Download I - Free Law School Outlines Professor Subject

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I. Principles of Promissory Obligation - 3
A. Freedom to Contract; Freedom of Contract -3
1. Freedom to Contract 9/6 – 3 (licensee has no duty to aid; limited by discrim laws)
2. Freedom of Contract 9/7 – 3 (can’t make illegal Ks)
B. Grounds for Enforcing Promises - 3
1. Introduction 9/8 – 3 (RSC §1, 17)
2. Formality 9/8 - 4
3. Consideration 9/8, 9/13 – 4 (RSC §71, 81; motives don’t matter; nominal consideration is an
exception to rule that court won’t examine adequacy of consideration; gratuitous promises unenforceable)
4. Benefit 9/13, 9/14 – 5 (RSC §86; material benefit + subsequent promise is binding; gratuitous
promises unenf, quasi-K enf; household services presumed gratuitous; Crisan – unconscious, no promise)
5. Reliance 0/14, 9/15 – 6 (reliance w/no promise – loss lies where it falls; promise with no
reliance – executory K; reliance requires good faith; RSC §90)
C. Fairness and Other Limits on Enforcing Promises – 8
1. The Problem of “Inadequate” Consideration 9/15, 9/20 – 8 (need gross inadequacy; risky
investment ok; disparity of bargaining power; YCC §1-103, 2-102, 2-105, 2-302; RSC 208)
2. “Illusory” Promises and Related Fairness Issues 9/20, 9/21 – 9 (defined narrowly;
cancellation clauses; Lady Lucy; requirement & output Ks ok, distributorship Ks; unconscionability, RSC
77, 205; UCC 1-203, 2-309; good faith requirement)
D. Applications: Employment and Domestic-Relations Contracts - 11
1. Employment 9/21 – 11 (employment at will)
2. Contracts between Unmarried Partners 9/22 - 12
II. Remedies for Breach of Contract - 12
A. Damages – 12
1. Introduction 9/27 – 12 (restitution – recover value conferred on breacher; reliance – recover
losses the injured party suffered by relying on K; expectation – recover what injured party expected to get if
K had been performed, i.e. benefit of the bargain)
2. The Basic Measure: Expectation Damages 9/27, 9/28 - 12
3. Rationales for the Expectation Measure (and their limitations) 9/28, 9/29 - 14
4. Limitations on Recovery of Expectation Damages - 15
a. Avoidable Damages 9/29, 10/18 – 15 (try to get cover; overhead costs not avoidable; only
have to take similar employment; can’t persist in accumulating damages; lost volume exception; RSC §350)
b. Consequential Damages 10/19, 10/20 – 16 (UCC rejects tacit agreement test – reason to
know; no emotional distress damages; foreseeable in natural course of events (imputed knowledge rule);
communicate special circumstances – brought home; UCC 2-715; RSC 351, 353)
c. Uncertain Damages 10/20 – 19 (new biz speculative; uncertain unrecoverable, RSC 352)
5. Alternative Interests: Reliance and Restitution – 20 (
a. Reliance Damages in Lieu of Expectation Damages 10/25 –20 (RSC 349 b/c of
uncertainty, fairness)
b. Damages in Promissory Estoppel Cases 10/25 – 20 (RSC §90)
c. Restitution as a Remedy for Breach of Contract 10/26 – 21 (losing Ks; RSC 373; only
allowed when performance incomplete; prevent unjust enrichment
6. Contractual Provisions Setting Damages 10/26 – 22 (liquidated damages & penalty clauses,
RSC 356(1); UCC 2-718)
B. Specific Performance 10/26, 10/27 – 23 (not when have monetary equivalent; uncertainty a reason;
not for employment RSC 350; UCC 2-716)
III. Assent - 24
A. The Making of Agreements - 24
1. Introduction 11/1 - 24
2. Objective versus Subjective Theories of Contract 11/1 - 25
3. Intention not to be Bound 11/2 – 26 (joke; offers v. solicitation; negotiations; RSC 27)
4. Indefiniteness 11/2, 11/3, 11/8 – 27 (CL: unspecific = unenf; UCC 2-204(3), 2-305 open-price
arrangements; RSC 33; payment at delivery)
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5. Misunderstandings 11/8, 11/9 – 29 (no meeting of minds  no K; CL: new entrant gets a
break; RSC 201, 20; UCC; new entrant held to industry standard)
6. Termination of Offers – 30
a. In General 11/9 – 30 (RSC 36)
b. Lapse of Time 11/9 – 30 (unspecified termination of offer  reasonable time)
c. Death or Incapacity of Offeror or Offeree 11/9 – 30 (RSC 32; bilateral v. unilateral K)
d. Revocation 11/9, 11/15, 11/16 – 31 (unilateral K; RSC 25, 45, 62 option K, UCC 2-204, 2206; are subs’ bids binding; UCC 2-205, RSC 87)
7. Valid Means of Acceptance – 34
a. General Concepts 11/16 – 34 (CL: deviant acceptance & mirror image, inquiry v.
counteroffer; UCC 2-207)
b. The “Battle of the Forms” 11/16 – 35 (J if adgesuibl YCC 2-207; CL: last-shot principle;
knock-out rule – conflicting terms  default)
c. The Mailbox Rule 11/17 – 36 RSC 63)
d. Silence as Acceptance 11/17 – 36 (RSC 69; prior dealings; duty to speak  reasonable
understanding)
B. Written Contracts and the Parol Evidence Rule - 37
1. Introduction 11/17 – 37 (statute of frauds, UCC 2-201)
2. Integration and Additional or Inconsistent Terms 11/22 – 38 parol evidence rule;
presumption of integration; RSC 213, 214, 216, 209
3. Ambiguity 11/22, 11/29 – 40 (four corners; extrinsic evidence; UCC 2-202, RSC 212)
C. Assent to Standardized Forms 11/29-30 – 41 (CL duty to read; UCC 2-314, 315, 316, RSC 211)
IV. Policing the Bargain – 43
A. Duress in the Formation of Contracts 12/1 – 43 (threat to breach; can’t get performance
elsewhere; legal protection inadequate)
B. Revisions of Contractual Duty 12/1, 12/6 – 44 (legal duty rule – exception for unforeseen
circumstances; RSC 89, UCC 2-209)
C. Mistake and Nondisclosure - 46
1. Mutual Mistake 12/6 – 46 (voids K; RSC 502, 152 – material error grounds for rescission)
2. Unilateral Mistake - 47
a. Clerical Error 12/6 - 47
b. The Duty to Disclose Information 12/7 – 48 (RSC 161)
V. Performance and Nonperformance - 49
A. Justifications for Nonperformance - 49
1. Failure of Conditions 12/7, 12/8 – 49 (divisible K, partial performance, no credit – pay on
delivery; RSC 234, 238, 239, 240; CL: finish work before paid; UCC 2-307)
2. Impossibility and Impracticability - 51
a. Development of the Doctrine 12/8 – 51 (personal; existence of thing; absolute contractor
liability)
b. Modern Approach 12/8, 12/13 – 52 (RSC 261, 262, 263, 264; UCC 2-615)
3. Frustration of Purpose 12/13 – 53 (traditional: losses lie; RSC 272)
B. Unjustified Nonperformance and the Problem of Forfeiture - 54
1. The Perfect-Tender Rule and the Doctrine of Substantial Performance 12/14 – 54 (UCC 2601, 2-508)
2. Restitution as a Remedy for the Breaching Party 12/15 – 57 (quantum meruit; sale of goods
= perfect tender; service = substantial performance – forfeiture problem; sale of land – probably like sale of
goods; UCC 2-718)
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I. PRINCIPLES OF PROMISSORY OBLIGATION
A. FREEDOM TO CONTRACT AND FREEDOM OF CONTRACT
(1) Freedom to Contract: freedom to enter or refuse contracts and to choose K partner
act utilitarianism – static analysis of cost/benefit
rule utilitarianism – dynamic analysis of cost/benefit
liberty – is it consistent with individual freedom in society?
Hurley v. Eddingfield, Ind. 1901, Supp. I-1: Physicians are not required to accept all contracts of
employment, even if they are the only doctor available and the patient is seriously ill. He’s not liable for
consequences of his (arbitrary) refusal, even if results in death. Licensee has no duty to aid (CL).
Common law rule: innkeepers and common carriers cannot turn people away b/c of risk to life
J. Bentham - every man is bound to assist if he can do it w/out exposing himself to sensible
inconvenience
Great Atlantic & Pacific Tea Co. v Cream of Wheat Co., Supp I-3 - trader can buy and sell to whoever
he wants
Runyon v. McCrary, US 1976, Supp I-4: Civil Rights statute does apply to private acts of racial
discrimination, so private schools can’t bar blacks. Parents have constitutional right (of free association and
privacy, or to direct the education of their children) to send kids to private schools but don’t have right to
provide children w/private education unfettered by reasonable government regulation.
Statutory limitation of freedom of K: interpret language; precedent; legislative history; policy/principle
13th Am – badges & incidents of slavery; 14th Am – equal protection of the law (if no one makes a K with
you, then you don’t have the right to make a K)
Jones v. Alfred H. Mayer Co.: 1982 may be interpreted as prohibiting all racial discrimination,
including property and extends right to make contracts “just as enjoyed by white citizens”; may be
necessary to uphold 13th Am with legislation, so application of statute is constitutional
(2) Freedom of Contract: freedom to choose terms of the agreement
Unger, The Critical Legal Studies Movement, Supp I-31: contract law is a series of principles &
counter-principles
freedom to contract (to enter or refuse K’s, to choose your K partner) v. freedom to choose contract
partner: will not be allowed to work in ways that subvert the communal aspects of social life (ex:
compulsory Ks, promissory estoppel, quasi-contract – which makes restitution for unjust enrichment, rules
that discourage K in non-commercial setting, discrimination law)
freedom of contract (freedom to choose terms of agreement) v. unfair bargains that should not be enforced
(inequalities, bargaining power)
Batten v. Faulk, 1856, Supp I-37: A bond given by a slave, with a freeman as surety, is against the
policy of the country and void as to both. The original transaction was illegal, so contract was illegal also.
Note: You can’t contract yourself into slavery.
Weber, Freedom and Coercion, Supp I-40: It seems as if “legal empowerment rules” give everyone
access to make contracts with any one they want and with any rules that they see fit. However, these are
actually only accessible to the owners of property and in effect support their autonomy and power positions.
Unger’s counter-principles are more important in private realm; principles in market realm.
B. GROUNDS FOR ENFORCING PROMISES
1. Introduction
Why enforce promises?
utilitarian – economy requires ability to make transactions over time (Posner)
rational and peaceful society
freedom and autonomy to do make binding commitments and protect from opportunism (Fried)
notion of equality
Modern legal approach is that a bargain or promise is enforceable unless reason appears to the
contrary.
Cohen, The Basis of a Contract p 189-190: Ability to rely on promises adds to confidence necessary for
social intercourse and enterprise. Promises constitute modern wealth  enforcement necessary.
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RSC §1 Contract Defined, Supp I-41: A contract is a promise or set of promises for the breach of
which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.
RSC §17 Requirement of a Bargain, Supp I-41: (1) The formation of a K requires a bargain in which
there is a manifestation of mutual assent to the exchange and a consideration except (2) whether or not a K
may be formed under special rules applicable to formal contracts or under the rules stated in §§82-94
2. Formality
Formality serves a cautionary function (combat impulsiveness); only a minority of states formality (seal) as
a basis for enforcing K. The more commonplace it becomes, the less effective. Can forge, so there may be
evidentiary problem. Seal makes K enforceable automatically, so society can’t override someone’s
judgment about what K they want to make.
Fuller, Consideration and Form p 194-195: Consideration for a promise can be either “formal” or
“substantive.” The benefit to having formality in promises: (1) evidentiary function – to show evidence of a
K (2) cautionary function – caution against breaching K; guard against gratuitous promises (3)
signaling/channeling function – helps courts bypass step of testing enforceability of K. Problems with
formality: (1) Risk of bureaucracy (2) becomes too routine to be effective
Comment: Formalism and the Seal, p 195-200: gradual erosion of requirements of form drained
solemnity of the occasion and thereby destroyed the usefulness of the seal. Seal no longer sufficiently clear
way of making promises binding without consideration except in a few states.
3. Consideration
consideration - something of value received by a promisor from a promisee; necessary for an
agreement to be enforceable; it can include a benefit (right, interest or profit), or a detriment (forebearance,
loss or responsibility). Consideration requires the voluntary assumption of an obligation by one party on the
condition of an act or forebearance by the other.
Moral obligations, unsupported by consideration, may not be enforceable by law.
 impulsiveness (cautionary function of the law) – procedural issue
 not socially important – substantive notion about the importance of promises
 mistakes/misunderstandings (evidentiary aspect of limiting enforceability of promises)
Hamer v. Sidway, NY 1891, p 205: Nephew’s abandonment of legal rights was sufficient consideration
for uncle’s promise of $5000. Gratuitous promises are not enforceable, but the court doesn’t care if
the consideration benefits the promisee or a third party, or is of any substantial value to anyone. It is
enough that something is promised, done, forborne or suffered by the party to whom the promise is made as
consideration for the promise made to him.
Note: dying doesn’t impact enforceability of K
Note: A K made by a minor is voidable, but not void. One-sided rule: only the person against whom
enforcement is sought must be of legal age.
RSC §71 Requirement of Exchange, p 209: Consideration is a performance or a return promise that is
bargained for as part of an exchange. Performance may consist of an act other than a promise, a
forebearance, or the creation, modification or destruction of a legal relation. The promise can be given to or
by the other party or a third party.
RSC §81 Consideration as Motive or Inducing Cause, p 209: If what is bargained for doesn’t
induce the making of a promise doesn’t bar it from being consideration. A promise that doesn’t induce
performance or return promise doesn’t prevent performance or return promise from being consideration.
Williams v. Carwardine, 1833, Supp I-42: It doesn’t matter what the party’s motives are for
performance; if they perform their part, the other party must keep his promise. Having given info leading
to brother’s murderer, was entitled to the reward.
Note: Court assumes she knew about the offer; if she hadn’t, would have a problem w/lack of assent.
Fried, Contract as Promise, Supp I-43: Being able to commit to a voluntary course of action allows, in
the case of reciprocal promises, both parties to rely on future conduct and pursue more complex projects;
trading promises, unlike goods, is often done over time, so need a device to permit trade over time. A
contract does restrict autonomy – mortgage interests of future self in favor of present self. Autonomy
argument: a person can shape the world and impose their will on others through K. But trades future
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freedom for greater freedom in the present – Fried says that facilitating predictability increases overall
freedom.
Posner, Economic Analysis of Law, Supp I-44: Need legally enforceable promises for transactions that
take place over time. Breaking contract reduces willingness of other people to make contracts in the future
w/you. The function of K law is: (1) to deter people from behaving opportunistically toward contracting
parties (2) to encourage the optimal timing of economic activity (3) to make unnecessary costly selfprotective measures. Enforce K for better market and economic system; want to avoid misallocation of
resources and to promote gain-producing transactions. He says reputation and social coercion is limited
in ability to prevent breach. But Posner ignores transaction costs of making K – what if transaction costs
exceed benefits gained or there is imperfect information?
Patterson, An Apology for Consideration p 210: Bargaining for a reciprocal exchange reflects an
important means of creation and maintenance of society. People prefer reciprocity to benevolence and tacit
obligations.
Nominal Consideration
 does it help with evidentiary & cautionary concerns? only as much as formality does
 procedural problems – may lead to fraud
Fischer v. Union Trust Co., MI 1904, p 211: Contract is unenforceable because there was not
sufficient consideration. Father gave his daughter property for $1 and promised to pay off the mortgage,
but he didn’t before his death. She sued for enforcement. It’s a gratuitous promise, as $1 for real estate is
nominal consideration. The deed is hers, but only got what the father could give – the estate is not
obligated to pay the mortgage.
Note: Executed transfers can’t be challenged for lack of consideration. This is about nominal consideration
for promise to pay the mortgages. Again, incompetent person’s Ks are voidable but not void.
Nominal Consideration, p 214: Nominal consideration is consideration that is so insignificant as to
bear no relationship to the value of what is being exchanged. Schnell v. Nell, 1861 - elaborate document
singed under seal by all parties; one cent not good consideration for $600 despite moral and past
considerations. Haigh v. Brooks, Exchequer, 1839 – traded document for $1,000; recognized that document
had no legal effect & therefore its surrender could not supply consideration, but Chief Justice said that its
promise meant it could be valuable and that surrender was sufficient consideration
4. Benefit
Why enforce a subsequent promise based on benefit? This rewards the Holmesian bad man who will
freeload over the “good guy” who promises to pay – law rewards manipulative schemer who doesn’t want
to pay for something he values.
Mills v. Wyman, MA 1825, p 231: father’s promise to pay for care of 25 yo son after son died was
without consideration. The care was not bestowed at father’s request, and father’s gratuitous promise came
later. In order for moral obligation to be consideration, there must have been some pre-existing obligation,
which has become inoperative by positive law, to form basis for an effective promise. No simultaneous
exchange = no valid contract. There’s no preexisting obligation, bargain; law does not enforce people’s
consciences.
assumpsit: breach of contract; an express or implied promise not under seal
Webb v. McGowin, AL 1935, p 236: Webb severely injured himself in order to avoid dropping a 75pound block on McGowin. McGowin’s life was saved, so he agreed to pay Webb a pension. When
McGowin died, his estate refused to continue payments. There is consideration to make the contract valid
and binding on defendant. The life saved of promisor defendant is a material benefit to him and thus forms
consideration. Even though they didn’t make a bargain beforehand, the court assumes what the intent of the
parties would have been. Subsequent promise = previous request. When a 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. Material benefit + moral obligation = consideration.
Note: McGowin had actually started paying; it’s not just a promise. Also, McGowin would have agreed to
this ahead of time; it’s unclear whether father in Mills would have.
RSC §86 Promise for Benefit Received, p 242: A promise made in recognition of a benefit previously
received is binding to the extent necessary to prevent injustice unless the promisee conferred the benefit as a
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gift or the promisor has been unjustly enriched, or to the extent that its value is disproportionate. Moral
obligations based solely on gratitude or sentiment are not sufficient of themselves to support a subsequent
promise. (This a new ground for enforcement – doesn’t include consideration!, see RSC §17)
Edson v. Poppe, 1910, p 244:  drilled a well on ’s land, and after the well was completed 
promised to pay  reasonable value for work & materials. Drilling did not seem gratuitous or an act of
voluntary courtesy to the defendant; subsequent promise was supported by sufficient consideration
(material benefit).
Note: Gratuitous promises are unenforceable; Quasi-contracts, which are gift promises solely because they
are made after the service is provided but otherwise look like a business deal, are enforceable.
Muir v. Kane, 1909, p 245: Clause in K of real estate sale promising to pay broker a fee is enforceable
even though the prior oral agreement violated the state statute of frauds and even though services had
already been rendered when K of sale was signed.  have moral obligation to pay for the services.
In re Schoenkerman’s Estate, 1940, p 245: Widower asked mother-in-law and sister-in-law to move
from Chicago to Milwaukee to live with him and take care of the kids. They did so for 11 years. A year
before his death, he executed two notes, promising them each money for which they sued upon his death.
Household services when living as a family are presumed to be gratuitous and you need an express K
to overcome this presumption. By giving notes, plainly acknowledged that moral obligation “afforded
more than ample consideration,” albeit not a legally enforceable obligation. However, they can only get
what was promised, not full value of their services.
In re Crisan Estate, 1961, Supp. I-46: Law implied a promise to pay for a year of emergency services
rendered to an unconscious patient by a public hospital. A person who supplied goods or services to
another without the other’s knowledge or consent is entitled to restitution if:
 helper acted unofficiously and with intent to charge therefor
 goods or services were necessary to prevent the other from suffering serious bodily harm or pain
 supplier had no reason to know the other would not consent to receiving them if mentally competent
 impossible for the other to give consent or b/c of extreme youth or mental impairment, the other’s
consent would have been immaterial
Social utility argument: a person who needs help in an emergency and is unable to ask for it should obtain
it; the attainment of such a result is aided by assuring compensation to the person rendering the aid if the
other is solvent
5. Reliance
Reliance with no promise?
1. promise: there is a harm on one side, but you want some notion that there is reason for the other side to
take responsibility
damnum absque injuria – just b/c there is harm doesn’t mean they necessarily get compensation under law
2. medium view: want some basis for responsibility (for example, statement of present intention)
3. focus purely on harm of injured party
Promise with no reliance?
executory contract: Although neither side has performed yet, if there has been a promise and consideration
it is enforceable.
1. promises create desirable expectations
2. line-drawing problems when try to segment some promises from others
3. if you didn’t enforce it, would be hard to tell when you can start relying on a promise
* equitable estoppel - representations made to facts past or present; one can’t make representation of
fact and then later disavow it once it’s been relied upon (tort doctrine)
* promissory estoppel - substitute for consideration, rendering a gratuitous promise enforceable as a
contract; acts of reliance by the promisee to his detriment provide a substitute for consideration
Kirskey v. Kirskey, AL 1845, p 246: Widow and her children left their home upon invitation of
brother-in-law. Promised to support them on condition “If you will come down and see me.” At first he
gave them house and land, then moved them to uncomfortable house in the woods, then kicked them out
altogether. Trial court said that the loss and inconvenience of moving was consideration, but appellate court
reversed – said promise to support her was a gratuitous promise. To be legally enforceable an executory
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promise must be supported by sufficient, bargained for consideration and coming down and seeing
promissor is not sufficient consideration. [Reliance is a later development in the law, no present in 1845.]
Ricketts v. Scothorn, Neb. 1898, p 247: Grandfather promised Katie $2,000, on the basis of which she
stopped working; he died, she sued the estate. Even though there was no consideration for the
gratuitous promise, the K is enforceable because she relied on the promise and altered her position
for the worse.
Feinberg v. Pfeiffer Co., MO 1959, Supp. I-49: At-will employee worked at Pfeiffer for 37 years at
which point they increased her salary and promised to pay her a pension. She worked two more years and
then retired; after change in leadership, decreased amount of pension, which she refused to accept. No
mutual obligation/consideration, but she retired from a lucrative position in reliance upon promise to pay
pension. Promissory estoppel – in relying on gratuitous promise, suffered detriment. Hence enforceable.
Note: reliance required her to quit b/c of promise not b/c she got sick, so if she had gotten sick before
quitting, the court would not have enforced the promise.
East Providence Credit Union v. Geremia, RI 1968, p 261: Good-faith reliance on promise by EPCU
to pay car insurance premium if Geremias did not was enforceable. There was consideration b/c amount of
car payment would have been added to their loan. “We are forced to renew the policy for you.”
1. Was there a promise which the promisor should reasonably expect to induce action or forbearance of a
definite and substantial character on the part of the promisee?
2. Did the promise induce such action or forbearance?
3. Can injustice be avoided only by enforcement of the promise?
Note: It’s not clear if there was a promise or present intention – why follow up w/a phone call?
Goodman v. Dicker, DC 1948, p 279: Dicker relied on promise of franchise and deliverance of radios
to his detriment (employed salesmen, solicited orders). Dealer franchise was terminable at will, so he can
recover reliance damages but not expected profits. Dair v. US (1872) - if someone by language or conduct
leads another to do what he would not otherwise have done, he shall not subject the person to loss or injury
by disappointing the expectations upon which he acted.
Barnett and Becker, Beyond Reliance, 280: Tort law gives remedy for promissory misrepresentations
made to induce reasonable reliance if the misrepresentation was a lie when it was made. We need K reliance
as a means of enforcement b/c if there is no actual fraud, then tort law affords no remedy. Reliance allows
recovery when promissor knows that promisee is likely to rely more than he should.
D’Ulisse-Cupo v Board of Notre Dame High School, Conn. 1987, 281: For a cause of action for
negligent misrepresentation (as opposed to promissory estoppel), don’t have to prove that the
representations were promissory, just that the representations contained false information. For negligent
misrep, even an innocent rep may be actionable if declarant had means of knowing, ought to know or has
the duty of knowing the truth
RSC 90, Promise Reasonably Inducing Action or Forbearance p 282: 1) A promise which the
promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third
person and which does [actually] induce such action or forbearance is binding if injustice can be avoided
only by enforcement of the promise. The remedy granted for breach may be limited as justice requires. 2)
A charitable subscription or marriage settlement is binding under (1) without proof that the promise induced
action or forbearance.
Comment: Unless there is unjust enrichment, damages should not put the party in a better position than the
performance of the promise would have put him. In the case of a gift promise, rarely proper to award
consequential damages greater than expectation damages.
* This section is the bargain theory of consideration giving way to reliance.
Atiyah, The Rise and Fall of Freedom of Contract, Supp I-54: A promise is wholly executory before
benefit or reliance occurs. People argue that we should enforce executory contracts (i.e. before reliance
occurs) because (1) promise creates expectations that will be disappointed if promise is not performed (2)
all contracts are executory before carried out; what’s the point of the transaction if the promises won’t be
enforced (3) uphold principle of promissory liability even where the non-performance of promise has little
effect. Promise-based Ks promote the continuation of social inequalities since some people are in a better
position than others to exercise free choice; reliance-based Ks are even more hostile to free choice b/c
people become bound without even promising and others are relieved from the responsibility of their own
actions.
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Fried, Contract As Promise, Supp I-58: A lie has bad intentions at the moment of speaking. A promise
is a truthful statement of intention – not a wrong until it is not kept. Why be liable for harm that befalls due
to change of heart? Because promises invoke trust in future actions, not merely in present sincerity.
Promising is a moral convention that creates expectations in others; it breaks principles of trust and
respect to break promises; hence promises act as a currency to create expectation for future
performance – social benefit.
Hillman, Questioning the “New Consensus” on Promissory Estoppel, Supp I-65: One of the critical
elements of promissory estoppel is detrimental reliance on a promise. Reliance plays a crucial role in
determining whether court will deny or affirm a promissory estoppel claim, which are remarkably
unsuccessful in court. You need both reliance and a promise to adjudicate a claim.
C. FAIRNESS AND OTHER LIMITS ON ENFORCING PROMISES
1. The Problem of “Inadequate Consideration”
Batsakis v. Demotsis, TX 1949, p 216: Mere inadequacy of consideration will not void a contract.
Demotsis received $25 from Batsakis during WWII and in return promised to pay back $2000 + 8%
interest.
Note: this is a case about inadequate consideration; it was valuable so not nominal consideration. RSC says
that as long as it’s not nominal, we don’t have a consideration problem. But we are worried about advantage
taking. Demotsis won b/c a competent person in times of inflation would have entered the K at the time.
Embola v. Tuppela, WA 1923, p 219: While Tuppela was in the insane asylum, his guardian sold his
Alaska gold mine. Embola gave him $270 to help him reclaim it for promise of $10,000 should mine be
recovered. Embola later refused to pay, said contract was “unconscionable,” not supported by adequate
consideration and in violation of usury laws. Court upheld the promise b/c Embola’s loan was an
investment and consideration was not inadequate (Tuppela considered the exchange “fair and to his
advantage”)
American Home Improvement, Inc. v. MacIver, NH 1964, Supp I-79: Paid $800 sales commission for
$1,759 K for home improvements. The K was illegal b/c it disobeyed statute that required it to disclose rate
of interest for loan. The K was unconscionable b/c it charged $2,568.80 for $809.60 worth of work, UCC
§2-302. MacIver did little work on the house before canceled contract. Hence court refused to enforce K.
Here we have consideration, but court voided K b/c of illegality and disproportionate value.
U.C.C. §1-103, App. 8: Supplementary General Principles of Law Applicable
U.C.C. §2-102, App. 15: Scope; Security and Other Transactions Excluded from this Article: UCC
applies to the sale of goods
U.C.C. § 2-105(1), App. 16: Definition of Goods
U.C.C. §2-302, App. 28: Unconscionable Contract or Clause: If the court as a matter of law finds the
K or any clause of the K to have been unconscionable at the time it ws made the court may refuse to enforce
the K, or it may enforce the remainder of the K without the unconscionable clause, or it may so limit the
application of any unconscionable clause as to avoid any unconscionable result.
Waters v. Min Ltd., MA 1992, p 687: Ex-con boyfriend represented her in negotiations for selling her
annuity to s who had a lawyer. s agreed to pay $50,000 for annuity that would return $694,000 over 25
years and had cash value of $189,000. Also forgave $100 debt of boyfriend and took $7,000 of what they
owed her for boyfriend’s debt. K was executed in unusual circumstances, and she was unduly influenced by
boyfriend. This is an unconscionable contract b/c he gross disparity in bargaining power, was unduly
influenced by someone working for himself and not for her, and not fair to get $50,000 for something
worth $189,000 with no presence of risk. s assumed no risk and plaintiff gained no advantage - gross
inadequacy of consideration. UCC doesn’t cover investment securities, but court reasoned by analogy.
RSC, §208, Unconscionable Contract or Term, Supp I-83: (identical to UCC §2-302(1)) If a K or
term thereof is unconscionable at the time the K is made a court may refuse to enforce the K, or may
enforce the remainder of the K without the unconscionable term, or may so limit the application of any
unconscionable term as to avoid any unconscionable result.
Shapiro, Courts, Legislatures and Paternalism, p 690: Courts are reluctant to invalidate private choice
b/c it is paternalistic. When they do it, they justify it w/reasons of efficiency, fair distribution of resources,
etc. Exception for sales arrangements – Williams – cast doubt on validity of a particular troublesome credit
arrangement in an installment sale of consumer goods to a person on welfare; was far from clear about basis
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of the holding - was it the procedural irregularities (such as lack of adequate notice of the nature and impact
of the arrangement), the unfairness of the arrangement or both? Outside sales arrangements, have more
paternalistic developments, such as limitations on employment at will in employment contracts, warranty of
habitability in landlord-tenant relations, coercion, duress, unconscionability, manufacturer liability
Williams v. Walker-Thomas Furniture Co., DC 1965, p 692: Williams bought several purchases from
furniture store on installment basis; each purchase was an add-on, which means that seller could repossess
all goods previously purchased if balance was unpaid. She didn’t get a copy of the K. Unconscionability
includes an absence of meaningful choice on the part of one of the parties together with contract
terms which are unreasonably favorable to the other party – gross inequality of bargaining power
means she didn’t have a meaningful choice; signed it with little or no knowledge of its terms.
Dawson, Unconscionable Coercion, p 693: The standard in section 2-302 is “conscience”; courts can
refuse enforcement to K that offends them. General clause and uncertain in application.
Sandel, Liberalism and the Limits of Justice, Supp I-84: You can analyze K by (1) looking at
conditions under which K was made, whether entered freely and (2) terms of agreement, whether each got
their fair share. Ideal of autonomy – choice, K is an act of will, must be voluntary; process itself justifies
the outcome. Ideal of reciprocity – outcome, K is instrument of mutual benefit, morality lies on underlying
fairness of exchange; contract approximates justice rather than confers it. Under (1)may be bound to unfair
terms, under (2) may be bound in ways that party did not choose.
Schwartz, A Reexamination of Nonsubstantive Unconscionability, Supp I-87: Non-substantive means
everything other than the terms of the deal. Lack of sophistication or inadequate knowledge is not a reason
to invalidate a K. Categories of non-substantive unconscionability objections to enforcement of a contract:
1. Poverty - poor consumer, although he would prefer not to bear certain risks under a contract, can afford
only with great difficulty an agreement that allocates risks to the seller. Court shouldn’t take away the
only deals poor people can make.
2. Market unresponsiveness - ex monopoly power. Monopolies are just as responsive as competitive
businesses.
3. Incompetency - buyer may be too unsophisticated or inept to make contracts that fully satisfy his
preferences. This is just a stigma – no evidence that this is a problem.
4. Lack of information - info unavailable or cost of finding & absorbing it exceeds, at the margin, the cost
of the info. Author believes that this may be the only proper non-substantive reason to invalidate a K,
but does not discuss this reason.
2. “Illusory” Promises and Related Fairness Issues
Illusory promises are defined narrowly – rough trend in modern law is to narrow even more (Wood,
Omni narrowing Wickham, Gurfein)
spectrum: autonomy – imply a duty (Wood) – modern good faith – unconscionability
Wickham & Burton Coal Co. v. Farmers’ Lumber Co., Iowa 1920, Supp I-104: coal co sent letter to
lumber co offering to sell as much as they wanted to purchase at certain low prices. Then refused to sell the
quantity requested at stated price. Contract void due to lack of mutual obligations and consideration. A
contract of sale is mutual when it contains an agreement to sell on one side and an agreement to
purchase on the other. The letter was an offer b/c did not specify amount of coal or payment. Each
shipment is a contract. Plus, there are a lot of alternative sources for coal.
Note: Output contracts and requirement contracts are considered to have consideration. Requirement is
“I will buy all that I need;” output is “I will sell all that I produce.”
RSC §77, Illusory and Alternative Promises, p 298: A promise is not consideration if promisor
reserves a choice of alternative performances unless (1) each alternative would have been consideration if
bargained for alone, or (2) one promise is consideration and alternatives are substantially unlikely
Gurfein v. Werbellovsky, CT 1922, p 298: Buyer has right to cancel order before shipment. Buyer sued
seller for refusing to ship what he ordered after repeated requests. Limited right of cancellation does not
invalidate consideration. As long as there is any time that the seller can compel the buyer to buy, then
there is consideration. This means that buyer can cancel before shipment, but seller cannot! This is the
common law rule. How is buyer’s freedom restricted? What is the consideration? If the goods had already
been shipped, cannot cancel order – even five minutes of ability to compel buyer to take goods = C.
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Gianni Sport Ltd. v. Gantos, Inc., MI 1986, p 699: K had a cancellation clause that Gantos can cancel
order before shipment or for late shipments. Gantos cancelled order to be shipped Oct 10 in late Sept; later
Gianni agreed to sell it for 50% off (Gantos’s business was 22% of Gianni’s sales that year, plus women’s
fashions change so can’t sell goods later). Declared cancellation clause unconscionable b/c of unequal
bargaining power and to some extent lack of alternatives for Gianni.
Wood v. Lucy, Lady Duff-Gordon, NY 1917, p 299: Lucy, a fashion designer, employed Wood to
market her designs & names; gave him exclusive right to place her endorsements on the designs of others
and to license others to market them for one year in return for his marketing efforts – each gets 50% profits.
She then gave endorsement w/o giving him 50%; said it’s not a K b/c he didn’t bind himself to anything.
Court said that the writing is “instinct with an obligation, imperfectly expressed” – promise to make
reasonable efforts at marketing her name is implied. [but can she sue him?] Court tries to tie it back to
what the parties wanted, whether or not they carried it out.
Omni Group, Inc. v. Seattle-First National Bank, WA 1982, p 302: Omni agreed to buy property from
Clarks subject to satisfaction with an engineer & architect’s report. Omni waived report, Clarks backed out.
Omni sued. Clarks contended that K was void b/c Omni’s promise to buy was conditional on the report.
Because Omni didn’t commission the report, Omni’s promise was illusory, and therefore lacked
consideration and was unenforceable. Court said a K condition calling for a party’s satisfaction with
the performance of an act does not render the party’s promise to perform illusory. A contractual
condition calling for the subjective satisfaction of one party imposes a duty of good faith in the
exercise of the party’s discretion. K enforceable
Lima Locomotive & Mach. Co. v. National Steel Castings Co., 1907, p 306: Contract with specified
price but unspecified quantity has mutuality because obligation to take entire supply of an
established business (not some random what-I-feel-like amount) makes it a mutual promise.
Corenswet, Inc. v. Amana Regrigeration, Inc., 1979, p 311: Corenswet had been exclusive wholesale
distributorship for Amana appliances for 7 years. Distributorship agreement was of indefinite duration and
terminable by either party “at any time for any reason” on ten day’s notice. Amana gave notice & gave
distributorship to another company. UCC 1-203’s obligation of good faith does not bar enforcement of
K clauses permitting termination w/o cause. The only limitations on arbitrary termination are
reasonable notice and unconscionability.
Note: In Wickham, had asymmetry in freedom to cancel K. In this case, either party can cancel with notice,
but even though you have formal symmetry, there is a greater burden on party if canceled so it’s unfair.
Note: footnote p 312 – Missouri doctrine – hardship rule designed to give an agent a reasonable time in
which to recoup his original investment in the agency (must have notice of cancellation) – can explain this
rule w/doctrine of good faith – don’t negate the point of the K
U.C.C. §1-203, App. 11: Obligation of Good Faith. Circumscribed by express terms of K – good
faith “in its performance or enforcement” [unconscionability is a broader doctrine than good faith]
U.C.C. §2-309, App. 33: Absence of Specific Time Provisions; Notice of Termination
(1) If time for shipment, delivery or any other action is not agreed upon, shall be a reasonable time
(2) Where K provides for successive performances but is indefinite in duration it is valid for a reasonable
time but unless otherwise agreed may be terminated at any time by either party
(3) termination requires reasonable notification and an agreement dispensing w/this req is invalid if its
operation would be unconscionable
Smith v. Price’s Creameries, NM 1982, p 695-698: Smiths spent $100,000 to start up business.
Wholesale distributorship agreement allowed Price to terminate with 30 days written notice and bars
competing in the area for 2 years afterward. Price rep said as long as perform satisfactorily, distributorship
will continue. Smiths say that Price wrongfully misrepresented circumstances under which could be
terminated and that K puts too much risk on distributors. Court said contract was not unconscionable
since there was no fraud, misrepresentation or procedural problems – freely entered by both parties.
Smith wants to change termination for any reason to termination for showing good cause. All Price
had to do was enter contract in good faith, which they did – doesn’t matter how terminated K.
Tymshare, Inc. v. Covell, DC 1984, p 698: All-purpose doctrine of “good faith” is often used to find
duties that were not expressed in K (like in Lucy). Should not use good faith; just call it illegal under
unconscionability or unlawful for whatever reason. For unconscionability have to look at legality of K in the
first place; good faith only refers to performance in what has been agreed to.
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RSC, §205, Duty of Good Faith and Fair Dealing, p 699: Every contract imposes upon each party a
duty of good faith and fair dealing in its performance and its enforcement.
Comment: Good faith means faithfulness to an agreed common purpose and consistency with the justified
expectations of the other party.
Kessler, Gilmore and Kronman, Contracts: Cases and Materials, Supp I-107: Debates in K doctrine
reflect the tensions in modern society between values favoring individual freedom and those favoring social
control. Free bargain & genuine agreement – autonomy of parties and noninterference in arrangements
they have made for themselves; individual is best judge of his own welfare and means of securing it; just
need legal machinery required by an economic system that relies on free exchange (classical laissez-faire;
Adam Smith - foundation of contract is the reasonable expectation which the promissor raises in the
promisee of which the satisfaction may be extorted by force). But then use of K depends on the system
governing the distribution of property; with unequal distribution, freedom of K becomes a one-sided
privilege that enables the powerful to legislate K in a substantially authoritarian manner without using
appearance of authoritarian forms. Social control - limit freedom by judicial and legislative control
designed to protect community interest (things like good faith; equality of opportunity).
D. APPLICATIONS: EMPLOYMENT AND DOMESTIC-RELATIONS CONTRACTS
1. Employment
Woolley v. Hoffman-LaRoche, Inc., NJ 1985, Supp I-121: Woolley, employed at will, was fired w/o
good cause; said they didn’t follow the procedures in the manual, which implied termination only with
cause. It’s a unilateral contract – won’t fire in return for promise from employees of continued service;
this is sufficient acceptance and consideration; can presume reliance. Absent a clear and prominent
disclaimer, [a promise] contained in a widely distributed employment manual that an employee will
be fired only for cause may be enforceable against an employer even when the employment is for an
indefinite term and would otherwise be terminable at will.
Note: In Williams, court said you have to know about the promise but it doesn’t have to be your motivation.
In Hamer, court said you do need proof of a promise. In Woolley, court cares both about who knew about
the promise and reliance. Why do they use reliance? b/c creates an intuitively stronger case for enforcement.
Also, Feinberg is not a consideration case – it is a pure promissory estoppel case, so you need a sharp
connection between action and reliance.
Fortune v. National Cash Register Co., MA 1977, Supp I-126: Fortune was an employment-at-will
salesman for NCR for 25 years. After he helped set up a $5 million order, they demoted him and then fired
him in order to avoid paying commission. Although the employment was terminable at will, an
employer cannot use this clause to get out of fulfilling another clause of the agreement (i.e. paying
commission) in bad faith. A written K contains implied covenant of good faith and fair dealings;
termination not made in good faith constitutes a breach of K.
2. Contracts between Unmarried Partners
(Michelle) Marvin v (Lee) Marvin, CA 1976, Supp I-132:  and  lived together for 7 years. Had an
oral agreement that they would combine earnings, share all property and act as married.  gave up her
career to be a homemaker. Broke up;  sued to enforce K under which entitled to half $1 million property
and support payments. The court should enforce express contracts between nonmarital partners except
to the extent that the contract is explicitly founded on the consideration of meretricious sexual
services. A promise to perform homemaking services is adequate, independent consideration.
(Victoria) Hewitt v (Robert) Hewitt, IL 1979, Supp I-139: V got pregnant in 1960 and R said they
should live as man & wife w/o formal ceremony and promised that he would “share his life, his future, his
earnings and his property” with her. They told everyone they were married and had 3 kids. In reliance on his
promises, she saw him through professional school by getting $ from her parents, assisted in establishing his
pedontia practice, put her earnings in a common fund and otherwise supported him as a wife and partner
until 1975. Court says it’s too difficult to separate sex from other services; would be more honest to return
to common law marriages than maintain the fiction that Ks “independent” of sex would actually be entered
into w/out the sexual activity. This is not the armed-length arrangement envisioned by traditional contract
principles, but an intimate arrangement of a fundamentally different kind. Effect of giving cohabitants
“contractual” rights is to at least take a step toward reinstituting common law marriage in California
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after it has been abolished by the legislature. Virginia’s claims are unenforceable because they
contravene public policy, implicit in Illinois Marriage and Dissolution of Marriage Act, disfavoring
grant of mutually enforceable property rights to knowingly unmarried cohabitants.
Note: Hewitt makes it more attractive for the powerful party (traditionally man) to prefer K to marriage.
II. REMEDIES FOR BREACH OF CONTRACT
A. DAMAGES
1. Introduction
restitution interest – recover value conferred on breacher: interest of a party in recovering values
conferred on the other party through efforts to perform a contract – want to prevent unjust enrichment (of
defaulting promisor at expense of promisee)
reliance interest – recover losses the injured party suffered by relying on K: party’s interest in
recovering losses suffered by virtue of reliance on the contract, whether or not there was a corresponding
gain to the opposite party – put promisee in as good a position as he was in before the promise was made
(go back to status quo, defensive or restorative)
expectation interest – recover what injured party expected to get if K was performed: interest of a
party in realizing the value of the expectancy that was created by the other’s promise (move from corrective
justice to distributive justice) – you forego other opportunities when you enter a contract, so this is
compensation for not getting the opportunity; benefit of the bargain
* Need to enforce contracts with or without reliance or otherwise people won’t feel comfortable entering
business agreements
2. The Basic Measure: Expectation Damages
Hawkins v. McGee, NH 1929, p 3: Dr. McGee gave a warranty: “I will guarantee to make the hand a
100% perfect hand or a 100% good hand” in order to do operation. Jury decided that the K was made. Jury,
when deciding damages, was told to consider (1) pain and suffering due to the operation (2) positive ill
effects of the operation upon Hawkins’ hand. Erroneous. The true measure of the plaintiff’s damage is
the difference between the value to him of a perfect or good hand, such as the jury found the
defendant had promised him, and the value of his hand in its present condition, including any
incidental consequences fairly within the contemplation of the parties when they made their contract.
Other damages that resulted (pain and suffering from operation) are not to be given.
Sullivan v. O’Connor, MA 1973, p 7: Entertainer said surgeon promised her a nose job that would
enhance her beauty. Jury gave plaintiff $13,500 reliance damages;  waived expectancy damages. This
damages rule was correct. If doctors’ “promises” were enforced, doctors would be frightened into practicing
“defensive medicine.” If their promises are not enforced and the public is limited to malpractice suits, then
charlatans will take advantage of patients by giving warrantees. Courts compromise by allowing the
breach of contract actions against doctors but insisting on clear proof. Restitution is too little and
expectation is too much – give reliance damages, in this case fee paid to , hospital expenses, worsened
physical and mental condition and pain & suffering from third operation to fix the problem.
Note: Reliance is easier to compute than expectation in this case; suspicions about promise  limit remedy
** Expectation damages are the best in commercial world when you know worth of contract and
weakest in noncommercial world where it requires imagination to determine the value of a successful
treatment.
Comment: Controls over Jury Verdicts, p 8: Damages for breach of K are set by finders of fact. In
order to control amount juries award, judges (1) control admission of evidence, (2) give instructions to the
jury, (3) order a new trial. Appellate courts can nullify jury’s findings if find it “against the overwhelming
weight of the evidence”, but don’t make own findings of fact unless jury trial was waived.
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RSC §347, Measure of Damages in General, Supp II-1: injured party has a right to expectation
damages as measured by the loss in value to him of the other party’s failure or deficiency, plus any other
loss, including incidental or consequential loss, caused by the breach, less any cost or other loss that he has
avoided by not having to perform. [expectation damages is default in K law]
Groves v. John Wunder Co., MN 1939, p 11: Groves leased property to Wunder for 7 years. Wunder
got rid of Groves as a competitor, removed gravel from the land and paid Groves $105,000. Wunder did not
return property in the state he promised to (he was supposed to regrade it). To regrade the property, it
would cost Wunder $60,000. The value of the property was only $12,160. Initial judgment was for the
difference in the value of the land at the time the K was made and value of land had the contract been
performed.  appealed – said that he deserved not difference in value, but the cost of doing work called
for by contract. ’s breach was willful and in bad faith. Damages should be for cost of performance.
Note: is cost of performance clearly disproportionate to the value to injured party under RSC §348?
Coase Theorem: get rid of externalities by clearly defining property rights; legal rules won’t always control
people’s behaviors b/c they can rearrange their behavior in light of the rules & contract around defaults
RSC, § 348, Alternatives to Loss in Value of Performance, Supp II-3: If breach results in defective
or unfinished construction and loss in value is not proven with sufficient certainty, can recover damages
based on diminution of property market price caused by the breach or the reasonable cost of completing
performance or remedying defects (if not clearly in excess of first valuation). [This section does not agree
with Wunder result]
Peevyhouse v. Garland Coal & Mining Co., OK 1962, p 19: Preevyhouse leased 60 acres to mining co
so that they could strip mine coal for 5 years. The mining co agreed to fill pits & bring land back to original
state at the end; they did not do so. It would cost $29,000 to fill their obligation; performance would raise
value of the land $300. Damages given: $300 b/c “no person can recover a greater amount in damages
for breach of an obligation than he would have gained by the full performance thereof on both sides”
Comment: Damages as Punishment for Contract Breach, p 26: In almost all K cases where punitive
damages have been rewarded, there has been a combination of K breach and independent tort. Contract
law does not allow punitive damages. When don’t have tort element, courts assert that neither punishment
nor setting an example for others can justify a damage award that is isolated and identified as having only
this purpose.
Louise Caroline Nursing Home, Inc. v. Dix Construction Corp., MA 1972, p 36: When  failed to
complete construction project,  sought damages even though it was able to find another contractor who
was able to complete the project within the K price. Court said the proper measure of damages when
developer has to find a substitute is actual cost minus original contract price. When the actual price
doesn’t exceed K price, developer has not been damaged. It is not the purpose of K law to put an
aggrieved party to a K in a better position than he would have been in absent the breach. Nursing
home can only get cost of completion, not benefits of the bargain (increase in market value, which was
greater than cost of construction); got benefit of bargain b/c they have the building.
3. Rationales for the Expectation Measure (and their limitations)
Expectation as Preferable to Reliance
1. reliance is often hard to measure
2. reliance doesn’t give full effect to promises (ex: purely executory contracts)
3. efficiency argument - reliance measure leads to inefficient breaches (efficient breach theory)
4. Friedmann - Kaldor-Hicks efficiency - if promisor’s profits from the breach exceed the loss to the
promisee, the breach is to be permitted or even encouraged on the ground that it leads to maximization of
resources (if breacher’s gain exceeds injured party’s loss, then the breach is efficient)
Note: Torts restores status quo ante (like reliance measure) – compensates you for loss you suffered; K law
tries to make you whole w/expectation damages
Critique of Efficient Breach Theory
1. Friedman: what transaction costs are most efficient?
2. incorrectly assumes that the $-based expectation measure gives full meaning to the promise (i.e.
encompasses all notions of the product’s value)
3. people should be able to rely on promises (undercompensatory)
4. quantitative monetary cost to making contracts easy to get out of – will make business world fall apart
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Why Not Reliance?, p 29: Law prefers expectation damages but sometimes allows reliance damages.
Sharp, Promissory Liability, p 29: A good reason for using expectation is b/c reliance is often difficult
to prove and to measure. Give expectation damages – equivalent of performance – to avoid distress, and to
support risk-taking, profit-making, a risk-taking gambling economy (credit economy).
Dawson, Restitution or Damages?, p 30 In land contracts with vendor defaulting in “good faith,” courts
often limit recovery to reliance loss - purchase price paid plus cost of title search. But when the price of
land is rising rapidly and vendor breaches in bad faith, this reliance measure is too low – it lets vendor
speculate without risk & renege if land rises in value – potential gain through breach.
RSC Reporter’s Note to Ch. 16, Supp II-4: For economic efficiency, we want goods to be consumed by
the person who values them the most, and each factor of production to be used for the most valuable input.
This requires mutually beneficial exchanges. If make a contract it means that each side finds what he is
promised more profitable than what he is promising. If a party later concludes that gains from K are smaller
than first estimated, would figure out if cost of breach is smaller than the loss in value of contract to you – if
it’s cheaper to break the contract, then you will break it & pay expectation interest – this maintains
economic efficiency b/c when you pay expectation interest, breach is neutral to one party and advantageous
to the second rather than incurring a loss in the first party – pareto efficient! (efficient breach theory).
Posner, Economic Analysis of the Law, Supp II-5: Sometimes profit from breach would exceed profit
from completion of contract. In this case, a breach is pareto superior.
** What if expectation exceeds reliance? Then awarding reliance would encourage inefficient breaches.
Ex: A to sell machine for $100 to B but will lose $5 on the deal. It would cost buyer $112 to get machine
elsewhere. Net gain to buyer for performance is $12; net loss to seller is $5. Expectation damages: $12.
Reliance damages: $0. W/reliance damages, A will breach, but his net gain of $5 is $7 less than B’s net loss
– inefficient breach!
Friedmann, The Efficient Breach Fallacy, Supp II-6: Efficient breach is inefficient. It does not limit
# transactions or transaction costs (such as litigation) at all. Specific performance or restitution of gains
acquired through breach of contract are more likely to reduce transactions than sole remedy of expectation
damages & also reduce total level of transaction costs b/c there will be fewer breaches. Relaxing K
remedies is deleterious to the willingness of parties to enter into Ks; if can’t rely on Ks then may turn to less
efficient methods of getting goods, such as becoming a self-supplier or vertically integrating w/supplier.
Craswell, Contract Remedies, Renegotiation, and Efficient Breach, Supp II-11: If you impose overcompensatory or punitive remedies, then buyers will have to pay a higher price for the goods. Allowing the
seller to keep most of the gains in those cases where he breaches after a better offer is later received lets the
seller quote a lower price. Allowing breach doesn’t give breacher extra profit; all of his buyers pay a little
extra & that is given to the person who they breach the contract with (“winners”) to get the higher price.
Holmes, The Path of the Law, p 34: Holmsian bad man: “The law is the witness and external deposit
of our moral life.” But do not confuse legal and moral ideas. A legal duty is nothing more than a prediction
that a court will award damages for certain (in)actions. A bad man has as much reason to obey the law as a
good one – to avoid punishment, not because of morality. The law prophesizes what courts will do in fact.
The duty to keep a K is nothing more than a prediction that you must pay damages if you do not keep it.
bilateral contract - a contract in which each party promises a performance (mutual, reciprocal)
unilateral contract -a contract in which only one party makes a promise or undertakes a performance
Dworkin, Is Wealth a Value?, Supp II-14: Challenges Posner’s economic analysis of the law, which
argues that judges should maximize social wealth. Wealth maximization achieved when resources are in
hands of those who value them most, but someone values a good more only if both willing and able to pay
more in money to have it. There is a disparity between sum people are willing to pay to acquire something
they do not have and the sum they would take in exchange for something they already own. Wealth
maximization is hence path-dependent – decisions depend on who had the property first. An improvement
in wealth doesn’t necessarily mean a social improvement. There may be many cases in which social wealth
maximization standard is indeterminate (if measure by acquiring value and already-owning value) Pareto
efficiency – no change in distribution can be made that leaves no one worse off and at least one person
better off –is a useless argument because most widespread distribution of resources meets this test, and in a
lot of court cases the decision will inevitably help one person and hurt the other. Posner wants the courts to
mimic the market – impose the result they believe the market would have reached (but didn’t) without
transaction costs (which may bar beneficial deals).
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Posner, Economic Analysis of the Law, Supp II-20: Value is measured by willingness to pay, but it may
be that the rich family pays more but values it less than the poor family. Thus efficiency has limits as an
ethical criterion of social decision making. Utility concepts also limited; just b/c one person has a greater
capacity for pleasure not a good reason for forced transfer of wealth. Pareto efficiency has few applications
to the real world b/c most transactions make third parties worse off somehow. Kaldor-Hicks efficiency:
transaction only maximizes wealth if net gain to the two parties of the contract is larger than loss to third
parties (or if compensate third parties for harm suffered by them).
Stiglitz, Economics of the Public Sector, Supp II-22: Bentham – utilitarianism defines social welfare
as sum of individual utilities. Should transfer wealth if marginal utility exceeds marginal cost. Society
should be willing to accept a decrease in utility of poor only if there is a much larger increase in utility of
the wealthy. Rawls argues that welfare of society only depends on the welfare of the worst-off individual;
social utility only improved if you improve his welfare, others’ welfare doesn’t matter, not concerned with
equality. Should continue transferring from rich to poor as long as we can make poor better off; don’t pay
any attention to costs imposed on the rich. Rawls would always give $ to indiv w/lower income; utilitarian
recognizes diminishing marginal utility.
4. Limitations on Recovery of Expectation Damages
a. Avoidable Damages
Clark v. Marsiglia, NY 1845, Supp II-25 [Rule]: Clark hired Marsiglia to clean and repair paintings.
After dropping them off, he told M he no longer wanted the work done. M did it anyway and sued. M had
no right, by obstinantly persisting in the work, make the penalty upon the defendant greater than it would
otherwise have been. Should compensate for past performance (before breach of contract), including
labor and materials, and indemnified for his loss in respect to the part left unexecuted; to persist in
accumulating a larger demand is not consistent with good faith towards the employer.
Leingang v. City of Mandan Weed Board, ND 1991, p 43: Plaintiff must be compensated for all the
detriment caused by the breach; should have only subtracted reasonable expenditures for performance
of contract from anticipated wages; should not have reduced contract price by constant overhead
expenses b/c has to pay them regardless of whether the contract was breached. Overhead costs are
not avoidable, so they are recoverable.
Parker (Shirley MacLaine) v. Twentieth Century-Fox Film Corp., CA 1970, p 45: MacLaine had a
contract for a musical Bloomer Girl for $750,000. Fox decided not to make the movie and instead offered
her a role in a western Big Country, Big Man with an amended but similar contract. General rule for
recovery for wrongfully discharged employee is amount of salary agreed upon minus what the
employee could have earned (through reasonable effort) from other employment; must show that the
employment was comparable, or substantially similar to that of which the employee has been
deprived. Reasonableness refers to efforts to get equally good employment; it doesn’t take away a
wrongfully discharged employee’s option to reject, or fail to seek, different or inferior employment
lest the possible earnings be charged against him in mitigation of damages. MacLaine’s failure to
accept Fox’s tendered substitute employment could not be applied in mitigation of damages b/c offer of Big
Country lead was employment that was different and inferior (different location, movie, political image).
Frug, Re-reading Contracts: A Feminist Analysis of a Contracts Casebook, Supp II-26: Casebook fails
to describe Lady Duff-Gordon as a successful, unconventional businesswoman who commercialized
personal appearance of women; MacLaine had solid reasons to differentiate between strong feminist role in
Bloomer Girl and stereotypical role in a western.
Problem, 54: $30,000 therapist quit; School District hired only person who applied for job for $33,000
(under union rules) and then sued therapist for $3,000; therapist says district wasn’t damaged by her breach
b/c it acquired a more experienced, valuable replacement with the higher salary; is district entitled to $3,000
damages? Is school avoiding by a non-similar transaction or benefiting by a better transaction? Likely
outcome: courts are reluctant to have low-level, regular employees pay damages.
RSC §350 Avoidability as a Limitation on Damages, Supp II-31: damages not recoverable for loss
that the injured party could have avoided without undue risk, burden or humiliation; the injured party is not
precluded from recovery by the rule in (1) to the extent that he has made reasonable but unsuccessful efforts
to avoid loss.
* the burden of proof is generally put on party in breach to show that substitute transaction was available
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* Lost volume – avoidance doctrine is not applicable: the mere fact that can find alternative disposition
of goods he was going to supply under contract doesn’t mean that by doing so he avoided loss. If he would
have entered into both transactions but for the breach, he has lost volume as a result of the breach and 2 nd
transaction is not a substitute for 1st one
b. Consequential Damages
Hadley v. Baxendale, Court of Exchequer 1854, p 67: Miller sent broken crank shaft to manufacturers
to get a new one made. Shipper promised next-day delivery, but didn’t deliver for several days. Miller sold
for lost profits from mill being shut down for five days. When a Contract has been breached, the injured
party should receive such damages as may fairly and reasonably be considered to be either arising
naturally from such breach or as both parties may reasonably have thought damages would be at
time K was made. In this case, no special circumstances were communicated to the s to make them aware
of what special damages would result from a breach. Thus, the s could not have foreseen something that
would not generally result from a breach and so loss of profits cannot reasonably be considered a
consequence fairly and reasonably contemplated by both parties.
Rule: To be recoverable, damages must be foreseeable (1) in natural course of events, or (2) because
the injured party communicated the special circumstances and thereby brought damages into the
other part’s contemplation
Note: case makes an exception to the rule of expectation damages – there’s no precedent (use French one)
Dilemma of agency: to whom must the special circumstances be communicated? Is clerk expected to care
even if can reasonably foresee potential legal damages?
* imputed knowledge rule: a reasonable person is taken to know the ‘ordinary course of things’ and
consequently what loss is liable to result from the breach of contract in that ordinary course
Kerr Steamship Co. v. Radio Corp. of America, NY 1927, Supp II-33:  delivered an encoded telegram
to  that, when translated, instructed ’s agent to divert 2,000 tons of sugar from the Philippines to New
York. Telegram never delivered, so  lost $6,675.29 in revenue from the sugar. Awarded $26.78, the
amount of the toll  paid . Notice of the special circumstances and nature of the transaction, at least
in outline, had to have been given the telegraph company in order for the damages to have been
foreseeable. No clerk or employee of the telegraph company is expected to give any thought as to
what it is they are transmitting. It was not enough that the length and cost of the telegram and the
names of the parties would suggest to a reasonable person that “business of moment” was the subject
of the message. Telegraphs have based their rates on basis of continuance of doctrine of foreseeability; if
got rid of it, then their liabilities would be high and rates would rise. The sender can always take out
insurance.
Note: relatively small transaction should not lead to huge damages; no expectation that a low-level
employee will take the time to pay attn to what they are doing even though reasonable person would realize
consequences if they were paying attention (telegraph business’ efficiency, privacy of customer) – court is
pessimistic about ability to effectively communicate special circumstances.
Individual insurance approach: people who need special treatment pay more
General rule: general damages protect everyone, but everyone has to pay more  cross-subsidization
Lamkins v. International Harvester Co., AK 1944, p 70: [subjective] Buyer told seller at time of K that
he needed lighting equipment (approx. $20) so he could use tractor at night. Tractor was delivered w/o
lighting and lighting wasn’t supplied until almost a year later. Buyer sued for not being able to plant soy
crop. was not aware of prospect of massive liability when making K. When damages arise from special
circumstances and are out of proportion to the (inadequate) consideration agreed to be paid for
services rendered under the contract, it seems doubtful that the party to be held liable would have
assented to such liability had it been called to his attention unless consideration to be paid was raised
to correspond to the liability assumed. Issue of damages wasn’t “brought home” to the seller –
changes communication requirement to contemplation requirement.
Note: could get same result w/extreme disproportion of consideration given and damages (risk wasn’t
priced into the consideration), and informality of dealings – similar to unconscionability
* Tacit agreement test: The extent of a promisor’s liability in K cases is likely to be within his
contemplation, and whether it is or not, should be worked out on terms which it fairly may be presumed he
would have assented to if they had been presented to his mind. Mere notice to a seller of some interest or
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probable action of the buyer is not enough necessarily to charge the seller on that account with special
damage if he fails to deliver the goods. (Not used in majority of states – most states use RSC §351 language
of disproportion or informality)
Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd., 1949, p 71: [objective] s delivered a
boiler 5 months late. Damages for loss of business profits could be recovered, but not the damages for
the special dyeing contracts that s had not been specifically told about at the time of agreement.
Defendants could reasonably have foreseen at the time of the contract that delay in delivery of boiler would
result in business losses. Leading case that repudiates the notion that you have to “bring home”
consequences to the other party – what is reasonably foreseeable depends on knowledge possessed by
party. This approach challenges traditional notions of consent to contract – did person consent to liability
for damages?
* Imputed knowledge: everyone, as a reasonable person, is taken to know what loss is liable to result from
a breach of contract in the ordinary course of things, whether they in fact possess this knowledge or not.
* Actual knowledge: must actually possess knowledge of special circumstances outside the ordinary course
of things of such a kind that breach in those special circumstances would be liable to cause more loss. It
suffices to show that had the breaching party considered the question of breach, they would have reasonably
concluded that they would be liable for additional loss that resulted.
Note: “Liable to Result,” p 72: ’s ship delivered sugar 9 days late; during that time, price of sugar fell
dramatically, resulting in a large loss. House of Lords couldn’t agree defining more exactly the required
probability of loss.
Hector Martinez & Co. v. Southern Pacific Transp. Co., 1979, p 73:  was a month late in delivering a
dragline which shipper intended to use in strip mining. Trial court, applying Hadley, dismissed shipper’s
claim for the fair rental value of the dragline for the period of delay. Appellate court distinguished b/c
Hadley rested on belief that, absent specific notice, the shaft was not an indispensable part of the mill.
However, it was obvious the dragline itself has value. Loss of use of a machine is a foreseeable result of
delayed transport. It may be foreseeable that deprivation of the machine’s use because of carriage delay will
case a loss of value during the delay period. A  does not have to show that the harm was the most
foreseeable of possible harms, only that a harm wasn’t so remote as to make it unforeseeable to a
reasonable person at time of contracting.
Note: Foreseeability Today, p 73: Prutch v. Ford Motor Co, 1980 – under UCC §2-715(2)(a),
foreseeability does not mean prior knowledge or actually foreseen; manufacturer cannot escape liability by
arguing that it did not foresee probable consequences which it should have foreseen. “Reason to know”
standard triggers liability for consequences that may not have actually been foreseen but which were
foreseeable. Consequential damages created by a buyer’s use of the product after discovery of the defect
may not be recovered. RSC §351(3) limits foreseeability losses at times when it is not good policy to
require  to pay for all the foreseeable loss caused by breach; courts can look to things like informality of
dealings (which presumably signals a failure of parties themselves to allocate risks) and disproportionate
losses to see whether justice requires a limit on the damages
U.C.C. §2-715, App. 65: Buyer’s Incidental and Consequential Damages: [Victoria approach]
1) Incidental damages resulting from seller’s breach include expenses reasonably incurred in inspection,
receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable
charges, expenses or commissions in connection w/effecting cover [obtaining goods elsewhere] and any
other reasonable expense incident to delay or other breach
2) Consequential damages resulting from seller’s breach include:
a) Any loss resulting from general or particular requirements and needs that the seller at time of
contract had reason to know and which could not be reasonably prevented by cover [obtaining
goods elsewhere] or otherwise
b) Injury to person or property proximately resulting from any breach of warranty
 sec 2 rejects the “tacit agreement” test, which made seller liable for all consequential damages of
which he had “reason to know” – liberality of that rule is limited by refusing recovery unless the buyer
could not reasonably have prevented the loss by cover or otherwise; must minimize damages in good
faith
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
in absence of excuse seller is liable for consequential damages in cases when he had reason to know of
buyer’s req. at time of K; don’t need conscious acceptance of an insurer’s liability from seller; seller’s
obligation for cons. damages not limited to cases in which he fails to use due effort in good faith
 particular needs must be made known to seller, general needs rarely need to be made known to charge
the seller with knowledge
 a seller who doesn’t want to take risk of consequential damages can use K limitations on remedy
 burden of proving extent of consequential loss incurred is on buyer; no need for certainty to the point of
precision, just a reasonable calculation
 under 2a, for a wholesaler selling to a retailer (who will re-sell the goods), the resale is one of the
requirements of which the seller had reason to know
RSC, §351, Unforeseeability and Related Limitations on Damages, Supp. II-34: [follows Victoria
objective approach] Damages are not recoverable for loss that breaching party didn’t have reason to foresee
as a probable result of the breach when contract was made. Loss may be foreseeable as a probable result of
the breach when it follows from the breach (1) in the ordinary course of events, or (2) as a result of special
circumstances beyond the ordinary course of event, that the breaching party had reason to know. 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 justice so requires in the circumstance to avoid
disproportionate compensation.
It’s not always in the interest of justice to require breaching party to pay all damages for foreseeable loss
 the parties assumed that one of them would not bear the risk of a particular loss
 no assumption, but it would be unjust to put the risk on that party
 extreme disproportion between loss and price charged by the potentially liable party (shows
that the low price was not intended to cover risks of such liability)
 informality of dealings, such as absence of detailed written contract – no careful attempt to
allocate all the risks so court can try to allocate them fairly
Valentine v. General American Credit, Inc., MI 1984, p 75: Valentine claimed that under her
employment contract she was entitled to job security and thus the peace of mind associated with it. Sued for
mental distress and exemplary damages. Court said can’t recover mental distress & exemplary damages
even though such damages may have been foreseeable and she might not be “made whole” absent award of
mental distress damages. Hadley rule is so open to expansion or contraction that it could award damages for
mental distress in virtually all contract breaches. The general rule is to “uniformly deny” recovery for
mental distress damages in common-law actions for breach of commercial (or employment) K even
when foreseeable. For mental distress damages, courts look to whether Contract has 1) elements of
personality (contract is made for the purpose of securing personal interests – secure relief from a particular
inconvenience or annoyance, or to confer a particular enjoyment) and 2) whether damage suffered upon
breach is capable of adequate compensation by reference to terms of contract. Primary purpose of
employment contract is economic and not to secure the protection of personal interest; the fact that
employment is important aspect in people’s lives is secondary. Mental distress damages can’t be estimated
with reasonable certainty.
RSC §353, Loss Due to Emotional Disturbance, Supp. II-35: Recovery for emotional disturbance
will be excluded unless breach also caused bodily harm or the contract or breach is of such a kind that
serious emotional disturbance was a particularly likely result.
Comment: damages for emotional disturbance aren’t ordinarily allowed – even if they are foreseeable,
they are difficult to establish and measure. You can recover damages in cases of carriers & passengers;
innkeepers & guests; disposition of dead bodies; messages concerning death.
Note: exemplary damages = punitive damages
c. Uncertain Damages
Freund v. Washington Square Press, Inc. , NY 1974, p 79: Court awarded author nominal damages
for breach by publisher (failure to publish book) b/c expectation damages (royalties from book) were
too uncertain and speculative and awarding damages for cost of performance (cost of publishing
book) would unjustly enrich . Damages should not put the injured party in a better position than they
would have been in had the K been performed (beyond benefit of the bargain). Should measure damages not
by cost of performance to  but by value of value of promised performance to . Restitution measure taken
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care of by return of manuscript; and didn’t allege reliance losses, which he could have gotten. Expectation
losses are the advance, which he got, and the royalties, which he didn’t prove.
Fera v. Village Plaza, Inc., MI 1976, p 82: Village Plaza breached on 10-year lease for store. Trial
court jury awarded s $200,000 in damages for profits prevented by breach. Traditional rule [still used in
some states] says profits of new businesses are too speculative and thus not recoverable. Here there
was the necessary testimony to allow jury to set amount of damages. The fact that we might have
reached a different decision than the jury is not the standard of proof employed. Where injury to some
degree is found, recovery is not precluded for lack of precise proof, especially when ’s own act or
neglect caused the imprecision.
Note: In some states, there is still a categorical rule against lost profits for new businesses b/c damages are
too uncertain; Fera uses more modern rule of RSC: Lost profits are recoverable if they can be shown
with sufficient certainty.
RSC §352 Uncertainty as a Limitation on Damages, Supp. II-36: Damages not recoverable for loss
beyond an amount that the evidence permits to be established with reasonable certainty.
Comment: Difficulty of proving lost profits varies depending on the nature of the transaction.
 For future transactions of a well-established business, loss of profits can be predicted by past
performance
 If business is new or speculative, proof is more difficult but is possible with the aid of expert testimony,
economic and financial data, market surveys, business records of similar business, and the like
5. Alternative Interests: Reliance and Restitution
a. Reliance Damages in Lieu of Expectation Damages
Note: efficient breach theory is fundamentally predicated on giving accurate expectation damages. When
expectation damages are uncertain, reliance damages are a way of restoring pre-promise world. There’s a
concern that reliance damages may be too low, thereby leading to inefficient breaches. On the other hand,
for a losing contract, reliance damages may be too generous. Expectation damages get benefit of good K
and downside of losing K; for reliance, maybe you shouldn’t get benefit, only downside. The law
compromises by allowing a breacher who can prove losses to subtract them from reliance damages, but
gives burden of proof to the breacher. Learned Hand: the mere fact that he breached should not make him
the insurer of the other party’s risks.
Security Stove & Mfg. Co. v. American Ry. Express Co., MO 1932 , Supp II-37:  was to transport a
furnace w/a gas and oil burner to an exhibition by a certain date. The crucial element of the furnace was not
shipped and so  had to leave the exhibition without showing the stove.  could not recover expectation
damages b/c too uncertain – not brought to be sold, but to be shown; plus, expectation damages would not
be foreseeable by the shipper.  is entitled to get reliance damages – cost of exhibiting stove (time,
travel, hotel, booth rental), even though such expenses would have been incurred had the K not been
breached, but can’t get damages for the marketing edge that it would have had over its competition if the
stove had been displayed. Note: Enforcement is based on consideration; this is a case about reliance
damages.
RSC §349 Damages Based on Reliance Interest, p 93: As an alternative to the expectation measure
of damages, the injured party has a right to damages based on 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 K been performed.
* essential reliance – preparation for performance or actual performance of K
* incidental reliance – preparation for collateral transactions that a party plans to carry out when K in
question is performed
L. Albert & Son v. Armstrong Rubber Co., 1949, p 94: Seller delivered machines two years late due to
WWII. Court found the delay was a breach by seller that justified the buyer rejecting and returning all 4
machines. Buyer sought $3000 in reliance damages for the cost of preparing foundations for machines.
Court allowed buyer to recover outlay expenses incurred in anticipation of performance of a K, as long as
seller gets a chance to deduct any sum it can prove upon further hearing would have been the buyer’s loss
had machines been delivered on time. If the benefits of performance would not have covered all of the
buyer’s expenses, the breaching party should not have to pay all of the expenses, i.e. insure buyer’s
risk.
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b. Damages in Promissory Estoppel Cases
Note: Promissory Estoppel Damages, p 282: Reliance measure focuses on harm suffered; expectation
measure focuses on promise made. Sometimes expectation damages lead to unjust enrichment. Under
promissory estoppel, expectation damages are generally available in both donative and commercial settings.
In most cases, the measure of relief (full enforcement or reliance loss) can be understood on basis of
traditional K principles.
RSC §90 Promise Reasonably Inducing Action or Forbearance (Reliance), p 282: A promise
which the promisor should reasonably expect to induce action or forbearance on part of the promisee or a
3rd person and which does induce such action or forbearance is binding if injustice can be avoided only be
enforcement of promise. Remedy granted for breach may be limited as justice requires.
Hillman introduction, I-72 (see I(C)(1)): Promissory estoppel requires detrimental reliance on a
promise. Some thought that it would swallow up the bargain theory of contract, but promissory estoppel has
a limited role in the courts and reliance is still an important element in the findings of promissory estoppel.
Most promissory estoppel cases failed in court.
Hillman, Questioning the “New Consensus” on Promissory Estoppel, Supp II-39: Contrary to popular
belief, courts do award damages in promissory estoppel cases as justice requires: use both expectancy and
reliance damages. Frequently award expectation damages b/c (1) expectation damages may be easier to
prove than reliance damages (2) court’s desire to compensate promisees for forgone opportunities (may
often be equivalent to lost expectancy in a market economy)
c. Restitution as a Remedy for Breach of Contract
United States v. Algernon Blair, Inc., 1973, p 99: Coastal had performed subcontracting work for Blair,
but Blair breached before Coastal finished performance. Completion of the K would have produced a
loss for Coastal – its position would have been worse than status quo ante. Coastal had, therefore,
conferred a benefit on Blair by its partial performance. Court awarded restitution damages in quantum
meruit – Latin “as much as he has deserved” – the reasonable value of services rendered undiminished
by any loss that would have been incurred by complete performance – allows a promisee to recover the
value of services he gave to the defendant irrespective of whether he would have lost money on the contract
and been unable to recover in a suit on the contract. Criticism: court remaking bad K in favor of injured
party.
Note: Restitution pays solely for the benefit conferred on breaching party; it ignores some of the reliance
expenses, such as preparation expenses. Under reliance but not restitution, if the K would have lsot money
then the losses are subtracted from damages.
Accompanying Note: Coastal got to disregard terms of contract by claiming “quantum merit.”
Restitution damages require the breacher to do something that was never promised, i.e. obligation to restore
him to status quo ante rather than give equivalent in money of what was promised.
Note: If Coastal had completed performance, expectation damages would be the only available damages.
Restitution is not available once performance is completed by injured party and all the breaching
party owes is money (RSC §373)
Oliver v. Campbell, CA 1954, p 195:  (a lawyer) agreed in writing to represent  in a pending action
brought by ’s wife for divorce for $850. Trial lasted 29 days; before findings were signed,  dismissed 
from the case. Court only allowed  to recover the contracted fee rather than full value of his services.
When an employment contract is terminated by wrongful discharge before performance is completed,
the contract doesn’t operate as a limit on recovery. In this case,  had in effect performed and was
therefore limited to K price in accordance w/RSC §350: remedy of restitution in money is not available to
one who has fully performed, if the only part of agreed exchange for such performance that hasn’t been
rendered by  is a sum of money constituting a liquidated debt.
Note: Discontinuity at Full Performance, p 106: Rule applied in Oliver v. Campbell can be explained
by saying that courts should look to terms of K to govern measure of compensation. It’s easier to look
at contract provisions than make an extended inquiry into external sources as to what may be fair
compensation. Remedy in restitution is designed to prevent unjust enrichment of breacher, so remedy
is measured not by loss to injured party, but by gain received by party in breach.
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Reason to use expectation damages: it is the province of the law to provide remedies for enforcing Ks and
for indemnifying parties injured by their breach; to step in and imply a new & different contract in the cases
when performance was not completed is wrong.
If  chooses not to rescind the agreement if  breaches, but instead completes performance and sues to
recover damages, the  is limited to recovery of damages on the K and may not seek recovery based on
alleged quasi-K. In the same way, a party facing the other’s breach by nonperformance alone (e.g.,
Algernon Blair, where there was no explicit repudiation) may, by its manner of responding to the
breach, affect the availability of restitution remedy.
RSC §373 Restitution When Other Party is in Breach, Supp. II-46: For non-performance that is a
total breach or a repudiation, the injured party is entitled to restitution for any benefit he has conferred on
the other party by way of part performance or reliance. The injured party has no right to restitution if he has
performed all of his duties under the K and no performance by the other party remains due other than the
payment of a definite sum of money for that performance.
Comment: An injured party usually seeks (through expectation or reliance interest) to enforce the broken
promise, but the injured party may also seek (through restitution interest) to prevent unjust enrichment of
other party.
Note: this applies to all enforceable promises, based on consideration, reliance or otherwise.
Note: there is no relationship between grounds for enforcement and measure of damages
Note: You’ll always be better off under expectation rather than restitution unless it was a losing contract
6. Contractual Provisions Setting Damages
liquidated damages clause – if trying to K around damages in a permissible way
penalty clause – provision will be struck down if they make the amount too high
 invalidating penalty clause may be good b/c (1) maybe unconscionable (2) promote efficient breaches
(3) people sometimes make mistakes b/c they are overly optimistic
 but (1) unconscionability applies to consumer-business, not business-business (2) invalidating them is a
purely substantive restriction on asymetry of values to the two parties of a K w/a gift element –
inadequate consideration is not usually policed by the courts – why do it under this doctrine? (3) people
may use liquidated damages clauses to set damages the law finds too uncertain to compensate
City of Rye v. Public Service Mutual Insurance Co., NY 1974, p 129: Developers contracted with City
of Rye () to construct apartments. Developers had to post a $100,000 bond to ensure liquidated damages
of $200/day for each day past projected completion date for the buildings. Bond amount unrelated to actual
damages. When damages from breach would be hard to ascertain, parties may provide for liquidated
damages that reasonably approximate actual damages, but if the liquidated damages are so
disproportionate as to constitute a penalty, they will not be permitted. Here, the $200/day clause was
not in proportion to any actual damages; there was no evidence that the City suffered any damages at all.
Punitive damages are not allowed for contracts unless legislature passes a statute authorizing them.
Banta v. Stamford Motor Co., CT 1914, Supp II-48: Yacht was two months late, so  had to abandon
cruise. K stipulated that  would pay $15/day for every day the boat was late. Requirements to enforcing
liquidated damages provisions: (1) Stipulated damages must be reasonable in light of harm
anticipated [RSC now also allows for reasonableness in light of actual harm]. This clause was not punitive
but a way to determine in advance a fair amount to be paid as damages in event of a breach. (2) Difficulty
in proving harm: here, the yacht was not for profit but for pleasure, and so measure is uncertain
Muldoon v. Lynch, CA 1885, p 132: Muldoon contracted to erect a monument of Italian marble for
Lynch’s husband. The contract stipulated the monument was to be done in 12 months “under forfeiture of
$10/day” for every day beyond the year. Marble was shipped two years late, but Lynch not allowed to
deduct the $10/day deduction in overall price b/c the clause is a penalty clause and will not be
enforced. There were no actual damages, and the harm suffered is not legally compensable. Penalty clause
is unenforceable b/c there’s no evidence the amount is reasonable in light of the harm from breach.
Note: Even if it was only 10 days late, still wouldn’t be allowed to deduct the $ b/c it’s punitive.
RSC §356(1) Liquidated Damages and Penalties, p 134: Damages for breach by either party may be
liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual
loss caused by breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated
damages is unenforceable on grounds of public policy as a penalty.
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Comment: Amount is reasonable to extent that it approximates actual loss resulted or loss anticipated at
time of making of the K. The greater the difficulty either of proving loss has occurred or of establishing its
amount w/ requisite certainty, the easier it is to show that the amount that was fixed is reasonable
U.C.C. §2-718(1), App. 67, Liquidation or Limitation of Damages; Deposits: Damages for breach by
either party may be liquidated in the agreement but only at an amount which is reasonable in the light of
anticipated or actual harm caused by breach, the difficulties of proof of loss, and the inconvenience or
nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated
damages is void as a penalty.
Comment: Unreasonably small amounts of fixed damages would be subject to similar criticism as
unreasonably large amounts and may be stricken under section on unconscionable Ks or clauses.
Wilt v. Waterfield, MO 1954, p 136:  contracted to sell his farm to  for $19,000, and received a
$1900 down payment. The contract provided that if either party failed to perform, the other party would be
entitled to 10% the agreed sales price.  breached by selling farm to a 3rd party (for $7000 more than he had
agreed to sell it to  for) and  sued for damages. Court said damage measure using arbitrary
percentage measurement is invalid as a penalty, but  is entitled to recover for up to his actual loss,
which is $7000 (difference between contract price and market price) plus the $1900 down payment.
Comment: The Penalty Rule and “Efficiency”, p 145: A general rule invalidating penalty clauses is not
efficient b/c (1) parties could negotiate the allocation of efficiency gains after the breach, and (2) Just
compensation is not necessarily achieved if rules do not recognize as provable or compensable all of the
losses (even idiosyncratic or subjective values) the promisee may contemplate or suffer.
B. Specific Performance
output K – supply all of your output
requirements K – supply all the needs of someone
Note: parties cannot contract for SP b/c it’s like a penalty clause & is involuntary servitude
Note: only give SP when expectation damages are uncertain
Van Wagner Advertising Corp. v. S&M Enterprises, NY 1986, p 146-151: Michaels leased billboard to
Van Wagner for 3 years plus options for seven additional years. In 1982, Michaels sold the building to
S&M, who chose to cancel the lease. The lease agreement provided that lease could be canceled with 60
days notice if the building was sold to a third party, but parol evidence showed that the parties intended for
only Michaels to be able to terminate the lease so S&M was breaching. Court said monetary damages were
adequate b/c specific performance would impose a disproportionate burden on the defaulting landlord and
be disproportionate in harm to  and benefit to . Give money damages unless the court cannot obtain,
at reasonable cost, enough information about substitutes to permit it to calculate an award of money
damages without imposing an unacceptably high risk of under-compensation to the injured promisee
(uncertainty as a reason for specific performance). No SP b/c there is a monetary equivalent.
Note: doctrinal standard rests on (1) adequacy of $ damages (2) deference to trial court’s discretion
Curtice Bros. Co. v. Catts, NJ 1907, p 151: Curtice, a tomato canning plant, sued for specific
performance of a contract where , a farmer, had agreed to sell entire tomato crop from specified land.
Court enjoined the farmer from selling tomatoes to anyone else and, if that doesn’t induce performance, a
court-appointed official will harvest the crop. Specific performance is necessary when no adequate
remedy at law exists, even regarding a contract touching sale of personal property. Here, substitute
performance is not available. It is an “output contract,” where supplier agrees to sell total output
(uncertain) to the buyer. Breach leaves the factory helpless, except o the extent an uncertain market may
happen to supply the deficiency. Lost profits may be too uncertain to calculate (RSC §360(a)).
 True specific performance is never awarded; instead court awards equitable relief (negative
specific performance). Courts don’t want to award true specific performance in cases where
personal service is required in contract because it is viewed as akin to involuntary servitude
RSC §360 Factors Affecting Adequacy of Damages, p 157: To determine whether remedy in
damages would be adequate to protect injured party’s expectations, consider difficulty of proving damages
w/ reasonable certainty, difficulty of procuring a suitable substitute performance by means of money
awarded as damages, and likelihood that an award of damages could not be collected
U.C.C. §2-716, App. 66: Buyer’s Right to Specific Performance or Replevin: Specific performance
may be decreed where goods are unique or in other proper circumstances. Decree for specific performance
23
may include such terms and conditions as to payment of price, damages, or other relief as court may deem
just. Buyer has a right of replevin (retaking of personal property wrongfully taken) for goods identified to
the K if after reasonable effort his is unable to effect cover (open market purchase of substitute goods) for
such goods or the circumstances reasonably indicate that such effort will be unavailing or if the goods have
been shipped under reservation and satisfaction of the security interest in them has been made or tendered
Comment: This Article seeks to further a more liberal attitude than some courts have shown in connection
w/ the specific performance of Ks of sale. Specific performance is no longer limited to goods which are
already specific or ascertained at the time of contracting. The test of uniqueness under this section must be
made in terms of the total situation which characterizes the K. Uniqueness is not the sole basis of the
remedy under this section. Get replevin if cover is reasonably unavailable & goods identified to the K.
Note, p 158: It is generally understood that UCC §2-716(1) preserves the historical “adequacy” test
of equity jurisdiction. The proposed revision of 2-716(1) allows a court to decree spec. perf. if both
parties agree to the remedy or if agreed performance of breaching party are. Even if both parties agree to
spec. perf., can’t enter decree when breaching party’s sole remaining K obligation is payment of money.
Eastern Rolling Mill Co. v. Michlovitz, MD 1929, p 159: Eastern agreed to supply  w/ all scrap metal
they would accumulate during next 5 years as a by-product of their milling operations (output K). Eastern
breached. Court awarded specific performance b/c quantity of scrap  will produce and market price
is speculative and not compensatory. Not involuntary servitude because the scrap metal is a byproduct of the normal milling operations that would occur anyway, so there is no requirement to run
the plant involved, only a requirement to hand over scrap metal that results from whatever operations are
involved.
American Broadcasting Co. v. Wolf, NY 1981, p 171: Wolf gave ABC right of first refusal during first
45 days, and promise of good faith negotiations for extension of K for 90 days. He signed with CBS during
the good faith term, thereby breaching K. An employment contract will not be specifically enforced,
after its termination, through injunction, absent the need to prevent injury from unfair competition
(usually theft of trade secrets or customer lists) or to enforce an express and valid anti-competitive
covenant. If relief were granted here, any breach of an employment contract provision relating to renewal
negotiations logically would serve as the basis for an open-ended restraint upon the employee’s ability to
earn a living should he ultimately choose not to extend his employment (b/c ABC wanted to stop him from
performing his 2-year contract with CBS). Refuse to create a non-competitive covenant by implication.
ABC cannot get equitable relief, but it can get relief in form of monetary damages.
Note: In employment context, can only give SP when (1) there is a covenant not to compete in the K (2)
issue of trade secrets being disclosed
Posner, Economic Analysis of the Law, Supp II-49: Court must give damages unless they are difficult
to compute because of lack of good market substitute for performance. In real estate, the courts often award
SP b/c damages are uncertain. If this is an efficient breach, the seller can always pay buyer to surrender
right to specific performance – but that may be blocked by increased transaction costs. Furthermore, SP
requires court to monitor case until performance is complete – more expensive than damages.
Schwartz, The Case for Specific Performance, Supp. II-50: Specific performance should be routinely
available because: (1) Damages are often undercompensatory because incidental damages are difficult to
monetize and courts may be reluctant to award speculative damages, (2) Promisees have economic
incentives to sue for damages when damages are likely to be fully compensatory; the very fact that a
promisee requests specific performance thus implies that damages are an inadequate remedy (3) Promisees
have better information than courts as to the adequacy of damages and difficulties of coercing performance
(4) Expanding the availability of specific performance would not generate higher post-breach negotiation
costs than the damage remedy because buyers and sellers are likely to have a comparable cover costs, or if
anything, sellers have lower costs than buyers
III. ASSENT
A. THE MAKING OF AGREEMENTS
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1. Introduction
Introductory Note, 323: Contract obligation is voluntarily assumed, resting on the assent of each party
to the proposed exchange.
Llewellyn, What Price Contract? - An Essay in Perspective, p 324: Regime of contract regiments men
into groups and classes & moves toward socialization of social relations; people are divided by a rough
equality in bargaining power. Major importance of legal contract is to provide a highly adjustable
framework for group organization and temporary or permanent relation between individuals and groups.
2. Objective versus Subjective Theories of Contract
Embry v. Hargadine-McKittrick Dry Goods Co., MO 1907, p 325: Embry approached the company
president in December and told him he needed to know the status of his re-employment, because if he
wasn’t going to get a contract for another year he would leave and seek employment elsewhere. The
president then said, “Go ahead, you’re all right. Get your men out and don’t let that worry you.” Embry
took that as assurance of a K. President denies saying this and says no contract was made. Court uses
reasonable person standard, concludes that any reasonable person would find a K to have been
formed. “In so far as their intention is an influential element, it is only such intention as the words or
acts of the parties indicate; not one secretly cherished which is inconsistent with those words or acts.”
Note: situation was informal & never mentioned employment K, but Embry made a notice of reliance;
McKittrick behaved recklessly, but only liable in combination w/Embry’s reliance
Question, p 328: In East Providence Credit Union v. Germania, Germanias had a good-faith reliance
on promise of East Providence to pay car insurance premium & add it to their loan. Embry theory of
reasonable person buttresses the decision made in East Providence. In order to determine assent, the
court must look at the objective external expressions of intent in terms of what a reasonable person
would understand by a party’s actions or words and must NOT look to party’s subjective intent.
Hotchkiss v. National City Bank of New York, NY 1911 (Judge Learned Hand), Supp III-1: A contract
has, strictly speaking, nothing to do with the personal or individual intent of the parties. A contract is an
obligation attached by the mere force of law to certain acts of the parties, usually words, which
ordinarily accompany and represent a known intent. Even if neither party intended something else
than the usual meaning which the law imposes on them when he used the words, that party would
still be held to the usual meaning.
Whittier, The Restatement of Contracts and Mutual Assent, p 328: New doctrine seems to hold that one
who did not actually assent to the contract may be held to it if he carelessly led the other party to reasonable
think that there was assent. The chief unfortunate result of this state of the law is that the party is bound to
the contract even though the other party is notified of the mistake before the latter has changed his position
or suffered any damage or if his mistake was non-negligent. Wants promise + reliance for enforceability. A
K is about assent, so we do care about subjective intent.
Minow and Rakoff, Is the “Reasonable Person” a Reasonable Standard in a Multicultural World?, in
Everday Practices and Trouble Cases, Supp. III-2: Reasonable person standard sets an objective standard
that does not depend on the subjective beliefs or intentions of particular individuals and provides flexibility
to adapt to an enormous range of specific circumstances and varying historical practices. However, the
understanding of the reasonable person in the circumstances becomes problematic when take into account
multi-culturalism of our society. The reasonable person standard tolerates and protects particular,
existing group subdivisions (status law) – hegemonic custom of dominant group. It’s a false universalism
that does not provide governing rules for interactions between people who are seen as members of different
groups. It’s difficult to ascertain the intention of the parties when there is a difference between
general usage and trade usage(s). Limiting people to a specific contract-law meaning may lead to a
hierarchy of the educated who know the word’s formal significance.
Tiersma, The Language of Offer and Acceptance, Supp. III-23: How can you tell the difference
between a statement of intent and a promise? Grice’s conversational implicature – Cooperative
Principle: participants in conversation normally cooperate with one another and so court should
interpret utterance as being relevant to what went on before. (1) quantity – make your contribution to
conversation only as informative as necessary (2) quality – your contribution should be true and you should
have adequate evidence for it (3) relation – you contribution should be relevant (4) manner – promote
brevity, clarity, etc.
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Note: Courts sometimes set penalty default rules to encourage the more informed party to make terms of
the agreement clear. Aggressive disclosure will lead to a more actual assent.
Note: Interpretation of language: The law says that if there’s an industry usage, it’s binding on the parties.
For sale of goods under UCC, even if one of the parties can actually be shown not to know that meaning
(new entrant to industry), they are still bound by industry meaning. Bound by status as industry member.
3. Intention not to be Bound
Keller v. Holderman, MI 1863, Supp. III-28  gave  check for $300 for a silver watch worth $15.
Trial court found that the whole transaction was “a frolic and a banter” –  did not expect to sell and  did
not intend to buy. Court refused to enforce agreement b/c it was a joke – no K was made b/c neither
party intended to perform at the time agreement was made.
Moulton v. Kershaw, WI 1884, p 343: Kershaw sent Moulton a letter saying they were “authorized to
offer” [not “sell”] Michigan fine salt and would be pleased to receive their order. Moulton replied
immediately by telegram, ordering 2,000 barrels as offered. Kershaw withdrew their offer and Moulton
sued. Court said the letter was not a binding offer, but merely a solicitation for business, because no
quantity was specified and the offer left the quantity up to the buyer. If communication had said
“any quantity you want to order,” then the result would be opposite and it would be a binding offer.
Note: An illusory promise is when they assent to a deal but do not specify quantity (Wickham). This
uncertainty problem is about whether a K was ever made.
Note: precedent in Keller about grapes – built-in limitation of total # grapes growing in vineyard; here court
doesn’t want to figure out what a reasonable amount is or to give advertiser unlimited liability
Note: ads are generally not offers
Sharp, Promissory Liability, p 345: Moulton’s specified price but unspecified quantities led to
uncertainty that makes it hard to figure out if an offer. Distinguish a significant offer from statement of
intention or invitation to deal by the presence of a promise.
p 346: Lefkowitz v. Great Minneapolis Surplus Store, 1957 – placed ads in the paper saying that first
come, first serve will give fur coats away for $1; when the  showed up,  said that a “house rule” limited
the sales to women only. Ads normally do not constitute offers, but the MN court found an offer to sell and
thus a K formed b/c ads were “clear, definite, and explicit, and left nothing open to negotiation.” “An
advertiser does not have the right, after acceptance, to impose new or arbitrary conditions not contained in
the published offer.” Izadi v. Machado (Gus) Ford, FL 1989 – binding offer may be implied from the very
fact that deliberately misleading advertising intentionally leads the reader to the conclusion that one exists.
Ford Motor Credit Co. v. Russell, MN 1994 – unreasonable for public to believe advertisement of 1988
Ford Escort at $7,826, 11% APR constitutes offer since not everyone qualifies for such financing and all
must know dealer does not have unlimited number of Escorts. Carlill v. Carbolic Smoke Ball Co., 1893 medicine manufacturer’s NP ad: “$100 award will be paid by the Carbolic Smoke Ball Co. to any person
who contracts the increasing epidemic influenza, colds or any disease caused by taking cold, after having
used the smoke ball three times daily for two weeks according to the printed directions supplied with each
ball. $1000 is deposited with Alliance Bank, Regent Street, showing our sincerity in the matter.” Can you
use deposit to infer a quantity limit or simply to show that it is a serious offer (but then no quantity)
Note: rule: no quantity, no contract
Empro Mfg. Co. v. Ball-Co Mfg., Inc., 1989, p 352: Empro sent Ball-Co a “letter of intent” that
included several carefully drafted clauses, that stipulated Empro could change its mind w/o consequences.
Then sought to enforce letter of intent as a binding offer, saying the parties intended it to be so, after BallCo went to someone else. A preliminary letter of intent memorializing terms but anticipating further
negotiations and decisions cannot have legal force independent of a definitive contract. The
agreement only reflected an intermediate stage of negotiations and was not a final, binding deal.
Intent in contract law is objective, so the parties’ subjective intent is not important. There’s no reason
to believe Ball-Co assumed a one-sided commitment. Empro does not deserve reliance expenditures either –
these outlays are part of doing business. Contemplation of subsequent writing not binding.
Note: when all the terms are set but all that’s left is writing it down, then a K is legally binding even though
a subsequent writing is contemplated. The fact that a subsequent writing is contemplated does not
automatically deprive earlier arrangements of legal force.
Note: Contemplating a Writing, p 355: Billings v. Wilby, 1918, negotiations were made back and forth
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by wire; the final wire from the plaintiff read, “Will accept. Send contract signed at once.” Nobody had
previously mentioned a signed contract, and no written agreement was ever executed. Nevertheless,
plaintiff's wire was held to complete a contract. “[W]hen parties to an oral contract contemplate a
subsequent reducing of it to writing as a matter of convenience and prudence and not as a condition
precedent, it is binding on them though their intent to formally express the agreement in writing was never
carried out.” RSC § 27 mentions ‘contemplating’ a writing during bargaining: “It is possible thus to make a
contract the terms of which include an obligation to execute subsequently a final writing which shall contain
certain provisions.”
4. Indefiniteness
Note: Indefiniteness is a doctrine for once you already have agreement. Course of dealings (like in Embry)
are one way to solve an indefiniteness problem. Requirements Ks are ok b/c offering party was explicit
that the offeree can order as much as he wants.
Joseph Martin, Jr. Delicatessen v. Schumacher, NY 1981, p 347: Classic unenforceable, subjective
“agreement to agree” case. Landlord asked for exorbitant rent (double market value) to renew lease.
Tenant sued for specific performance to compel landlord to extend lease at appraiser’s figure or other
reasonable sum. Court refuses to enforce because terms aren’t specific and definite enough. Neither
party is bound in K to any formula to determine rent, and court can’t make one up and impose it on
the parties since a K is a private ordering in which party freely binds himself to do something. Court
distinguishes from Metropolitan Corp. v. May Oil Burner Corp and U.C.C. code that allows a series of
annual renewals to ripen into a course of dealing which can give meaning to otherwise uncertain term.
Sub-issues: (1) it’s a real-estate transaction (2) both parties are businessmen (3) no course of dealing to give
meaning to an otherwise uncertain term.
Lafayette Place (Associates) v. Boston Redev. Auth., MA 1998, Supp. III-29: Boston breached 3-way
K to transfer land after LPA exercised its option to buy. Contract stated “the parties shall in good faith
negotiate and enter into an agreement” and set up arbitration devices to deal with disagreements over the
details and city claimed this was too indefinite to be enforceable. Court said that although the contract
leaves undetermined the contract price and exactly what was to be included in Hayward Parcel,
because the parties specified formulae and procedures that provided mechanisms to narrow present
uncertainties to rights and obligations, their agreement was binding. Rules of contract must not
preclude parties from binding themselves in the face of uncertainty.
Like in Martin, court says appropriate details of the purchase should be worked out by the parties; the only
difference is that they set out a formula for determining what the price would be.
Note, p 350: Open price arrangments (like in Martin) omit any reference to a fixed price or provide
that the price will be the “market price” at a specified date or time and place – allows the parties to
speculate. Common law: If K has significant indefiniteness, it is not enforceable. UCC §204-3 As long as
parties intend to be bound, and there’s a reasonably certain basis for giving a remedy, an agreement is
binding despite some terms having been left open. U.C.C. §2-305 ensures that most open-price
arrangements, including a term leaving the price to be agreed by the parties, will be enforceable.
Common law: even if parties intend to be bound, if they leave important terms out (for non-sale-ofgoods contracts), they don’t have a binding contract; significant indefiniteness  K unenforceable – it’s
unclear if RSC §33 is consistent w/CL
RSC §33 Certainty, p 350: A manifestation of intent is not a contract unless the terms of the contract
are reasonably certain. The terms of a contract are reasonably certain if they provide a basis for determining
the existence of a breach and for giving an appropriate remedy. The fact that one or more terms of a
proposed bargain are left open or uncertain may show that may show that a manifestation of intention is not
intended to be understood as an offer or as an acceptance.
Comment: fundamental policy that K should be made by the parties, not by the courts, so remedies for
breach must have a basis in the agreement of the parties
U.C.C. §2-305(1), (4), App. 30, Open Price Term: The parties if they so intend can conclude a
contract for sale even though the price is not settled. In such a case the price is a reasonable price at the
time for delivery if (a) nothing is said as to price; or (b) the price is left to be agreed by the parties and they
fail to agree; or (c) the price is to be fixed in terms of some agreed market or other standard as set or
recorded by a third person or agency and it is not so set or recorded. Where, however, the parties intend not
27
to be bound unless the price be fixed or agreed and it is not agreed there is no contract. In such a case the
buyer must return any goods already received or if unable to do so must pay their reasonable value at the
time of delivery and the seller must return any portion of the price paid on account.
Comment: article rejects formula that “an agreement to agree is unenforceable” or defeating agreements
where price term is left open on making of agreement which is intended by parties to be binding on the
ground of indefiniteness; trier of fact has to figure out if they intended to make an agreement; you can make
a particular person’s judgment a condition of the contract.
Southwest Engineering Company v. Martin Tractor Company, Kan. 1970, p 351: Parties reached no
agreement on terms of payment for a generator, but failure to agree on terms of payment would not, of
itself, defeat an otherwise valid agreement reached by them so long as there is any reasonably certain basis
for granting a remedy. Considered together, UCC §§ 2-204(3) and 2-310(a) (which supplies the missing
term) mean that where parties have reached an enforceable agreement for the sale of goods, but omit
the terms of payment, the law will imply, as part of the agreement, that payment is to be made at time
of delivery.
U.C.C. §2-204, App. 20, Formation in General: (1) A contract for sale of goods may be made in any
manner sufficient to show agreement, including conduct by both parties which recognizes the existence of
such a contract . (2) An agreement sufficient to constitute a contract for sale may be found even though the
moment of its making is undetermined. (3) Even though one or more terms are left open a contract for sale
does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably
certain basis for giving an appropriate remedy.
Comment: (1) is for implying contract from conduct; (2) is for correspondence that does not disclose
exact point at which deal was closed, but actions of parties indicate that a binding obligation has been
undertaken; (3) is for open terms – makes it valid despite missing terms if there is a reasonably certain
basis for granting a remedy; test: apply commercial standards of “indefiniteness.” The more terms are left
open, the less likely that they intended it to be a binding agreement.
Cofman v. Acton Corp., 1992, Supp. III-33: s (Cofman + 10 others) entered into settlement
agreements with  that had a provision providing that the s could, w/in 3 years of the settlement
agreements, demand payment for stock. Payment was to be decided through a formula in the provision. s
voted on a reverse stock split a year after the settlement agreements were made. Because the settlement
agreements did not adequately and definitely address the issue of an eventuality such as a stock split,
the court must determine the meaning by looking at extrinsic evidence. The court must accept both
the guidance and constraints to be found in parties’ own mutual expression of their agreement. Here it
seems unlikely that the meaning of agreement was to give a windfall compensation provision contingent on
a stock split or reverse stock split, despite ’s arguments to the contrary.
Note: All K’s have elements of indefiniteness; this K is not fatally indefinite b/c you can’t make a
contingency for everything. Court should ask what the parties would have contracted had they known of the
contingency. Does this eliminate idea of assent?
Barnett, The Sound of Silence, Supp. III-37: All K’s are incomplete to some degree b/c of our
ignorance of the future and our relative indeterminacy of aim. Legal realists say that contract law fills the
gaps inherent in every contract, and the notion of gap filling or “implied-in-law” creates a legal fiction of
assent to things the parties did not agree to. Parties do not only consent to the explicit terms in their
agreement; rather, they may also choose to remain silent and let default rules operate (this is only true if
have good information about the default rule and there are low transaction costs associated with bargaining
around the default rule). There is direct consent to expressed and implied-in-fact terms. (1) When both
parties know the law, default rules are consensual. (2) When only one party knows the law, the default rule
should reflect the commonsense understanding of the community to which the rationally ignorant party
belongs. (3) When neither party knows the law, should adopt a default rule that tracks their shared tacit
assumptions. (4) When two parties hold rational but inconsistent assumptions, if one of their assumptions
conforms to the prevailing community norms then they should be able to rely on the “reasonable meaning,”
and if there is no dominant convention and their assumptions are reasonable then they have failed to reach a
consensual agreement on a material issue (misunderstanding like in Raffles).
* Penalty default rule – purposely set to encourage informed party to inform rationally ignorant party of
contract terms in expressing a preference for the term that deviates from the common sense term.
* If you can’t contract around a default rule, then it becomes an immutable rule
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Craswell, Contract Law, Default Rules, Supp. III-58: You can interpret agreement using existing
expectations, substantive moral values (Rawlsian, economic efficiency), or individual autonomy. If
selection of background rule is mandatory, then freedom of contract would be restricted. But if preferred
rules just used as default when not specified by parties, then freedom of contract not very limited.
Ayres and Gertner, Filling Gaps in Incomplete Contracts, Supp. III-64: Default rules – parties can
contract around, Immutable rules – parties cannot change (good faith; not allowing penalty clauses;
unconscionability; unconstitutionality). Efficient default may sometimes diverge from the “what the parties
would have contract for” principle. Penalty defaults are purposefully set at what the parties would not
want – in order to encourage the parties to reveal information to each other or to third parties.
Penalty defaults are appropriate when it is cheaper for the parties to negotiate a term ex ante than for the
courts to estimate ex post what the parties would have wanted. A “tailored default” attempts to provide a
contract’s parties with precisely “what they would have contracted for”. An “untailored default” provides
the parties to all contracts with a single, off-the-rack standard that in some sense represents what the
majority of contracting parties would want.
U.C.C. establishes radically different defaults for lack of quantity & price terms in K. Default
quantity is zero; default price will be set by courts.
Wheeler v. White, TX 1965, p 355: Contract said that White would obtain a loan from a third party or
provide it himself for Wheeler to build a shopping center. Specified amount of loan, terms of repayment,
commission and fees. K failed to provide amount of monthly installments, amount of interest, how interest
computed, when interest would be paid, etc. Wheeler tore down existing building in preparation, and White
breached, saying K was too indefinite to be enforced. Court agreed that K was fatally indefinite, but
said that can recover reliance damages (not expectation damages for anticipated profits). Promissory
estoppel is for cases in which promisor tacitly encourages conduct that doesn’t necessarily constitute
any actual performance of the K itself, but must be done by the promissee before he can begin to
perform the K & this fact is known to the promisor.
Questions, p 358: In Empro did not award damages for letter of intent b/c it was part of business
expenses of researching and negotiating the K. In Wheeler, had reliance damages in form of getting ready to
perform the contract by encouragement of the other party.
Hoffman v. Red Owl Stores, Inc., WI 1965, p 408:  sold his bakery, bought and sold a small grocery
store in hopes of getting a Red Owl franchise. Despite years of encouragement, at the last minute Red Owl
hiked the price. Court used promissory estoppel (reliance) as a substitute for consideration, rendering a
gratuitous contract enforceable as a contract. The conditions for a promissory estoppel C/A are: (1) Was the
promise one which the promisor should reasonably expect to induce action or forbearance of a definite and
substantial character on the part of the promisee? (2) did the promise induce such action or forbearance? (3)
Can injustice be avoided only by enforcement of the promise? K indefinite, reliance damages only.
Note: this is controversial; in Wheeler, it looked as if there was a K. Here court is unusually aggressive –
was there intention to be bound? usually a K requires assent. Why not have a tort claim for fraud or
misrepresentation? b/c torts require the representation to be a lie when it is made
Barnett and Becker, Beyond Reliance, p 414: Red Owl could not use tort liability for promissory
misrepresentation b/c that requires the promise to be a lie when it was made (promisor possessed the present
intent not to perform.” Contract promissory estoppel is a more flexible liability standard – allows liability
on (negligent) misrepresentation of the reliability of the promise.
5. Misunderstandings
Difference between Indefiniteness and Misunderstanding: Indefiniteness is where the parties fail to
speak to an issue or term in the K. Misunderstanding is where parties mean to speak to an issue, but they
speak in an ambiguous way about that issue.
Raffles v. Wichelhaus, Court of Exchequer 1864, p 359:  and  agreed that the  would sell  cotton
that would arrive on the “Peerless” from Bombay for a set price. When the ship arrived,  breached and
refused to accept or pay for goods.  meant Peerless ship that sailed in October, and  meant Peerless ship
that sailed in December. No breach b/c there was no consensus/mutual assent (meeting of the minds
sufficient to form a K) even though both  and ’s meanings were reasonable, and therefore no binding
contract. RULE: Misunderstanding when the parties speak in an ambiguous way on an issue voids K.
Note: in Embry, a subjective disagreement doesn’t invalidate the existence of a K if there is an objectively
29
reasonable meaning; had past relationship and there was a K; here no objectively reasonable meaning –
material misunderstanding
Flower City Painting Contractors v. Gumina Constr. Co., 1979, p 360: , a painting subcontractor,
believed that the K required it to paint only interior walls of individual units, not exteriors. , the general
contractor, relied on customary trade usage interpretation and believed it covered both.  interpreted
demand for additional compensation as a repudiation of the contract and canceled. Court said no K ever
came into existence for lack of a “meeting of the minds in the 1st instance.”  used trade usage;  was
new to business and did not know (nor should he necessarily yet have known) the trade usage (and so
used literal meaning). No single reasonable meaning can be found.
Note: Under UCC, a person who appears to be a member of the trade or holds himself out that way is
held to industry usages. Under common law, new entrant gets a break.
Problem, p 361: Frigaliment Importing Co. v. B.N.S. International Sales Corp, NY 1960 – discussed in
RSC §201: A agrees to sell and B to buy eviscerated “chicken.” A tenders “stewing chicken” or “fowl”; B
rejects on the ground that the K calls for “broilers” or “fryers.” Each party makes a claim for damages
against the other. If each acted in good faith and neither had reason to know of the difference in
meanings, both claims fail. Konic International Corp. v. Spokane Computer Services, Inc., Idaho 1985 –
buyer asked how much something was & seller said “fifty-six twenty.” Seller meant $5,620 and buyer heard
$56.20; mistake not discovered until after equipment was installed; both parties were found to be equally at
fault.
RSC §20 Effect of Misunderstanding, p 362: If both or neither of the parties know or have reason to
know the materially different meaning attached by the other, then there is no manifestation of mutual
assent. If one party knows the different meaning attached by the other, or if one party has no reason to know
and the other does have reason to know the meaning attached by the other party, then there is a K.
6. Termination of Offers
a. In General
RSC §36 Methods of Termination of the Power of Acceptance, p 377: An offeree’s power of
acceptance may be terminated by a rejection or counter-offer by the offeree, lapse of time, revocation
by the offerer, or death or incapacity of the offeror or offeree. In addition, an offeree’s power of
acceptance is terminated by the nonoccurrence of any condition of acceptance under the terms of the offer.
b. Lapse of Time
Textron, Inc. v. Froelich, PA 1973, p 368: During a phone conversation, seller offered broker steel rods
at stated prices. Broker needed to check w/ customers before accepting. No time limit was specified for
offer. Broker called back 5 weeks later and agreed to buy one lot; 2 days after he called to agree to buy the
other. Seller responded both times w/ “Fine, thank you.” Rods weren’t delivered. If no time for expiration
for a power of acceptance is specified in the offer, the power terminates at the end of a reasonable
time. What a reasonable time is goes to trier of fact; depends on nature of K proposed, the usages of
business and other circumstances of the case which the offeree either knows or has reason to know.
 Seller’s response of “Fine, thank you” could actually be an acceptance of buyer’s later offer to buy.
Note: court bases decision on reliance by offeree; discussion of reasonable time is dicta
c. Death or Incapacity of Offeror or Offeree
Davis v. Jacoby, CA 1934, p 371: s were niece and nephew-in-law of Whiteheads. When Aunt got
sick, Uncle wrote to s saying that if they would come to California and help him take care of the Aunt and
manage his money, the niece would inherit everything. s accepted but before they could get to CA, the
Uncle killed himself. They sold their business and moved to CA (cost $8K) and took care of the Aunt until
she died. The will left everything to other nephews, and s sued for specific performance. Court awarded
SP; said reasonable meaning of K was bilateral, and so it was binding from the moment s promised
to perform, not just upon performance (looked at intent, language, reliance, circumstances).
Note: At the time, the first Restatement §31 included Presumption of Bilateral K: “In case of doubt it is
presumed that an offer invites the formation of a bilateral contract by an acceptance amounting in effect to a
promise by the offeree to perform what the offer requests, rather than the formation of one or more
unilateral contracts by actual performance on the part of the offeree.” There is a presumption of bilateral
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contract b/c “It is not always easy to determine whether an offerer requests an act or a promise to do the act.
As a bilateral contract immediately and fully protects both parties, the interpretation is favored that a
bilateral contract is proposed.” – This is NO LONGER THE CASE.
unilateral contract –cannot be accepted by a promise to perform, but only by performance itself
bilateral contract –acceptance can be a promise by offeree to perform
Question, p 376: If, after their acceptance, the Davises had decided not to move, then there was a K,
but they breached and so do not deserve SP.
Note, p 376: The presumption in original Restatement’s §31 has been modified in RSC §32: “In case
of doubt an offer is interpreted as inviting the offeree to accept either by promising to perform what the
offer requests or by rendering the performance, as the offeree chooses”
d. Revocation
Rules for Unilateral Contracts
1. traditional: offeror can revoke anytime before performance is completed; protects offerors; bright-loine
rule; when it’s not a discrete act & takes time, investment, this rule becomes problematic
2. modern rule: partial performance means you can’t revoke (RSC §45) – when an offeror wants a unilateral
contract, then an options K is created when performance has begun – this includes the on the requested
performance, not preparations (§87 gives reliance grounds for these claims; §90 does not include
requirement that it has to occur before acceptance b/c it’s talking about an offer; §87-2 requires action or
forbearance of a substantial character). RSC §25 options K limits power to revoke. §45: limits offeror, but
does bind offeree! under §45, a K is formed only if have complete performance – an end run around
avoidable damages! why isn’t this unfair to offeror? b/c he chose unilateral
Formality as a basis for making offers irrevocable
1. under statutory law in effect in many states, a promise in writing to keep an offer open is binding
2. under common law, an offer is revocable unless use formality – in writing and recite purported
consideration
3. under UCC, limitation of 3 months
Dickinson v. Dodds, England 1876, Supp. III-69:  offered to sell property to  and promised to keep
offer open until Friday.  sold the property to someone else before the end of the week.  sued for SP.
Court said the document was only an offer & not a concluded agreement b/c there was no
consideration given for the promise to keep property unsold. Promise not binding. At any moment
before complete acceptance of the offer,  was free to do whatever he wanted with the property,
including explicitly or actually retracting/withdrawing the offer. Don’t require personal notice of
revocation; it’s clear that  knew  had changed his mind, so there was never existence of the “same mind
between the two parties which is essential in point of law to the making of an agreement.”
Note: If there is consideration for keeping the offer open, then it can’t be revoked. It then becomes an
option contract – RSC §25)
RSC §25 Options Contracts, Supp. III-72: An option contract is a promise that meets the
requirements for the formation of a contract and limits the promisor’s power to revoke an offer.
Comment: A promise which constitutes an option contract may be contained in the offer itself, or it may be
made separately in a collateral offer to keep the main offer open. [options K must have consideration]
Petterson v. Pattberg, NY 1928, p 377:  told  (Petterson) that he could pay off his mortgage in cash
for $780 less than was due under scheduled payments if he paid one payment on April 25 and the rest by
May 31st.  paid the April payment, and then he made a contract to sell the land to a third person free and
clear of the mortgage. When he went before May 31st to pay the rest, Pattberg refused to accept the payment
because he already sold the mortgage to a 3rd party. Petterson then had to pay the full amount of the bond
and mortgage, to a loss of $780. Court refused to give damages b/c the offer was to form a unilateral
K. Performance of the act required for acceptance. Because offer of defendant was withdrawn before
it became a binding promise, no contract was ever made. Dissent says that the consideration requested
by  was a promise to pay with present intention and ability to make the payment, and that ’s promise was
accepted by  in the way  intended for it to be accepted, if he acted in good faith. Should have used
clearer language if wanted to reserve right to refuse offered payment.
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Note: offeror is the master of the offer. majority judge interprets this as a “screw me” K – full performance
would only be giving $, but Pattberg had to accept the $ for full performance; it’s more plausible that the act
being requested was trying to pay. In this case, the problem is figuring out what the act requested was.
Note: Illusory K doctrine is about bilateral Ks w/one side only making a purported promise but not really
doing anything; unilateral K means one party is not bound in any way until performance
Wormser, The True Companion of Unilateral Contracts, p 381: When an act is wanted in return for a
promise, a unilateral contract is created when the act is done – the offeror can withdraw his offer until it has
been accepted (until performance is completed). Doctrine of unilateral contract is just and equitable b/c
allows both parties to reconsider and withdraw.
Comment: The Unilateral Contract, p 382: Unilateral contract theory that allows offeror to revoke until
performance has been completed (makes offeror the “master of the offer”) compels results contrary to
common sense and elementary decency when applied to cases where performance requires long or
expensive preparation or is actually a series of acts extending over a period of time.
RSC §45 Option Contract Created by Part Performance or Tender, p 383: Where an offer invites
an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option
contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it.
The offeror’s duty of performance under any option contract so created is conditional on completion or
tender of the invited performance in accordance with the terms of the offer.
Comment: Preparations for performance: What is begun or tendered must be part of the actual performance
invited in order to preclude revocation under this section. Beginning preparations, though they may be
essential to carrying out the contract or to accepting the offer, is not enough. Preparations to perform may,
however, constitute justifiable reliance sufficient to make the offeror’s promise binding under §87(2).
Brackenbury v. Hodgkin, Maine 1917, p 384: Mother Ks w/ daughter and son-in-law (s) to move
from Missouri to Maine and take care of her in exchange for use and income of premises and household
goods while mom was alive and ownership of the place when she died. s did come and take care of her,
and relations became strained. Mom then executed a deed to her son. Court said that offer was a
unilateral K – since s embarked upon performance, they have accepted and K is binding. Mom
couldn’t convey the interest in land to son since it belonged to s since their acceptance created an
equitable interest in the land. No breach of duty of s since tried to perform and did to extent mom allowed
them to.
Note: §45 doesn’t apply b/c performance is not complete. § 62 says beginning of performance is like a
promise to render complete performance and counts as an acceptance. Both §45 and §62 make K binding.
Note, Doubt as to the Form of Acceptance, p 386: Traditional viewpoint: unilateral contract, and
reliance of §45 protects offeree once performance has begun. But this may not be helpful for needs of
commercial offerors. RSC §32 provides that when nature of acceptance invited by offer is “in doubt,” the
offer should be interpreted as inviting acceptance either by a promise to perform or by rendering the
performance, as the offeree chooses. This doesn’t involve much loss of offeror’s control since offeror can
specify means of acceptance. Significance of §32 is its introduction of a presumption of offeror
indifference when form of acceptance is not made clear. RSC §62, Effect of Performance by Offeree
Where Offer Invites Either Performance or Promise, says that when an offer invites an offeree to choose
between acceptance by promise and acceptance by performance, the tender or beginning of the invited
performance or a tender of a beginning of it is an acceptance by performance, and such an acceptance
operates as a promise to render complete performance.
Note: §62 is b/c don’t want to trap someone into asymmetry where offeror is bound and offeree isn’t –
protect offeror when he is vague; only if very clear do we have asymmetric situation
U.C.C. §2-204(1),(2), App. 20: A contract for sale of goods may be made in any manner sufficient to
show agreement, including conduct by both parties which recognizes the existence of such a contract. An
agreement sufficient to constitute a contract for sale may be found even though the moment of its making is
undetermined.
U.C.C. §2-206(1), Offer and Acceptance in Formation of a Contract, App. 22: Unless otherwise
unambiguously indicated by the language or circumstances an offer to make a contract shall be construed as
inviting acceptance in any manner and by any medium reasonable in the circumstances. An order or other
offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a
prompt promise to ship or by the prompt or current shipment of conforming or non-conforming goods, but
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such a shipment of non-conforming 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.
Comment: any reasonable manner of acceptance is intended to be regarded as available unless the offeror
has made quite clear that it will not be acceptable.
James Baird Co. v. Gimbel Bros., Inc., 1933, p 395: Gimble, , offered to supply linoleum to various
contractors who were bidding on a public construction contact at a wrongfully low price, due to incorrect
specifications. Baird relied on Gimbel’s quoted price to submit a bid and later that day received a
telegraphed message from Gimbel that its quote prices were in error. Baird’s bid was accepted. He then
tried to enforce the offer as a contract. Baird had not awarded Gimbel the K yet and was not obligated to.
An offer for an exchange, either being an act or a promise, is not meant to become a promise until a
consideration is received. Here, the linoleum was to be delivered for the contractor’s acceptance and
payment, not his bid. An option contract has not arisen, as it is clear from the language of the offer that
Gimble had no intention of assuming a one-sided obligation. Court refused to apply doctrine of
promissory estoppel be to a case where the offer for exchange is not intended to become a promise
until a consideration is received. Neither subcontractor nor general are bound by sub’s bid.
Note: A general does not accept offer and create bilateral K when use sub’s offer in a bid. Court
refused to use reliance b/c reliance may be a substitute for consideration in a gift setting, but courts won’t
allow reliance to hurry up acceptance in an offer for exchange. An offer for exchange is not meant to
become a promise until consideration is received.
Drennan v. Star Paving Co., CA 1958, p 398: Star, subcontractor, informed  day after  submitted
bid that his bid was in error and that he would only do work for double.  got another company to do work
for $4K more than  had projected and sued  for the difference. Court said that  had reason to expect that
if bid was low it would be relied on by . ’s bid did not state or imply revocability at any time before
acceptance, and acting in reasonable, justifiable reliance on an offer may serve as consideration (RSC §90).
’s stake in ’s reliance on his bid plus ’s being bound by his own bid make it only fair that  should
have the chance to accepts ’s bid. If Drennan delayed acceptance after he had been awarded the general
contract in hopes of getting a better price for the sub-contract, or if he reopened bargaining with the
subcontractor, then he could not at the same time claim a continuing right to accept the general offer. ’s
bid was also not so low such that  should have recognized the error. The loss resulting from the mistake
should fall on the party who caused it. A promise which the promisor should reasonably expect to
induce action or forbearance of definite and substantial character on the part of a promisee and
which does induce such action or forbearance is binding if injustice can only be avoided by
enforcement of the promise. Subcontractor is bound by his bid as long as general doesn’t take too
long to accept and doesn’t bargain with others.
Note: this is not a §45 case b/c under §45 have consideration for the promise at start of performance; baird
uses §45 by analogy
E. A. Coronis Associates v. M. Gordon Constr. Co., NJ 1966, p 402: Gordon solicited bid from
subcontractor Coronis. Coronis sent offer letter on 4/22; letter did not assure that it would hold open its
offer. Gordon was awarded contract on 5/27 and Coronis revoked on 6/1. Gordon expressed that “We are
holding you to your bid” on 6/3. Court said there was no contract, but remanded for trial b/c promissory
estoppel may be applicable. Gordon cannot prevail under U.C.C. §2-205 which requires an offer “in
a signed writing which by its terms gives assurance that it will be held open.”
U.C.C. §2-205, Firm Offers: An offer by a merchant to buy or sell goods in a signed writing which by its
terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time
stated or if no time is stated for a reasonable time, but in no event may such a period of irrevocability
exceed 3 months. Any such term of assurance on a form supplied by the offeree must be separately signed
by the offeror.
Note, p 403: Common pattern (now and even before adoption of UCC §2-205) was to substitute for
consideration the giving of a signed writing which, by its terms, stated assurances of irrevocability. If
the contract fixed a time during which it was irrevocable, then the absence of consideration during
that time would not make the offer revocable. If the offer did not state a period of time, then it shall
be construed to state that that the offer is irrevocable for a reasonable time. In 1997 draft of UCC
revision, it says that the assurance of irrevocability in a writing supplied by the offeree must be
“conspicuous,” not separately signed by the offeror, to be effective.
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Comment: The Firm Offer in Context, p 404: Contractors don’t form K’s w/subcontractors before
acceptance of their general bid b/c (1) like to work til the last minute (2) uncertain whether they will be
awarded the K (3) each subcontractor lumps together different items at a fixed price, making it difficult to
compare proposals (4) want to further negotiate after main K awarded
RSC §87 Option Contract, Supp. III-73: An offer is binding as an option contract if it (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) is made irrevocable by statute. An offer which the
offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the
offeree before acceptance and which does induce such action of forbearance is binding as an option contract
to the extent necessary to avoid injustice.
Comment: Nominal consideration may furnish consideration for the irrevocability of a short-term offer
proposing a transaction involving much larger sums
7. Valid Means of Acceptance
a. General Concepts
Note: common law: mirror image rule: any proposal of new terms implies a counteroffer that terminates
power to accept the original offer; if it’s an inquiry, then it’s irrevocable; if it’s a counter-offer, it’s
revocable. If it’s a counter-offer the person who made the counter-offer is bound to it and the other person
is not bound. The party making the counter-offer has terminated power to accept on original terms.
UCC §2-207: rejects mirror image rule; additional terms are proposed additions
Livingstone v. Evans, Alberta 1925, p 415:  offered land at $1800.  responded w/“Send lowest cash
price. Will give $1600 cash.”  responded “Can’t reduce price.” Immediately,  responded w/ an
acceptance at $1800, but in the meantime,  had sold the land to someone else. Court said that ’s $1600
was a counter-offer and thus a rejection that terminated power of acceptance, but ’s response rejected
counteroffer and reinstated original offer. Need to look to reasonable meaning/interpretation of parties’
responses in order to determine if things are a counteroffer or inquiry, rejection of counteroffer
and/or reinstatement of original offer.
Rule: The making of a counter-offer is a rejection of the original offer. An inquiry, on the other
hand, does not terminate power of acceptance.
Note: sale of land is a context in which you get specific performance.
U.C.C. §2-207, App. 23: Additional Terms in Acceptance of Confirmation: Even if state new terms,
can operate as an acceptance if sent within a reasonable time. The additional terms are proposals that will
become part of K unless the offer expressly limits acceptance to the terms of the offer, the new terms
materially alter the K, or notification of objection to them is given within a reasonable time.
Comment: The “Deviant Acceptance” at Common Law, p 417:
 Question: Did offeree make an acceptance that conforms to the terms of the offer? If offeree’s response
was nonconforming (introduced new and different terms), then the offer is “rejected” and the power of
acceptance terminated. This is the Deviant Acceptance Rule: The introduction of new or variant terms
means that the offer is dead and then bargaining must begin again.
Qualifying doctrines:
1) If offeree’s acceptance attempts only to make explicit terms which were already implicit in offer, or
2) offeree merely “suggests” a new term without insisting on its inclusion, or
3) offeree expresses lack of enthusiasm or dissatisfaction (grumbling acceptance),
 then acceptance is usually effective. The fighting issue is interpretation: whether offeree’s purported
acceptance is absolute or conditioned.
 When answering communication is held to be deviant, then there must be an inquiry as to whether the
rejection also contained a counteroffer which the original offeror can accept.
 U.C.C. has restricted deviant acceptance rule. §2-204 authorizes formation of contract in any manner
sufficient to show agreement and declares unnecessary an actual identification of the offeror, the offeree and
the moment of making the K (hard to pinpoint after complex negotiations). RSC §22 is similar.
 Events that ordinarily terminate a power of acceptance, including a deviant acceptance, do not have that
effect when the offer that created the power is a binding option. Counteroffer during option period does not
terminate the power of acceptance.
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b. The “Battle of the Forms”
Contract Formation Through the Exchange of Printed Forms, p 419: In most cases, neither party
expressly agrees to the other’s form. The development of large enterprises with mass production and mass
distribution made standardized contracts inevitable. Uniformity of terms is an important factor in the exact
calculations of risks; risks difficult to calculate can be excluded altogether. Benefits of standard contracts:
costs and hence prices are reduced. However, form contracts are usually between strong and weak
bargainers. Standardized contracts are contracts of adhesion. UCC §204, 206 allows any reasonable
manner of acceptance. §207 includes innovations respecting sales transactions.
U.C.C. §2-207, App. 23: Additional Terms in Acceptance or Confirmation: A definite and
seasonable expression of acceptance or a written confirmation which is sent within a reasonable time
operates as an acceptance even though it states terms additional to or different from those offered or agreed
upon, unless acceptance is expressly made conditional on assent to the additional or different terms. The
additional terms are to be construed as proposals for addition to the contract. Between merchants such
terms become part of the contract unless: (a) the offer expressly limits acceptance to the terms of the offer;
(b) they materially alter it; or (c) notification of objection to them has already been given or is given within
a reasonable time after notice of them is received. Conduct by both parties which recognizes the existence
of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise
establish a contract. In such case the terms of a particular contract consist of those terms on which the
writings of the parties agree, together with any supplementary terms of this Act.
Comment:
1. This is for (a) Written confirmation where agreement has been reached and one party sends formal memo
w/terms so far agreed upon and some terms not discussed. (b) offer and acceptance, which intends to close
agreement w/further minor suggestions
2. Proposed deal which in commercial understanding has in fact been closed is recognized as a contract
unless explicitly say that the acceptance is conditional on additional terms.
3. If additional terms materially alter original bargain, they will not be included w/o express agreement. If
would not change bargain materially, they will be incorporated unless notice of objection is given w/in
reasonable time. If no answer w/in reasonable time after additional terms proposed, it’s fair and
commercially sound to assume that their inclusion has been assented to. If clauses conflict, then assume that
each party objected & it’s not part of the contract.
5. it’s not important to figure out which act constituted the offer and which the acceptance. the only question
is what terms are included in the contract.
** this section rejects common law “mirror image rule” and converts common law counteroffer into
an acceptance even if states additional or different terms
Idaho Power Co. v. Westinghouse Electric Corp., 1979, p 421:  sold  a machine. ’s form limited
liability to replacement and repair. ’s purchase order said it superseded all previous agreements, added
some terms regarding shipping charges, and did not mention liability. Machine failed and caused a fire. 
repaired regulator, but  sought other damages. Under UCC §2-207(1), the purchase order was an
acceptance b/c didn’t make acceptance expressly conditional on assent to additional or different
terms. Under UCC §2-207(2), ’s terms regarding liability govern b/c ’s new terms materially alter
the K. IP’s purchase order attempts to invoke knock-out rule, but court refuses to from a general clause. **
The broader the construction you give the knock-out rule, the more the offeree party can impose its own
tesm on the K as long as they are consistent w/UCC defaults!
Common law:  would have been deemed to have made a counteroffer w/its purchase order, which 
accepted by shipping machine (last shot principle concedes the terms to the party who fires off the last
counteroffer before negotiations end and performance begins)
Sometimes, when terms conflict, employ knockout rule, which makes the conflicting terms cancel each
other out and court fills in missing term (default rule).
Baird and Weisberg, Rules, Standards and the Battle of the Forms, p 426: Chief innovation of UCC §2207 is not its abandonment of the mirror image rule, but its abandonment of the very principle of a formal
rule of offer and acceptance. Instead, it substitutes a general standard under which the court is to look to gist
of parties’ communications to determine if they’ve formed a contract. In so doing, the court is to overlook
any express terms in those communications that do not fairly reflect the parties’ agreement. It treats
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documents that conflict over terms of the bargain in the same way UCC treats documents that are silent on
essential terms. (fill in the blanks for incomplete K under general standards or by referring to trade customs)
Comment: The Qualified or Conditional Acceptance, p 426: Common law mirror image rule gave
way to revisionist RSC §59: “A reply to an offer which purports to accept it but is conditional on the
offeror's assent to terms additional to or different from those offered is not an acceptance but is a counteroffer.” RSC Comment: “A definite and seasonable expression of acceptance is operative despite the
statement of additional or different terms if the acceptance is not made to depend on assent to the
additional or different terms.” [RSC is reformist – does not reflect CL’s mirror image rule]
c. The Mailbox Rule
RSC §63 Time When Acceptance Takes Effect, p 436: Unless the offer provides otherwise,
(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; but (b) an acceptance under an option contract is not operative until received by
the offeror.
Comment: Option contracts are commonly subject to a definite time limit and the usual understanding is
that the notification that the option has been exercised must be received by the offeror before that time. So
either offeror or offeree can revoke offer/acceptance before it reaches the offeror.
Problem, p 437: Mailbox rule says that once the acceptance has left the offeree’s possession, the
contract is complete. However, much may depend on means of communication. If vendor requests
immediate notification, that may mean a telegram (and not a letter) is required.
Note: once it goes in the mail, you’ve accepted and can’t revoke. BUT if you notify the person receiving
your acceptance of your rejection before they receive the acceptance and they rely on rejection, can’t try the
rejection is controlling.
d. Silence as Acceptance
Note: the silence cases are based on assent by action rather than words. Holmesian bad man takes advantage
of knowing legal rules, so bright-line rule might be unjust.
Day v. Caton, MA 1876, Supp. III-74:  built a wall that was ½ on his property and ½ on another
person’s.  alleged that  said he would pay ½ for the wall if he used the wall when building on the
property.  said  knew that  expected payment and benefited from ’s efforts. If a party voluntarily
accepts and avails himself of valuable services rendered for his benefit when he has the option to
accept or reject them, a promise to pay for them may be inferred, even if there’s no proof they were
rendered by his authority of request.  could easily have communicated non-acceptance to : silence in
such circumstances, accompanied w/ knowledge that  expected payment, shows an agreement to pay. If
the fact is brought to attention only on a single occasion or it is extremely difficult to notify other party of
non-acceptance, then an agreement may not be inferred.
RSC §69(1) Acceptance by Silence or Exercise of Dominion, p 441: When an offeree fails to reply
to an offer, his silence and inaction operate as an acceptance (1) when he takes the benefit of offered
services with reasonable opportunity to reject them and with reason to know that they were offered with the
expectation of compensation, (2) when the offeror has stated or given the offeree reason to understand that
assent may be manifested by silence or inaction, and the he remains silent and inactive, and (3) when
because of previous dealings, it is reasonable that the offeree should notify the offeror if he does not intend
to accept.
Hobbs v. Massasoit Whip Co., MA 1893, p 442:  sent eel skins to , who kept them for some months
w/o response until they were destroyed.  received no notice of ’s declining to accept the skins. Court
said due to prior dealings with a pattern of acceptance by silence (standing offer by which  sent skins
and got paid for them), ’s conduct imported acceptance in the view of the law b/c  knew or should
have known ’s expectations in sending the skins.
Comment: The Privilege of Silence, p 443: It used to be that silence would not constitute an acceptance
of an offer in the absence of a duty to speak. RSC replaced duty to speak with standard of reasonable
understanding. RSC §69(a) – offeree takes the benefit of offered services – it’s not enough that the actor
expected to be paid; it must be shown that the party to be charged in some manner “assented.” UCC §2207(2) – also applies reasonable understanding rule: between merchants, additional terms in accepting form
36
become part of the K unless timely notice of objection is given. Prior dealings may make even material
alteration part of the contract. Applicant for insurance is usually considered an offeror, so if something
happens before application is accepted, he is not covered. However, if insurance co. doesn’t take prompt
action, then a number of courts will find insurer’s silence as an “implied” acceptance and ground liability in
the insurance contract.
Morone v. Morone, NY 1980, p 446:  and  lived together 1952-1975 and have two kids. (1) She is
suing on basis of long-continued relationship and her expectation (and his knowledge of her expectation) of
full compensation for her domestic and business services. (2) Also, she alleges that in 1952, they entered
into an oral partnership agreement, and the profits of the partnership were to be used and applied for the
equal benefit of both. Dismissed (1) b/c it sought recovery for marital-type relationship. Sustained 2nd C/A.
Court rejects notion that domestic services are more likely than others to result in a personal rather than
contractual bond, or that it is reasonable to infer that simply b/c compensation contracted for is not payable
in periodic installments that there was no such contract. Changing social customs have made living together
more common; no statutory requirement that such a contract as plaintiff here alleges be in writing. While an
express K about earnings and assets of an unmarried couple is enforceable (as long as sex is not part
of the consideration), an implied K will not be recognized b/c it would essentially re-institute
common-law marriage, which the legislature has abolished, see Marvin v. Marvin. Plus, don’t want to
impose anything onto a private and noncontractual relationship b/c of risk of fraud, afterthought, error. But
we may not want to create incentives for express Ks at beginning of relationship, so maybe should protect
implied contract.
B. WRITTEN CONTRACTS AND PAROL EVIDENCE RULE
1. Introduction
Introductory Note, p 450: A writing is essential to the full enforceability of only some types of
agreements (see Statute of Frauds). When agreement is put in writing, parties may encounter a numbers of
problems associated with written undertakings. One set of problems is dealt with by the Parol Evidence
Rule, which is a body of doctrines (“extrinsic evidence,” “plain meaning,” “four corners”) which taken
together, also function as devices for preferring writings over oral statements or promises.
The Statute of Frauds, p 925: To be enforceable, a K must be in writing and signed by party against
whom enforcement is sought for:
(1) contracts promising to pay damages from estate
(2) suretyship contracts to answer for the debts, defaults or miscarriages of another person
(3) agreements made in consideration of marriage
(4) contract for sale of land or interest therein (exception: revocable licenses, short-term lease of land)
(5) any agreement that is not to be performed within the space of one year from the making thereof; i.e.
contracts that necessarily will not be performed within a year
(avoid fallibility of memories or death/disappearance of witnesses)
 If express terms of K make its performance take more than a year, then it falls w/in statute
 Standard test is whether the performance called for by the K must necessarily extend for a year or more
under the terms of the K, disregarding possibilities of discharge through conditions or events not expressly
stated in the agreement itself (ex: death)
 Possible test is whether it is potentially performable within one year
 one-year provision is disfavored by courts & its application is limited
 sometimes when one party has fully performed and the other has not, the courts will enforce anyway to
prevent fraud or injustice
 In proposed revision of UCC statute of frauds, “writing” is substituted with “record,” which is defined
widely to include retrievable electronic documents also. “Signed” means “any symbol executed or adopted
by a party with present intention to authenticate a writing” (UCC 1-201(39)), so written sig not required.
U.C.C. §2-201, App 18: Formal Requirements; Statute of Frauds: Must put K for sale of goods
worth >$500 in writing. A writing is not insufficient because it omits or incorrectly states a term agreed
upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such
writing. If writing in confirmation of K is sent within a reasonable time, then receiving party has 10 days to
send written notice of objections. A contract which is not written will still be enforced (a) if the goods are to
be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the
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seller’s business and the seller, before notice of repudiation is received and under circumstances which
reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their
manufacture or commitments for their procurement; or (b) if the party against whom enforcement is sought
admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is
not enforceable under this provision beyond the quantity of goods admitted; or (c) with respect to goods for
which payment has been made and accepted or which have been received and accepted.
Comment: The only definite and invariable requirements for the written K are 1) must evidence a contract
for the sale of goods, 2) must be “signed” by party to be charged, 3) must specify a quantity (but not price!).
Partial performance as a substitute for the required memorandum can validate the K only for goods which
have been accepted or for which payment has been made and accepted. A merchant who doesn’t respond
w/in 10 days loses defense of statute of frauds but can still challenge whether K was in fact made orally
prior to written confirmation. If making of K admitted in court then don’t need additional writing for
protection against fraud; so you can’t admit to K and still use statute as a defense.
2. Integration and Additional or Inconsistent Terms
parol evidence rule: principle that a writing intended by the parties to be a final embodiment of their
agreement cannot be modified by evidence that adds to, varies or contradicts the writing
Mitchill v. Lath, NY 1928, p 451: Mitchill, , bought some property from Lath, , for $8400 pursuant
to a full and complete written sales contract.  seeks to compel  to perform on his oral agreement to
remove an ice house from a neighboring property, which would cost  $8000. For an oral agreement that
changes the written contract to be accepted, (1) the agreement must in form be a collateral one
(parallel, additional but subordinate, distinct from and independent of the written agreement), (2) must not
contradict express or implied provisions of the written contract, and (3) must be one that parties
would not ordinarily be expected to embody in writing. Court finds this oral agreement unenforceable
because this term would naturally be embodied in the writing. The parol agreement is closely related to the
subject of the written contract, and could be said to contradict the conditions of the written contract. If
there had been separate consideration for the removal of the ice house, there would have been no problem
in enforcing. Note: parol evidence rule doesn’t police subsequent modifications of K. Traditionally,
modification would require separate consideration; in modern law, just need changed circumstances.
Rule (presumption) of integration: if oral agreement is embodied in writing, then cannot assert that other
terms of the same agreement were not integrated in the writing
Hatley v. Stafford, OR 1978, p 458: Hatley, , leased tract of farmland from Stafford, . Lease was
for 1 year, but  was permitted to “buy-out” Hatley’s right of possession if he chose at maximum price of
$70/acre. Hatley planted crops worth $400/acre, and after 6 months,  took possession of property. 
claimed they had an oral agreement that buy-out provision would only apply for period of 30-60 days after
beginning of lease. Court allowed parol evidence which did not expressly contradict a provision contained
in a written agreement b/c it determined that the agreement was partially integrated. Because oral
agreement was not supported by separate consideration, the trial court’s ruling can only be upheld if
the agreement was (1) not inconsistent with the written lease and (2) such an agreement as might
naturally be made as a separate agreement by parties situated as were parties to the written contract.
Judge decides whether agreement was integrated; jury decides whether they agreed on time limitation.
Court decided it was partially integrated b/c K would be one-sided if complete integration was found,
neither party had a lawyer, document was hand-written and not carefully prepared, intent of parties. Court
implicitly says that limited duration of buyout clause is an additional consistent term b/c they add it to the
K.
Note, p 463: Lee v. Joseph E. Seagram & Sons, 2nd Cir. 1977 – in complex situations, “an oral
agreement can be treated as separate and independent of the written agreement even though the written K
contains a strong integration clause.” Masterson v. Sine – a brother conveyed a ranch to his sister, the deed
reserving him an option to repurchase on stated terms; the brother went bankrupt and the trustee tried to
enforce the option on behalf of creditors; the brother and sister said that the option was personal to the
grantors and not assignable or otherwise available to third persons b/c the parties wanted the ranch kept in
the family; Court said it was natural that the agreement of nontransferability was kept separate from the
deed
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Hayden v. Hoadley, VT 1920, p 464: s failed to perform the repairs they promised to make on house
they conveyed to s. Court refused to allow admission of parol evidence re: time of performance b/c legal
effect of K’s silence as to time of performance was to require repairs to be completed within a reasonable
time. Parol evidence not admissible for a complete contract. To admit the testimony offered by s would
allow plain legal effect of written contract to be controlled by oral evidence.
Note: This is NOT the majority approach; Majority approach is in RSC – inconsistency determined with
reference only to actually agreed terms. Hayden says the oral testimony is inconsistent w/gap-filler of UCC,
so it’s an inconsistent term. Under RSC gap-fillers do not create incconsistency.
RSC §209 Integrated Agreements, p 464: An integrated agreement is a writing or writings
constituting a final expression of one or more terms of an agreement. Whether there is an integrated
agreement is to be determined by the court as a question preliminary to determination of a question of
interpretation or to application of the parol evidence rule. Presumption of integration: Where the parties
reduce an agreement to a writing which in view of its completeness and specificity reasonably appears to be
a complete agreement, it is taken to be an integrated agreement unless it is established by other evidence
that the writing did not constitute a final expression.
Note: under (3) most writings are integrated b/c most written Ks are reasonably complete.
RSC §213(1) Effect of Integrated Agreement on Prior Agreements (Parol Evidence Rule), p 465:
A binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them.
Comment: Whether a binding agreement is completely integrated or partially integrated, it supersedes
inconsistent terms of prior agreements. Before applying this rule, the court must first determine that it is an
integrated agreement and that it is inconsistent with the terms in question
RSC §214 Evidence of Prior or Contemporaneous Agreements and Negotiations, p 465:
Agreements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in
evidence to establish (a) that the writing is or is not an integrated agreement; (b) that the integrated
agreement, if any, is completely or partially integrated; (c) the meaning of the writing, whether or not
integrated; (d) illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause; (e)
ground for granting or denying rescission, reformation, specific performance, or other remedy.
Note: Judge decides whether it is integrated; more likely to conclude it is complete if doesn’t look at oral
evidence. If he can use oral evidence, less likely to look integrated – will depend on credibility of witnesses
and situational evidence.
RSC §216 Consistent Additional Terms, p 466: Evidence of a consistent additional term is
admissible to supplement an integrated agreement unless the court finds that the agreement was completely
integrated. An agreement is not completely integrated if the writing omits a consistent additional agreed
term which is
agreed to for separate consideration, or such a term as in the circumstances might naturally be omitted from
the writing.
Note: You can never add inconsistent terms (whether completely or partially integrated).
Comment:
 Consistency: Determination of whether the term is consistent or inconsistent requires interpretation of the
writing in light of all the circumstances. The meaning of the writing includes terms explicitly stated and
terms fairly implied as part of the bargain, but does not include a gap fillers unless it can be inferred that
parties Ked w/reference to the rule of law.
 Written term excluding oral terms (“merger” clause): Is likely to conclude the issue whether the
agreement is completely integrated. Consistent additional terms may then be excluded even though their
omission would have been natural in the absence of such a clause. But clause does not control the question
of whether the writing was assented to as an integrated agreement.
3. Ambiguity
parol evidence – an express oral discussion separate from the written K
extrinsic evidence – anything other than the writing
Interpretation of Written Agreements, p 491: If a court concludes that the writing incorporates parties’
entire agreement, or even their understanding on some part of the transaction, parol evidence rule operates
to exclude proof of additional, divergent terms. Reasons for the rule: desire for certainty and predictability,
reduce litigation, unease about juries. Even after admitting oral evidence, ambiguities may remain.
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Bethlehem Steel Co. v. Turner Constr. Co., NY 1957, p 493: Contract contained a provision that if
“prices for component materials” increased or decreased, contract prices would correspondingly adjust,
subject to a limit in steel prices to $15 per ton.  said “prices for component materials” included various
steel items supplied that  regularly charged to the trade.  said phrase referred only to prices  had to pay
for materials it used to produce the steel. Court gave summary judgment to  b/c K was sufficiently clear.
Where the intention of the parties may be gathered from the four corners of the instrument,
interpretation of the contract is a question of law and no trial is necessary. When a contract is clear
in and of itself, circumstances extrinsic to the document may not be considered.
Note: NY continues to adhere to the “four-corner” standard; only when K language is ambiguous – a
question of law, determined by reference to the K alone – may a court turn to extrinsic evidence of intent.
Authorities such as RSC §212 favor contextual inquiry into ambiguity to aid in interpretation of what is in
the instrument
Robert Industries, Inc. v. Spence, MA 1973, p 494: A contract is to be read in the light of the
circumstances of its execution, which may enable the court to see that its words are really ambiguous.
When the written agreement, as applied to the subject matter, is in any respect uncertain or equivocal in
meaning, all the circumstances of the parties leading to its execution may be shown for the purpose of
elucidating, but not of contradicting or changing its terms. The words themselves remain the most important
evidence of intention.
Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co., CA 1968, p 494: K included an
indemnity clause indemnifying  against loss, damage, expense, and liability resulting from injury to
property. During work, accident injured ’s property.  says clause only applies to 3rd parties;  says it
applies to his property. Language plain on its face, but court allowed parol evidence. A rule that would
limit the determination of the meaning of a written instrument to its four corners merely b/c it seems to the
court to be clear and ambiguous presupposes a degree of verbal precision & stability our language has not
attained. Extrinsic evidence is admissible to show a meaning to which language is reasonably
susceptible (expose ambiguity). It can interpret terms according to extrinsic evidence of parties’
intent, but extrinsic evidence can’t contradict express terms of K (otherwise parol evidence rule would
be rendered null).
Tension: language has no meaning apart from context v. language limits meaning when attached to terms
Federal Dep. Ins. Corp. v. W.R. Grace & Co., 1989, p 498: “Four corners” rule tends to cut down on
the amount of litigation, in part by reducing the role of the jury. Rule stands for the proposition that
language in a contract is not rendered ambiguous simply because the parties do not agree upon its meaning.
To say that mere disagreement makes a K ambiguous would provide parties who put a K in writing
with little or no protection.
Class discussion: PG&E empowers jury and may be dicta anyway b/c the language is ambiguous on its face;
if there is a single reasonable meaning, both parties are bound by that, but if there is more than one
reasonable meaning then there is misunderstanding and there is no K
U.C.C. §2-202, App. 19, Final Written Expression: Parol or Extrinsic Evidence: Complete terms
which are set forth in a writing and intended by the parties as a final expression of their agreement may not
be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be
explained or supplemented (a) by course of dealing or usage of trade (§1-205) or by course of performance
(§2-208); and (b) by evidence of consistent additional terms unless the court finds the writing to have been
intended also as a complete and exclusive statement of the terms of the agreement.
Comment
 Section rejects: a) Any assumption that because a writing is final on some matters, it is to be taken as
including all the matters agreed upon; b) The premise that language used has a legal meaning rather than the
meaning which arises out of the commercial context in which it is used; and c) requirement that court must
first find language used is ambiguous to admit the type of evidence specified in paragraph (a)
 Written evidence about trade usage and course of performance is admissible under (a); should supplement
or explain the parties’ intent in K and is to be read on the assumption that the course of prior dealings
between parties and the trade usages, unless carefully negated, were taken for granted when K was phrased.
 Consistent terms may not be proven if the court finds that the K was intended by both parties to be a
complete and exclusive statement of all the terms; if the additional terms are such that, if agreed upon,
would have been part of the K then evidence of their alleged making must be kept from trier of fact.
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RSC §212 Interpretation of Integrated Agreement, p 499: A question of interpretation of an
integrated agreement is to be determined by the trier of fact if it depends on the credibility of extrinsic
evidence or on a choice among reasonable inferences to be drawn from extrinsic evidence. Otherwise a
question of interpretation of an integrated agreement is to be determined as a question of law.
Comment: “question of law”. Usually the meaning of a word is a question of fact, but general usage as to
the meaning of words is often proper for judicial notice without extrinsic evidence. This is b/c historically
interpreting written documents has been done by trial judge rather than jury, and treated as a question of law
for appellate review. This limits jury’s power to dispense damages in guise of finding of fact, contributes to
stability and predictability of contractual relationships, and promotes uniformity.
C. ASSENT TO STANDARDIZED FORMS
Usually penalty defaults are reverted to as a punishment for not negotiating with the terms. In the case of
form contracts they did spell it out – are you discouraging due diligence by not enforcing K? Why have
heightened scrutiny stricter than unconscionability for form contracts in courts?
Introductory Note, p 501: When one party simply signs, or acquiesces in, the standard form prepared
and presented by the other, he has a common law duty to read the fine print. Under “duty to read” unless
one can show facts and circumstances to demonstrate that he was prevented from reading the contract, it is
binding.
Mundy v. Lumberman’s Mut. Cas. Co., 1st Cir. 1986, p 503: Mundy protested insurance policy’s $1000
limit for stolen silverware. The ins. co. had sent them the policy and a summary of the changes written in
straightforward English using readable print. Even a casual reading of the material would have given them
adequate notice of the policy change. Court said they were bound by the changes So long as you receive a
copy of the terms of the renewal ins. policy, and the insurer doesn’t make incorrect representations
and you get notice that there are changes in the coverage given, then you are bound by the changes.
Note: there is a common law duty to read.
Comment: Form “Contracts”, p 506: Powerful companies try to take advantage of consumers by using
one-sided terms. Courts’ roundabout way of finding “inconsistencies” in order to cancel out troublesome
clauses or rejecting clauses as counter to the purpose of the transactions they served are misconstrued b/c
“covert tools are never reliable tools.” Instead, Llewellyn Rule encourages courts to realize that consumers
have only assented specifically to the dickered terms and gave blanket assent to any reasonable and
decent terms that do not alter the reasonable meaning of the dickered terms. Do not accept terms that
alter or impair fair meaning of dickered terms or that are unreasonable or unfair. How do you decide if it’s a
dickered term? circumstances of agreement, information gaps, over-optimism esp in non-repeat transactions
Gilmore, Logic and Experience, p 514: Traditionally, the active part was more protected; now we feel
that the weak should be protected against the strong and risks should fall on whoever dares to act.
U.C.C. §2-314, App. 36, Implied Warranty: Merchantability, Usage of Trade: Unless excluded or
modified in §2-316, there is an implied warranty of merchantability (resaleability). This means that they
must be of average quality, are fit for the ordinary purposes for which such goods are used, are of even
quality,, adequately packaged and conform to promises on the label. Also, other implied warranties may
arise from course of dealing or usage of trade.
U.C.C. §2-315, App. 37, Implied Warranty: Fitness for Particular Purpose: When the seller knows
what the goods are going to be used for, there is an implied warranty that the goods will be suitable for such
a purpose.
U.C.C. §2-316(2),(3), App. 38, Exclusion or Modification of Warranties: To exclude the warranty
of merchantability, language must be specific and conspicuous. Language to exclude all implied warranties
of fitness is sufficient if it states, for example, that “There are no warranties which extend beyond the
description on the face hereof,” or “as is,” “with all faults.” When the buyer before entering into the
contract has examined the goods of the sample or model as fully as he desired or has refused to examine the
goods there is no implied warranty with regard to defects which an examination ought in the circumstances
to have revealed to him; and an implied warranty can also be excluded or modified by course of dealing or
course of performance or usage of trade.
Richards v. Richards, WI 1994, p 516: ’s husband worked for Monkem Co., a trucking company that
required  to sign a “Passenger Authorization” form in order to ride with him, which released company
from liability.  suffered injuries while riding as a passenger in truck operated by her husband and then
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sought to sue the trucking company. WI SC reversed summary judgment for  b/c the form was an
exculpatory contract against public policy (she waived all liability that she might ever incur against the
company for anything). Courts dislike exculpatory contracts b/c they tend to allow conduct below the
acceptable standard of care. In this case, the public policy of imposing liability on persons whose conduct
creates an unreasonable risk of harm outweighs the public policy of freedom of contract. Unenforceable
b/c title of K was misleading (overruled duty to read), release was extremely broad and all-inclusive,
and it was an adhesion K b/c  had no opportunity to negotiate (echoes of unconscionability: lack of
clarity in document, breadth and one-sidedness of waiver, no bargaining power for form contract)
Broemmer v. Abortion Services of Phoenix, AZ 1992, p 521: ’s abortion punctured her uterus. She
had signed 3 forms in 5 minutes; they didn’t give her a copy or explain them. One of them was an
arbitration agreement that said all disputes would go before a board of doctors. Adhesion contracts will
not be enforced unless they are conscionable and within the reasonable expectations of the parties. In
this case, she was under time pressure and a lot of emotional stress; she’s uneducated weaker party w/no
realistic alternative or choice since terms are non-negotiable. Did not knowingly assent.
Note: she was there for a one-time transaction, but clinic had repeat transactions
RSC §211 Standardized Agreements, p 527: When a party signs or otherwise assents to a
standardized agreement, he adopts it as an integrated agreement with respect to the terms included in the
writing. Such a writing is interpreted wherever reasonable as treating alike all those similarly situated
without regard to their knowledge or understanding of the standard terms of the writing. Where the other
party has reason to believe that the party manifesting such assent would not do so if he knew that the writing
contained a particular term, the term is not part of the agreement.
Comment
 Assent to unknown terms: One of the purposes of standardization is to eliminate bargaining over details
of individual transactions, and that purpose would not be served if a substantial number of customers
retained counsel and reviewed the standard terms. Company employees probably don’t understand the terms
either and have limited authority to vary them. Customers trust in the good faith of the company. They
understand that they are assenting to terms not read or understood.
 Equality of treatment: People who assent to standard K terms assume that others are doing likewise and
they are being treated equally to others. Apart from government regulation, courts in construing and
applying a standardized contract seek to effectuate the reasonable expectations of the average member of
the public who accepts it.
Comment: §211 and “Reasonable Expectations”, p 528: Customers are not bound to unknown terms in
standardized forms that are beyond the range of reasonable expectation. A party does not assent to a term if
the other party has reason to believe the adhering party would not have accepted the agreement if he had
known that the agreement contained the particular term. This is an objective test.
Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 1984 AZ – adopted RSC §211’s interpretation
of standardized agreements. “RSC §211 is basically a modification of the parol evidence rule when dealing
with contracts containing boiler-plate provisions which are not negotiated, and often not even read by the
parties.” It adopts a rule of integration which recognizes the method by which people do business.
A lot of courts use RSC §211 to interpret insurance contracts
Farm Bureau Mut. Ins. Co. v. Sandbulte, Iowa 1981 – to use reasonable expectation doctrine for an
adhesion K, you have to show through proof of the underlying negotiations or inferences from the
circumstances that the exclusion is (1) bizarre or oppressive, (2) eviscerates terms explicitly agreed to, or
(3) eliminates the dominant purpose of the transaction.
Rakoff, Contracts of Adhesion: An Essay in Reconstruction, Supp. III-76: The adhesion K is grounded
in efficiencies of mass distribution and in substantial institutional rigidities. Adherents’ responses to
contracts of adhesion make sense b/c bargaining is not possible and customers shop for only a few key
terms, which makes the contracts become more one-sided over time. Can’t bargain – “We can’t make
exceptions for one customer.” Their rights depend on the willingness of the drafting party to process a
dispute in a routine and reasonable way. The discretion of the organization has taken place of rights
enforceable by law. The consumer’s experience of modern commercial life is one of submission to
organization domination. Refusing to not enforce an adhesion K for reasons of freedom of K equates the
individual w/the drafting organization – essentially a laissez faire policy. Form terms are imposed on the
transaction in a way that no individual adherent can prevent, and a major purpose and effect of such terms is
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to ensure that the drafting party will prevail if the dispute goes to court.
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IV. POLICING THE BARGAIN
A. DURESS IN THE FORMATION OF CONTRACTS
1. Trebilcock – normative economics – desirability of rule measured by consequences
Kaldor-Hicks efficiency (wealth maximization)
Pareto efficiency
utilitarianism
2. Fried – autonomy/freedom of contract – rights-oriented approach; not consequentialist
3. Communitarian – Unger, Dalton – distributive, status and power concerns; questions legitimacy of
people’s preferences; solidarity
4. Positive economics – descriptive of consequences
Farnsworth and Young, Contracts: Cases and Materials, Supp. IV-1: If assent to a contract is obtained
by duress it may not be enforced against the victim. The general conception of “economic coercion” or
“business compulsion” has won a place recently as a “junior partner” of duress in redressing oppression.
Duress is not a commonplace defense in contract actions. Courts have different standards for duress:
(1) Restraint or danger, either actually inflicted or impending, which is sufficient in severity or
apprehension to overcome the mind of a person of ordinary firmness.
(2) To deprive a person of free choice, or to destroy a person’s volition, or to obtain consent only in form.
(3) A threat of lawful action can’t be duress. But these days, “An unjust and inequitable threat is wrongful,
although the threatened act would not be a violation of duty in the sense of an independent actionable wrong
in the law of crimes, torts, or contracts.” (ex: threatening to fire an at-will employee)
Trebilcock, The Limits of Freedom of Contract, Supp. IV-3: Traditional Rights-Based/Autonomy
Approach: you have duress when “threat,” or violation of one’s rights, is present. This requires a
determination of what one’s rights are and the base-line from which you evaluate the threat/offer.
Consequentialist Approaches: (1) “Equality of exchange”: (Benson Gordley) Looks at substantive terms
of deal – inequalities in the market value of performances exchanged should be grounds for contractual
invalidation or revision. (2) Kronman: advantage-taking by one party should be permitted unless it
violates the rights or liberty of the other party. If advantage-taking will enhance the long-term well-being of
group, esp non-advantage-taking class, then allow it. Pareto efficiency Approach: literal pareto efficiency
approach is determinative but can be morally upsetting (like coming across a drowning boat and agreeing to
tow them to shore for $1 million – both parties better off)
Dalton, An Essay in the Deconstruction of Contract Doctrine, Supp. IV-23: Generally contract doctrine
has always portrayed contract as essentially private and free, with the public aspect being as small part. This
isn’t really true – for example, the doctrine of consideration reflects public attitudes about which bargains
are worthy of enforcement. One denial device is to present duress and unconscionability as doctrines that
police process, not substance. This technique of separation admits public involvement, but reassures that
the public decisions are being made in the neutral and consensual territory of the bargaining process
(policing bad behavior, not substantive terms of the private exchange). You cannot surmise subjective intent
ex post facto, so you have to look at outside evidence to “objectively” figure out what was going on in the
contract. By the very fact of this objective inquiry, public norms are being imposed on private contracts.
Policing anything, whether classified as procedural or substantive, requires social norms.
B. REVISIONS OF CONTRACTUAL DUTY
Introductory Note, p 553: In many contracts, especially those requiring alternating performances over
time, the need for adjustments, perhaps even major modifications, will be commonplace. Given the delay,
uncertainty, and expense of court proceedings, it is unlikely that legal remedies for breach of contract will
the promisee the full equivalent of the promisor’s actual performance. At times, a promisee will be well
advised to offer a benefit to a promisor who is refusing to honor a contract, in order to induce performance.
Austin Instrument, Inc. v. Loral Corp., NY 1971, p 554: Loral sub-contracted with Austin for their $6
million general K with the Navy that included a cancellation clause in case of Lorel default as well as
liquidated damages for late deliveries. Navy awarded 2nd K to Loral, and when Loral notified Austin they
wouldn’t get all the possible sub Ks, Austin threatened to stop sending parts if Loral wouldn’t pay extra for
1st Sub-K and award Austin 2nd Sub-K for a higher price. Loral initially refused, but could not find another
sub-contractor who could deliver in time to fulfill Navy K. Loral agreed to Austin’s terms, waited til after
Austin fulfilled 2nd sub-K and stopped payment. Court allowed Loral to recover extra payment on 1 st K on
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grounds of economic duress. 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 the
exercise of his free will. Loral was forced to make K under economic duress through (1) threat to
breach original K, (2) could not get performance elsewhere, (3) pursuing legal remedy for breach
would be inadequate protection.
Smithwick v. Whitley, NC 1910, p 557:  contracted in writing to purchase land from  at $35/acre.
W/o getting deed,  moved unto land and made improvements.  then informed  3 years later that the
deal was off unless he paid $50/acre.  agreed rather than lose the land. Court refused to allow  to
recover overpayment due to duress b/c b/c duress exists only where the unlawful act of another has
deprived one of free will. An adequate legal remedy (specific performance) existed for the breach of K.
Alaska Packers’ Ass’n v. Domenico, 9th Cir. 1902, p 560: Workers contracted to catch salmon for $50
or $60, but once they arrive in Alaska they refuse to work until the superintendent agreed to pay them $100.
Not being able to find replacement workers and knowing the season was very short, the superintendent did
agree, although he informed them that he had no authority to change the K. The company did not find out
about the “new K” until the workers returned to San Francisco. Court said modification was not enforceable
b/c it was not supported by consideration – the workers didn’t promise anything new in return for the extra
$$. Legal duty rule: When a party merely does what he has already obligated himself to do, he
cannot demand an additional compensation therefor; and although by taking advantage of the
necessities of his adversary, he obtains a promise for more, the law will not enforce the “new K.”
Question, p 564: Couldn’t they have decided on grounds of duress rather than consideration? Workers
exploited APA’s lack of an adequate legal remedy.
Schwartzreich v. Bauman-Basch, Inc., NY 1921, p 564:  agreed to employ Schwartzreich, , who
agreed to work full-time as a designer of coats and wraps for $90/week for one year starting Nov. 1917.
When S got another offer for $115/wk, B raised his salary to $100/wk. After they met a big deadline in
Dec., B fired S. B claimed new K was signed under duress. Court gave S damages. Parties to a contract
can rescind it by mutual consent and can then make a new contract where their mutual promises are
consideration for each other. There is no reason why a new contract couldn’t be entered into at the
same time the old one is destroyed and rescinded by mutual consent.
Note: but the whole point of an employment K is to get commitment from employees; also there’s a
difference between having a remote possibility of the unforeseen circumstance and a change in bargaining
power due to a foreseeable job offer; legal remedy is inadequate for Bauman – can’t get SP
Questions, p 565: The parties to a bilateral contract neither has performed may rescind it by mutual
agreement. But you also need consideration to modify or discharge a K.
RSC §89 Things Not Anticipated: A promise modifying a duty under a K not fully performed on either
side is binding (a) if the modification is fair and equitable in view of circumstances not anticipated by the
parties when the K was made; or (b) to the extent provided by statute; or (c) to the extent that justice
requires enforcement in view of material change of position in reliance on the promise.
Why can’t two things the parties are perfectly free to do – rescind an old agreement and make a new one –
take place at the same time? maybe b/c if the terms of the new K improve terms for only one of the parties,
doubt is created as to the mutuality of the agreement to rescind the original K. It doesn’t make sense to give
a consideration exception b/c the rescission of 1st K is dependent on new agreement & new agreement is
dependent on rescission of 1st K – circular logic.
Goebel v. Lynn, MI 1882, Supp IV-29: Goebel contracted to buy ice for $2/ton, but ice company later
hiked price to $3.75/ton after failure of an ice crop.  had stock of beer that would be ruined without it.
Court enforced new promise b/c (1) Goebel abided by new K for 8 months w/o buying ice from other
sources, which he was able to do, and (2) Unexpected and extraordinary circumstances had rendered
the first contract useless – Goebel either had to make a new arrangement or hold the ice company to the
existing contract, ruining both the ice company and themselves.
Brian Constr. & Dev. Co. v. Brighenti, CT 1978, p 565:  assigned sub-contract to  which covered
“everything requisite and necessary to finish the entire work properly.” Unexpected conditions that neither
party expected meant that excavation had to go deeper, and  asked for more $.  promised extra $ but 
didn’t perform anyway. A subsequent oral agreement of parties to modify a written K is valid when
unanticipated, burdensome conditions, not contemplated by the parties at the time the written K was
executed, are encountered during the performance of the original K.  lived up to the right standard of
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honesty and fair dealings and agreed to pay what was then reasonable, just and fair. Additional work (under
oral agreement) was a new and distinct K supported by consideration. The ’s failure to comply with the
agreement is a breach of contract.
Note: a minority of courts reject legal-duty rule and recognize giving up right to old K as consideration
Note: Things “Not Anticipated,” p 569: RSC §89 Things Not Anticipated: A promise modifying a
duty under a K not fully performed on either side is binding (a) If the modification is fair and equitable in
view of circumstances not anticipated by the parties when the K was made; or (b) To the extent provided by
statute; or (c) To the extent that justice requires enforcement in view of material change of position in
reliance on the promise.
This RSC reflects modern unforeseen circumstances exception to the existing legal duty rule. Change is
only supported when the refusal to perform first K is equitable and fair, and the difficulties substantial,
unforeseen and not within the contemplation of the parties when the original K was made. This is a good
change to the doctrine b/c the old doctrine would allow parties to expressly rescind 1 st K and create 2nd K,
with new consideration & terms, but would not allow changes to 1st K even when it was clear that both
parties did not want to be held to original terms. Roth Steel Products v. Sharon Steel Corp., 6 th Cir. 1983 –
when apply UCC §2-209(1) in a modification setting, UCC’s general obligation of “good faith” requires
inquiries into (1) the parties’ “subjective honesty” and (2) the “justification” for the decision to seek a
modification
U.C.C. §2-209(1), App. 26, Modification, Recission and Waiver: An agreement modifying a K
within this Article needs no consideration to be binding.
Official Comment:
1. Section seeks to protect and make effective all necessary/desirable modifications of sales Ks without
regard to technicalities that may hamper adjustment.
2. Modifications must meet test of good faith [don’t need consideration]
 Extortion of modification without legitimate commercial reason is ineffective as violation of good faith
 Test of good faith includes observance of “reasonable commercial standards of fair dealing in the trade”
and may require an objectively demonstrable reason for the modification
 Market shifts that make performance involve a loss may provide such a good reason for modification even
if there’s no unforeseen difficulty that would be a legal excuse from performance under §2-615 or §2-616
Note: Common law: you cannot disable yourself from being able to recontract in the future – a written K
can always be modified orally, even if the modification contradicts the terms of the K. UCC says a written
K between merchants in generally can’t be modified orally, but if K specifically says it can’t be modified
orally, then has to be written; if it’s a consumer-merchant relationship the consumer must sign the change.
Note: standard for an enforceable modification differs from the standards under the “excuse” doctrines
(mistake, impossibility, frustration of purpose) – magnitude of changed circumstances necessary
Fried v. Fischer, PA 1938, Supp. IV-30: Fried leased store to Fischer, , and his partner Brill. 
withdrew from lease early to go to business elsewhere with permission of Brill and Fried. When Brill
stopped paying rent, Fried sued Brill and Fischer. Normally a promise by a creditor to release one
partner of a debtor firm from liability for an obligation is, in the absence of qualifying facts, legally
unenforceable for lack of consideration. However, promissory estoppel (reliance) may be applied if
(1) it was intended that the promise be relied upon, (2) the promise was in fact relied upon, and (3) a
refusal to enforce the agreement would result in injustice.  knew his announcement of the intended
abandonment of his right to enforce ’s liability for rent would be relied upon by  to the extent of his
embarking upon a new business adventure, so doctrine of promissory estoppel is applicable.
C. MISTAKE AND NONDISCLOSURE
1. Mutual Mistake
Sherwood v. Walker, MI 1887, p 602:  contracted to buy cow for $80. Both believed cow was barren.
 found out cow was pregnant – now worth $1000, so breached. Mutual mistake of material facts voids a
contract. If there’s a difference or misapprehension as to the substance of the thing bargained for, or the
thing delivered or received is different in substance from the thing bargained for and intended to be sold,
then there’s no contract and no assent. Remanded for jury determination of whether the K was contracted to
be sold upon the understanding of both parties that she was barren.
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Beachcomber Cons., Inc. v. Boskett, NJ 1979, p 608: , a retail coin dealer, for 15-45 minutes
inspected a dime purportedly minted in 1916 in Denver that  had obtained for $450.  bought it for $500.
When  tried to resell coin, found out it was a counterfeit. Court declared rescission by mutual mistake
–  did not assume risk of genuineness by performing his own examination. Both  and  believed coin
was genuine; price asked and paid was based on that “essential fact.” Because both were certain the coin
was genuine, RSC §502 (saying risk of existence of doubtful facts are assumed as elements of the bargain
when both parties are conscious of the uncertainty) is not applicable. Where parties can be restored to the
status quo, even a negligent failure to discover a mistake such as this does not preclude rescission.
Restatement illustrations, p 609:
(1) If A sells B land that they both believe has valuable timber on it, but in fact a fire had destroyed the
timber, the K is voidable by B.
(2) A sells B “such title to Blackacre as A possesses.” A doesn’t own Blackacre. The K is not voidable.
(3) If A buys a $100 jewel for 10 cents at a thrift store after correctly believing that it was placed in the
cheap jewelry cabinet by mistake, the shopkeeper is entitled to restitution.
(4) If A discovers a valuable book at a second-hand bookstore selling books for $1 each, and he hands the
book to the proprietor with $1 and the proprietor reads the name of the book and the price tag and
completes the purchase, the book dealer is not entitled to restitution.
Note 2: Reformulating Sherwood, p 610: A century after Sherwood, MI SC rejected distinction
between material mistakes (touching the substance of the consideration) and collateral mistakes (running to
value). In Lenawee County Bd. of Health v. Messerly, MI 1982, said better approach is “a case-by-case
analysis whereby rescission is indicated when the mistaken belief relates to a basic assumption of the parties
upon which the contract is made, and which materially affects the agreed performance of the parties (RSC
§152). Rescission is not available, however, to relieve a party who has assumed the risk of loss in
connection with the mistake.” So a mutual mistake about a basic assumption that materially affects the
agreed exchange is grounds for rescission, but not when the K had allocated to the purchaser the risk
in an “as is” clause (for unknown defects).
2. Unilateral Mistake
a. Clerical Error
Elsinore Union Elementary School Dist. v. Kastorff, CA 1960, p 612: In calculating bid to build
school, Kastorff forgot to add price of plumbing. Clerical error resulted in bid being off by $12,000. He
notified school bd. right away, but they voted after notification to give him the bid anyway.  refused to
sign the written contract and  sued to enforce. The mistake was an honest, excusable and material
mistake (a clerical error is not “neglect of legal duty”) and of fundamental character, and the 
notified the  right away. The school district accepted the bid with knowledge of the error, and
would not suffer damage or prejudice in rescission since no intervening rights had accrued. K not
enforceable, although court does insist that mistake be material for it to void the K.
S.T.S. Transport Serv., Inc. v. Volvo White Truck Corp., 7 th Cir. 1985, p 617: Unilateral mistakes
that are clerical or mathematical and/or occur in spite of the exercise of reasonable care, rather than
miscalculations of judgment about economic climate or risks, will generally be granted relief. Such
errors are difficult to prevent and no useful social purpose is served by enforcing the mistaken term.
Presumption of rescission rather than enforcement should not apply to extreme negligence, and there is an
exception when K has been relied upon. It would be illogical, if not impossible, to require a bidder who has
made a mistake in calculating a bid to establish that the mistake was one most reasonable bidders would
make under substantially similar circumstances.
Comment: Information and Mistake, p 618: Relief is routinely given in mistaken-bid cases if the
bidder-offeror’s error was known or reasonably should have been known by the offeree before
acceptance. How is this reconciled with courts’ general reluctance to impose of a duty of disclosure in
arm’s-length relationships that would erase knowledgeable party’s advantage? Kronman’s hypothesis:
Risk of mistake represents a cost to both society and the contracting parties, because a mistake entails a
misallocation, or waste, of resources. Since information prevents mistakes, a court should assign the risk of
mistake to the lower-cost information-gatherer either by (1) distinguishing “casually acquired”
information from “deliberately acquired” – so in the bidding case, it’s just zero-cost happenstance that
you discover a mistake v. a K for which you did studies and research. Deliberately acquired information
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involves a discovery cost that can be offset by benefit of non-disclosure. (2) blanket rules for categories of
cases, decide categories by likely cost of information.
b. The Duty to Disclose Information
Reed v.. King, CA 1983, Supp. IV-33: Reed,  purchased a house from King, .  did not tell  that
a woman and her 4 kids were murdered in the house 10 years earlier.  sued, seeking rescission and
damages since she had paid $76,000 for the house but it was only worth $65,000 b/c of its past. Where
seller knows of facts materially affecting value or desirability of property which are known or
accessible only to him and also knows that such facts are not known to or w/in reach of diligent
attention and observation of the buyer, seller is under a duty to disclose them. Non-disclosure of
murders was failure of good faith/fair dealing. Reed must demonstrate objective tangible harm to recover.
Note: Under RSC §161(b) concealment and misrepresentation invalidates a K. So does mere nondisclosure
when disclosure would correct a mistake as to basic assumption of K and failure to disclose = bad faith. For
concealment and misrepresentation, both parties have equal duties. For nondisclosure, the law assumes that
the seller is the low-cost information gatherer and only gives seller a duty to disclose.
Eytan v. Bach, DC 1977, p 635: Husband and wife sued to recover $157.50 paid to , an antique
retailer, for 3 paintings that ’s learned later were not original productions of unknown 19 th-century artists,
but were recent reproductions placed in old frames. s had inspected and touched the paintings, and 
made no express representation that the paintings were either “originals or ancient.”  did not have a duty
to disclose that the paintings were not originals b/c $50 was a sufficiently small amount to put a
purchaser on notice that they weren’t antiques. s did not ask whether the paintings were originals,
and there was no duty on the vendor to inform them of the obvious. It doesn’t seem fair to give them
the benefit of the bargain if they were right but protect them if they were wrong.
Note: Nondisclosure and Concealment, p 636: When is there a duty to disclose?
Matthews v. Kincaid, Alaska 1987: duty to disclose arises in situations involving facts that are concealed or
unlikely to be discovered because of the special relationship between the parties, the course of their
dealings, or the nature of the fact itself. A duty to disclose is rarely imposed when parties deal at arm’s
length and where information is the type the buyer would be expected to discover by ordinary inspection
and inquiry.
Federal Dep. Ins. Corp. v. W.R. Grace & Co., 7 th Cir. 1989: An omission can be actionable as a fraud, but
not every failure to disclose info that would later cause the other party to reassess the deal is actionable.
Hill v. Jones, Ariz.Ct.App. 1986: caveat emptor’s vitality has waned during 2nd half of 20th century; modern
view is that a vendor has an affirmative duty to disclose material facts when: (1) Disclosure is necessary to
prevent a previous assertion from being a misrepresentation or from being fraudulent or material, (2)
Disclosure would correct a mistake of the other party as to a basic assumption on which that party is making
the contract and if nondisclosure amounts to a failure to act in good faith and in accordance with reasonable
standards of fair dealing, (3) Disclosure would correct a mistake of the other party as to the contents or
effect of a writing, or (4) The other person is entitled to know the fact because of a relationship of trust and
confidence between them.
Judicial policies: (1) finality of dealings (2) promoting honest business dealings (3) mistake, fraud,
misrepresentation. Thus, when nondisclosure of material facts affects the value of property and the facts are
not reasonably capable of being known to the buyer courts will intervene.
United States v. Dial, 7th Cir. 1985: Liability is narrower for nondisclosure than for active
misrepresentation, because society wants to encourage people to find out the true value of things, and it
does this by allowing them to profit from their knowledge.
RSC §161(b) When Non-Disclosure is Equivalent to an Assertion, Supp. IV-35: A person’s nondisclosure of a fact known to him is equivalent to an assertion that the fact does not exist when he knows
that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that
party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in
accordance with reasonable standards of fair dealing.
Comment:
In many situations, if one party knows that the other is mistaken as to a basic assumption, he is expected
to disclose the fact that would correct the mistake. A seller of real or personal property is ordinarily
expected to disclose a known latent defect that would probably prevent the buyer from buying at K price.
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 However, a buyer of property is not ordinarily expected to disclose circumstances that make the property
more valuable than the seller supposes.
V. PERFORMANCE AND NONPERFORMANCE
A. JUSTIFICATIONS FOR NONPERFORMANCE
1. Failure of Conditions
Kingston v. Preston, Court of King’s Bench, 1773, p 771:  contracted to work for  until value of
stock is reduced to a certain point.  then would give his business to  in return for security.  refused to
perform, saying  didn’t give the necessary security. ’s promise deemed to be a condition precedent to
’s promise to give him the business so had no duty to give up his business until  gave security. Kinds of
covenants: (1) Mutual and independent covenants, where either party can recover damages for
breach & where it is no excuse for  to allege a breach of the covenants on the part of the  (2)
Conditioned and dependent covenants, in which the performance of one depends on the prior
performance of another and until this prior condition is performed, the other party is not liable to an
action on his covenant (3) Simultaneous covenants, in which the performing party can sue the nonperforming party even though it is not certain that either is obliged to perform. Decide dependence/
independence of covenants from evident sense and meaning of parties – precedence must depend on the
order of time in which the intent of the transaction requires their performance. Here, essence of the
agreement was that  didn’t have to trust in ’s personal security but was rather entitled to security for
payment of money before he delivered up his stock and business to , so the giving of security must
necessarily be a condition precedent.
Williston, Contracts, p 773: A court must enforce the will of the parties in an express condition, even if
it is harsh, unless it violates public policy. Where the court imposes a condition in absence of or irrespective
of the manifested intention of the parties, it can do so in such a way as to do justice and avoid hardship.
RSC §234 Order of Performances, p 773: Where all or part of the performances to be exchanged
under an exchange of promises can be rendered simultaneously, they are to that extent due simultaneously,
unless the language or the circumstances indicate the contrary.
Comment: Cases where simultaneous performance is possible can be grouped into 5 categories
(requirement of simultaneous performance applies to 1st 4 categories):
(1) Where same time is fixed for performance of each party;
(2) Where a time is fixed for the performance of one of the parties and no time is fixed for the other;
(3) Where no time is fixed for the performance of either party;
(4) Where the same period is fixed within which each party is to perform;
(5) Where different periods are fixed within which each party is to perform.
RSC §238 Effect on Other Party’s Duties of a Failure to Offer Performance, p 774: Where all or
part of the performances to be exchanged under an exchange of promises are due simultaneously, it is a
condition of each party’s duties to render such performance that the other party either render or, with
manifested present ability to do so, offer performance of his part of the simultaneous exchange.
Conley v. Pitney Bowles, 8th Cir. 1994, p 781: Conley, , employee, sued Pitney Bowles, , employer
after he had been denied continued disability benefits from car accident injury.  was granted summary
judgement because employment contract contained clause requiring exhaustion of administrative remedies
prior to a suit in court, and  did not exhaust these remedies.  appealed, arguing that manual of benefits
says that any person whose claim is denied will receive written explanation of appeal procedure, and he
never received this, so he is excused from the requirement of exhaustion. ’s obligation to provide notice
necessarily precedes exhaustion requirement of K. A defense under the exhaustion clause may not be
asserted absent performance of the notice clause. In bilateral contract s for an agreed exchange of
performances, where one party’s performance is to be rendered prior in time to that of the other , it
is a constructive condition precedent to the latter’s duty. Note:  didn’t argue constructive notice.
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Stewart v. Newbury, NY 1917, p 800: Stewart, , hired Newbury Mfg. Co. to do concrete building
work.  wanted monthly payments, whereas  wanted to pay after performance was completed. Absent a
contrary agreement, where a K is made to perform work and no agreement is made as to payment
and there is no custom understood by both parties, the work must be substantially performed before
payment can be demanded (common law rule).  was not entitled to receive payment at reasonable
times as work progressed nor could he abandon work and recover amount due for work performed if
payments were refused.
Patterson, Conditions in Contract, p 803: When one party’s performance does not require a substantial
time, then the his duty is conditional on performance by the other party. When one party’s promise requires
a substantial time for performance, some extension of credit is necessary. Typical case under this rule is the
contract to do work for money. The order-of-performance test of credit burdens the employee to
extend credit (don’t get paid until complete work) b/c (1) employer normally has greater
responsibility (2) employee cannot be compelled by specific performance. Employers present the
lower credit risk. The rule’s severity has been mitigated by statutes requiring wages to be paid at short
intervals to certain classes of employees, etc.
U.C.C. §2-307, App. 32, Delivery in Single Lot or Several Lots: default rule – Unless otherwise
agreed all goods called for by a contract for sale must be tendered in a single delivery and payment is due
only such tender but where the circumstances give either party the right to make or demand delivery in lots
the price if it can be apportioned may be demanded for each lot.
RSC §239, p 804: Where performances are to be exchanged under an exchange of promises, and the
whole of one party’s performance can be rendered at one time, it is due at one time, unless the language or
circumstances indicate the contrary. When only a part of one party’s performance is due at one time, if the
other party’s performance can be so apportioned that there is a comparable part that can also be rendered at
that time, it is due at that time, unless the language or the circumstances indicate the contrary.
Tipton v. Feitner, NY 1859, p 805:  sold  dressed hogs, which were delivered that day, and live
hogs, which were not delivered. Court held that s could recover price of dressed hogs, deducting the
damages which the  had sustained for the breach of the other branch of the K. Delivery of live hogs was
not a condition precedent for payment for dressed hogs. It is not universally true that a party to a K who has
himself failed to perform some of its provisions is thereby precluded from recovering damages for a breach
committed by the other party. In contracts for the purchase of property, where there is no stipulation
for credit or delay on either side, the delivery or conveyance of the property and the payment of the
price should be concurrent acts. The law wants to discourage breaches, but not with penalties beyond the
damages sustained by the party injured. Not an entire contract, where the performing party has to do
everything before the paying party has to do anything – rejects needless extensions of credit.
RSC §240 Past Performances as Agreed Equivalents, p 837: If the performances to be exchanged
under an exchange of promises can be apportioned into corresponding pairs of part performances so that the
parts of each pair are properly regarded as agreed equivalents, a party’s performance of his part of such a
pair has the same effect on the other’s duties to render performance of the agreed equivalent as it would
have if only that pair of performances had been promised.
Comment: Separate contracts distinguished. When it is proper to regard parts of pairs of corresponding
performances under a K as agreed equivalents, the K is sometimes loosely said to be divisible or severable.
The pairs are not treated as separate contracts b/c under separate contracts, performance under the first
would not impact duties to perform the second; because this is a single K, even though you can treat the
pairs of corresponding parts as agreed equivalents, the parties are bound by a single K and a single promise
for an exchange of their whole performances.
Trapkus v. Edstrom’s Inc., IL 1986, p 838: A divisible K is one in which both parties have divided
up their performance into units in such a way that each past performance is the rough compensation
for a corresponding past performance by the other party. The test of whether the K is an entire K or a
divisible K is whether, had the parties thought of it, they would be willing to exchange the part performance
irrespective of what transpired subsequently or whether the divisions made are merely for the purpose of
requiring periodic payments as the work progresses.
Note: “Divisible” or “Severable” Contracts, p 839: Restatement §240 illustrations based on Tipton:
1. A sells B dressed and live hogs. Dressed hogs to be delivered immediately, and live hogs 15 days later.
Payment due within 30 days of delivery. A breaches for live hogs. If court finds that delivery of dressed
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hogs and payment of price stated for them are agreed equivalents, A can recover stated price for dressed
hogs and B can claim damages for live hogs breach.
2. Facts same except A has no right to payment for either dressed or live hogs until 30 days after delivery of
live ones. A unjustifiably refuses to deliver live ones until B pays for dressed hogs. If court finds that
delivery of dressed hogs and payment of price stated for them are agreed equivalents, A can recover stated
price for dressed hogs and B can claim damages for live hogs breach.
3. Same facts except before A delivers dressed hogs, he repudiates by saying he will not deliver live ones. B
refuses to accept dressed hogs. Even if court finds that delivery of dressed hogs and payment of the price
stated for them are agreed equivalents, A has no claim against B. B has claim for damages for total breach
of contract.
The rule that a party who fails to perform cannot recover on the K for part performance applies only
to entire, indivisible Ks, not to severable contracts. A party who has performed part of a divisible K
may recover the agreed equivalent in an action on the K; the remedy is not off-the-K restitution.
2. Impossibility and Impracticability (and frustration of purpose)
a. Development of the Doctrine
Taylor v. Caldwell, King’s Bench 1863, p 638:  contracted to let ’s use the music hall on certain
dates. Before the first date, the music hall burned down. No stipulation was made in contract to cover the
possibility of such a disaster.  sued for breach. In contracts in which the performance depends on the
continued existence of a given person or thing, a condition is implied that the impossibility of
performance arising from the perishing of the person or thing shall excuse performance. Existence of
the music hall was an implied condition – parties must have contemplated the hall would continue to exist
and absence any express or implied warranty that it would exist, the parties should be excused from
performance if it ceases to exist (so long as neither party is at fault).
Harrison v. Conlan, MA 1865, p 642:  was employed by priest to play church organ for 3 months.
After 1 month, priest died. The church was closed except for the priest’s funeral.  sued church for full
salary. Court said  was entitled only to one month’s pay plus fee for playing at funeral. In Catholic
churches, the organist is furnished by the pastor so that his services are rendered to pastor personally. Upon
priest’s death, therefore, contract was ended since further performance under it was impossible. Contracts
which can only be performed personally by the promisor terminate when death renders the personal
performance impossible.
Tompkins v. Dudley, NY 1862, p 642: Contractor almost finished school house when it burned down.
School board sued for refund of the payments they had already made. The contractor’s duty is absolute.
When a party by his own contract absolutely engages to do an act, it is deemed to be his own fault and folly
that he did not thereby expressly provide against contingencies, and exempt himself from responsibility in
certain events, so in case of their occurrence, the performance is not excused by an inevitable accident or
other contingency, although not foreseen by or within the control of the party. The law will only excuse
nonperformance for acts prevented by an act of G-d. When one of two innocent persons may sustain a
loss, the law leaves it where the agreement of the parties has put it; the courts will not insert a clause into
the K where none exists. Court finds a positive K, or absolute K. Reasonable for builder to assume risk for
what he is building.
Garman v. Hoover, PA 1928, p 645: s, contractors, agreed to build house and garage for  for $8300.
s had almost completed project and had received $5600 in progress payments from s, when building
burned down. s had taken out insurance on the building and received $5609 in insurance. s rebuilt
building supplying materials worth $7968 and then sued to recover contract price without deducting the
$5600 they received before. The installment payments were not agreed equivalents for the successive
stages in the construction work, but were merely advance payments for an entire performance. s
were obligated to complete the buildings even though the house, when partially completed, was
destroyed by fire. s have no claim on the insurance proceeds received by s. If s wished insurance
protection, they should have insured their own interest.
Note, 645: Cases like Tompkins and Garman are infrequent b/c builders buy insure against loss.
Another technique for mitigating the impact of the rule of absolute contractor liability (that is shifting risk
to owners) is to find the contract specifications given the contractor both faulty and the responsibility of
someone other than the contractor.
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b. Modern Approach (more forthrightly focused on distributive issues)
American Trading & Prod. Corp. v. Shell Int’l Marine, Ltd., 2 nd Cir 1972, p 660:  contracted to ship
’s cargo from Texas to India. While en route, the Suez Canal was closed and the  had to take a longer
way around that cost 33% more.  sued for additional compensation under doctrine of impossibility/
impracticability, saying the K meant only passage through the Suez Canal, which was impossible and
additional compensation should be given in quantum meruit for the benefit conferred. Court: Performance
is not impossible. An alternative route was widely known, and use of the Suez Canal was not designated
as exclusive means under the contract. All the contract shows is that the parties contemplated use of
Canal as the most probable route, not that it was a condition of performance. Not enough hardship to find
impracticability – there was no extreme or unreasonable difficulty, expense, injury, or loss. Mere
increase is cost alone is not a sufficient excuse for nonperformance unless it is an “extreme and
unreasonable” expense.
Note: unforeseen developments provide a reason for K modification, so if they had called before
completing trip and co. had agreed to pay more, then enforceable. Threshold for enforceable mod. lower
than for excuse
Note: it may be more efficient for shipping co. to self-insure against risk of Suez closing, but that leads to
cross-subsidization. But while shipping co may know more about Suez, oil co knows more about magnitude
of loss.
RSC §261 Discharge by Supervening Impracticability, Supp. V-1: When 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.
RSC §262 Death or Incapacity of Person Necessary for Performance, Supp V-1: If the existence of
a particular person is necessary for the performance of a duty, his death or such incapacity as makes
performance impracticable is an event the non-occurrence of which was a basic assumption on which the K
was made.
RSC §263 Destruction, Deterioration or Failure to Come into Existence of Thing Necessary for
Performance, Supp V-1: If the existence of a specific thing is necessary for the performance of a duty, its
failure to come into existence, destruction, or such deterioration as makes performance impracticable is an
event the non-occurrence of which was a basic assumption on which the K was made.
RSC §264 Prevention by Governmental Regulation or Order, Supp V-1: If the performance of a
duty is made impracticable by having to comply with a domestic or foreign governmental regulation or
order, that regulation or order is an event the non-occurrence of which was a basic assumption on which the
K was made.
U.C.C. §2-615, App. 55, Excuse by Failure of Presupposed Conditions: Except so far as a seller
may have assumed a greater obligation and subject to the preceding section on substituted performance:
(a) Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and
(c) is not a breach of his duty under a contract for sale if performance as agreed has been made
impracticable by the occurrence of a contingency the non occurrence of which was a basic assumption on
which the contract was made of by compliance in good faith with any applicable foreign or domestic
governmental regulation or order whether or not it later proves to be invalid.
(b) Where the causes mentioned in paragraph (a) affect only a part of the seller’s capacity to perform, he
must allocate production and deliveries among his customers but may at his option include regular
customers not then under contract as well as his own requirements for further manufacture. He may so
allocate in any manner which is fair and reasonable.
(c) The seller must notify the buyer seasonably that there will be delay or non-delivery and, when allocation
is required under paragraph (b), of the estimated quota thus made available for the buyer.
Comment:
 2 Tests for excuse under this Article: 1) Basic Assumption test; 2) Commercial Impracticability test.
 Increased cost alone does not excuse performance unless the rise in cost is due to some unforeseen
contingency which alters the essential nature of performance.
 Rise or fall in market is not a justification because that is exactly the type of business risk which business
contracts made at fixed prices are intended to cover.
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 Severe shortage of raw materials or supplies due to contingency like war, crop failure, etc. which causes
marked increase in cost or prevents seller from performing is in contemplation of this section.
 If there is an exclusive source of supply and contingency has been contemplated or assumed by parties at
time of contracting, then there is no excuse under this section unless seller has employed all due measure to
assure himself that his source will not fail.
 Failure of conditions for convenience or collateral values, not commercial impracticability of main
performance, does not amount to complete excuse, But, good faith and reason of the present section and
preceding one may be held to justify any needed delay involved in a good faith inquiry seeking a
readjustment of the contract terms to meet the new conditions.
 Exemptions of this section do not apply when the contingency in question is sufficiently foreshadowed at
the time of contracting to be included among the business risks in contract.
 An excused seller must fulfill his contract to the extent which the supervening contingency permits.
L.N. Jackson & Co. v. Royal Norwegian Government, 2nd Cir 1949, p 663: When the promisor offers
as an excuse a burden upon his performance which he did not provide against, he must be content to have
the question decided by the facts that both he and the promisee knew in common when the contract was
made. Although a promise to perform personal service is excusable by the death of the promisor, it
would not be so if the promisor knew that his death was imminent.
Mishara Constr. Co. v. Transit-Mixed Concrete Corp., MA 1974, p 664: Mishara, , general
contractor for housing project, contracted with  to get concrete. A labor dispute disrupted work at the site.
Work on the main project was resumed but there was a picket line until completion of project. After notice
to Transit, Mishara bought concrete elsewhere at higher cost. Mishara brought suit for cost of cover,
including expenses of locating alternate source. The UCC § 2-615’s test of commercial impracticability
requires the intervening circumstance to be one that the parties assumed would not occur. Certain
risks are so unusual and have such severe consequences that they must have been beyond the scope of
the risks assigned. Much must depend on the facts known to the parties at the time of the contract,
regarding the prospects for labor difficulties and the severity of their probable effects. If picket line was
inconvenient but not impracticable and labor strikes common, then Transit breached K. Jury must decide;
reject per se instruction.
Unger, Law in Modern Society, Supp V-2: Formality: A system of rules and/or ceremony is formal
insofar as it allows its official or non-official interpreters to justify their decisions by reference to the rules.
Supposedly make it possible to ascertain entitlements and obligations without evaluating the goodness or
badness of particular results (make it seem “objective). Equity is intuitive sense of justice in the particular
case (opposite of rules). The more equity is sacrificed to the logic of rules, the greater the distance between
official law and lay sentiment of right. Solidarity: moral ideals cherished by the broader communities to
which the judge and the litigants belonged. A legal order confers entitlements and obligations; the more
formal it becomes, the more it treats each entitlement as a power to be exercised in the discretion of the
powerholder. Solidarity means that one takes no entitlements for granted; cannot be made a basis for rules.
A judge using solidarity in a unforeseen circumstances K case will ask which party is more blameworthy
and ascertain distributive justice.
Speidel, The New Spirit of Contract, Supp V-8: There has been a shift from the classical to the neoclassical system of contracts that allows hardship to provide a justification for the court to police the
transaction in the interest of fairness and the triumph of the duty of good faith in performance &
enforcement of bargains. Also modify Ks to avoid unbargained-for hardship & unjust enrichment. When
changed circumstances, the risk of which the disadvantaged party did not assume, cause extreme
hardship and imperil the relationship, the advantaged party acts in bad faith if he fails to accept a
proposed modification that would be enforceable if accepted.
3. Frustration of Purpose
Traditional rule: let the losses lie where they are allocated by the K (Kull, Chandler)
Difference between impossibility and frustration of purpose: usually party claiming impossibility is
performing party and party claiming frustration of purpose is paying party. For both, even that made K less
valuable materialized later, in contrast to mistake doctrine.
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Krell v. Henry, England 1903, p 667: Krell leased room to Henry to view coronation parade of King
Edward VII but parade was canceled due to king’s illness. The coronation is a basic assumption on which
the K was made. Couldn’t foresee the cancellation of the coronation so Henry doesn’t have to pay rent.
1) Having regard to all the circumstances, what was the foundation of the K?
2) Was the performance of the K prevented?
3) Was the event which prevented the performance of the K of such a character that it cannot
reasonably be said to have been in the contemplation of the parties at the date of the K?
If all three q’s answered affirmatively, both parties discharged from further performance of the K.
Also, change of state of things or conditions is enough; you don’t need the direct subject of the K to perish
or fail to be in existence at the date of the K to qualify for being excused from performance.
Comment: Relief Following Discharge, p 670: American law generally allows restitution of the value of
performances already rendered in impossibility or frustration cases. The concept of “benefit” often becomes
so attenuated as to give disguised protection to the reliance interest. Court seems to take degrees of fault
into account. RSC §272 (b) takes the position that recovery in impossibility and frustration cases
“may go beyond mere restitution and include elements of reliance by the claimant even though they
have not benefited the other party.”
Chase Precast Corp. v. John J. Paonessa Co., MA 1991, p 676: Paonessa, , contracted with the state to
improve Route 128.  then contracted with Chase, , for concrete median barriers. There were public
protests over the barriers and so the State decided not to use them. The state’s K w/ allowed the state to
change quantities specified in their K.  refused to purchase the barriers that had not already been
delivered.  sued  for payment of all the barriers contracted for.  is excused from duty to buy the
median barriers on grounds of frustration of purpose. Test applied by court to find frustration of
purpose: Did the parties assume no cancellation? Did the parties contemplate or anticipate
occurrence? Both parties did in fact contemplate the possibility of cancellation because they were both
aware that the cancellation clause existed in the ’s contract with the State.
Note: modern view: it’s ok if the foresaw the event; just want to know how they intended to allocate risk
Posner and Rosenfield, Impossibility and Related Doctrines, Supp V-14: Courts should give the risk
to the superior risk bearer. Discharge obligations for party who could not reasonably have prevented the
event rendering his performance uneconomical and the party least able to estimate probability of event’s
occurrence and magnitude of loss and to insure against the event. Enforce for party who can self-insure.
Kull, Mistake, Frustration and the Windfall Principle, Supp V-18: Superior risk-bearing capacity as
determined after the fact by judges is a default term that conveys no usable information to the parties; an
uninformative default term cannot be the source of any economies from superior risk spreading.
Instead of ex-ante allocation of frustration risks, the court should let losses fall where they may so that
parties will address potential losses in their agreement. Trying to figure out who is the most efficient risk
bearer is too difficult and unpredictable, and it’s unclear what risks the payment schedule reflects.
B. UNJUSTIFIED NONPERFORMANCE AND THE PROBLEM OF FORFEITURE
1. The Perfect-Tender Rule and the Doctrine of Substantial Performance
Perfect Tender Rule: Any nonconforming tender of goods by seller means buyer is excused from any duty
to pay; sellers required to deliver goods that comply exactly w/the sales agreement
Modern UCC “perfect tender rule” is §2-601; most important exception is §2-508
Oshinsky v. Lorraine Mfg. Co., 2nd Cir 1911, p 807:  delivered some of the goods one day late and 
refused them. Contract stated goods to be delivered “stock: Nov. 15.” The language of the delivery
provision is plain, unequivocal and free from ambiguity. B/c goods were not tendered on time, 
failed to establish its cause of action. (Pre-UCC case)
Ramirez v. Autosport, NJ 1982, p 808: UCC maintains the perfect tender rule, but mitigates its
harshness (and protects sellers from the risk that buyers in a declining market would reject goods for minor
nonconformities and force the loss on surprised sellers).
U.C.C. §2-601, App. 45, Buyer’s Rights on Improper Delivery: If the goods or the tender of delivery
fail in any respect to conform to the K, the buyer may (1) reject the whole, or (b) accept the whole, or (c)
accept any commercial unit or units and reject the rest.
Comment:
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1. A buyer accepting non-conforming tender is not penalized by loss of any remedy otherwise open to him.
Partial acceptance is accepted whether goods conform or not; the only limitation on partial acceptance is
that good faith and commercial reasonableness must be used to avoid undue impairment of the value of the
remaining portion of the goods.
2. Acceptance made with the knowledge of the other party is final. An original refusal may be withdrawn by
a later acceptance if seller has indicated that he is holding the tender open but not if his original rejection
caused the seller to arrange for other disposition of the goods. Any exercise of ownership after rejection is
wrongful against the seller b/c blocks seller from seeking alternate disposition. Buyer’s attempts in good
faith to dispose of defective goods where the seller failed to give instructions within a reasonable time are
not to be regarded as acceptance.
Prescott & Co. v. J.B. Powles & Co., WA 1920, p 809: Prescott ordered 300 crates of Australian
onions, then he changed his mind and wired seller that he wanted to cancel. But the boat had already left
Australia with only 240 crates (U.S. Gov’t had commandeered part of the ship so could only ship partial
order). Buyer refused to accept onions or to pay anything. Buyer excused from non-performance by
breach of seller even though seller’s breach is due to impossibility. Can’t justify a recovery for seller
when his performance was partial. (Pre-UCC case: Buyer is entitled to reject goods even when seller
has partially performed if quantity delivered is less than quantity contracted for. Court rejects idea
of substantial performance)
Beck & Pauli Lithographing Co. v. Colorado Milling & Elevator Co., 8th Cir 1892, p 811: Contract for
purchase from  more than 300,000 pages of engraved letterhead to be furnished “in the course of the year”
1889. In December 1889,  shipped the finished product by rail, but they arrived by Jan 4.  refused to
accept goods, saying delivery was too late. Stipulations as to the time of performance are not
necessarily of the essence, unless express provisions of the contract or the nature of the subject
matter indicates that the parties intended performance on time to be a condition precedent. In the
ordinary contracts of merchants for the sale or manufacture of marketable commodities, time clauses
should be strictly construed on account of the frequent and rapid interchange and use of such commodities
made necessary by the demands of commerce. But this was a contract for artistic skill and labor to be
bestowed on articles that would not be saleable to any other buyer. There was nothing to indicate
that delivery a few days late would be harmful to defendant, but if there was injury, defendant’s
remedy was in damages for the delay. Its refusal to accept delivery not justified by this trifling delay.
Comment: “Goods” and “Services” – The Scope of the UCC Sales Article, p 811: Sale of goods has
more demanding law of performance than other contracts. Sometimes hard to classify K.
(a) K provides for the transfer of ownership of goods, as well as incorporeal rights or realty. Then
courts would either split K into goods and non-goods (to be decided under general K law) or see if the bulk
of the transaction is goods.
(b) The rendition of a service often involves the transfer of ownership of goods. For mixed goods and
services contracts, the test is whether their predominant factor is the rendition of service, with goods
incidentally involved or a transaction for sale, with labor incidentally involved. If the rendition of services is
not central to a mixed contract, there is a general trend to view any transaction heavily weighted towards
goods that are governed by UCC.
(c) Leases of equipment: Even if transaction falls technically outside the scope of Article 2, sales-law
results may be reached because of the view that many leases are closely analogous to, and not economically
different from a sale. Also §2-102 says applicability is to “transactions of goods” – could interpret it to
include a lease. Joseph Martin, Jr. Delicatessen v. Schumacher is an example of court refusing to extend
UCC by analogy to real estate transactions.
Bartus v. Riccardi, NY 1967, p 813:  contracted to purchase a specific model hearing aid.  supplied
a later, improved model instead of the one contracted for.  did not like the new hearing aid, and seller
offered to replace it with the original model mentioned in K.  then said he didn’t want any hearing aid, and
seller sued for payment.  claimed right to reject improper delivery of goods under UCC §2-601 and §2602(2)(c) and says his acceptance was “reasonably induced… by the seller’s assurances” §2-608(1)(b).
Court said  could recover price even though he initially delivered a nonconforming model b/c he
subsequently tendered a conforming model, see UCC §2-508(2). ’s position had not been altered by
reason of original non-conforming tender.
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U.C.C. §2-508, App. 43, Cure by Seller of Improper Tender or Delivery; Replacement: If
nonconforming goods rejected, can seasonably notify buyer of intention to cure and make a conforming
delivery before time of performance expires. If buyer rejects nonconforming goods that seller has
reasonable grounds to believe would be acceptable then seller, if seasonably notifies buyer, may have a
further reasonable time to substitute conforming tender
Comment
(1) applies even when has taken back non-conforming goods and refunded the price. the closer to the
expiration date, the greater promptness of notification necessary. Time for cure of tender is modified by any
K time modifications.
(2) seeks to avoid injustice to seller by surprise rejection by buyer. Seller is charged with commercial
knowledge of factors of a particular sales situation; if buyer gives notice either implicitly, as in prior course
of dealings, or expressly of a “no replacement” clause, the seller is held in rigid compliance. If clause is in a
form contract that is out of line w/trade usage or prior dealings and not called to seller’s attention, then it’s
not enough to show that tender would be unacceptable.
(3) “a further reasonable time to substitute conforming tender” meant to protect buyer
Worldwide RV Sales & Service v. Brooks, IN 1989, p 816:  contracted to buy motor home w/2 roof
AC units. At delivery, vehicle only had one roof AC.  refused to accept the vehicle and demanded return
of his down payment.  offered to install front and rear units and remove the center air conditioner, but this
would leave a hole in the center of the vehicle’s roof.  refused offer.  was awarded a refund of deposit.
The refusal to take motor home was proper under UCC §2-601. Worldwide cannot claim the benefit of
§2-508, for it neither made “a conforming delivery” nor substituted “a conforming tender.” What it
offered the day of the rejection was inadequate.
Note: CL approach, in contrast to UCC approach, is the “substantial performance” doctrine.
Plante v. Jacobs, WI 1960, p 818: Jacobs paid for $20,000 of $26,700 house but refused to pay more
b/c of faulty construction. Substantial performance as applied to construction of a house, esp those
w/stock floor plans, does not mean that every detail must be in strict compliance with the
specifications and plans. Damages due are the difference between the value of the house as it stands
with faulty and incomplete construction and the value of the house if it had been constructed in strict
accordance with the plans and specifications = diminished value rule. The cost of replacement/repair
is helpful, but not binding for defect that would cost a lot to fix but would not affect market price.
Common law does not require perfect tender; buyer must accept imperfect tender and is compensated for
the defective/incomplete performance. Compensation here is measured against market value, although
normally compared against harm suffered.
Jacob & Youngs v. Kent, NY 1921, p 821: Owner contracted for large, expensive house to be built
using Reading pipe. After living in the house for over a year, owner discovered that contractor had used
different brand of pipes than he specified in K and refused to pay the balance owed on construction of
house.  can recover based on substantial performance because breach wasn’t willful and was relatively
minor. Damages = Contract price, less damage suffered by the owner due to breach, measured by difference
in value of the house, if any, resulting from the use of pipe other than Reading brand pipe. [Cardozo:] “The
courts never say that one who makes a K fills the measure of his duty by less than full performance.
They do say, however, that an omission, both trivial and innocent, will sometimes be atoned for by
allowance of the resulting damage, and will not always be the breach of a condition to be followed by
a forfeiture.” The parties can form a K in which they insist that every detail be performed perfectly, but the
law will be slow to impute the purpose, in the silence of the parties, where the significance of the default is
grievously out of proportion to the oppression of the forfeiture.
Note, p 822: The K in Jacob & Youngs had a clause that said that any work not fully in accordance with the
specifications will be rejected and is to be torn down, removed and remade or replaced in accordance
w/specifications, whenever discovered.
Note: Restitution for the “Willful” Defaulter, p 823:
Glazer v. Schwartz, MA 1931: Recovery on K requires complete performance. Recovery in quantum meruit
available if owner obtains substantially what was called for by the K and the failure to perform is not
willful. Builder breached after doing most of the work, so he can’t collect the rest of his fee, but homeowner
can recover for materials not supplied plus cost of making structure conform to the K.
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Ficara v. Belleau, MA 1954: Homeowner sued contractor who willfully breached. Court gave him
difference between original and substitute K price, but refused to allow him to recover the full amount he
paid for substitute K b/c that would be unjust enrichment. “The  is entitled to be made whole and no
more.”
MA still says that a party’s failure to perform in full bars recovery on the K, but one who both
substantially performs and makes a “good faith” effort to perform fully may recover in quantum
meruit. Good faith = absence of intentional departures from the K.
2. Restitution as a Remedy for the Breaching Party
Sale of goods = perfect tender rule
K for Service = substantial performance (key difference is forfeiture problem particularly severe)
Sale of land = probably treated like sale of goods
Comment: The Common Counts and Restitution, p 107: Quantum Meruit is claim for recovery of
the payment of services rendered. This pleading alleges that after performance was rendered, there was a
subsequent promise to pay, but the allegation of subsequent promise is just a formality. Promise to pay is
implied  term quasi-contract as a basis for restitution. The fiction of a contract allows a party to
seek restitution under a quasi-contractual liability when a substantial default bars recovery on the
contract. Courts allow claims of quantum meruit when one party would be enriched unjustly if there
were no payment to the other party, even if no promise of payment had been made.
Britton v. Turner, NH 1834, p 111:  agreed to work on ’s farm for 1 year. After working 9 ½
months,  abandoned performance and sued in assumpsit including a count in quantum meruit for the value
of the work he had done. Court allowed a reasonable sum for the service he performed less the damage
inflicted on his employer from his leaving under quantum meruit even though he voluntarily failed to
complete the K. The settled rule, which held the opposite, was unfair because an employee who attempts
performance may be placed in a much worse situation than he who wholly disregards his K, and the
employer would get more by the breach than the injury he sustained by such breach and more than he would
be entitled to if he brought an action for damages. Court held that a breacher is entitled to restitution for his
partial performance and the benefit it conferred on the other party to prevent unjust enrichment.
Question, p 115: For a long time in US, employees who abandoned employment Ks without compelling
reason or legal justification were refused relief in restitution even though in other settings the character or
quality of the breach was accorded less weight by courts. Today it’s hard to predict when courts will
grant an employee restitution; still pay attention to reasons performance was abandoned, and the stricter
test of conduct is still applied to defaulters under service Ks. Bright v. Ganas, MD 1937: misconduct
amounting to moral depravity bars all recovery on an express K and in quantum meruit for work already
done. Stiff v. Associated Sewing Supply Co, MN 1989: gross misconduct involving dishonesty and
disloyalty triggers common law’s forfeiture doctrine, under which employer owes nothing.
Note: The “Grand Tradition” (Llewellyn), p 116: The great weight of authority was contrary to
Britton’s result. Maxim of “Grand Tradition” of common law: the rule follows where its reason leads;
where the reason stops, there stops the rule. The conceptions of precedent as static and of movement as
improper without taking full account of the guidance the court rightly seeks also from its sense of decency
and sense, are an aberration which crept into lawyer’s thinking in the late 1800s. There is confusion when
modern courts seek to work in the Grand Manner but still seek to write in the Formal style.
Reynolds v. Armstead, CO 1968, p 823:  contracted to apply brick veneer that matched color of
existing brick to ’s house.  did not use the right color, but the veneer was in all other respects of sound
construction. ’s breach was a material breach and so  can not recover under substantial
performance of express K. However,  is entitled to restitution damages (quantum meruit).  is
awarded K price minus damages caused to  by ’s failure to perform fully.
Note: difference between these cases and restitution damages in II is which party is suing; also in these
cases K price operates as an upper limit on damages.
Rationale for restitution rule for breaching worker
1. avoid employer’s incentive to drive worker away
2. unreasonable to expect someone to work for a year without getting any $ (survival)
3. avoid oddity of punishing party performer who otherwise seems better off completely breaching
4. efficient breach theory – don’t be too punitive
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U.C.C. §2-718(2)-(4), App. 67, Liquidation or Limitation of Damages; Deposit: When a seller
justifiably withholds delivery of goods because of the buyer’s breach, the buyer is entitled to restitution of
any amount by which the sum of his payments exceeds: (a) the amount to which the seller is entitled by
virtue of terms liquidating the seller’s damages in accordance with subsection (1), or (b) in the absence of
such terms, twenty per cent of the value of the total performance for which the buyer is obligated under the
contract or $500, whichever is smaller.
The buyer’s right to restitution under subsection (2) is subject to offset to the extent that the seller
establishes (a) a right to recover damages under the provisions of the Article other than subsection (1) and
(b) the amount or value of any benefits received by the buyer directly or indirectly by reason of the contract.
When a seller has received payment in goods their reasonable value or the proceeds of their resale shall be
treated as payments for the purposes of subsection (2); but if the seller has notice of the buyer’s breach
before reselling goods received in part performance, his resale is subject to the conditions laid down in this
Article on resale by an aggrieved seller (§2-706).
Note: UCC adopts Britton rule but allows injured party to withhold some $ as penalty to breacher.
Comment: Subsection (2) refuses to recognize a forfeiture unless the amount of the payment so forfeited
represents a reasonable liquidation of damages as determined under subsection (1). A special exception is
made in the case of small amounts (20% of price or $500, whichever is smaller) deposited as security. No
distinction is made between cases in which the payment is to be applied on the price and those in which it is
intended as security for performance. Subsection (2) is applicable to any deposit or down or part payment.
In the case of a deposit or turn in of goods resold before the breach, the amount actually received on the
resale is to be viewed as the deposit rather than the amount allowed the buyer for the trade in. However, if
the seller knows of the breach prior to the resale of the goods turned in, he must make reasonable efforts to
realize their true value, and this is assured by requiring him to comply with the conditions laid down in the
section on resale by an aggrieved seller.
Vines v. Orchard Hills, Inc., CT 1980, p 121:  made a 10% down payment on condo, which was also
liquidated damages in the event of buyer’s breach. Then transferred to another state at work and reneged on
contract.  kept the down payment as liquidated damages.  sued to recover down payment. A party
breaching a land sale contract can recover the down payment specified in K as liquidated damages in
case of breach if he can prove that no damages were inflicted upon the seller at the time of breach
(want to prevent unjust enrichment). Whether the non-defaulting party was injured by the breach is
measured as of the time of the breach, not trial. Neither the seller’s status as a developer of a condominium
project nor the absence of willfulness on the part of the purchasers furnishes a justification for disregarding
the liquidated damages clause, although these factors may play some role in the ultimate determination of
whether the seller was in fact unjustly enriched by the down payment he retained.
Note: The Forfeiture Rule, p 126: In most areas of law, courts and legislatures have now adopted
rules generally permitting a defaulter to recover the net benefit conferred by a part performance. In
NY, this was the case in regards to goods, but not to real estate. In NY, an agreement that expressly
provides that seller could retain 10% deposit in case of default would be upheld as a valid liquidated
damages clause, in view of the recognized difficulty of estimating actual damages and general acceptance of
10% down payment as a reasonable amount. Buyer could try to prove the amount retained exceeded the
actual damages, but this is a difficult burden in any real estate case.