Table of Contents

CHAPTER 2: BARGAIN THEORY OF CONTRACT 2

CONSIDERATION 2PROMISSORY ESTOPPEL: RELIANCE 4MATERIAL BENEFIT RULE AND RESTITUTION (QUASI-CONTRACT) 5

CHAPTER 3: NEGOTIATION AND FORMATION 8

CONTRACT FORMATION 8EFFECT OF MISUNDERSTANDING 10PRELIMINARY AGREEMENTS 11BATTLE OF THE FORMS (CAN APPLY TO ONLY ONE FORM) 12STATUTE OF FRAUDS 14

CHAPTER 4: CONTRACT CONTENTS 17

THE PAROL EVIDENCE RULE 17INTERPRETING THE CONTRACT TERMS: AMBIGUITY EXCEPTION 19IMPLIED TERMS AND IMPLIED COVENANT OF GOOD FAITH 21MODIFICATION 24

CHAPTER 5: LEGAL REGULATION OF CONTRACT 26

MISREPRESENTATION 26MISTAKE 27UNCONSCIONABILITY 28

CHAPTER 6: REMEDIES 30

THE MAIN ISSUE 30EXPECTATION DAMAGES AND ITS PRIMACY 30RELIANCE DAMAGES 34RESTITUTION DAMAGES 34SPECIFIC PERFORMANCE 35LIQUIDATED DAMAGES 36

CHAPTER 2: BARGAIN THEORY OF CONTRACT

I. Strength of Contract from Strong to Weak:a. If there is Consideration, then use bargain theory.b. If there is no bargain, then use Promissory Estoppelc. If there is no reliance, then use Material Benefit Ruled. If there is no promise, then use Restitution (expectation of compensation).

II. Objective Theory of Contract: Lucy v. Zehmera. Whether there is a promise depends on the external or objective interpretation.

i. Undisclosed subjective intention does not matter. Contrast this with the “meeting of the minds” required in traditional common law.

b. Policy: reduces contracting costs and induces disclosure of subjective intentions.

Consideration

I. Alternative to Consideration Theory: Forma. The traditional common law gave promises effect if they followed a predetermined

procedural formi. Pros:

1. Expresses the promise in a final and irrevocable form and indicates the end of negotiation.

2. The document itself proves the content of the promise.ii. Cons:

1. Socially obtrusive (why not just take my word for it?)2. It is difficult to express the promise exactly. 3. Inflexible and difficult to amend or withdraw

b. Still survives in some jurisdictions (e.g. Massachusetts) and is abolished by the UCC, but its influence remains in statutes of frauds and form contracts (consumers have to indicate acceptance of new terms).

II. Bargain Theory of Consideration: Res. §71—Sought Given Test. A performance or a return promise must be bargained for, i.e. “sought” by the promisor and “given in exchange” by the promisee for the promise.

a. Distinguishes between promises that should be enforced and those that should not (e.g. promise of a gift).

i. Lake Land v. Columber: employer forbearing to discharge at-will employee is sufficient consideration for non-competition agreement.

ii. Fiege v. Boehm: forbearing to sue for a lawful claim is sufficient consideration if the party honestly intended to pursue non-frivolous litigation that he believed was well founded.

b. Replaces the benefit/detriment theory, which required either benefit to the promisor or detriment to the promisee.

i. Hamer v. Sidway: legal benefit and detriment is all that is required, e.g. the giving up of a legal right like not drinking alcohol.

ii. If a legal right cannot be given up (e.g. right to vote), then the “given” part of the sought/given test is not satisfied and there is no consideration.

iii. If the legal right can be given up, the court may still forbid it on public policy grounds (Res 178/179). Thus consideration is satisfied, but voided for public policy.

c. Once there is a bargain, courts will not delve into questions of adequacy, mutuality, benefit/detriment, or motive (Res §§79, 81).

i. Exception #1: Pretense or Sham Transaction. When a promisor attempts to make a gift for a nominal consideration, the consideration may not have been bargained for. For example, offering a peppercorn as consideration (Res §79 cmt. d).

ii. Exception #2: Defective Formation. Consideration can be met even with great difference in values exchanged, but that disparity may be a sign of fraud or duress or incapacity, thereby raising issues of mistake, incapacity, misrepresentation, unconscionability, etc. (Res §79 cmt. e).

iii. Exception #3: Mere Condition vs. Consideration. 1. Fisher v. Jackson

a. Jackson induced Fisher to quit job and become reporter, and Fisher believed Jackson promised lifetime employment.

b. Held: Contract unenforceable because rendering the services incidental to employment was a condition of the job offer, not consideration for lifetime employment. There needs to be some other consideration beyond this.

2. Condition = consideration in many cases (e.g. give me $100 for the book; $100 is both condition and consideration vs. if you come to the restaurant at 12:00, I’ll buy you lunch; coming to the restaurant is a condition, but not consideration).

a. Subjective intent starts to matter for this kind of margin case (e.g. the restaurant. Did I have some other motive for wanting you to come there? If so, coming might be consideration).

III. Alternatives to Bargain Theory (should be enforced, but consideration fails)a. Illusory Promise: promise insufficiently binds one party

i. Res §77: An illusory promise is not consideration unless1. (a) Each of the alternative performances would have been

consideration if it alone had been bargained for; or2. (b) One of the alternative performances would have been consideration

and there is (or appears to the parties to be) a substantial possibility that events may eliminate the other alternatives before a choice is made.

ii. UCC 2-306: Output/Requirement Contracts1. (1) Contract by output or seller requirement means output or

requirement that occurs in good faith, except no quantity unreasonably disproportionate to any stated estimate/normal estimate.

2. (2) A lawful agreement for exclusive dealing imposes, unless otherwise agreed on, an obligation by the seller to use best efforts to

supply the goods and by the buyer to use best efforts to promote their sale.

iii. Petroleum v. Kendrick1. Contract gave Petroleum the option to sell a certain grade of oil to

Kendrick or discontinue making that oil.2. Held: Contract is enforceable. Both options have consideration, since

discontinuing making the grade of oil was a legal detriment, i.e. was “given.”

b. Option Contract: i. Regular consideration given for the option contract is acceptable. If not:

ii. Res § 87:1. (1) An offer is binding as an option contract if it

a. (a) Is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or

b. (b) Is made irrevocable by statute.2. (2) If an offer induces substantial action/forbearance before

acceptance, and offeror should reasonably expect it to do so, then it is binding as an option contract if it avoids injustice.

iii. UCC 2-205: 1. An offer by a merchant to buy or sell goods in a signed writing that by

its terms give assurance that it will be held open is not revocable for lack of consideration during the time stated or for a reasonable time (but not more than 3 months). The term of assurance on a form supplied by the offeree must be separately signed by the offeror.

iv. Hamilton Bancshares v. Leroy1. Leroy had stock option (purchase or not within a given time period)

that Hamilton withdrew before the period ended. 2. Held: $1 given as consideration was sufficient, if actually paid (Res.

87).

Promissory Estoppel: Reliance

I. Definition: Even if there is no bargain, under the doctrine of promissory estoppel, a promise may still be enforced based on the promisee’s (or a third party’s) reliance.

a. Res §90(1): pre-step—there must have been a promise. i. (1) Promisor should have reasonably expected to induce action or forbearance;

ii. (2) Promise did induce such action or forbearance (also known as reliance in fact); and

iii. (3) Injustice can be avoided only by enforcement of the promise; and 1. Judgment of law for judge, not fact for jury. They do this to apply the

rule as narrowly and consistently as possible, which jury would not do. 2. Reliance must be within the promisor’s reasonable expectation and

must be beneficial (i.e. creates value). a. Example: Harrington v. Taylor: Taylor didn’t expect

Harrington to save him.

b. Typically deals only with what has happened, not what will happen.

3. This is almost always a question of public policy (e.g. anonymity for tippers in journalism, see Cohen)

iv. (4) Remedy can also be limited “as justice requires.” 1. D only liable for foreseeable damages.

II. Examples a. Ricketts v. Scothorn

i. Grandpa promised granddaughter money so she wouldn’t have to work. She then quit her job, but he was unable to pay before he died. She sued his estate.

ii. Held: Promise enforced. Granddaughter quit her job, thereby relying on the promise. No consideration because promise was not given pursuant to any action by the granddaughter.

b. Cohen v. Cowles Media Coi. Cohen brought story to Cowles on condition of anonymity, but they published

his name along with the story and he was subsequently fired because of it.ii. Held: Cohen relied on Cowles’ promise; therefore they are responsible for the

harm to Cohen.

Material Benefit Rule and Restitution (Quasi-Contract)

I. Material Benefit Rule. a. Definition: Under the material benefit rule, a promise may be enforced based on a

benefit that has been conferred by the promisee to the promisor.i. Moral obligation and past consideration do not = consideration, hence the

material benefit rule. b. Res 86:

i. (1) The benefit must have been conferred by the promisee to the promisor, ii. (2) The benefit should not have been conferred as a gift OR the promisor

should have been “unjustly enriched,” and 1. #1 Conferred as a gift:

a. “Expectation of compensation”: promisee expects to be compensated for the action/forbearance.

i. Harrington v. Taylor: Harrington acted as volunteer in saving Taylor from the falling axe.

2. #2 Unjust Enrichment:a. “Forced benefit”: street musician plays at a bus stop with

expectation of compensation, then demands payment from bystanders for the benefit conferred. B/c the benefit was forced—and could easily have been negotiated for—there was likely no unjust enrichment. See Bailey v. West.

i. Distinguish this from a doctor that comes upon an unconscious, injured person. Here the costs of making a voluntary transaction are high, so courts consider

whether the parties would have come to terms (and what those terms would have been) if the transaction costs had been low.

ii. Webb v. McGowin: block was falling, no time to negotiate.

b. “Mistaken Identity”: agree to mow your lawn with expectation of compensation, but accidentally mow neighbor’s lawn (while they are away). Likely no unjust enrichment (unless the neighbor promises to pay).

c. “False claims”: A pays B a debt and gets a signed receipt. Later B obtains a default judgment against A for the amount of the debt, and A pays again. B's subsequent promise to refund the second payment if A has a receipt is binding.

iii. (3) Enforcing the promise is necessary to “prevent injustice.” iv. (4) The court also will not enforce the promise to the extent that its value is

disproportionate to the benefit.

II. Restitution (Quasi-Contract). Definition: Even in the absence of a contract (no promise), the court can still allow recovery based on the theory of quasi-contract.a. Quasi-contract doctrine is not part of contract law. It’s part of law of restitution.b. The main question under restitution is whether there was unjust enrichment.

i. (1) In answering this, the courts usually ask whether the promisee was acting as a volunteer or giving a gift to the promisor.

ii. (2) Posner: before the benefit was conferred, would the parties have liked to, but were unable to, enter into a bargain?

1. If yes, then unjust enrichment is more likely. If no, unjust enrichment is less likely.

2. Example: Bailey v. West: no intent to contract and no mutual agreement.

III. Material Benefit vs. Restitutiona. Material Benefit:

i. (1) Promise is made1. No promise in restitution

ii. (2) Definite Bilateral Relationship (promisee confers benefit on promisor)1. No such relationship in restitution

iii. (3) Remedy can be limited (proportionality) (this is less salient)1. No proportionality analysis under restitution

IV. Examplesa. Harrington v. Taylor

i. Harrington stops Mrs. Taylor from killing an unconscious Mr. Taylor and injures her hand in the process. Mr. Taylor promised to pay for her hand, but later reneged on the promise.

ii. Held: 1. Consideration: No. Nothing sought by Taylor b/c he was unconscious.

2. Promissory Estoppel: No. Mr. Taylor did not reasonably expect to induce Harrington to save him.

3. Material Benefit Rule: No. Harrington saved Taylor with no expectation of compensation, i.e. she acted as a volunteer.

b. Webb v. McGowin: i. Large block about to fall on McGowin, Webb jumped with the block and

diverted its course, saving McGowin but becoming crippled. McGowin promised to support Webb financially and did so until his death. Webb sued the estate to get continuing payments after McGowin’s death.

ii. Held: Promise enforceable. 1. Material benefit rule:

a. Moral obligation is sufficient consideration for a promise if a material benefit has been received (even if there was no duty originally).

b. Life and preservation of body = material benefit. c. Bailey v. West:

i. D’s agent brought the horse “Bascom’s Folly” to P’s farm and P accepted it with no express or implied agreement for compensation. The true owner of the horse was disputed, so P sent bills to D and the other potential owner.

ii. Held: no mutual intent for form a contract, so no contract implied in fact. No quasi contract if performance by one is not requested by the other.

CHAPTER 3: NEGOTIATION AND FORMATION

Contract Formation

Manifestation of Mutual Assent: offer + acceptance. Res 22(1).

I. Offer: manifestation of willingness to enter into bargaina. Must be reasonably certain, i.e. terms provide a basis for determining breach and for

giving appropriate remedy (Res 33). i. Advertisements are not usually an offer, but rather an invitation to make an

offer, because (1) they are usually indefinite and (2) courts have said so in close cases (Res 26).

ii. An ad is an offer if it is clear, definite, explicit, and leaves nothing open for negotiation (Ford Motor v. Russell).

1. Note: no obligation to negotiate in good faith, e.g. advertisers can be deceptive under contract law (other laws cover this).

iii. Ford Motor Credit v. Russell1. Russell bought a car from Ford based on ad that promised 11% APR to

qualifying applicants. Sued after defaulting years later b/c her APR was 13.75%.

2. Held: ad was not an offer b/c the terms were indefinite: number of cars available not specified (not infinite) and APR not specified for every customer, just for those that qualified.

b. An offer can be terminated due to (Res 36):i. (1) Rejection or counter-offer by offeree

1. Counter-offer = same subject matter, different termsa. Res 61/UCC 2-207(1):

i. Acceptance still valid if it is not made to depend on assent to the additional or different terms.

ii. 2-207(2): The additional or different terms are then to be construed as proposals for modification of the contract. SEE BELOW/FLOWCHART.

b. Ardente v. Horani. Sent signed agreement to purchase house along with

down-payment, but attached a letter seeking to confirm if the furniture was included with the house. Seller refused to sell furniture and rescinded offer.

ii. Held: The letter did not suggest the acceptance was independent from the furniture condition.

2. Davis v. Satrom: a. Exchanged letters back and forth over purchase of mobile

home, Davis’ last letter signed the agreement, but added several additional conditions. Satrom then cut off negotiations and rescinded the offer.

b. Held: No acceptance ever made, since conditional acceptance = counter-offer. Modifying the terms such that the original proposal is changed = counter-offer.

ii. (2) Lapse of time (reasonable or specified by contract) iii. (3) Revocation by the offeror, iv. (4) Death/incapacity of the offeror or offeree, or v. (5) If the offer was conditional, the non-occurrence of condition.

II. Acceptancea. Restatement: Offeror is allowed to dictate mode of acceptance; if it does not, then

offeree can choose any reasonable means of acceptance (Res 30, 32).i. Exception: in most cases, offeror cannot use offeree’s silence as a valid mode

of acceptance.1. Exception to exception: parties’ previous dealings create a reasonable

expectation that the offeree will give notice of any intention not to accept.

b. UCC: unless unambiguously stated otherwise, any reasonable acceptance is allowed (2-206(1)).

III. Option Contract (irrevocable offer)a. Options for Formation:

i. (1) Res 87(1)/UCC 2-205: Offeror signs the written contract and recites purported consideration.

ii. (2) Furnish consideration or promissory estoppel (Res 87(2))1. Double AA Builders v. Grand State Construction

a. AA solicited bids from subcontractors; Grand’s bid “good for 30 days.” AA relied on Grand’s bid in its proposal to Home Depot, and then Grand backed out during the 30-day period.

b. Held: Promissory estoppel allowed b/c AA relied on Grand’s promise and AZ law required subcontractors to perform based on bids.

i. Could have argued consideration, but didn’t. Would have needed to show that “sought” was imputed based on circumstances, i.e. Grand’s providing a bid was seeking return promise/performance from AA such as giving an overall bid to Home Depot, etc.

2. (3) Beginning to perform when the offer can be accepted only through performance (Res 45).

a. Example: reward poster for finding my dog, which indicates that the offeror doesn’t want an acceptance, just a performance.

IV. Mailbox Rulea. Acceptance is effective at time of dispatch.

i. Exceptions:1. (1) Option contract requires receipt2. (2) International sale of goods requires receipt.

b. All other forms of communication are effective at time of receipt. c. Overtaking Rejection:

i. Send letter accepting, then call and reject = there is still a contract (formed as soon as letter sent)

d. Overtaking Acceptance:i. A offers to sell B horse (by letter), B sends A a letter rejecting offer, but then

before A gets it B posts an acceptance.ii. Result: there is a contract

e. Overtaking Revocation:i. Send letter making offer, then send another letter rescinding offer, but Party B

accepts in between ii. Result: There is still a contract (formed as soon as acceptance sent).

Effect of Misunderstanding

I. Even when parties attach objectively different meanings to their manifestations, courts may still hold that there has been a manifestation of mutual assent:a. Res 20(1):

i. There is no manifestation of mutual assent if the parties attach materially different meanings to their manifestations and (a) neither party knows or has reason to know the meaning attached by the other or (b) each party knows or each party has reason to know the meaning attached by the other.

1. Cmt. b: the parties almost never see the bargain exactly the same, thus any differences must be material, e.g. affects reasonable certainty of performance or remedy.

2. Raffles v. Wichelhausa. No binding contract because the parties were thinking of

different ships, both named “Peerless.” No meeting of the minds, and neither party was negligent regarding the other party’s meaning.

b. Res 20(2): “Information Forcing Rule”/”Good Faith Negotiation Rule”i. There is a manifestation of mutual assent if Party A knows/should know of

Party B’s position, but Party B does not/should not know of Party A’s position, and Party B’s meaning applies.

1. Rationale: incentivizes party with knowledge (or reason to know) to reveal that information (or acquire it).

II. Applicationa. Merced County Sheriff’s Employees’ Ass’n v. County of Merced

i. Sheriffs thought % applied to difference between existing salary and average. County thought % applied to the survey average. Firefighters thought the same thing, except that the County raised this issue in discussions and improperly advised them of the meaning of the language on %.

ii. Held: if only one party’s view is reasonable, then that party is correct. For the Sheriff’s, only their view was reasonable, to it applies. If both views are reasonable, then:

1. Sheriffs: County was negligent, but Sheriffs were not. Sheriffs meaning attaches.

2. Firefighters: County and Firefighters were both negligent. Contract unenforceable.

Preliminary Agreements

I. Although manifestation of mutual assent usually takes the form of an offer + acceptance, Res 22(2) allows it even without offer or acceptance. However, it is difficult and important to determine when this manifestation occurs, since contract formation is often gradual.a. Problems that arise during passage from negotiating a complex contract to closing it:

i. (1) Difficult to tell when negotiation becomes closing1. Is the final document only a formality?

ii. (2) Intermediate documents – describe consensus on some parts of final contract, but without full detail. What is their status?

1. Letters of Intent, Memos of Agreement, etc.2. Objective Theory of Contract can lead courts to infer contract despite

absence of final formalitiesiii. (3) Parties deliberately leave some issues unsettled, even though they are

likely to eventually arise in the course of contract’s execution. (“agreements to agree”)

1. There is sometimes a contractual duty to negotiate in good faith on remaining differences.

II. Preliminary agreements (MOU, LOI) that are conditioned on a final written agreement are not enforceable. However, if courts believe the final written agreement was intended to be a “mere memorial” and all the substantive parts have been agreed upon, then the agreement is binding (Res 27).a. Courts consider the following factors when applying the Mere Memorial Test:

i. Extent to which express agreement has been reached on all terms to be included

ii. Whether the contract is the kind that is usually written, whether it needs formal writing for full expression

iii. Few or many detailsiv. Amount involved large or smallv. Common or unusual contract

vi. Standard form contract widely used in similar transactionsvii. Whether each party takes any action in preparation for performance during the

negotiationsb. Arnold Palmer Golf v. Fuqua Industries

i. After months of negotiation, the parties created a MOI with details like form of combination, manner of business, loans Fuqua agreed to make to Palmer,

warranties and covenants to be contained in definitive agreement. The MOI was conditioned on a final written agreement. Fuqua then backed out.

ii. Held: The condition on a final written agreement is not dispositive. If the parties agreed that is was a memorial of the completed agreement as written in the MOI, then the MOI would stand.

c. Empro Manufacturing v. Ball-Co Manufacturingi. Empro sent LOI to purchase Ball-Co’s assets, stating general terms/conditions

were subject to final agreement signed by both and 5 other conditions (including Board approval). On signing MOI, Ball-Co proposed a change to the bargain.

ii. Held: The “subject to” was binding b/c conditions were named by not fulfilled

Battle of the Forms (can apply to only one form)

I. Intro to UCC 2-207a. Restatement cites to it, so it’s used for all contracts.b. 2-207 addresses the intersection between the process of contract formation and

contract interpretation for standard contracts. i. A contract is almost always conceded to exist, but the terms are disputed.

c. 2-207 is less favorable for the party sending the last form – the only favorable result is a contract based on a counter-offer. This means 50%-75% of the time, 2-207 works against party sending last form.

i. Business groups are against 2-207ii. Consumer groups are for 2-207

d. UCC 2-207 tries to remedy inequities from last shot rule: i. (1) Formation: Abrogates Mirror Image Rule

1. Ex) Parties arrange sale of good by phone. Then one party sends a written “confirmation” that contains long list of terms. Some of the terms may be innocent; some may be overtly partial to drafting party. 2-207 provides a filter allowing the former, but not the latter.

ii. (2) Interpretation: Assumes there is a contract and tells which proposals are part of the contract

1. Ex) One party sends an order for goods, seller then sends what purports to be acceptance, but with terms that vary from the order terms. 2-207 is supposed to deal with this, but does so poorly.

iii. (3) Implied-in-Fact Contract: Allows exchanged documents that do not make a contract to influence the content of the contract.

1. Ex) Exchange of docs between two parties does not lead to contract, but they then recognize a contract through their conduct.

II. 2-207(1): Additional/Different Terms must be expressly conditional on assent, i.e. party unwilling to proceed w/o assent to the terms.a. Step Saver: “accept these box-top terms or return at your own expense” is not enough

to show that terms must be assented to. Distinctions before the contract (like item on a shelf) are different from distinctions after the contract (like box-top terms).

b. SEE FLOWCHART.

III. 2-207(2): a. Additional terms become part of the contract unless:

i. The offer expressly limits acceptance to the terms of the offerii. The additional terms materially alter the contract

iii. Notification of objection to the terms has already been given or is given within a reasonable time after receiving them.

b. Does this standard apply to different terms?i. Gardner Zemke:

1. Nobody View: don’t allow different termsa. Rationale: 2-207(2) plainly excludes the word “different”

2. Minority View: allow different termsa. Rationale: different vs. additional is ambiguous.

3. Majority View: knockout rule—different terms cancel each other out.a. Rationale: consistent with purpose and spirit of UCC, which is

to take advantage away from party sending the last form (the other two give advantage to last sender).

b. Criticism: only applies to confirmation forms, not offer and acceptance forms.

c. Criticism: 2-207(2) doesn’t say the word “different”c. If the parties are not merchants, then 2-207(2) is persuasive.

IV. 2-207(3):a. If conduct establishes the existence of a contract despite conflicting writings that

would not otherwise establish a contract, then the contract consists of the terms the parties agree on + the UCC defaults (i.e. set different/additional terms aside).

b. If there is only one writing, then 2-207(3) is persuasive.

V. Problems in 2-207a. Addresses formation and interpretation, but only interpretation is ever usedb. 2-207(3) is awkward and seems to apply only where no contract has been formed by

the writingsc. 2-207(1)’s “additional or different” doesn’t match with 2-207(2)’s “additional”d. Too respectful of common law distinction between offers and acceptances, which

doesn’t matter in modern contracting, where a contract often evolves from a mess of phone calls, emails and written forms.

VI. Rolling Contractsa. When there is no agreement or offer in prior communication (e.g. phone call, online

ordering, etc.) then you have a rolling contract: valid acceptance can take place only after the terms are delivered.

i. 2-207 does not apply to rolling contracts. There must have been a contract based on the prior communication for 2-207 to apply.

b. Hill v. Gateway 2000

i. P bought computer from D over the phone. Computer arrived with list of terms that become part of contract if computer not returned within 20 days. Terms were not read over phone.

ii. Held: Terms are binding. UCC 2-207 not relevant b/c: 1. Easterbrook: Only one form. (Wrong! See Cmt. 1)2. Brower v. Gateway: arbitration clause is not a material alteration of an

oral agreement, but rather one provision of a contract formed when the product was not returned. Thus it is not an additional or different term at all, but rather a term accepted in the manner specified by Gateway, e.g. not returning the product, which they can do as masters of the offer.

Statute of Frauds

I. Requires a “writing” signed by party against whom enforcement is sought in six classes of contracts (Res 110, 130, 131 and UCC 2-201)a. (1)-(4): Executor-Administrator: executor and decedent; Suretyship: duty of another;

Marriage; Land Contract: sale of interest in landb. (5) One-Year Provision: performance not within one year from making of contract

i. Majority View: Does not include infinite durations. Unless the agreement itself expressly and specifically states that it is not to be performed within a year, the duration is infinite and the statute does not apply.

1. Minority View: Also include contracts where it is realistically impossible to complete performance within a year.

ii. Courts limit the provision this way because the old rationales are seen as inaccurate in the modern world.

iii. Klewin v. Flagship Properties:1. The corporation and the developers had entered into an oral contract

that failed to specify explicitly the time for performance when performance of that contract within one year of its making was exceedingly unlikely.

2. Held: unless performance is not within one year by the express terms of the contract, then the contract is of indefinite duration and not under statute of frauds (regardless of how long performance actually takes).

c. (6) Sale of Goods Over $500i. 2-201—Writing Requirements

1. (1) First, it must evidence a contract for the sale of goods; 2. (2) Second, it must be "signed", a word which includes any

authentication which identifies the party to be charged; and 3. (3) Third, it must specify a quantity.

ii. 2-201—Four Exceptions1. (1) Between merchants, written confirmation signed by sender is

received within reasonable time and not objected through writing within 10 days of receipt.

a. Rationale: custom + efficiency. There just isn’t time in the business to make carefully drafted and executed contracts.

2. (2) Partial performance (or substantial preparation) for specially manufactured good.

a. Requires reliance analysis. 3. (3) Party admits in court that a contract for sale was made.

a. Rationale: if you admit to a contract, then the Statute of Frauds is no longer needed to prevent fraud/perjury

b. ConAgra: admission must be deliberate, clear, and unequivocal.

4. (4) When payment (good) has been made (delivered) and accepted.a. Rationale: performance has already begun.

d. “Writing”i. Res 131: Writing must

1. (a) Reasonably identify the subject matter of the contract,2. (b) Be sufficient to indicate that a contract with respect thereto has

been made between the parties or offered by the signer to the other party, and

3. (c) State with reasonable certainty the essential terms of the unperformed promises in the contract.

e. “Signed”i. Res 134: The signature to a memorandum may be any symbol made or

adopted with an intention, actual or apparent, to authenticate the writing as that of the signer.

II. Rationale for Statute of Fraudsa. Old Rationale: prevent fraud and perjury, and control jury.

i. Courts find this rationale no longer persuasive (esp. for One-Year Provision), so they attempt to limit the statute and relax the writing and signature requirement.

1. E.g. UCC 2-201 Cmt 1: minimal writing requirement, Res 134 signature requirement.

b. Other Rationales: Some contracts must be in writing:i. (1) Some promises are so important that they should be evidenced in writing.

1. E.g. land contracts, $500+, 1+ year to performii. (2) Some promises are potentially dangerous for promisors (usually because

they are more or less unilateral and may be entered into without sufficient thought).

1. E.g. contract for a duty of another (e.g. parent might take on debt of a child too casually).

iii. (3) These contracts also typically involve more emotionc. Criticisms:

i. Arguments against 1-year requirement1. Worried that memory fails and evidence goes stale?

a. Then the 1-year period should be from making of contract to litigation of contract, not from making of contract to completion of performance.

2. Want to separate significant contracts of long duration from less significant contracts of short duration?

a. Then the time should go from commencement of performance to completion of performance, not from making of contract to completion of performance.

d. UCC vs. Restatement i. UCC takes a minimalist view of concern with the possibility someone might

fraudulently assert the existence of a contract that was never made.ii. Restatement is often more demanding

CHAPTER 4: CONTRACT CONTENTS

The Parol Evidence Rule

I. Background: contracting parties often adopt a writing to set out their rights and obligations. The parol evidence rule allows the court to disregard certain extrinsic evidence and to focus solely on the writing to determine the content of the contract.

a. Rationale: promotion of certainty and predictability; control of the jury; prevention of perjury; channeling effect (inducing parties to write down a more complete contract).

b. Baker v. Bailey: Commercial stability requires that parties to a contract may rely on its express terms without worrying that the law will allow the other party to change the terms later.

II. Exceptions to Parol Evidence Rule (Res. 214)a. Extrinsic evidence subsequent to the writing. Covered by modification/waiver.b. Agreements and negotiations prior to or contemporaneous with the adoption of a

writing are admissible in evidence to establishi. Level of Integration

1. Masterson v. Sineii. The Meaning of the Writing (aka ambiguity exception)

1. See Masterson v. Sine: extrinsic evidence allowed to explain the ambiguous terms “same consideration” and “depreciation”

iii. Illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause;

iv. Remedy (ground for granting or denying rescission)c. UCC 2-202: also allows extrinsic evidence for course of dealing, usage of trade,

or course of performance (Res does the same, but we weren’t assigned these sections).

d. Parol evidence was traditionally allowed to prove an oral condition that forestalls the enforcement of a written document.

i. Ex) Signed doc to buy a new truck, but on the oral condition that wife must agree. The oral provision sticks.

III. Full vs. Partial Integration (writing is final expression on some terms, but not others) a. Four Corners:

i. Whether the writing, by itself, seems to indicate that it is a complete and exclusive statement of all the terms of the agreement, i.e., whether the writing looks complete on its face.

b. Merger/Integration Clausei. Benefits of Merger Clauses

1. Ex post cost litigation2. Very sure rights, duties, and obligations, not a lot of uncertainty3. More likely for parties to discuss all major terms in negotiation to

make sure everything is there

a. Helps flush out any lurking issues that one party may be hiding or holding on to.

ii. Not dispositive. Just a strong factor for integration. c. Characteristics of parties and underlying transaction

i. Sophistication, standardized forms, size/complexity of transactiond. Natural Omission Test (Res 216)

i. For an additional term consistent with the writing, whether the parties would have naturally omitted it from the writing.

1. Yes: partial integration, so evidence allowed.2. No: full integration, no evidence allowed.

ii. Masterson v. Sine: 1. Res 240(1)(b): permit proof of a collateral agreement if parties in

the circumstances might naturally make it as a separate agreement. 2. Here the parties (1) used a form contract; (2) had no merger clause,

and (3) did not know the disadvantage of not putting the whole agreement into the writing. Thus it was natural for them to not include the assignability clause in the contract.

e. Certain Inclusion Test (UCC 2-202):i. Whether the parties would certainly have included the additional term in

the writing. 1. Yes: full integration 2. No: partial integration.

IV. Consistency with the Writinga. West Coast: expansive view of extrinsic evidence and consistency

i. Masterson v. Sine:1. Being inconsistent with the default rule is not the same as being

inconsistent with the writing (this is controversial). (Res 216 Cmt. b).

b. East Coast: restrictive view. c. UCC on consistency: 2-202

i. Snyder v. Herbert Greenbaum: Inconsistency = “absence of reasonable harmony in terms of the language and respective obligations of the parties.”

V. Applicationsa. Baker v. Bailey

i. Completely integrated water well-use agreement.ii. Held: oral agreement invalid.

b. Mitchell v. Lathi. Removal of an icehouse part of oral agreement, but not the written

document. ii. Held: writing fully integrated, oral agreement excluded.

c. Masterson v. Sinei. Masterson sold house to family member Sine with an option to buy back

the house in 10 years. Oral agreement on the side that the option could not

be transferred to parties outside the family.ii. Held: Oral agreement applies b/c not fully integrated: the option clause

does not discuss assignability, and there is no evidence to indicate that the parties knew they should put the whole agreement into the writing. Therefore a collateral agreement might naturally be made as a separate agreement.

Interpreting the Contract Terms: Ambiguity Exception

One of the most important exceptions to the parol evidence rule

I. Operation: Plain Meaning Rulea. Is the meaning of the disputed terms plain (unambiguous)?

i. Yes: extrinsic evidence excluded to extent of parol evidence rule.ii. No: extrinsic evidence allowed to determine meaning of the terms.

b. Should extrinsic evidence be allowed to determine whether meaning is clear? (Discuss both positions on exam)

i. CA Position: liberal allowance of extrinsic evidence. Evidence essentially allowed for any interpretation.

1. Res 212 (cmt. b) follows this approach, but acknowledges that the words of the writing itself are the most important.

2. The test of admissibility of extrinsic evidence for interpretation is not whether it appears 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.

3. Pacific Gas v. GW Thomas Drayagea. D contract with P had indemnity clause against all loss,

damage, expense and liability resulting from injury to property or connected with the contract. P’s property was damaged.

b. Held: extrinsic evidence allowed that custom did not extend the indemnity to injury to P’s own property.

ii. NY and DE Position: restrictive allowance of extrinsic evidence. Essentially only allow evidence for custom, usage, etc., but not for MOUs, oral agreements, etc.

1. A contract provision is ambiguous if it is capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business.

a. This is a very high standard. 2. Random House v. Rosetta Books

a. Random House sought to enjoin Rosetta from selling in digital format 8 specific books b/c the authors had given RH, not Rosetta, the right to “print, publish and sell the works in book form.”

b. Held:

i. “In book form” was not intended to mean all types of books, since book club editions, reprints, etc. were listed separately. The authors also reserved certain rights for themselves, i.e. “broadest rights” were not intended

ii. Custom: “print, publish and sell a work in book form” is understood to be a “limited” grant.

iii. Tradeoff between CA and NY approaches:1. NY/Random House/Formalist:

a. Triple-checking the writing drives up costs up frontb. Textualist, Williston, minimum evidence

2. CA/Pacific Gas/Anti-Formalist: a. Ex-post costs greater, since litigation is probably more likelyb. Contextualists, Corbin (influential in drafting Restatement),

liberal evidence,

II. Evidence of course of performance, course of dealing, and trade usagea. UCC 2-202(a): always allowed unless carefully negated. (see Res 202(5), 203, 222,

223).b. Definitions

i. UCC 1-303(a): A “course of performance” is a sequence of conduct between the parties to a particular transaction that exists if:

1. (1) The agreement involves repeated occasions for performance by a party; and

2. (2) The other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection.

ii. UCC 1-303(b): A “course of dealing” is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.

iii. UCC 1-303(c): A “usage of trade” is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage must be proved as facts. If it is established that such a usage is embodied in a trade code or similar record, the interpretation of the record is a question of law.

1. This is controversial. 2. Defining trade usage is difficult and is a question of fact, not law.

iv. UCC 1-303(d): any of these three may supplement or qualify the terms of the agreement. This implies conflict.

c. Courts should construe all evidence as consistent as possible with each other. However, if that’s not feasible, 1-303(e) adopts a hierarchy of interpretive importance: express terms > course of performance > course of dealing > usage of trade.

III. Canons of Constructiona. Plain Meaning Ruleb. Rule Against Surplusage:

i. All provisions of the contract should have meaning; no provision should be rendered useless by interpretation.

c. Expressio Unius: i. Expressing one excludes the others

d. Contra Proferentem (Res 206): i. Interpretation against drafter

IV. Applicationa. ConFold Pacific v. Polaris Industries

i. 1) In a contract between commercially sophisticated parties, “unambiguous contractual language must be enforced as it is written.”

1. Policy: disputes disposed of quickly/cheaply, enforcing unambiguous contract language as written protects the parties against the vagaries of litigation without too great a risk of misinterpretation -> increases value of contracts as means of conducting business.

ii. 2) “Enforcing contracts as written has particular merit when the party that drafted the contract is arguing that it should be relieved from the consequences of having neglected to spell out its rights concerning the very core of the transaction.”

1. Contra Proferentem/Res. 206: contracts should be interpreted against the drafter, i.e. if the phrase is ambiguous, it should be interpreted for the non-drafting party.

2. Policy: incentivizes care when drafting writingsb. Nanakuli Paving v. Shell Oil

i. Parties held to general business practices that they should have been aware of—or that the other party reasonably believed they knew of—because the other party is justified in relying on those practices.

ii. One single occasion of conduct is not enough to demonstrate performance, but the UCC does not specify how many are necessary. Here, the only two instances were the only occasions for price protection.

iii. The jury have construed an express contract term as reasonably consistent with trade usage and Shell’s performance because express contract terms can be “qualified” (1-303(d)) by custom, though they cannot be completely negated. Complete negation is inconsistent. Complete negation here would mean the buyer sets the price, which isn’t true, so this is not complete negation.

1. This is a loose concept of consistency

Implied Terms and Implied Covenant of Good Faith

I. Good Faith Requirement

a. Res 205 and UCC 1-304: duty of good faith and fair dealing in contract performance and enforcement.

b. Good faith for merchants = “honesty in fact and the observance of reasonable commercial standards of fair dealing.” (UCC 2-103(1)(b)).

c. Two Main Theories:i. Robert Summers: good faith is a covering word for the absence of bad faith,

e.g. evading the spirit of the bargain, failing to be sufficiently diligent, willfully shirking obligations, abusing the power to specify terms, abusing the power to determine compliance, and interfering with the other party’s performance.

ii. Steven Burton: unified theory of good faith, discouraging the exercise of discretion for the purpose of recapturing opportunities forgone or bargained away at the time of contracting.

d. Rationale:i. Some things are so basic to contract relationships that writing them out would

be a waste of time.ii. It encourages people to have contractual relationships.

iii. Sometimes (open price/quantity contract) one party is necessarily given a lot of discretion, so this puts a boundary on that discretion.

1. Saves open contracts from being illusory promises. iv. Fills in for some of the gaps in written contracts

II. Limitationsa. (1) Must have a contract. No good faith required outside contract.b. (2) No independent basis: duty applies to performance and enforcement of a

specific/express duty/right under the contract (or a default provision).c. (3) Main Question: Was discretion given to one party by the express terms, and did

that party exercise its discretion in good faith? i. Discretion can be given to one party either through express allocation of

authority or through ambiguous language.ii. Centronics v. Genicom

1. Majority Viewa. (1) Does the agreement ostensibly allow to or confer upon D a

degree of discretion in performance tantamount to a power to deprive P of a substantial proportion of the agreement’s value?

b. (2) If so, does competent evidence indicate that the parties intended by their agreement to make a legally enforceable contract?

i. If there’s way too much discretion, then we have a problem with illusory promise.

c. (3) If so, has D’s exercise of discretion exceeded the limits of reasonableness (good faith)?

i. Depends on the common purpose of the contract, against which the reasonableness of the complaining party’s expectations and the community standards of honesty, decency and reasonableness may be measured.

d. (4) Is the cause of damage complained of D’s abuse of discretion? Or does it result from events beyond the control of either party?

i. Point is to emphasize that the good faith requirement is not a fail-safe device barring D from the fruits of every P’s bad bargain

2. Minority View (Burton Analysis)a. First identify the unstated economic opportunities intended to

be bargained away as a cost of performance. Bad faith is discretionary action subjectively intended to recapture such an opportunity, thereby refusing to pay an expected performance cost.

III. Open-Price and Output Contractsa. UCC 2-305 and 2-306 require the party to set the price or quantity in “good faith”

(not unreasonably disproportionate). i. The court looks first at whether it’s prima facie commercially reasonable.

1. Yes: good faith.2. No/Objective Evidence of Bad Faith: additional fact-intensive inquiry

required.ii. Rationale for Safe Harbor: minimize judicial intrusion; promote predictability

and certainty in commercial transactions.

IV. Applicationa. Nanakuli Paving v. Shell Oil: Good Faith in trade usage

i. 1) Advanced notice:1. Advanced notice of price increase was common and universal practice,

so Shell was required to give advanced notice to be in good faith. ii. 2) Price protection:

1. Raising the prices was in good faith, but raising them without advance notice and without protecting existing contracts was not in good faith.

b. Shell Oil v. HRNi. Dealers buy Shell gas at dealer prices in effect at the time of purchase. Jobbers

buy gas at the retroactive DTW price. Dealers sue on theory that Shell is trying to put them out of business by giving favorable prices to Jobbers.

ii. Majority: a commercially reasonable price is a good faith price absent some evidence of discrimination. There price here is commercially reasonable.

iii. Minority (ruling in Shell): subjective (honest in fact) and objective (commercially reasonable) elements both required. There is therefore no safe harbor. Price is reasonable and there’s no evidence of discrimination.

1. Allegations of Dishonesty must have basis in objective fact:a. (1) UCC Drafters: requiring open-price industries to justify

their prices would lead to a lawsuit in every case, and every contract would become a public utility rate case.

b. (2) Premising a breach of contract solely on assumed subjective motives injects uncertainty into the law and

undermines the UCC’s primary goal: certainty and predictability.

2. Different from Nanakuli because here the question is on the price change amount, not the price change procedure. Also Nanakuli had objective facts.

a. (3) A purely subjective standard would make surplusage of “honesty of fact” in the UCC 2-103(1)(b)

Modification

I. Traditional vs. Modern Appraocha. Traditional:

i. Modification requires both consideration and MoMA.1. Pre-Existing Duty Rule: parties cannot modify a contract by imposing

the same obligations as before (Res 73). Pre-existing duties are not consideration.

2. Policy Rationale: prevents parties from refusing to complete the agreed upon work unless paid more, e.g. Alaskan fishermen that strike once out at sea—employer forced to give in to demands.

b. Modern Approach: relaxes consideration requirement.i. Res 89: A promise modifying a duty under a contract not fully performed on

either side is binding1. (a) If the modification is fair and equitable in view of circumstances

not anticipated by the parties when the contract was made; ora. Consideration: “fair and equitable test”

2. (b) To the extent provided by statute; ora. UCC 2-209(1): “an agreement modifying a contract for the sale

of goods needs no consideration to be binding.”i. Must meet test of good faith: honest in fact and

commercially reasonable. 3. (c) To the extent that justice requires enforcement in view of material

change of position in reliance on the promise.a. Promissory Estoppel

ii. Angel v. Murray1. City increased garbage collector’s salary b/c of a sudden increase of

400 new dwelling units in a single year (compared to past increases of 20-25 units per year). Private citizen sued b/c salary increase not provided for in the contract.

2. Held: modification is fair since 400-home increase not anticipated.iii. Res 73

1. Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of honest dispute is not consideration; but a similar performance is consideration if it differs from what was required by the duty in a way which reflects more than a pretense of bargain.

a. Some think this should be subsumed into Res 89, i.e. Res 89 should be the only standard.

c. Res 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 contract is voidable by the victim.”

i. Res 176 defines improper threat: e.g. breach of good faith, use of power for illegitimate ends, threatened act harms recipient and doesn’t benefit party making threat, etc.

II. Modification through verbal agreement or contracta. UCC 2-209(3):

i. No oral modification if contract within statute of frauds.b. No-Oral-Modification and No-Waiver Clauses (no changes after writing)

i. Attempt to disallow course of performance evidence from modifying written contract (UCC 2-202).

ii. Operate like parol evidence rule on extrinsic evidence subsequent to written contract.

iii. UCC 2-209(2): modern courts more willing to honor these clausesc. Exceptions to No-Oral Modification Rule

i. (1) Oral modification not materialii. (2) Other party relies on the oral promise of another to reduce an oral

modification to writingiii. (3) Statutory exceptions under 2-201(3) (see above under Statute of Frauds).

1. Brookside Farms v. Mama Rizzo’sa. Basil prices increased, shipments shipped and received until

the last check bounced. Rizzo’s sued b/c contract did not allow price change.

b. Held: goods received and accepted is an exception to the statute of frauds, so the oral modification is allowed.

CHAPTER 5: LEGAL REGULATION OF CONTRACT

Misrepresentation

I. Definitiona. Moving party argues that the other made an important, false statement that the

moving party relied on at the time of contract formation.i. Remedy for misrepresentation is rescission, since there was no manifestation

of mutual assent and therefore no contract.

II. Elements (Res 164(1))a. (1) There was a misrepresentation

i. Misrepresentation = assertion not in accord with the facts (not law or opinion) (Res 159)

1. Affirmative misstatementa. Must be with reference to facts b/c ignorance of the law is not

an excuse. Also, fact must be in the past or present, but not in the future. Fact is not an opinion or prediction.

2. Concealment (Res 160)a. Action intended or known to be likely to prevent another from

learning a fact is equivalent to an assertion that the fact does not exist.

3. Non-Disclosure (Res 161)a. Only allowed in exceptional circumstances, e.g. when party

failing to disclose knows that the disclosure would correct a mistake of the other party as to the basic assumption of the contract and non-disclosure is a failure to act in good faith/in accordance with reasonable standards of fair dealing (industry norms) (Res 161(b)).

i. The bad faith part creates uncertainty, so courts try to limit it.

b. How the info was obtained matters: finding mineral deposits on farmer’s land (productive) = allowed vs. CEO knowing about insider info (not productive) = not allowed.

c. It is very difficult to prove misrepresentation in non-disclosure. The better approach is to turn non-disclosure into an affirmative misrepresentation in the contract (or negotiations) by “flushing out” potential problems.

b. (2) Misrepresentation was fraudulent or materiali. Fraudulent: Res 162(1): maker intends the assertion to induce a party to

manifest assent and 1. (1) Knows/believes that the assertion is not in accord with the facts or 2. (2) Does not have confidence in the truth of the assertion or3. (3) Knows that he does not have the basis that he states or implies for

the assertion.

ii. Material: would likely induce a reasonable person to manifest assent, or if maker knows it would be likely (Res 162(2)).

1. Just needs to increase the chances, not be the thing that tipped them over the edge.

c. (3) Misrepresentation induced moving party to give assent (reliance)d. (4) Reliance was justified

III. Applicationa. Weintraub v. Krobatch

i. W did not disclose a cockroach infestation to Ks buying her house. Ks discovered it when they returned at night after signing the contract.

ii. Held: Contract rescinded. Silence regarding a material fact to the contract can be fraudulent where that fact materially affects the desirability of the contract and the fact was know to one party but unknown and unobservable by the other.

Mistake

I. Definition: Moving party argues that she was unilaterally mistaken about something important, or that both parties were mistaken. a. Remedy is rescission.

II. Elements (Res 152)a. (1) There was a mutual mistake

i. Mistake = belief not in accord with the facts (Res 151).b. (2) Mistake was to basic assumption of contractc. (3) Mistake has material effect on agreed exchange of performanced. (4) Moving party did not bear the risk of mistake (Res 154). Party bears risk of

mistake when:i. Risk is allocated by agreement

ii. Moving party is aware, at time contract made, that it has only limited knowledge of facts surrounding mistake, and but treats that limited knowledge as sufficient (“conscious ignorance”)

iii. Risk allocated by the court on reasonableness grounds.

III. Additional Elements for Unilateral Mistakea. (5) Enforcement of contract would be unconscionable (Res 153)b. (6) Other party knew/had reason to know of the mistake or other party’s fault caused

the mistake (Res 153)i. Information-forcing provision.

IV. Misrepresentation vs. Mistakea. Misunderstanding is about language or scope of contract

i. The parties should be able to clear up misunderstandings themselves, so no meeting of the minds

b. Mistake is about facts external to the contracti. Nobody knew, and the parties could not have done anything, so there is a

meeting of the minds (about something that is not true, yes, but still a meeting of the minds), and we assign the risk based on the circumstances.

V. Applicationa. Lenawee County v. Messerly

i. P sold land to D. There was an illegal septic tank that neither party knew about. After the sale, sewage seeped up through ground, and County declared the land uninhabitable. D refused to pay, and P sued.

ii. Held: Contract enforceable b/c D assumed the risk. They had adequate opportunity to inspect the property and purchased it “as is.”

b. Disclaimer Clauses (e.g. inspected, property “as is”) in Both Weintraub and Messerly. i. In Weintraub, the court ignores it. Why?

1. Only one party was mistaken2. One party is culpable and the other is innocent. Culpable party

shouldn’t be allowed to hide behind a disclaimer clause. ii. In Messerly, it played a central role. Why?

1. Both parties were mistaken2. Both parties are innocent

Unconscionability

I. Definitiona. Allows courts to police contracts or clauses they find unconscionable (UCC 2-302,

Res 208).b. Matter of law, not fact (UCC 2-302(1))c. Must be present at time of entering into contract (UCC 2-302(1))d. Courts have discretion for remedy: entire contract can be unenforceable, particular

terms unenforceable, or terms given limited application.

II. Substantive and Procedural Unconscionabilitya. Procedural: did the party have meaningful choice/opportunity to actually negotiate?

i. Factors: 1. Gross inequality of bargaining power

a. Ferguson (CA): does not matter that she could have found another job.

2. Manner the contract was entered into:a. Reasonable opportunity to read/understand the termsb. Fine printc. Deceptive sales practices

ii. In practice, a mandatory arbitration clause is per se procedurally unconscionable in the ordinary employment/consumer context. CA is the most this way; other states are less so.

b. Substantive: are the terms “unreasonably favorable” to one party?

i. Terms are considered in light of general commercial background and commercial needs of the particular trade or case.

ii. Originally a conjunctive test, but some courts (CA) have adopted sliding-scale approach.

iii. Criticism: courts are not well-positioned to analyze this; juries would be better.

III. Applicationa. Williams v. Walker-Thomas Furniture

i. Contract: monthly rent payment, WT keeps the title, title handed over when last monthly payment made totaling value of the item. In addition, all payments made by purchaser are credited pro rata to all outstanding leases, bills, and accounts due the company (i.e. balance is due on every item purchased until all items purchased are liquidated, so default allowed WT to repossess anything bought from them).

ii. Held: Remanded. Consider unequal bargaining power and commercial un-sophistication of Williams.

b. Ferguson v. Countrywide Credit Industriesi. P sued under federal and state law for sexual harassment, retaliation, and

hostile work environment. D responded with petition for arbitration order based on contract.

ii. Held: Mandatory arbitration clause is unconscionable. 1. Procedure: gross inequality of bargaining power.2. Substance:

a. Types of Disputes Covered: One-sided coverage of arbitration agreement.

i. All the issues the agreement covers are beneficial to D, and the one’s not covered are beneficial to P.

b. Allocation of Arbitration Costs: Arbitration Feesi. If arbitration is compelled, contract can’t require P to

bear expenses that they wouldn’t otherwise bear in court.

c. Discovery Process Adopted: One-sided discovery provisioni. Not a problem in and of itself, but it goes to a pattern in

the contract of terms designed to unduly benefit D and hurt P

3. Deciding to Sever/Limit or Refuse to Enforce an Unconscionable Contract

a. Ask: Is there more than one unlawful provision that indicates a systematic effort to benefit D and P’s expense?

b. Ask: Does lack of mutuality permeate the contract such that the contract would need to be reformed by adding terms?

iii. NOTE: SCOTUS response: cannot use unconscionability to target mandatory arbitration clauses or class arbitration waivers b/c they preempt the Federal Arbitration Act.

CHAPTER 6: REMEDIES

The Main Issue

I. Assuming that there is a contract (Chapters 2 and 3) and we know its content (Chapter 4), what is the remedy in case there is breach?

II. Efficient Breacha. Pareto superior: Seller and B are both better off as a result of the breach, and A is

not worse off after he receives compensatory damages.i. This is because there is no duty to keep your promise in contract law, just

a requirement of compensation for breach. Thus there is strict liability for breach and punitive sanctions are forbidden.

b. Efficient breach isn’t law, but you can use it when you make policy arguments. Make policy arguments when the law isn’t clear on how to proceed.

c. Criticisms/Reasons to Doubt:i. (1) Whether contract damages can be precisely estimated in advance of a

breach1. The theory relies on a potential breacher being able to calculate

with accuracy the profit stemming from a breach. Efficient breach may be deterred by the difficulty of such an estimate.

ii. (2) Whether our law fully compensates the victim of a breach1. Theory assumes that injured party can be fully compensated for the

breach, and hence is held harmless by the law. This isn’t necessarily true, e.g. legal expenses, which are a transaction cost that may undermine the eventual award.

iii. (3) Whether the breaching party should receive the entire profit from the breach

1. The crux of the theory is that the breaching party gets to keep the entire gain from the more efficient allocation of resources.

III. There are potentially five different remedy measures available for breach of contract: expectation damages, reliance damages, restitution damages, liquidated damages, and specific performance

Expectation Damages and its Primacy

I. Expectation damages are the go-to damages (Restatement §344 cmt a) a. The objective of expectation damages is to put the promisee (injured party) “in as

good a position as she would have been in had the contract been performed” (Restatement §344(a))

b. Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort (Restatement §355)

i. No punitive damages in contracts!

c. Subcategories of Expectation Damagesi. Consequential damages: UCC 2-715, Hadley v. Baxendale

1. Defect in car caused it to crash through garage and burn home. ii. Direct damages:

1. Seller delivered car that didn’t conform to contract, buyer could recover difference in value of car as delivered and car as contracted for.

II. Calculating Expectation Damagesa. Expectation damages is calculated based on the actual value at the time of the breach,

not expected value at the time of the contract (Restatement §344 cmt b) i. In theory, subjective value should determine damages; in practice, objective

(market) value determines damages, in part due to certainty requirement. ii. Damages cannot be measured by the breacher’s gain, otherwise efficient

breaches would be foreclosed.b. Res. 347: Expectation interest measured by:

i. (a) The loss in the value to him of the other party's performance caused by its failure or deficiency, plus

ii. (b) Any other loss, including incidental or consequential loss, caused by the breach, less

iii. (c) Any cost or other loss that he has avoided by not having to perform.

III. Three Limitations a. (1) Certainty: damages are not recoverable beyond an amount that the evidence

permits to be established with reasonable certainty (Restatement §352; c.f. Res 33) i. Locke v. US (1960): certainty requirement is relaxed if a breach is willful.

ii. Freund v. Washington Square Press1. P sold book rights to D with contract to print soft- and hard-bound

copies. P received $2,000 advance. D merged with another company, stopped printing hardbound at all, and refused to publish the book. P sought to prove (1) delay of academic promotion, (2) loss of royalties.

2. Held: (1) P was promoted anyway (only care about circumstances at the time of the breach); (2) Not proven with reasonable certainty—no baseline given for estimating. Granted $0.06 nominal damages.

a. Measuring damages by the cost for P to publish the book would make P better off than if D had performed

b. (2) Foreseeability: loss that is not foreseen by the breaching party at the time of

entering into the contract is not recoverable (Restatement §351; UCC §2-715) i. Loss may be foreseen if either it arises in the ordinary course of events, or if

the breaching party had reason to know, e.g., because the promisee communicated her special circumstance to the breaching party

1. Information-forcing principle2. Does not depend on promisee’s knowledge

ii. Res 351(3): A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in

reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation.

iii. UCC 2-715(2):1. Consequential damages resulting from seller’s breach include

a. (a) Any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not be reasonably prevented by cover or otherwise; and

b. (b) Injury to person or property proximately resulting from any breach of warranty (aka seller can’t contract out of tort liability)

iv. Hadley v. Baxendale1. P flourmill owner sent broken iron shaft to common carrier D and D’s

clerk was told that the shaft must be delivered immediately b/c the mill was stopped, but delivery was delayed for unreasonable amount of time causing lost profits.

2. Held: Not foreseeable. It cannot be said that under ordinary circumstances such loss arises naturally from this type of breach. There is a multitude of reasons for a miller to send a crankshaft to a third party. Ds had no way of knowing that their breach would cause a longer shutdown of the mill, resulting in lost profits. Further, Ps never communicated the special circumstances to Ds, nor did Ds know of the special circumstances.

c. (3) Avoidability (Mitigation): i. Restatement Position

1. Promisee may not recover damages that he could have mitigated, without undue risk, burden or humiliation, after breach (Restatement §350(1))

a. If the injured party made “reasonable efforts” but failed, damages will not be reduced. Res 350(2)

ii. UCC has the mitigation principle “built in” to calculation of damages 1. When the injured party resells (or covers) after breach, the injured

party is entitled to recover the difference between the contract price and the resale price (or the cover price) (UCC §§2-706, 2-712)

2. In case the injured party does not cover (or resell), the injured party gets the difference between contract price and market price (UCC §§2-708, 2-713)

iii. Rationale: mitigation incentivizes injured party to NOT engage in wasteful activity (running up the meter).

iv. In Re Worldcom Inc.1. MJ had endorsement agreement with MCI, then MCI went bankrupt,

so MJ sued for remainder of contract.2. Held: did not fulfill duty to mitigate b/c took no steps to find

replacement endorsement. Mitigation was not a burden, since he had 16 endorsements, and replacing this one with another would not

“dilute” his impact as an endorser. Mitigation would not harm his reputation since finding a new endorser (any endorser, of his choosing) is not the same as a company being forced to sell damaged goods.

d. The three limitations also apply to reliance and restitution damages

IV. Construction Contract Exception (Restatement §348) a. For breach of a construction contract (b/c subjective element particularly strong for

land), when the subjective value of the performance to the promisee cannot be shown with reasonable certainty, the promisee can claim alternate remedy based on either the diminution of (objective or market) value (what was the land worth vs. what it’s worth now) or the reasonable cost of performance/completion.

i. To receive the cost of performance, however, it cannot be disproportionately larger than the probable loss of (subjective) value.

1. This is different from Peevyhouse, which required cost of performance be disproportionately larger than the probable loss of objective value (since subjective value couldn’t be proven). Follow the Restatement for the exam.

V. Lost Volume Seller Complication (Restatement §347 cmt f; UCC §2-708)a. After buyer’s breach, even though the seller has “mitigated” the loss by reselling the

product to a substitute buyer, the seller may argue that the she would have sold the product to two buyers rather than one

i. In that case, the seller is considered a “lost volume seller” and is entitled to the lost profit that the seller would have made from the first buyer

b. In determining whether the seller is a “lost volume seller,” courts look at whether i. (1) “Could”: The seller has excess capacity to meet the demand; and

ii. (2) “Would”: The seller would have sold to the resale buyer even in the absence of the buyer’s breach (whether the substitute transaction was “wholly independent” of the breach)

c. Krafsur v. UOP i. UOP claimed LP (refinery) owed $4 million in unpaid royalties for licensing

of a refining technology. LP bankrupt, sold to new company RHC, which entered into new contract with UOP and paid royalties of $3.7 million.

ii. Held: Not lost volume seller. Could: unlimited number of copies of software, so this is satisfied. Would: UOP could not have sold to RHC unless LP had not breached the contract, so the sale was not wholly independent of the breach.

VI. Applications a. Foreseeability limitation and communication of special circumstance: Hadley v.

Baxendale b. Obligation to seek alternate endorsement deals: In re Worldcom

i. Undue burden, risk, humiliation.

Reliance Damages

I. The objective of the reliance damages is to put the party “in as good a position as he would have been in had the contract not been made” (Restatement §344(b)). Use these when expectation damages cannot be proved with reasonable certainty or would have resulted in a loss. Typically smaller than expectation damages.

a. Res 349: The injured party has a right to damages based on his reliance interest, including expenditures made in preparation for performance or in performance, less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed.

i. Res 344 Cmt. a: Such expenditures include incurring expenses in preparing to perform, in performing, or in foregoing opportunities to make other contracts.

b. Certainty: reliance interest must be proven with certainty (e.g. show receipts for what you spent in preparation/performance).

c. Foreseeability: reliance interest must be foreseeable to D. i. Wartzman: Reliance on an attorney is treated differently with respect to

foreseeability, i.e. where a client relies on an attorney, he is liable for the loss that has accrued due to his negligence.

d. Mitigation:i. Wartzman: mitigation not required where both parties had equal opportunity

to mitigate (i.e. by hiring a securities specialist).

II. Wartzman v. Hightower Productionsa. D law firm (Wartzman) improperly advised P Hightower Productions on the creation

of their corporation, for which P sued for reliance damages (for creation of company, hiring talent, sale of stock to the public, etc.)

b. Held: Reliance damages granted. Expectation damages not sought because this was a new kind of venture, so success was difficult to estimate.

Restitution Damages

I. The objective of the restitution damages is to “restore…any benefit that the party has conferred on the other party” (Restatement §§344(c), 370). Rationale: breaching party should not benefit from the breach, i.e. no unjust enrichment.

a. Res 371: Restitution damages can be based on either:i. Cost-based appraisal: How much it would cost the breaching party to obtain

the benefit from someone in non-breaching party’s position, or ii. Profit-based appraisal: The extent to which the breaching party’s property has

been increased in value or his other interests advanced1. Reliance damages are smaller than restitution damages. However, if

the contract has negative profit, then restitution damages may be larger.

b. Restitution damages may be available even if the court determines that there is no enforceable agreement (due, for instance, to statute of frauds, mistake, or others)

i. Professor thinks that reliance (promissory estoppel or material benefit) cannot overcome a statute of frauds defense, since the latter is contract law and the former is not. However, courts are entirely undecided on this point.

ii. Fischer v. First Chicago Capital Markets1. Held: restitution damages not bound by statute of frauds. Must prove

that Fischer performed the services, the value of those services (what would FCCM would have paid someone else OR what did FCCM profit from his services), and that FCCM received a benefit that it would be unjust to retain without compensating Fischer.

c. Material Benefit Rule intersects with both contract law and restitution damages. d. Three limitations still apply, but in practice they matter much less than for

expectation or reliance damages.

Specific Performance Most specific performance cases involve land. Specific performance usually avoided b/c requires too much court time and effort to enforce.

I. Restatement Adequacy Test: Court will grant specific performance when monetary damages is deemed inadequate (Restatement §359); or

a. Res 360: Whether or not monetary relief is inadequate or the good is unique is based on numerous factors, including:

i. (1) The difficulty of proving damages with reasonable certainty; ii. (2) The difficulty of procuring a suitable substitute performance; and

iii. (3) The likelihood of collecting awarded damages

II. UCC Uniqueness Test: grant specific performance when the good to be delivered is unique or under “other proper circumstances” (UCC §2-716)

a. Inability to cover is “strong evidence” of “other proper circumstances” (UCC §2-716 cmt. 2).

i. This is because inability to cover may mean temporary uniqueness, i.e. the product simply can’t be made elsewhere at this time. See Almetals.

b. The decree for specific performance may include such terms and conditions as to payment of the price, damages, or other relief as the court may deem just.

c. Buyer can usually get delivery.d. 2-709: seller can get the price:

i. (a) Of goods accepted or of conforming goods lost or damaged within a commercially reasonable time after risk of their loss has passed to the buyer; and

ii. (b) Of goods identified in the contract if the seller is unable after reasonable effort to resell them at a reasonable price or the circumstances reasonably indicate that such effort will be unavailing (no market).

III. Rationales and Criticisms

a. Economic Waste Concern (Peevyhouse): specific performance is likely to lead to economic waste b/c the parties clearly had some motive, probably economic, to breach in the first place.

i. Despite this concern, the modern trend is moving in favor of specific performance.

ii. Even in Peevyhouse, the issue of inadequate damages would still need to be proved.

b. Posner’s Rationale:i. Benefits of substituting injunction for damages:

1. (1) Shifts burden of determining the cost of D’s conduct from the court to the parties.

a. If P’s damages are smaller than D’s gains, then there must be a price for dissolving the injunction.

i. However, although promisor could pay promisee to remove the injunction, that payment would bear no relation to the costs of promisor’s failure to perform.

2. (2) Prices and costs are better determined by the market than by government.

a. Battle of experts less reliable than negotiations between P and D.

ii. Costs of injunctions:1. Impose costs on third parties

a. Bilateral monopoly: two parties can deal only with each other. c. Schwartz Rationale for Specific Performance:

i. (1) Damages are often under-compensatory b/c difficult to monetize and frustration/anger at breach isn’t recoverable

ii. (2) Promisees have economic incentives to sue for damages when damages are likely to be fully compensatory, so the fact the P sues for specific performance suggests damages are not enough.

iii. (3) Promisees possess better info than courts as to both the adequacy of damages and the difficulties of coercing performance.

IV. Application a. Almetals v. Wickeder

i. W contracted to provide special metal for 10 years after initial contract ended for A’s existing customers. W terminated contract as soon as initial contract ended, then required cash on delivery, which went against industry practice and threatened to bankrupt A.

ii. Held: specific performance granted, since no other company could make the metal required. Cash on delivery was a breach of contract.

Liquidated Damages

I. UCC 2-718(1): Although parties are free to liquidate damages, the amount has to be reasonable (not too large or too small) in light of:

a. (1) The anticipated or actual harm caused by the breach,

i. Determined based on whether the promisee is being put in a better position than in the case of full performance, i.e., whether liquidated damages operate as a penalty.

1. There is tension between the freedom to contract and the limitation on penalties, since here the parties have agreed to a penalty.

a. Rationale: inequality of bargaining power means penalties could be routinely imposed with little chance to negotiate.

b. Criticism: penalty is just one element of consideration. b. (2) The difficulties of proof of loss, and c. (3) The inconvenience or non-feasibility of otherwise obtaining an adequate remedy d. Restatement §356(1) requires only the first two elements.

II. With liquidated damages, certainty, mitigation and foreseeability limitations do not applya. NPS v. Minihane

i. Agreement requires purchaser of the license to pay, upon default, the amounts due for all years remaining on the license—acceleration clause—in this case, for 2 luxury seats for 10 years at Patriots games.

ii. Held: Uncertainty and foreseeability satisfied b/c the amount is stated in the contract. Mitigation is irrelevant in the case of an enforceable liquidated damages provision (majority view), since the provision is an exchange of the opportunity to determine actual damages after a breach (including mitigation) for the peace of mine and certainty of result afforded by the liquidated damages provision. Asking about mitigation defeats the purpose of the provision.

III. Arbitration Clausesa. Don’t apply here b/c they regulate procedure, not remedy. The other standards

(mistake, fraud, etc.) should be applied to arbitration clauses. d