parties.”

3) A totally integrated document admits of no outside evidence of a prior agreement at all.1. "Integration": A document is said to be an "integration" of the parties’ agreement if it is intended as the final expression of the agreement. (The parol evidence rule applies only to documents which are "integrations," i.e., final expressions of agreement.)2. Partial integration: A "partial" integration is a document that is intended to be final, but that is not intended to include all details of the parties’ agreement.3. Total integration: A "total" integration is a document that is not only a final expression of agreement, but that is also intended to include all details of the agreement. [Merger clause]

4) The parol evidence rule applies to oral agreements and discussions that occur prior to a signing of an integration. It also applies to writings created prior to an integration (e.g., draft agreements that were not intended to be final expressions of agreement).

If an ancillary writing is signed at the same time a formal document is signed, the ancillary document is treated as part of the writing, and will not be subject to the parol evidence rule.

5) The parol evidence rule never bars consideration of subsequent oral agreements. A written contract may always be modified after its execution by an oral agreement. (Unless there is a no oral modification clause.)

6) The judge makes a preliminary decision about whether or not to admit parol evidence. Two means of deciding:

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a. Four corners rule : judge decides whether there is an integration, and whether it is total or partial, by looking solely at the document

b. Judge determines intent of the parties at the time K was signed by looking at all evidence including witness testimony

7. Collateral bargains—parol evidence of prior or contemporaneous oral agreement will be admitted if:1. agreement is collateral to written K—collateral bargain can’t be so closely connected

to written part of the agreement as to be part of ita. collateral bargain not supported by independent consideration

2. parol evidence not contradict express or implied provisions of the written K3. terms of collateral bargain must be those that ordinary parties would not expect to

have embodied in writinga. Mitchel v Lath (NY 1928): Ds wanted to sell farm. P was interested on condition Ds

demolished an ice house that they had across the street from the farm located on land owned by a 3rd party. Ds agreed. P bought farm relying on promise, made up written contract, took possession. Ds never demolished ice house. Held: D doesn’t satisfy 3rd prong of collateral bargain test b/c written K was explicit and would expect the issue of the ice house to be raised in it.

b. Masterson v Sine (CA 1968): Ps held land as tenants in common. 1958 they conveyed land to Ps with an option to repurchase within 10 years. After conveyance P went bankrupt. Bankruptcy trustee and wife of P brought suit to enforce option. Question is whether parol evidence about limitations on the option can be presented by D who argues that option was personal to grantors and not assignable. Held: this is not an arm’s length agreement and the deed was a standardized form, so such a collateral bargain may not have been put into K.

c. Alaska Northern Development v Alyeska Pipeline Service (AK 1983): AND negotiated a K with APS for spare parts. On Dec 10 AND prepared letter of intent that did not include a price. On Dec 11 APS responded with letter of intent, no price, and clause: “Please consider this as said letter of intent, subject to final approval of the owner committee.” AND and APS agreed to a price, but in March the owner committee of APS rejected the Dec 11 proposal. AND sues for breach wanting to introduce parol evidence that the owner committee only had the authority to ok the price. Held: Extrinsic evidence contradicts the writing within its context and thus can’t be admitted.

d. Luther Williams Jr., Inc v Johnson (DC Ct App 1967): P claims that he contracted to do home improvements for D and offered them financing. D said they had their own and would make downpayment on getting the $. P calls back, D says they didn’t get their $ and that they had contracted with another contractor. D claims that they thought they were signing an estimate, that they said the agreement depended upon their getting financing, and that they should not become obligated until getting the $. Held: local rule allows a written K to be conditioned on an oral agreement that K not become binding until some other condition is met. And, p.e. allowed to establish the existence of this oral agreement when K is silent on it, when oral testimony doesn’t contradict K, and when it can be inferred that K was not intended to be integrated. And, if condition precedent hasn’t been met, there is no K, so no integration. Reasoning: no provision in the K concerned finances, so the oral agreement doesn’t contradict the terms of the writing.

UCC §2-202 terms in integrated contract may be explained or supplemented (but not contradicted) by 1) course of dealing or usage of trade or by course of performance, 2) evidence of consistent additional terms unless the court finds the writing was intended also as a complete and exclusive statement of the terms of the agreement.

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Summary—To exclude parol evidence:1. determine whether writing was integrated2. determine whether evidence of a prior agreement is inconsistent with the writing3. if the info was consistent and was a term that should have been in the writing but

was not, it should still be excluded

B. Warranties, interpretation, and the Parol Evidence Rule1. Relationship of parol evidence rule to warranties

a. if a disclaimer is effective, the p.e.r. is irrelevant b/c the warranty has been excluded by other means

b. Courts set a high standard for excluding evidence of an undisclaimed implied warranty even if there is a merger clause

c. express oral warranty will be admitted even if there is a merger clause if court concludes that writing was not intended as total integration and the oral warranty is consistent with the written terms.

d. p.e.r. does not apply at all if the representations were fraudulent2. Interpretation of contracts and the Parol Evidence Rule

a. Pacific Gas and Electric v. G.W. Thomas Drayage (CA 1968): D made K with P to repair cover of a turbine and agreed to indemnify P ‘against all loss, damage, expense, and liability resulting from injury to property’ due to the work. The turbine was damaged. P wants to recover cost of repairing it. D claims that the indemnity was only to protect 3rd parties. Held: to understand K, judge needs to hear parol evidence.

b. Traynor theory of interpretation: the test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.

i. Don’t assume 1) that judge understands what parties intended by terms, 2) that the use of magic words is sufficient to make a K acceptable, 3) that words are stable.

ii. To interpret K:A. determine what the terms mean—according to the partiesB. this requires at least a preliminary consideration of evidence about

the intention based on the circumstances of the making of the KC. If court discovers that terms are ambiguous and could be interpreted

in more than one way, it should allow extrinsic evidence.c. Other approaches to interpretation:

i. Enforce K literally—formalistii. Assume a hypothetical bargain—judge determines what parties really

intendediii. Majoritarian default rule—enforce meaning most people use in the

relevant industry/communityiv. Contra preferentum—interpret K to disadvantage of its drafter

1. Kemp Fisheries v Castle & Cooke Inc . (9th Cir. 1988): P leased fishing boat from D. Extensive negotiations by lawyers for both sides lead to K that does not include all terms P wants, but P signs K anyway. No

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warranty on engines and freezer, which break down causing P to lose money. No integration clause. Appeals Ct. disallows parol evidence of implied warranties and claim of contract ambiguity. Held: letter of intent indicated this was final agreement, sophisticated business transaction, K changed to include some of what P wanted during negotiations, P’s acceptance of boat indicated his acceptance of its seaworthiness, K is detailed implying integration.

2. Frigaliment Importing Co v. BNS International Sales (SDNY 1960): what is chicken. Parol evidence used to determine that meaning of term chicken in an export K is ambiguous. To interpret, court looks at: wording of K, negotiations, trade usage, expert witnesses, statutory definitions, price, P’s response to first incorrect shipment.

C. ConditionsA. Conditions versus promises

1. Condition—leads to forfeiture2. Promise—leads to breach and liability only for damages caused by breach

a. Jacob & Youngs v. Kent (NY 1921) Cardozo, J.: failure to use correct piping is a trivial and innocent omission. It is not treated as a condition of the K, so forfeiture is not the remedy. Installation of Reading pipe treated as a duty (a promise), so P breached and D can recover damages, but they are only nominal.

3. Waiver of condition/promisea. you can waive a conditionb. you can’t waive consideration on a promise b/c that would become a gift

i. Clark v. West (NY 1908): K for authoring law books with condition that if P refrained from drinking the whole time the price paid would increase. P sues for extra wages b/c he claims no-drinking condition was waived. If drinking clause is K with consideration being more money, it can’t be waived b/c of pre-existing duty rule. If it’s a condition precedent collateral to K, it can be waived and non-performance of condition can’t be reason for nonpayment.

B. Types of conditions and the performance they demand1. Express conditions— R2K § 224: “an event, not certain to occur, which must occur, unless its

non-occurrence is excused, before performance under a contract becomes due.”c. strict compliance required

i. Dove v Rose Acre Farms (CA IN 1982): P missed out on bonus b/c he did not fulfill all of the requirements. Held: no bonus b/c conditions explicit, P agreed to them voluntarily, and their purpose was not the performance of the construction agreed to in K.

d. courts will avoid strict compliance if forfeiture results i. forfeiting party relied on bargain and partly performed

ii. non-forfeiting party benefitted from part performancee. Court may excuse fulfillment of condition if no prejudice results

i. Aetna Casualty v. Murphy (CT 1988): D waited too long to file claim with his insurance company. Company won’t cover him b/c argues notification was a condition of the policy and failure to notify caused prejudice. Held: it was an adhesion K, D might forfeit disproportionately if K upheld, but D failed to show P was not prejudiced.

f. Condition precedent: must occur before performance of other party is duei. Wal-Noon Corp v Hill (CofA CA 1975): under K landlord would make repairs if

tenant notifies it. D repaired roof without notifying landlord. D cannot later sue for reimbursement b/c D did not fulfill condition precedent of notification and P was prejudiced. Can partially recover through unjust enrichment.

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2. Implied-in-fact conditions—implied from parties’ conduct3. Constructive conditions—not agreed to by parties but imposed by courts to ensure

fairness.a. each party’s substantial performance of his promise is generally a constructive

condition to the performance of any subsequent duties by the other partyb. Order of performance—not always made clear in K, has to be interpreted

i. where two performances are independentii. where one party has to act as a condition of the performance of the

other1. can be difficult to determine when breach has occurred2. Kingston v. Preston (KB 1773): D refused to fulfill terms of K and

turn over his business b/c P had not met condition precedent and provided security. Held: D should not have to give up something valuable on basis of P’s assurances.

iii. Simultaneous performance, e.g sales of goods and landc. Independent promises

i. usually promises presumed to be in exchange for each other = dependentii. where promises in a bilateral K are not dependent, court will not apply

theory of constructive conditionsa. non-occurrence of a constructive conditions would therefore

not relieve breaching party of the duty to perform.b. Ice house case

d. Divisible Contractsi. where parties have divided up their performances into units or

installments, in which each part performance is the rough compensation for a corresponding part performance by the other party.

ii. A divisible K is treated as a series of separate Ks for the purpose of determining constructive conditions

iii. Test for divisibility R2K §240: K is divisible if it can be apportioned into corresponding pairs of part performances so that the parts of each pair are properly regarded as agreed equivalents.

a. If consideration is apportioned, K is divisible.b. K is divisible when

i. Performance of each party is divided into 2 or more parts

ii. Number of parts due from each party is the sameiii. Performance of each part by one party is the agreed

exchange for a corresponding performance by the other party.

c. Court will find K divisible only if so finding will be fair to party that has not breached

d. In construction Ks payments made be periodic but K is not necessarily divisible.

i. Lowy v. United Pacific Insurance (CA 1967): D hired to do 2 phase street construction project. D almost finished part 1 and demanded more money b/c P had added changes in plans. P refused, D ceased work. P got another company to finish the job. Held: K was divisible, so failure to perform phase 2 doesn’t affect

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recovery for Phase 1. In phase 1, D had substantially performed and stopped work b/c of P’s refusal to pay, so D can recover for work done.

e. service Ks where wage is paid at specific units of time are usually held to be divisible so that employee can recover wages.

i. Britton v. Turner (NH 1834): D hired P to work for 1 year with payment at the end. P worked for 9 months then left. D can show no damage from P’s leaving. Held: P did breach, but he can recover wages minus damages for the 9 months he worked from theory of quantum meruit/substantial performance.

4. Substantial Performancea. Opposite of substantial performance is material breach

i. In a material breach, non-breaching party can both recover damages and also suspend or be discharged from performing his own obligations under K.

1. O.-W. Grun Roofing v. Cope (TX 1975): roofer shingled new roof badly causing it to look discolored. Owner refused to pay. Roofer sues, but court holds that color was a material element, that curing deficiency would require completely redoing roof, so this was not substantial performance but material breach, no quantum meruit allowed b/c D did not get benefit from roof.

2. Factors determining material breach: a. Extent to which non-breaching party is deprived of the

benefit he reasonably expected from Kb. Whether breach goes to essence of K, e.g. principal

reason parties made Kc. Extent to which non-breaching party can be adequately

compensated for loss by damage awardsd. Amount of performance completed

i. The more work the breaching party has done, the greater the forfeit

ii. Breach at the outset is usually trivial, no forfeit involved

e. Likelihood breach can be cured, greater the likelihood, the less likely it is to be a material breach

f. Willful breach likely to be considered materialg. Delay in performance that significantly deprives non-

breaching party of benefit of Kh. For sale of goods, see UCC rules on non-conforming

goods §2-601 (perfect tender rule: “unless otherwise agreed, if the goods or the tender of delivery fail in any respect to conform to the K, the buyer may (a) reject the whole; or (b) accept the whole; or (c) accept any commercial unit or units and reject the rest.”)

ii. With substantial performance, non-breaching party’s duty to perform is only suspended and defaulting party has chance to cure his defective performance. Failure to cure leads to breach and discharges non-breaching party from duty to perform.

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b. Elements of substantial performancei. There must have been good faith intent to comply

ii. The work must be substantially completediii. The defects are not pervasiveiv. The deviation is not in an essential element of the workv. The defects can be remedied without difficulty

c. The right to deviate slightly from a K depends on:i. Purpose served

ii. Desire to be gratified (e.g. pipes of a particular brand)iii. Excuse for deviationiv. Cruelty to breaching party of enforcing strict adherence

1. Britton v. Turner 2. but see, Dove v. Rose Acres Farm.

v. Ratio of monetary value of tendered performance to the promised performance

D. Warranties• UCC recognizes four warranties by seller guaranteeing buyer that goods will have certain characteristics• To prove breach of warranty, buyer must prove;

i. that seller made a warranty, express or impliedii. that the good were defective at the time of the sale

iii. that the buyer’s loss or injury was proximately and actually caused by the defect

iv. that no affirmative defense (e.g. assumption of risk) applies

1. Express warranty UCC 2-313, created by the seller by:a. Any affirmations of fact or promise made by seller to buyer relating to the goods

and becoming part of the basis of the bargain, creates express warranty that goods will conform to the affirmation or promise

b. Any description of goods which is party of the basis of the bargain creates an express warranty that the goods will conform to the description

c. A sample or model which is party of the basis of the bargain creates an express warranty that the goods will conform to the sample or model

d. It is not necessary to use special wording to create an express warrantyi. Not necessary to have intent to create an express warranty

ii. Seller’s opinions do not create a warranty (puffing)2. Implied warranty of merchantability UCC 2-314

a. Unless excluded or modified, a warranty that goods shall be merchantable is implied in a K for their sale if the seller is a merchant with respect to goods of that kind

b. Criteria of merchantabilityi. Goods must be fit for the ordinary purposes for which such goods are used

ii. Goods must pass w/o objection in the trade under the K description

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iii. Good must run, w/i variations permitted by agreement, of even kind, quality and quantity within each unit and among all units involved

iv. Goods must be adequately contained, packaged, and labeled as the agreement may require

v. Goods must conform to the promises or affirmations of fact made on any container or label

3. Implied warranty of fitness for particular purpose UCC 2-315a. Where seller at the time of contracting has reason to know any particular purpose

for which the goods are required and that the buyer is relying on the seller’s judgment to select or furnish suitable goods, there is an implied warranty that the goods shall be fit for such purpose.

b. To prove breach of implied warranty for particular purpose, buyer must:i. Show seller had reason to know buyer’s purpos

ii. Show seller had reason to know buyer was relying on seller’s judgmentiii. Show that buyer did in fact rely on seller’s judgment

4. Disclaimers of warranty UCC §2-316—tightly controlled by UCCa. Explicitly disclaiming implied warranties of merchantability and fitness for

particular purpose:i. Merchantability : the disclaimer must mention the word merchantability

1. The disclaimer does not have to be in writing, but if it is in writing, it must be conspicuous. (cannot be buried in the fine print)

ii. Fitness : must be in writing and conspicuous1. But it does not need to use any particular words

b. Implied limitations excluding or limiting implied warrantiesi. Language of sale may implicitly disclaim the warranty by using terms like

“as is” “with all faults”ii. Examination of sample or model: If buyer is asked to examine a sample or

model, or the goods themselves, there is no implied warranty with regard to defects which an examination ought to have revealed.

1. an express warranty is not waived b/c inspection would have disclosed defects

iii. Course of dealing, course of performance, and usage of trade can also exclude or modify an implied warranty

5. Limits on disclaimer of warranties by limiting remedies available to buyera. E.g. buyer’s remedies are limited to repair or replacement of defective goods or

partsb. UCC § 2-719 limits remedy meddling

i. UCC remedies come back into K if K’s limited remedy would fail of its essential purpose

1. Murray v. Holiday Rambler (WI 1978): P buys motor home with warranty limited to repair/replacement of defective parts, but everything is wrong with it. Seller performs repairs, but court holds that the limited remedy fails of its purpose when seller is given opportunity to fix defects yet the vehicle still fails to operate as it should.

ii. Unconscionability UCC §2-719(3), remedy limitation is unconscionable when:

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1. it limits consequential damages for injury to the person in the case of consumer goods

2. but limits on consequential damages where the loss is commercial will generally not be unconscionable

iii. Unconscionability of disclaimers of warranty liabilities: same measure as unconscionable Ks (no bargaining, gross inequality of power, monopoly)

1. Henningsen v. Bloomfield Motors (NJ 1960): woman injured by defective car, sues for damages even though warranty of consequential damages disclaimed. Held: disclaimer is unconscionable b/c adhesion K, same used by all car manufacturers, so no bargaining allowed about disclaimers. Not shown that buyer agreed to and understood terms.

A. Risk is allocated 1) by express or constructive conditions or 2) by express or implied warranties

g. failure or non-occurrence of a condition relieves at least one party from obligation to perform K

h. failure of warranty gives non-breaching party right to recover damages

V. Avoidance of ContractFailure to read a K is not grounds for rescission

[Morta v Korea Insurance Corp]reasons not to enforce a contract: 1) defect in the process of contract formation (e.g. duress, fraud, undue influence) or 2) within narrow limits some incompetence of the party against whom the agreement is to be enforced.1. Mistake

Def. Mistake: “a belief that is not in accord with the facts”(Does not apply to a mistaken belief about what will happen in the future, e.g. an unforeseen price increase)

o By one party= unilateralo By both parties= mutual

Restatement 2d §151 mistake can provide basis for rescinding a contract:o Mutual : when mistake was about a basic assumption, when mistake has material effect on

agreed upon exchange, and when adversely affected party does not bear the risk of the mistake: contract is voidable.

o Unilateral : when one party made a mistake about a basic assumption, when mistake has material effect on agreed upon exchange that is adverse to him, and when adversely affected party does not bear the risk of the mistake, AND either 1) enforcement of the contract would be unconscionable, or 2) the other party had reason to know of the mistake or actually caused it: contract is voidable.

A. Mutual Mistake: three requirements must be met1. Basic Assumption . Test of whether an issue is central to the bargain: look for

unexpected unbargained-for gain on one hand and unexpected, un-bargained for loss on the other. Other basic assumptions: the existence of the subject matter

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(sale for timber on land when all the timber had been burned), quality of subject matter (barren cow).

Beachcomber Coins v Boskett (NJ AD 1979): P bought coin from D. Both believed it was a rare Denver-minted dime. After purchase, P discovered coin was fake and wanted to give coin back. Fact was central to bargain, enforcement would be onerous, no issue question of assuming risk because both parties thought the coin was genuine and worth the amount charged. They were not conscious of a risk.

Sherwood v Walker (MI 1887): supposedly barren cow. Mistake about nature of the thing because “a barren cow is substantially a different creature than a breeding one.”

Not basic assumptions: 1) market conditions, 2) and the ability of buyer to pay the purchase price.

2. Material Effect. Party must show that the resulting imbalance in the agreed exchange is so severe that he cannot fairly be required to carry it out. Courts more likely to find mistake where the party seeking avoidance has been disadvantaged AND the other party has been advantaged, not merely unaffected.

3. Risk of Mistake . Ways risk of loss will be allocated to the parties. Restatement 2d §154, 152.

Risk can be allocated by agreement of the parties The party who knows that his knowledge is limited, but treats his limited

knowledge as sufficient, will be held to bear the risk of mistake. Court allocates the risk to the party on the grounds that it is reasonable to

do so. Minerals in land: seller may not avoid contract if he finds out that

land being sold for agriculture actually has valuable minerals in it. Building conditions: builder contracts to build on land owned by

Owner. It turns out that soil conditions make the building much more expensive. Builder bears the risk and cannot avoid contract.

Lenawee Country Board of Health v. Messerly (MI 1982): Pickles buy apartment complex from Messerlys. 5-6 days after sale, Pickles find out it has illegal septic system. Board of Health issues permanent injunction against human habitation until system is fixed to standard. This would cost more than the land was worth. Is there mutual mistake? Yes, but risk is to be allocated by court, court can assess equity of rescission, and chooses not to here because the Pickles, by accepting the “as is” clause in the land contract, assumed the risk that the land would be a different value than they assumed.

Risk of error in transmission : in case of error in transmission, loss falls on party who selects the means of communication.

Codicil #1-if receiver is innocent and has no reason to suspect the error.

Codicil #2-the message is not forged1. Ayer v. Western Union (ME 1887): Ayer sends telegraph to

another company offering lumber for sale at given price. Western Union makes mistake in sending price. Offered accepted at incorrect price. Mistake becomes clear, but Ayer has to sell at the lower mistake price. Ayer sues WU for breach because of mistake. WU doesn’t deny mistake. What damages? Cost of telegram or what Ayer lost on transaction because of mistake? WU can’t require Ayer to rescind contract because by rule, Ayer bears risk. Since Ayer can’t void contract, WU owes damages. If Ayer could rescind, WU would only owe cost of telegram.

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B. Unilateral Mistake: three basic requirements plus additions1. Additional requirements:

e. Either enforcement of the contract would be unconscionablef. Or the other party had reason to know of the mistake or his fault caused the

mistake.v. If the offeree knew or should have known about the mistake it is arguable

that he had no power to accept the offer at all. There is no meeting of minds, the offeree is just trying to take advantage of the offeror’s error.

2. Construction bids are most common types of unilateral mistakec. Will have to show that mistake represents a significant portion of the bid,

depriving him of all or most of his profit (material effect)d. Clerical error common reason for avoidance of contract

i. Boise Junior College District v Mattefs Construction (Idaho 1969): D, contractor, bid for construction project. D was second lowest bid, but refused when offered because clerical error had left out a large sub-bid. Plaintiff knew that the bid was too low because of a mistake.

2. Lack of Capacity: contract is voidable at the option of the incompetentINFANCY

1. Until a person reaches majority, any contract which he enters into is voidable at his option.

2. Infants may disaffirm contracts, and may do so orally or by his conduct.3. A disaffirmed contract may not be enforced against a minor, but the minor may enforce a

contract against an adult by for damages for failure to go through with the purchase.4. If the infant lies about his age, all courts let the other party avoid the contract on grounds

of fraud. In other words, the infant who falsely claims adulthood loses his power to ratify the contract.

5. A minor may not ratify until he has reached adulthood. Ratification may occur in 3 ways: i. Failure to disaffirm: By inaction – if the infant does not disaffirm within a reasonable time after reaching majority, he will be held to have implicitly ratified.ii. Expressly – the contract may be ratified by words, either written or (in most states) oral.iii. By conduct – if the former infant actively induces the other party to perform, this conduct may constitute a ratification (e.g., both parties begin to exchange performances after the infant’s majority). But mere part payment or part performance by the former infant is probably not by itself a ratification.

Restitution:1. If the infant is a defendant to a breach-of-contract suit brought by the non-infant, the

latter will not be allowed to recover profits he would have made, or any other contract damages. But he will have a limited right of restitution, the right to require the defendant infant to return the goods or other value if he still has them.

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2. If the infant is a plaintiff who is suing to recover money already paid by him, the court will require the infant to return any value which he has, and will in fact subtract from the infant’s recovery any value obtained and dissipated.

3. For necessaries, minor only has to pay what they were worth and can recover for unjust enrichment.

4. Restoration: minor has to return what he has, but is not responsible for use or depreciation or to return an equivalent of what was received.

Example: Infant buys a car for $4,000 in cash from D. Infant then disaffirms and sues to recover his $4,000. To recover the $4,000, Infant will have to return the car. If Infant has wrecked the car, or sold it for money which he has then spent, the value of the car will be subtracted from any recovery by Infant. So if the car was in fact worth $4,000, Infant will recover nothing if he no longer has the car.

Bowling v Sperry (IN app 1962): Appellant Bowling bought used car from appellee. Iin June 29 paid part of price, on July 1 paid rest with money borrowed from his aunt. His grandmother and aunt accompanied him, but sales receipt was in his name alone. One week later, found car had problems, returned it to lot, refused to pay for repairs, sent letter disavowing purchase. Ruling: contract is voidable because appellant was a minor. The presence of his guardians was not sufficient to make them responsible for the contract. Appellee knew appellant’s age when he sold him the car. The car was not a necessary.

MENTAL INCOMPETENCERestatement 2d §15(1) definition:

1. Person is unable to understand in a reasonable manner the nature and consequences of the transaction or

a. Applies even if contract is completely fair and where the other party does not know of the impairment

i. Heights Realty v Philiips (NM 1988): Gholson contract to sell her house with realtor (P). Realtor thought Gholson was lucid. Realtor arranged for buyer, Gholson did not accept offer. Realtor sues for her commission. Ruling: presumption of competency was overcome by clear and convincing evidence.

2. Person is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition.

a. Less likely to succeed at getting contract set aside unless:i. Other party knew of impairment

ii. The transaction was not one a reasonably competent person would have made

3. There is a presumption of competency, burden of proof is on the person asserting lack of competency.

4. (A person has no capacity to incur contractual duties if his property is under guardianship.)

5. Right of avoidance: contract can be disaffirmed at will at any time until it is completed if the terms are unfair or where other party knows of impairment. But if contract is fair and other party has no knowledge of impairment, the power of avoidance terminates once contract has been performed in whole of in part or once the circumstances have so changed that avoidance would be unjust.

3. Unconscionability & Adhesion ContractsAdhesion Contract:

1. Standardized form, with non-negotiated, pre-drafted terms, complicated, unclear, favorable to the drafter, printed in small type

3. Offered on a take it or leave it basis

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4. Gross disparity in bargaining poweri. Consumers more likely to be found to be at a disadvantage

rather than businesses

Once plaintiff has demonstrated that the contract was an adhesion contract, he must show that his reasonable expectations were thwarted by the provisions of the contract or that it is unconscionable.

E.g. Ticket stubs where plaintiff did not realize he was entering into a contract because there was no reason to have an expectation of it. Restatement 2d §211: a document binds a party only if he signs or otherwise manifests assent to it and furthermore has reason to believe that like writings are regularly used to embody terms of agreements of the same type.

Unconscionable: no definition provided by UCC1. Shockingly unfair2. very one-sided in favor of the more powerful party3. Excessive price : over two or three times the standard cash market price4. Remedy meddling 5. Supplier knew or had reason to know: 1) that he took advantage of the inability of the

consumer reasonably to protect his interests because of his physical infirmity, ignorance, illiteracy, inability to understand the language of an agreement or similar factors, and 2) that when the consumer transaction was entered into there was no reasonable probability of payment of the obligation in full by the consumer.

6. Mostly relevant to protecting consumers7. Purpose is to prevent oppression and unfair surprise, not to disturb the allocation of risks

because of superior bargaining power.8. Look at contract at time of signing ( post-contract action, such as the delivery of shoddy

goods are not covered under unconscionability)9. Procedural unconscionability

a. One party was induced to enter the contract without any meaningful choice, no bargaining is possible, indicating lack of real assent

10. Substantive unconscionability a. A clause that is shockingly unfair and one-sided

i. Excessive price1. Jones v Star Credit (NY 1969): P on welfare, bough freezer on credit

from door-to-door salesman. Including prices, taxes, interest, and fees, the total cost came to over $1400. Thus far P has paid over $600. Proved at trial that normal retail value of freezer is $300. Ruling: price was grossly unfair and there was extreme inequality of bargaining power and defendant knew that plaintiff could be taken advantage of, therefore unconscionable.

ii. Unfair modification of either the seller’s or the buyer’s remedies11. Remedies:

a. Refuse to enforce contractb. Strike out offending clausec. Limit force of the clause

12. Consumer Unconscionability

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a. Can’t hide boilerplate limiting consumer’s rights, especially in adhesion K where details had not been negotiated. Such fine print will not necessarily be considered by the court as part of the agreement.

b. Frequent problems:i. Gross inequality of bargaining power

ii. Consumer unable to understand terms of Kiii. Important terms hidden or minimized by sales pitchiv. Contract terms unreasonably favorable to other partyv. Consumer’s lack of choice and

vi. K is adhesion contract, no bargaining took placevii. Cutler Corp v Latshaw (PA 1953): D contracted in writing for repair work on

her house. Unsatisfied with the work, she ordered work to be stopped. Following year, P confessed judgment against D for cost of contract under warrant of attorney. D had signed an “adhesion contract”—a take it or leave it contract with boilerplate clauses in small type on the back of the contract. No. 6 spelled out warrant of attorney with confession of judgment. But, evidence that P never called D’s attention to the writing on the back of the contracts b/c P did not use reverse sides to write work specifications, even though there was room there. Held: An authority to confess is so powerful that is must be given clearly and explicitly. Small print conditions in inconspicuous places cannot be used to surrender fundamental personal and property rights unless the word appears w/i a setting which warns of the potency of the capitulation being made.

viii. Williams v Walker-Thomas Furniture (DC CA 1964): P, single mother on relief, bought household items from D on credit. Clause in contract made payments of subsequent items cumulative, so couldn’t pay for first good until second good was entirely paid for. When P defaulted on payment for last purchase—a stereo--, all major goods were repossessed. Held: There is an absolute duty to read a contract or have it read to you. P should not have been spending her money on frivolities anyway.

1. Williams v Walker-Thomas redux: Don’t need legislation to find a contract unconscionable b/c there is a common law tradition. Can also apply UCC. RULE: where the element of unconscionability is present at the time the contract is made, the contract should not be enforced. Can’t ask party to assume risks for bad bargain where it is unlikely that it was able to give real consent to terms.

13. Commercial Unconscionability a. Courts hesitant to extend unconscionability to businessesb. UCC test for unconscionable contract for sale : whether in the light of the general

commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract.

c. Party offering contract, the more powerful party, has burden of showing that the other party had knowledge of any unusual or unconscionable terms contained in contract.

d. Contracts with unusual or prejudicial clauses can be made but have to be entered into knowingly and willingly.

e. Conditions for proving unconscionability:1. Gross disparity of bargaining power used to stronger party’s advantage and

unknown to weaker party2. Causing great hardship and risk to weaker party

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f. Weaver [D] v American Oil Co (IN 1971): Lease from AOC to Weaver=gas station leasee from AOC, included boilerplate hold harmless clause, providing that leasee would hold harmless and also indemnify the oil company for any negligence of oil company on leased premises. AOC employee sprayed D and his employee with oil and they were burned. P initiated suit to determine liability of Weaver based on hold harmless clause. Held unconscionable b/c Weaver had little education, Weaver never read lease, was not told to read lease, or told to consult lawyer and AOC did not explain the terms of the lease to him so his consent wasn’t knowing, AOC has superior bargaining power, clause was in fine print w/o title heading identifying it and K presented on take it or leave it basis.

g. But, Zapatha v Dairy Mart (MA 1980): Zapatha had business experience and some college business courses. He made application for a DM franchise and was accepted. DM agent asked P to read the franchise agreement. Contract included termination clause: either party could terminate on 90 days notice after 12 months without cause. If DM initiated termination without cause, it would repurchase saleable merchandise inventory at retail prices less 20%. DM agent read and explained termination clause to P. P testified he misunderstood clause to mean DM could terminate only for cause. Dm agent suggested P take agreement to a lawyer, but said terms were not negotiable. P signed without consulting lawyer. Four years later DM offered new contract with some terms less favorable to franchisee. P said he preferred to stay with old contract. Several months later, DM gave 90 days notice of termination, offered to negotiate, without promising anything, about continuing under new version of contract. Held: No surprise b/c termination clause was not obscure or hidden in fine print; it was explained by the agent; P understood meaning of clause. No oppression b/c agreement was substantively fair. No bad faith b/c although brochure given before signing up as agent implied that franchisee was more independent than he was, DM was honest about why it terminated agreement and that fulfills the good faith requirement even if reason was arbitrary.

4. Illegality: a contract is illegal if the subject matter is illegal or against public policy1. Examples of illegal contracts : those barred by statute, gambling K’s, usurious K’s,

covenants not to compete, bribery, performance of service without a license, cohabitation agreements.

2. Unenforceability of promises : Restatement 2d Contracts §178(1)a. promise is unenforceable if a legislative statute says it is.b. if there is no clear statute, it is unenforceable if the interest in its enforcement

outweighs by public policy against enforcement.

Restatement 2d Contracts §178(2) TEST (1) to determine enforcement: a. the parties’ justified expectationsb. what forfeiture would result from denial of enforcementc. any special public interest in enforcement

Restatement 2d Contracts §178(3) TEST (2) weighing public policy against enforcement of the term

a. the strength of the policy as manifested in legislation or judicial decisionsb. likelihood that a refusal to enforce will enhance the policyc. seriousness of the misconduct and extent to which it was intentionald. directness of connection between misconduct and the illegal term

3. Enforceability of illegal contracts : As a general rule neither party may enforce an illegal contract even where X promises to do something legal in return for Y doing something illegal.

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a. Exceptions to no restitution theory:1) Denial of restitution causes disproportionate forfeiture2) P was excusably ignorant of facts or of legislation of a minor nature

making the deal illegal3) P was not equally in the wrong with D-P not “in pari delicto”4) P did not engage in serious misconduct and he withdraws from the

transaction before the illegal purpose has been achieved.5) Statutes protect one party and make only the other party’s conduct

criminalRK2d seems to favor enforcement in doubtful cases.

Sinnar v. Le Roy (WA 1954): P owned grocery store, was denied beer license by state. D hearing about denial said a friend of his in city government could get him a license but it would cost $450. (Regular fee=$60.) D made off with money, though P said D promised either a license or the money back. Court won’t force D to return $, b/c “a court will not knowingly aid in the furtherance of an illegal transaction, but will leave the parties where it finds them.”

4. Covenants not to compete : will be upheld if reasonable in scope and if it protects some legitimate interest of the promisee.

a. Employment contracts: closely scrutinized by courts. Allowed to stand if:1. used to prevent disclosure of trade secrets or confidential

information gained from the employer2. used to prevent employee from stealing customers

Usually employer not entitled to protection against employee’s use of knowledge, skill, general info acquired while employed by him.

b. Sale of business contracts : If the seller of a business is selling its "good will," his ancillary promise that he will not compete in the same business as the purchaser will be upheld, provided that it is not unreasonably broad either geographically or in duration.

c. Issues courts will focus one : 1. absence or presence of limitations in time and space2. whether employee had sole contact with the customer3. did employee have access to trade secrets or confidential info4. is goal to eliminate ordinary competition or unfair competition5. does covenant stifle a skill of the employee6. would benefit to employer be much less than detriment to employee7. is employee’s sole means of support barred8. did employee acquire the skill while in the employ of the employer9. is the forbidden employment merely incidental to the main employment

d. Three approaches to dealing with unacceptable covenant (RK2d §184(2) accepts approach 3):1. an overly broad covenant will simply be held unconscionable and not

enforced, allowing no change2. Blue penciling: accepting covenants where words can be deleted to make

it acceptable, otherwise refusing to enforce3. If covenant was drafted in good faith, then court can alter it reasonably to

make it enforceable. Allows court to refashion K.Data Management v Greene (AK 1988): D’s signed non-competition agreements with P agreeing not to compete for 5 years in all of Alaska. After

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D’s were fired, P filed suit for breach when D’s took on private clients. (Case remanded to decide if Data Management acted in good faith.)

5. Cohabitation agreements Watts v Watts (WI 1987): P (Sue) and D (James) in dispute over division of their property after 12 years of nonmarital cohabitation during which they passed themselves off as husband and wife, illegally benefiting from things like insurance coverage.

1. RULE: a contract will not be enforced if it violated public policy, but determining whether it does depends on balancing in light of circumstances the interest in enforcing the particular bargain against the policy against enforcement.

2. Claims based on unjust enrichment: an action for recovery grounded on the moral principle that one who has received a benefit—without an express or implied K—has the duty to make restitution when retaining such a benefit would be unjust.

Test:1) did P confer benefit on D?2) did D know of benefit?3) did D accept benefits under conditions making it inequitable for D to retain

them?

5. Fraud and the Duty to Disclose:1. Misrepresentation-an assertion not in accordance with the facts.

a. can be used in defense in breach of K or as grounds for recission.b. Usually misrepresentation makes K voidable, but fraud will make it voidc. P does not generally have to prove that the misrepresentation was

intentionally made. A negligent or even innocent misrepresentation will usually be sufficient to avoid the contract, if it is made as to a material fact.

d. The party asserting misrepresentation must show that he justifiably relied on the misstatement.

e. The misrepresentation must be one of fact, rather than of opinion R2K § 168-169i. Opinions can be grounds for misrepresentations in certain cases :

1. There is a fiduciary relationship between the parties2. Where representor has used trick or artifice3. Where parties do not deal at arm’s length4. Where representee does not have equal opportunity to

become apprised of the truth or falsity of the fact represented.

Vokes v Arthur Murray (FL DC CA 1968): D sold P dance lessons by convincing her that she was talented, when she actually was not and D knew it. Rule: a misrepresentation, to be actionable, must be one of fact rather than opinion, but, opinion can be taken as statement of fact when parties were not dealing on equal terms.Morta v Korea Insurance Corp (9th Cir 1988): P signed release after payment by D for accident costs. Later P suffered adverse medical affects and had emergency surgery. Court disallows claims of fraud, undue influence b/c Morta had lawyer look at K. Not reading release is not grounds for mistake. No rescission.

2. Concealment and non-disclosure: a. No general duty to disclose—silence not fraud unless there is a duty to disclose.

i. Laidlaw v Organ (US 1817): P knew news of end of war would raise tobacco prices. D did not know news and P was silent about news when asked. D sold to P at an earlier

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agreed upon price. P had no obligation to provide information as long as he did not actively deceive.

b. Duty to disclose :i. If part of the truth is told, but another part is not, so as to create an overall

misleading impressionii. If a party takes positive action to conceal the truth, this will be actionable

even if it is not verbal.iii. If the party knows that disclosure of a fact is needed to prevent some

previous assertion from being misleading, and doesn’t disclose itiv. If the parties have some kind of fiduciary relationship, so that one

believes that the other is looking out for her interests, there will be a duty to disclose material facts. [Constructive fraud

v. If one party knows that the other is making a mistake as to a basic assumption, the former’s failure to correct that misunderstanding will be actionable if the non-disclosure amounts to a "failure to act in good faith."

1. Hill v Jones (CA AZ 1986): House buyer asks about termite infestation, seller does not disclose prior termite infestation. Buyer relies on termite inspector’s report, but seller may have hampered inspection. Buyer finds termites, want damages for fraudulent concealment, but buyers were informed purchasers.

2. seller may have affirmative duty to disclose if buyr makes specific inquiry regardless of whether the fact is material

a. Material fact : one to which a reasonable person would attach importance in determining his choice of action in the transaction in question.

c. General obligation to exercise good faith in contracting: a. Test of good faith based on issues like

i. Nature of the undisclosed factii. Accessibility of parties to knowledge

iii. Nature of Kiv. Trade customs and prior course of dealingv. Conduct of the party in obtaining information

vi. Status quo and relationship between the parties

POLICY ISSUE (assumption of risk): want to limit ways to get out of a contract in order to encourage parties to inform themselves in advance. The easier it is to rescind, the less incentive there is to get informed. However, an improvident agreement may be voided b/c of surprise, mistake, want of freedom, undue influence, the suggestion of falsehood, or the suppression of truth.

6. Duress1) A contract is voidable on the ground of duress when it is established that the party

making the claim was forced to agree to it by means of a wrongful threat precluding th exercise of his free will.

2) RK2d §175(1): If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the K is voidable by the victim.”

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a. RK2d §176 when a threat is improper: 3) Test:

a. Immediate possession of needful goods is threatenedb. Or one party to a contract has threatened to breach the agreement by withholding

goods unless the other party agrees to some further demand.c. A mere threat to breach by non-delivery does not constitute economic duress.d. Threatened party can’t get good from another source of supply

i. Deprives free willii. No reasonable alternative

e. Ordinary remedy for breach would not be adequatei. Austin Instruments v Loral Corp (NY 1971): Loral has Navy contract to deliver

radars. It subcontracts one component to Austin. Austin begins delivery. Loral gets 2nd contract, only offers subcontract to Austin where it has lowest bid. In response Austin threatens to stop delivery of components from 1st contract unless it gets all the subcontracts for 2nd contract and unless it gets higher price for all components already and to be delivered. Loral can’t find anyone else who can deliver the components in time, so accedes to Austin’s demands. Loral reasonably thought itself in a duress situation.

ii. Machinery Hauling v Steel of West Virginia (WV 1989): Steel hired P to haul load to another company. When delivery was almost complete Steel orally told P that merchandise had been rejected and P should return last three truckloads to Steel. Steel then instructed P to pay price of the undelivered loads or Steel would stop doing business with P. Held: Statement not unlawful b/c P did not have an on-going hauling contract with Steel. P has no legal claim to future expectancy of contracts with Steel. (Threats to do what the threatening party has a legal right to do not constitute duress.)

f. Courts hesitate to accept duress defense b/c party can usually ask for preliminary injunction & b/c supplier might have a good reason for the threat e.g. change of circumstances.

7. Impossibility, Existing impracticability, Frustration of Purpose

Intro points:1. Parties may be discharged from performing the contract if: (1) performance is impossible; (2)

because of new events, the fundamental purpose of one of the parties has been frustrated; or (3) performance is not impossible but is much more burdensome than was originally expected ("impracticable"). If a party is "discharged" from performing for such a reason, he is not liable for breach of contract.

2. The doctrines of impossibility, impracticability and frustration apply only where the parties themselves did not allocate the risk of the events which have rendered performance impossible, impracticable or frustrated. Thus the parties are always free to agree explicitly that certain contingencies will or will not render the contract impossible, etc., and these understandings will be honored by the courts.

A. Impossibility

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1. R2K §261: “where, after a K is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the K was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.”

a. event occurred after K madeb. non-occurrence of event a basic assumption of Kc. event was not fault of party seeking discharged. parties did not otherwise allocate the risk in the K

2. Four main types of impossibility: (1) destruction of the subject matter

a. If K involves tangible goods which are essential to the performance of K and which are destroyed, K is discharged.

b. essential property is one specifically referred to in Kc. Taylor v. Caldwell (KB 1863): P hired music hall from D. Before dates of hiring,

music hall burned down. Held: D is not liable for damages to P because there is an implied condition that music hall will exist; where there is an implied condition the parties will be excused in case, before breach, performance becomes impossible b/c the thing that has to exist has been destroyed through no fault of the contractor.

(2) failure of the agreed-upon means of performancea. If an intangible but essential aspect of K is rendered impossible, K is

discharged, but not in every case:b. United States v Wegematic (2nd Cir 1966): P wins bid to supply computer it

hasn’t designed yet. When it can’t meet K delivery dates, it defaults but asks to be relieved of contractual penalties. Held: no, because no reason the promisee should have to bear the risk that manufacturer’s representations are mere aspirations.

c. Canadian Industrial Alcohol v Dunbar Molasses (NY 1932): P contracted with D, a middleman, for delivery of a certain large quantity of molasses during spring/summer of 1928. D only delivery 25% of the total and disclaimed responsibility for the remainder b/c the factory didn’t produce enough that year to meet the delivery, even though it was working under capacity. Held: D liable for negligently failing to secure K with factory. Can’t use impossibility claim.

i. But, some things might have been cause for discharge such as failure of sugar crop, war, bad strike.

(3) death or incapacity of a party(4) supervening illegality—performance of K becomes illegal after K is made

B. Impracticability—when a thing can only be done at an excessive and unreasonable cost.1. if due to changed circumstances, performance would be infeasible from a commercial

viewpoint, the promisor may be excused just as he would be if performance were literally impossible.a. cost increase must be extremeb. K did not allocate risk of a price rise to either partyc. UCC §2-615(a) allows seller impracticability excuse

i. Mineral Park v. Howard (CA 1916): P sold rights to gravel, D agreed to buy all its gravel from P. D uses only half of its original estimate in gravel from P’s land b/c the rest of the gravel is under water and dredging it up would make the costs excessively high. Held: D is discharged b/c impracticability of situation makes situation same as if there was no gravel there.

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C. Frustration of Purpose: 1. event occurs that destroys one party’s purpose in entering into the K, even though

performance of K is not itself rendered impossible.2. R2K §265: Where, after a K is made, a party’s principal purpose is substantially frustrated

without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the K was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.

3. Change in circumstances makes one party’s performance virtually worthless to the other, frustrating the purpose of K. Prerequisites:

1. frustrated purpose is principal purpose of K—without this purpose, K would make little sense

2. frustration must be substantial—not enough that a loss was sustained3. Promisee got no benefit from K after thwarting event4. non-occurrence of frustrating event must have been a basic assumption on which K

was madelack of foreseeability of event is a factor, but mere lack of foreseeability is not conclusive

i. Krell v Henry (KB 1903): D contracted with P to use a room in P’s flat for purpose of viewing coronation parade. Coronation did not takeplace. P sues for payment of fee for use of room. Held: Performance of K is not impossible for D, but the purpose of the K was a license to use room for purpose of seeing parade and no other use, so D would derive no benefit from K.

ii. Washington State Hop Producers v. Goschie Farms (WA 1989): Gov’t controlled allotments to grow hops. Trust (P) organized to run market in hops allotments. As late a June 1985, no indication of deregulation. In May 1985, trust invited bids for 1985 and 1986 allotments. Then USDA terminated market order. 1986 allotments went way down in price. Held: Frustration does not derive from the 90% decline in price of hop allotment following announcement terminating market order. The frustration comes from the irrelevance of control of hop bas after the 1985 crop year.

D. Anticipatory Breach:Breach or Repudiation by Payor:

Unless stated in K, payment for performance occurs upon completion of performance. If performer has not breached, and payor refuses to pay, performer can enforce K for full amount plus interest. If performer has breached, payor has duty to pay with an adjustment for damages cause by the immaterial breach.

If non-breaching performer has completed only part of performance and payor repudiates K, performer has defensive remedy of withholding performance and offensive remedy of suing often before payor’s obligation is due.

1. Anticipatory Breach: where party makes it clear that he intends to repudiate K even before his performance is due.

2. Generally aggrieved party can suspend his own performance and institute suit for breach even before repudiator’s time for performance has arrived.

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3. Repudiation: any positive statement by the obligor to obligee which is reasonably interpreted by obligee to mean that the obligor will not or cannot perform his contractual duty.

Repudiation may take form of:1. statement that obligor intends not to perform

a. must be made to promisee not 3rd partyb. not enough for obligor to express vague doubts about willingness or ability to

performc. vague language accompanied by acts implying obligor intends to repudiate is

sufficient2. obligor takes an action that renders his performance of K impossible

a. act must be voluntaryb. act must make performance impossible, not merely more difficult

3. obligor indicates he will be unable to performer even though he desires to do so (e.g. bankruptcy)

a. John Hancock Life Ins v. Cohen (P) (9th Cir 1958): insured bought policy in 1939, died in 1945. Policy provided for monthly payment to beneficiary (P) for 20 years after date of issue + lump sum at end. In 1954, D terminated payments and paid out lump sum, arguing both parties had intended policy to last for 15 years. Courts found D had breached by anticipatory repudiation. Held: doctrine of anticipatory breach not applicable to suits to enforce Ks for future payment of money only, b/c here it would change terms of K and force D to pay now what he contracted to pay over time in future.

VI. RemediesA. Damages: seeks to compensate for something that was not gained but should have been.

Burden of proving damages is on the plaintiffOnly economic losses are compensated, if there is no loss, there are no damages.

1. Types of damages:a. Compensatory (expectancy) damages: amount to put P in the position he would have been

if the K had been performed. The default in contract disputes. argument for expectancy damages strongest in business context having to do with

production or distribution of goods or allocation of functions in the market place.

b. Restitution damages: amount corresponding to any benefit conferred by P on D in performance of K disrupted by D’s breach. (Getting your money back)

c. Reliance damages: P is entitled to recover any expenditures made by him and for other detriment following proximately and foreseeably upon D’s failure to carry out his promise. Goal is to put P back in the position he occupied just prior to entering K and to compensate him for the detriments he suffered in reliance on the agreement. Will be lower than expectation damages.

• Use reliance damages when you can’t prove lost profits from K if it would have worked out.

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Example: Seller sells car to Buyer for $1000. Market price of car goes up to $1500. Seller breaches. Buyer has not yet paid.

Expectation damages || Reliance damages || Restitution damagesNew market value minus || If buyer hasn’t paid, his || If buyer hasn’t paid his ’s are 0buyer’s expenses: || ’s = $0. If he has paid, || If he has paid, they are $1000.($1500-$1000=$500) || they are $1000. ||Buyer gets benefit of his ||bargain or its value and the ||net value is now $1500. ||

2. R2K §344: purpose of K remedies is to protect one or more of following interests of promisee

(a) his expectation interest, which is his interest in having the benefit of his bargain by being put in as good a position as he would have been in had the K not been performed.

(b) His reliance interest, which is his interest in being reimbursed for loss caused by reliance on the K by being put in as good a position as he would have been had the K not been made,

(c) His restitution interest, which is his interest in having restored to him any benefit that he has conferred on the other party.

3. Expectation damagesa. Normally this is the profit P would have made if K had been fulfilled.b. Calculating expectation damages R2K §347

Damages= Plaintiff’s loss in value caused by D’s non-performance (determined by deducting the contractual value of what P received from what he was promised)

PlusAny other loss (including consequential and incidental damages)

MinusAny cost or loss P avoided by not having to perform

*Where P covers, damages = cover price – K price**Breach results in P’s losing income but also saving costs:

damages = expected returns – savings1. L. Albert & son v Armstrong Rubber (2nd Cir. 1949): P breached K for delivery of 4

rubber refiners when it delivered two on time and two late. D counterclaimed for reliance damages b/c it had to spend $3000 to build foundations for the refiners. P says that D would have lost money on the venture, and it is not the insurer of the promisee’s venture. Promisee can recover what he spent in necessary preparation subject to any deductions promisor can prove that promisee would have lost if K had been fully performed. In suit for reimbursement of losses incurred in reliance on a K, don’t put P in better position than he would have occupied had K been fully performed.

Part performance:Gross profit + reliance expenditures – payment received.

. (or, K price minus cost of completetion)

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c. Efficient breach : where defendant’s cost of performance would exceed the benefit that performance would give to both parties. D can breach, pay damages, and still lose less than if he had performed.

d. Limitations on expectation damagesa. Foreseeability : Where two parties have made a K which one of them has broken,

the damages which the other party ought to receive in respect of such breach of K should be such as at time of making K may fairly and reasonably be considered either

i. [causation] arising naturally, i.e. according to the usual course of things, from such breach of K, or

ii. [foreseeability] such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the K, as the probable result of the breach of it.

1. Foreseeability is only an issue with consequential damagesa. General damages : consequential damages that would have

been obvious to the breacher at the time K was made without any special knowledge of the other party’s circumstances.

b. Special damages : consequences breacher would have had no basis for expecting at time of making K.

i. special circumstances that would increase damages have to be revealed at time of making K.

2. Hadley v. Baxendale (EX 1854): establishes basic rule of damages. P, a miller, needs to send broken mill axle to repairshop. Without new axle, mill is stopped. P sends servant to D, a carrier, to inquire about sending the axle. D can furnish satisfactory service, so P sends axle with them, but its delivery was delayed by D’s neglect, and meanwhile P’s mill isn’t running. Trial ct gave P damages for the lost productivity. EX overturns on principle: D did not know of P’s great haste, so D cannot be liable for damages due to P’s mill being shut down the extra days due to D’s negligence.

3. Spang Industries, Fort Pitt Bridge Division v Aetna Ins : late delivery of steel for bridge. Ct. disallowed P’s argument that it can’t be held to special conditions of the August delivery which were made after the K was formed b/c P was in the business and knew what consequences were likely to follow from its breach, and that is all that is required to meet Hadley standard.

b. Duty to mitigate : P has good faith duty to take reasonable action to mitigate damages.

i. P not required to take action to mitigate that would be unduly burdensome, humiliating, or risky.

c. Consequential damages must be foreseeable, ascertainable, and unavoidabled. Non-speculative damages : speculative losses are not recoverable (this refers both

to uncertainty about measure and extent of damages as well as to uncertainty about cause of loss).

1. Hydraform Products v American Steel & Aluminum (NH 1985): D breached K for supplying steel, causing P losses in sales and forcing P to sell woodstove division at lower price. P cannot recover speculative losses for following years or for lower sale price of division.

2. New business rule: When the business that is interfered with as a result of a breach of K is a new business or one merely in

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contemplation, the anticipated profits from such business cannot be recovered as an item of damages b/c it cannot be rendered reasonably certain that there would have been any profits at all from the conduct of the business.

a. UCC tends to reject this principle and be concerned with whether losses can be proven with reasonable certainty.

e. Unfair forfeiture : R2K§348(2)(b): court should not grant the cost of remedying defects if the cost is clearly disproportionate to the probable loss in value to P.

i. But see, American Standard v Schectman (NY 1981): D hired by P to level its factory and appurtanences and to grade ground, tearing out foundations up to one foot deep. D didn’t do its job right, leaving walls above ground, not grading, etc. P able to sell land for close to market price anyway. Trial court found proper measure of damages to be amount it would cost to have finished the job correctly. D argued proper damages were diminution in market value. App Ct. agreed with trial court. This is not Jacob Youngs situation where the defect was trivial and repairing it would work great economic harm. In this case, D simply didn’t fulfill terms of K—and these were not matters incidental to the K, but rather the essence of the K. Furthermore unlike in Jacob Youngs, D’s failure was not a good faith mistake.

4. Restitution damages: value to D of P’s performance. Return to pre-K position.a. Goal is to prevent unjust enrichmentb. Measurement of restitution interest, R2K §371:

i. the reasonable value to the other party of what he receivedii. the extent to which the other party’s property has been increased in value or his

other interests advanced.b. R2K § 370: A party is entitled to restitution under the rules stated in this R only to the

extent that he has conferred a benefit on the other party by way of part performance or reliance.

i. Bernstein v. Nemeyer : P invested $1 million in real estate with D. K included a negative cash flow guarantee whereby D would make up losses to P. P’s were warned of weak market. Venture lost money, D defaulted on guaranty to P, and despite D’s good faith efforts mortgages were foreclosed. P sues for rescission of K and restitution of their investment. Held: restitution would mean putting breaching party back in the position it was in before the K. D’s lost so much from the investment and were not unjustly enriched, that P’s could not put them back into pre-K position, so no restitution.

c. Restitution not limited to the K price.d. Prefer restitution to expectation damages when full performance of K would have

resulted in a net loss to P.i. X contracts with Y to build house for $50,000. After partial performance, X realizes full

performance will be $65,000. Then Y repudiates K. If X sues for expectation damages, they will be zero b/c X will have net loss of $15,000. By suing in restitution for value of the partial performance, X can recoup amount spent so far in labor and materials.

e. Restitution available as remedy when:i. D’s breach is material

ii. P has partially performed Kiii. D has received P’s partial performance, i.e. D has to have received a benefit.

f. Restitution not available where K has been fully performed.g. Calculation of restitution damages: the value rendered to D, regardless of how much the

conferring of that value cost P, and regardless of how much P was injured by D’s breach.

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i. If performance has no value to D, there can be no restitution damages regardless of how much performance cost P.

ii. Value measured as sum D would have to pay to acquire P’s performance on the market

1. not the subjective value to D2. not the sum for which D could resell P’s performance

h. Employer wrongfully terminates K before work begins or after partial performance. K is not divisible.

i. Results : employee stops working. Damages= amount of salary agreed upon for the period of service, minus amount employer affirmatively proves the employee has earned or with reasonable effort might have earned from other employment.

1. R2K §347 version: damages based upon the loss in the value to him of the other party’s performance less any cost or other loss that he has avoided by not having to perform.

5. Reliance damages: the detriment P has incurred by changing his position in reliance on his belief that D would perform his part of bargain. Returns P to pre-K position

Sullivan v O’Connor (MA 1974): suit for breach of K in plastic surgery on P’s nose. D promised surgery would enhance P’s beauty, but it left her worse off. P is a performer. Issue is appropriate damages. Held: P can recover for medical expenses, worsening of her condition, pain & suffering of 3rd operation to try to fix botched job.

a. Prefer reliance damages to expectation damages when i. amount of damages cannot be estimated with reasonable certaintyii. K has become impossible to perform and one party conferred benefits on the other prior to the supervening event making K impossibleii. K is unenforceable b/c of Statute of Frauds

iii. There is no legally enforceable contract (suit in quasi-contract)b. Reliance and expectation damages are mutually exclusive

i. Reliance is a component of expectation : cost to P of work already performed + total profit P would have made on K (profit=K price-P’s total cost of performing), where cost of work already performed is reliance measure.

c. Expectation damages will usually exceed reliance damages, so expectation interest acts as a ceiling on recovery of reliance damages, e.g. where P makes a losing K and reliance damages would put him in better position than expectation, net loss will be substracted from reliance damages.

i. Burden on D to prove P would have suffered a net loss if K had been performed.1. L. Albert & son v Armstrong Rubber

6. Specific Performance: P obtains actual performance promised by D rather than damages.a. Usually used to enforce performance of

i. land contractsii. K for sale or service where item or skill is unique

b. Pre-conditions to granting equitable relief:i. money damages must be inadequate to protect injured party

1. b/c damages are speculative or hard to calculate (e.g. worth of painting)2. P cannot purchase a substitute

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Laclede Gas v. Amoco Oil (8th Cir. 1975): Laclede couldn’t buy enough propane anywhere else to meet its supply over long-term.Curtice Brothers v. Catts (NJ 1907): P can’t get replacement tomatoes on open market and this will effect factory’s ability to function. “The business and its needs are extraordinary in that the maintenance of all of the conditions prearranged to secure the pack are a necessity to insure the successful operation of the plant.”

3. Promisor promises to forbear from performance, e.g. to compete with promisee.

ii. K terms must be definite enough to allow Ct. to frame an adequate orderiii. Ct’s task of enforcing and supervising the relief must not be unduly difficult

c. Specific performance will not be ordered to enforce personal service K’si. Rationale: can’t force people to work together when they don’t want to, how can

court measure if performance was sufficient, and it might approximate involuntary servitude.

ii. But, Ct’s might order a negative injunction (Lumley doctrine) whena. the employee has unique skills or has special knowledge of employer’s

business.1. ABC v. Wolf (NY 1981): negative injunction not granted b/c term of

employment had already expired.b. will not be allowed if employee has no other way to make a living.

d. Why not order specific performance:i. It might be impossible, e.g. the goods already sold to a 3rd party

ii. Difficulty of administering it, especially over timeiii. It would cost more than expectation damages and would therefore be inefficient

7. Liquidated damages: agreement in K as to the consequences of breach.a. Determines measure of damages court can awardb. To be enforceable, liquidated damages clauses must meet 2 requirements:

i. The amount fixed must be reasonable relative to the anticipated or actual loss from breach

ii. (Sometimes) the harm caused by the breach must be uncertain or very difficult to calculate accurately, even after the fact

1. “Contractual provisions fixing liquidated damages in the event of breach will not be voided as unconscionable or contrary to public policy if the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation.”

2. If damages are ascertainable on the date K made, the liquidated damages clause will be considered a penalty and will not be enforced

c. Liquidated damages meant by default to apply to material breaches unless otherwise stated in K.

i. United Airlines v. Austin Travel (2nd Cir. 1989): liquidated damages for breach of K leasing airline reservation system held to be both reasonable and a material breach.

d. Policy against enforcement of penalties for breach b/c purpose of damages is to put party in position he would have been in if K had been performed, not a better position.

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i. Where liquidated damages are really only penalties, Ct may refuse to enforce it and only award ordinary damages

1. Court may find liquidated damages unconscionable2. If it is not a penalty, clause is enforceable unless P can show

(Florida law):a. Intimation of fraud on seller’s partb. Buyer’s failure to fulfill K due to misfortune beyond his

controlc. Mutual rescission of Kd. Benefit to seller would be unconscionable

ii. Cts. will also only enforce liquidated damages clauses if the amount is reasonable

1. traditional rule : calculation of whether amount is reasonable is determined as of time of contracting

2. modern rule : clause should be enforced if either:a. it is a reasonable forecast when viewed as of time of

contracting, or,b. clause is reasonable in light of the actual damages that have

occurred.3. Where there was no actual loss to P at all, R2K §356 will not

enforce liquidated damages clause even if it is reasonable.a. But see, Southwest Engineering v. United States (8th Cir.

1965): Ct upholds liquidated damages as measured at time K was made and as reasonable in relation to K price even though D could show no actual harm.

b. Leeber v. Deltona Corp (ME 1988): buyer breached real estate K, liquidated damages provision allowed seller to retain deposit. Ct. ruled that damages were not unconscionable b/c damages around %15 were accepted in precedent cases, and the fact that the damages were greater than seller’s actual losses were not the measure of the appropriateness of the liquidated damages, since both sides take the risk at the signing of K that the actual damages will be higher than the liquidated damages provided for.

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