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Contracts
David Phillips
Friday, January 4, 2002
Article II of UCC and Restatement most important texts to have in class
Westlaw TWEN Website contains important documents to course, including two
discussion forums:
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General discussion forum, Prof. Phillips will answer questions almost every day.
Need to post at least five entries over the quarter; can be questions or statements.
Problems and Hypotheticals forum. Problem will be on website dealing with
today's and Monday's readings. Carrie and Elizabeth (class TAs) will be on
website to discuss answers. Next Friday, 1:45-3:15pm can meet with TAs for
initial problem (optional).
Example:
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Phillips promises that if we all work hard, we will all get outstanding on our
evaluations.
o Five months later, we all work hard, but don't get outstanding. Can we sue
Phillips?
o Does this promise constitute a contract? When do promises amount to a
contract?
o Sometimes it matters whether agreement is in writing.
o Also matters whether there is consideration: we never agreed to promise.
o Phillips gives 'outstanding' to everyone. May be against policy/legality.
o Ambiguous language.
o Need to have remedy. What would remedy be in promise to give
'outstanding'?
o Mental capacity--does promisor have ability to make contract?
o
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Does Phillips have the authority to make this promise? He is agent of
Northeastern Law School.
o Intent. Did we believe Phillips when he made promise? Maybe he did not
intend to make contractually-binding promise, nor did we understand it as
such.
Ultimate question is what will be enforced and what not in many different
contexts.
Going to look first at not whether a contract will be enforced but how it is enforced. This
is why we start with remedies.
United States Naval Institute v. Charter
Communications and Berkley Publishing Group
[936 F.2d 692]
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Tom Clancy's first novel, 'Hunt for Red October'. Could not get published by any
major publisher. Small publisher (US Naval Institute) publishes hardcover,
contracts with Charter Communications and Berkley to publish paperback.
Probably affiliated corporations (one control the other or common ownership).
Contract calls for paperback to start being sold in 10/01/85, but books start selling
9/15/85. Naval Institute sues for copyright infringement and breach of contract.
Since Berkley is licensee, cannot infringe on copyright, thus this count is
dismissed.
Plaintiff wants all of Berkley's profits from period of breach a well as damages
equal to loss of Naval's profits. Berkley's profits are much greater than Naval's
loss.
Basic principle: court will enforce remedy of plaintiff's loss, not defendant's gain.
Naval cannot get Berkley's profits (if they did, this would be 'restitution damages'-damages calculated by amount gained by promisor). Common exception to this is
copyright infringement (but court had dismissed this claim).
Contract law generally wants to put party in position they would have been had
contract been performed. This would not be achieved by restitution or punitive
damages. I.e., give party the 'benefit of bargain' or protect their expectation
interest.
Another reason for not appyling punitive damages, economic efficiency. Three notions of
efficiency:
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Pareto optimality: Could not make anyone in community better off without
making someone else worse off. Rarely used in legal analysis; problems include
that there can be more than one pareto optimal state depending on starting
conditions.
Pareto superior: Makes at least somebody better off without making someone
else worse off. Quite relevant to contract law.
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Kaldor Hicks: Cost/benefit analysis. Gains of doing something exceed losses;
something is least costly way of doing something.
Example:
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Phillips offers $100 for contracts book to student. Student agrees, both are better
off. Contract is pareto superior move, since both parties are being made better off.
This assumes no externalities.
If we assume that Naval's lost profits $30K, Berkley's profits are $100K. Berkley can pay
Naval $30K, Berkley is still up $70K, thus someone has been made better off without
making someone else worse off (absent transaction costs). Thus this is a pareto superior
(efficient) resolution.
In torts and criminal law, conduct is all undesirable. In contracts, however, not all breach
is undesireable; sometimes more efficient resolution involves breach.
Award in Naval Academy is profits; i.e., expectation damages (what they expected to
make), rather than reliance damages (what their costs were from breach). Court accepts
August profits as basis of damages, although early September sales were much lower.
Court finds it reasonable to be generous to injured party in this case of uncertainty.
Sullivan v. O'Connor
[296 N.E.2d 183]
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Sullivan sued plastic surgeon after nose fix made it worse. Claims both
malpractice and breach of contract.
Doctor made express warranty that nose would be better after surgery; this
warranty was violated.
Under malpractice claim, need to prove negligence; but under contract claim,
need only to prove breach of contract.
In lower court jury found doctor was not negligent, but did find for plaintiff on
contract claim.
In torts, generally want to put person back in position had injury not occurred;
these are reliance damages. In contracts, reliance damages would party in same
position as they would have been in had the contract not been made; i.e., had
surgery never taken place.
General norm in contract law is expectation damages--would want to put
Sullivan into position with fixed nose (as if contract had been performed as
promised).
For Monday: read assignment #2 (pages 22-39).
Monday, January 7, 1992 (Class 2)
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What does it mean to enforce?
What is consideration?
Enforceability
Sullivan v. O'Connor
(continued)
[296 N.E.2d 183] Supreme Judicial Court of Massachusetts 1973
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If we assume Sullivan's nose was originally worth $35K, and would have been
$50K had operation been performed correctly but only $25K with improper
operation.
If Sullivan is awarded her expectation interest, she would be awarded $25K (the
difference between what she expected and what she ended up with).
If we want to protect Sullivan's reliance interest, she would be awarded only
$10K (difference between result and original state).
In tort law, general remedy grant is reliance-based damages. Not automatic that
contract law had to protect expectation interest. Why protect expectation interest?
o Defendant voluntarily entered into agreement knowing expectation
interest would be protected (but could also apply to reliance interest).
o Provides incentive to enter into contracts, provides incentive for plaintiff
to rely on contract.
o Generally, we want people to rely on promises made by other people.
o Example: steel company makes a future contract for purchase of iron ore
that is later converted into steel (forward contract). Steel company should
act with expectation of delivery of steel; purchase other components, make
deal with auto manufacturer, etc.. Company needs to be able to rely on its
expectations.
o Why not stick with reliance interest and make plaintiff prove everything
they did in relying on the contract to come up with damages?
o Expectation damages in contract law is based upon model of
commercial/business context.
o Reliance might be hard to quantify or prove.
o Might be waste of judicial resources to require proof of reliance costs
when it is nearly always there, or if it's very hard to quantify or prove but
almost certainly there.
o Can we assume 'automatic reliance'?
 In business transactions, there is an opportunity cost. If steel
company had not entered into contract with iron ore company, they
would have entered into contract with another iron ore company.
o
o
o
o
Cost of making contract with first company includes not having
made contract with other company.
 This would be per se reliance in business contracts.
Sullivan v. O'Connor, however, is quite far from business transaction
context. Might want to grant reliance interest so as to not place too much
liability on doctors, public policy reason. But why grant cause of action at
all?
 Judges really think case is about negligence, this reflects remedy.
Also might be difficult to quantify.
Court is ambivalent about breach of contract cause of action: "Cause of
action is somewhat suspect" thus "moderation...of the recovery...should be
permitted."
Possibly pain and suffering under reliance theory would actually be
greater since she would have had pain and suffering anyways if the
operation had been successful. Under reliance theory, however, pain and
suffering can be included because that is needed to get her back to original
state.
Generally don't get restitution damages. E.g., Naval Institute case: damages were based
on plaintiff's loss, not defendant's gain. Primary reason is that restitution damages would
be punishment in many cases. Exceptions: spy case, copyright cases. These cases deal
with property that is suspect in another person's hands. Also, in trust situations,
restitution is granted. In corporations, directors and officers are considered fiduciaries as
in trust situations. When trust situation is breached, no ambivalence--this is wrong. Thus
restitution can be granted.
Remedy in these cases is damages not specific relief. Later in course we'll see frequent
exceptions to this dogma.
Consideration
Hamer v. Sidway
[27 N.E. 256] Court of Appeals of Maryland 1955
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Uncle promises to pay nephew $5,000 if he does not drink or smoke until he is 21.
One nephew turns 21, Uncle keeps money in trust for nephew. Uncle dies without
paying nephew.
Nephew transferred promise to his ex-wife who transferred it to someone else.
Defendant argues that there is no consideration.
Why have consideration as a necessary factor of contract?
o Can be helpful to determining who is involved in contract
o Gives people right to change their mind
o Family context: wouldn't want all promises made in family context to be
enforced
Can nephew recover $5,000, even though his promise didn't 'benefit' his uncle?
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Yes; a promise is consideration whether it benefits the promisee or burdens the
promisor.
Consideration was nephew's not smoking or drinking, not nephew's promise not
to smoke or drink. Important not to confuse promise to perform with performance.
Uncle invited action, not intent, on part of nephew.
If return consideration from nephew was assent, then this would be bilateral
contract (where both sides tender promises toward seach other). In case at hand,
uncle had unilateral contract: promise on one side, performance on the other side.
If contract had been bilateral, uncle could have sued nephew since he broke the
promise (might not be able to prove damages though).
Defendant argues that consideration only benefitted nephew, thus was not
consideration. Connects to history of contracts:
o Action in Covenant: Causes of action based upon promises made under
seal. Served evidentiary purpose, had act/formality associated with
promise. Cautionary function of seal. 'Channeling function'.
o Action in Debt: One side had almost always done what they promised do
(given the money); other side which hadn't yet given anything.
o Action in Assumpsit: Arose out of tort law for misfeasance--person did
something but did it wrong, causing damage. Later expanded to include
nonfeasance. Still assumption of damage.
Hence need for benefit to promisor or detriment to promisee.
Tuesday, January 8, 2002 (Class 3)
In many cases, you will be grossly undercompensated, even with expectancy damages
because of counsel costs. How to deal with this?
1. Certain contractual actions have statutes that allow for counsel fees added to
recovery (for example, consumer cases).
2. Class actions; 'much larger pot' of damages.
3. Statutes that cause losing party to pay all legal costs.
4. Parties try to contract around the (American) rule: put in original contract, that
prevailing party will get counsel fees in litigation.
5. English rule: losing party pays for everything. Why not choose this system (see
web discussion)?
Need to come up with dividing line between actionable and unactionable promises. Our
legal system has come up with consideration as dividing line. But what does
consideration mean?
Traditionally, there must have been either a benefit to promisor or a detriment to
promisee (rooting in historical action of assumpsit). Question in Hamer v. Sidway
[27 N.E. 256] was whether the nephew's not drinking and smoking consisted of a
detriment.
Question of remedies: what are damages to promisor when only consideration is
detriment to promisee?
E.g., if nephew had accepted contract and then breached it, Uncle could sue for breach of
contract, but what damages might there be?
Second Restatement of Contracts abandons benefit to promisor/detriment to promisee.
Question becomes: Was there something that was bargained for? As long as there was
some kind of 'bargain' or 'exchange' (which can include forbearance) then there is
consideration.
Why has consideration persisted?
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To maintain a dividing line between unactionable and actionable promises
Seal: evidentiary (strong evidence that promise was made), cautionary (promisor
understands the seriousness of what he is doing), and channelling (channel
behavior of parties into something which is legally enforceable). Consideration
plays a similar role, has taken over these three functions in law.
In Hamer these functions were essentially met, perhaps lead to court's decision.
Fiege v. Boehm
[123 A.2d 316] 1956 Court of Appeals of Maryland (cb34)
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Boehm, plaintiff, female is suing Fiege, defendant, male for failure to pay child
expenses after she promised not to initiate bastardy proceedings (quasi-criminal at
time of case).
Defendant is claiming there was no consideration as it turns out he wasn't father.
Some sort of implicitly public policy that 'once you agree to support a child you
will follow through'.
o Recent Massachusetts case dealing with similar issue: Paternity of Cheryl
[434 Mass. 23] [746 N.E.2d 488].
'Good faith' or 'honest belief': subjective tests of whether agreement should be
binding. Court also wants to include some sort of objective 'reasonable' standard.
Movement away from weighing whether consideration is 'sufficient'. Still certain
situations exist where courts are willing to step in for public policy reasons and find
consideration to be insufficient.
Feinberg v. Pfeiffer Co.
[322 S.W.2d 163] 1959 Saint Louis Court of Appeals, Missouri (cb39)
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Pfeiffer Co. promised to Feinberg $200 per month for rest of her life. After CEO
dies and wife leaves company, son-in-law takes over and stops payment on advice
of lawyer that contract is not binding.
Two causes of action: breach of contract and reliance-based cause (the latter dealt
with later).
Defendant's argument is that there is no consideration since consideration can't be
past acts (no bargain, no exchange), and subsequent acts were not required to earn
pension.
If we look at traditional justifications for consideration, can find same
justifications for respecting corporate resolution calling for pension. Would need
to let go of some formalistic requirements.
For next class, begin to read "Requirement of Bargain", also finish this section.
Friday, January 11, 2002 (Class 4)
Review up to this point:
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Line between unforceable an enforceable -- consideration
Consideration as benefit to promisor or detriment to promisee
Move towards requirement for exchange or bargainment, clearer standard than
benefit/detriment
Frequently the job of lawyer is not to litigate but to prevent these situations from
happening. Feinberg v. Pfeiffer: board could have passed resolution 'in recognition of
past years of service but in recognition of the next six months of work which will be very
important to the company, etc. etc., you get pension of $200/month.' Would have been
clear consideration.
Mills Case
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Sick man (Wyman, Jr.) is found, Mills cares for him, father (Wyman, Sr.) writes
letter promising to pay Mills but then renegs, man sues.
Court finds contract unenforceable despite 'moral obligation'.
Webb v. McGowin? et al.
[168 So. 199] 1936 Supreme Court of Alabama
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Webb was holding block, was about to drop on supervisor, went down with block
to cause it to miss supervisor, saves his life, incurring permanent serious injury.
Supervisor promises to pay Webb for life.
Could argue that had McGowin? been given the chance to sign such a contract
before accident happened, would have signed it. "Back-date" contract.
Court finds there was a benefit to the promisor and detriment to promisee; Court
uses this to get away from the requirement for a bargain in exchange.
Eight year history of making payments; serves evidentiary and cautionary
purposes.
If purpose of consideration was served, why not enforce promise?
How to distiguish between Mills and Webb?
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Detriment to Mills not as serious as to Webb
Moral obligation not as great
Some evidence in Mills (letter) but is there caution? Did father know he was
making legally binding agreement vs. McGowin? who clearly did expect
agreement to be binding.
Ultimately, Court in Webb may be reacting to facts and arguing to reach the
conclusion they need to reach.
Discussion of 'law, justice, morality'. Problem of inconsistent judgment or precedent
being misused. History of Courts of Law vs. Courts of Equity (not as tightly held to legal
rules).
Kirksey v. Kirksey
[8 Ala. 131] 1845 Supreme Court of Alabama
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Brother-in-law offers to allow brother's widow to live with him in a comfortable
place if she leaves where she is. After a couple of years, he moves her to a less
comfortable location and then finally kicks her out.
Court finds promise unenforceable, 'mere gratuity'.
Issue of benefit/detriment. Could argue widow was benefitted because she was
given new place to live; but could also show she suffered a detriment by losing
her claim to adverse possession to her land.
Perhaps cautionary function has not been fulfilled.
Some reluctance to involve the court in "family matters", particularly at this time.
Central Adjustment Bureau, Inc. v. Ingram
[678 S.W.2d 28] 1984 Supreme Court of Tennessee
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Three former employees of CAB had signed agreements not to compete CAB
(debt collection business).
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Value in business is based on knowledge and relationships ('intangible assets'
rather than 'tangible assets').
Probably the norm rather than the exception to have non-compete covenants in
this sort of business.
Agreement bound employees for two years; if agreement had been 'forever' court
would not have enforced it based on policy of not hampering trade.
Question is whether there was consideration given in return for non-compete
agreement.
Will pick up with Central Adjustment Bureau case on Monday...
Monday, January 14, 2002 (Class 5)

Course Logistics
o Lots of postings on TWEN, please participate.
o Always adds positive comment on evaluation for class participation (no
negative downside).
o Group 12a will be "on" tomorrow (Tuesday).
Non-competition agreements, especially pervasive with hi-tech firms in Boston area
Central Adjustment Bureau, Inc. v. Ingram
(continued)
[678 S.W.2d 28] 1984 Supreme Court of Tennessee (cb53)
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Time in contract was two years non-competition (fairly typical), all of United
States (expansive, but not unreasonable given CAB's operations in all 50 states).
Historically, Anglo-American policy has looked askance at Restraints on Trade,
similar to Property Law prohibitions on Restraints on Alienation.
Policy to allow people to earn living also goes against non-competition
agreements.
Courts examine non-competition agreements carefully, and they must be
reasonable in time, area, and business reasons.
Lower court modified agreement (probably in geographic scope, not clear from
facts of this case).
If you had a cardiologist practice in Buffalo, a court would likely enforce noncompetition agreement that applied to Buffalo but not for whole state. CAB has
tougher issue because scope is so wide.
Agreement included provision to pay all costs of litigation
Was there consideration on the part of the employer for the promise?
o
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How long after employment started did employee sign contract--future
employment as consideration. But employees were already employed by
CAB when they signed non-competition agreements. Court sees recency
of hiring to suggest that non-competition is part of "original employment
agreement". Would have been better for CAB if employees had signed
contract and been informed of it before they started working.
o Company threatened to fire Ingram if he refused to sign agreement,
suggests that there may not have been a real 'bargain'. "Sign here, or you'll
be fired."
o Promise of continued employment. Employment is generally held to be
'at will'--employer has immediate right to terminate employment, but
agrees not to terminate immediately if employee signs non-compete
agreement. If no time period is specified, however, promise could be
entirely illusory.
o Actual continued employment. Not only does company promise to
continue to employ, but it does continue to employ. Actual performance
has converted this from bilateral contract to unilateral contract.
Promise may not have been sufficient but when employer actually
performed (continued employment) it became binding. Problem:
Traditionally actual performance can't substitute for promise and promise
can't substitute for actual performance. At no time did CAB give up right
to fire employees.
o Beneficial changes. Employees had raises and promotions. This could
constitute consideration.
Court finds sufficient consideration, including all these different 'possible'
sources.
What errors did Ingram make?
o Taking information, soliciting clients from CAB while he was still
working for them.
o Ingram was agent of CAB, owes duties to employer.
Why are non-compete agreements often not enforced?
o Enforcement is expensive, particularly with low level employee.
o Employer may be involved in same conduct (recruiting).
o Pace of litigation, time of agreement may have expired.
Why enforce non-compete agreements?
o Repeat players. No one will be scared of non-compete agreements if they
know they are never litigated.
Issue of employee handbooks with employee at will: 'you will not be terminated without
cause', then handbook was changed to 'with or without cause'. Was there consideration
for the original agreement or the modified one? Courts disagree on whether this sort of
change can be made unilaterally. If no, employer may have disincentive to ever adopt this
sort of policy if they can't ever get rid of it.
Promise as Consideration
Cases where promisee is trying to hold promisor to contract under theory that promisee
made promise as well that is consideration. Promisor often responds that promisee's
promise is 'illusory' and not sufficient consideration.
Why enforce promises as consideration?
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In commercial context, we believe that you relied on promise because there is
always opportunity cost.
If we did not hold return promise to be consideration, no one would rely on it,
which would cause problems in commercial context (we want people to rely on
promises).
Strong v. Sheffield
[144 N.E. 330] 1895 Court of Appeals of New York (cb69)
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Strong, aggrieved promisee, uncle, is suing Sheffield, promisor, niece.
Sheffield's husband purchased Strong's business on credit.
Promisory note was demand note rather than time note. Ambiguity in case is
whether there were two notes or only one.
A note evidences monetary obligation; somebody's promise to pay (with or
without interest). Person making promise is maker of note, person to whom
promise is made is payee of note.
Demand instrument means payee can demand payment at any time, no fixed
date in agreement.
Negotiable instrument: "I promise to pay to the order of Strong" or "I promise to
pay to strong or Strong's assignees", means a new party can become holder of
note. (Not relevant in this case, since Strong was still holding note.)
Facts are unclear as to whether there was a promisory note when Strong sold
business to Nephew.
Husband (of Sheffield, Nephew-in-Law) is maker of note, Strong is payee.
Sheffield is (in modern terms) accommodation party, signing for the benefit of
the husband (the accommodated party).
Possible that wife signed as co-maker/accomodation party, or possibly as
endorser. Doesn't matter for this case because maker is primary obligor, then
endorser contracts that they will take up and pay the instrument.
Sheffield's defense: no consideration. She made promise to pay but haven't
received anything back.
Strong claims forbearance was consideration: he didn't demand payment for two
years.
Court finds this is not consideration since there was no promise (even though
there was performance). He could have demanded immediately at any time.
For tomorrow's class, look at 3-419, 3-303 of UCC, and 2-306 (for Eastern Air Lines
case).
Tuesday, January 15, 2002 (Class 6)
Strong v. Sheffield
(continued)
[39 N.E. 330] 1894 Court of Appeals of New York (cb69)
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Niece indorses note as accommodation (for benefit of someone else) or possibly
as co-maker, either way she would be obligated to pay instrument. If you sign as
co-maker, your obligation in primary; indorser has secondary obligation.
Example of accommodation instance: guaranty.
Surety: For most public construction contracts, contractor must obtain surety
bond; if contractor fails to complete project, surety is responsible for finishing
project.
Wife (Sheffield) wanted Strong to forbear on loan to husband. Strong did not ask
for money for two years. Does this not constitute consideration?
There was no formal promise to forbear, thus no consideration in view of court.
Demand negotiable instrument: Check, for example. In this case, we had
promissory note payable on demand.
Court needed to decide that promise was necessary consideration. Would have
been possible to interpret this as a unilateral contract rather than a bilateral
contract: in this case, she wanted forbearance, and Uncle forbore.
Uniform Commercial Code
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Early in the 20th century, several statutes were passed with the intent that
different states would adopt the same statute.
Uniform Sales Act, Professor Williston from Harvard, wrote First Restatement of
Contracts.
Negotiable Instruments Law, and other Uniform Acts were intended to be
passed by every State.
Some doubt at the time of the ability of Congress to regulate intrastate commerce.
Karl Lewellyn got job of writing Uniform Sales Act; realized there needed to be a
much larger set of documents that became Uniform Commercial Code.
American Law Institute became co-sponsor UCC.
Article that has been least revised is Article 2, from Uniform Sales Act.
Article 3 was revised in late 1980's.
Under UCC 3-419, whether or not Niece received something for her promise
doesn't matter. This doesn't mean consideration is irrelevant; if husband received
consideration than Niece's receiving consideration doesn't matter.
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UCC 3-303 (b), if an instrument is issued for value as in (a) then there is
consideration. 3-303 (a) (3): if instrument is issued or transferred as payment of,
or as security for, an antecedent claim against any person, whether or not the
claim is due.
Restatement of Contracts II: Section 71, Subsection 4. Allows promise to go to
different party than party who gives consideration. "Third-party beneficiary."
In Strong v. Sheffield, if husband received sufficient consideration, then wife's
promise is binding, under UCC.
Court adopts more formalistic mode of reasoning in Strong v. Sheffield and finds
no consideration and thus no binding contract.
Might want to include something in agreement acknowledging some sort of real
consideration, that return promise was valuable.
Mattei v. Hopper
[330 P.2d 625] 1958 Supreme Court of California (cb72)
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Hopper promises to convey land to Mattei, at closing Hopper refuses to convey
land.
Hopper claims there is no mutual obligation, since purchase offer included
condition subject to Realtor's obtaining leases satisfactory to purchaser. Thus
Hopper believes he is not obligated to convey land.
Hopper was just unhappy with the price offer, would appear that lack of mutuality
is lawyer's excuse. Underlying reality colors opinion.
Court applies 'good faith' standard to satisfaction condition to make condition
binding in some way.
Reasonable person standard is also possible standard (where 'reasonable person'
would be satisfied). Objective standard.
In either case, standard gives meaning to satisfaction condition, allows contract to
be binding.
In case where 'good faith' or 'reasonable person' test was being conducted, would
be hard to determine, court would still have to make judgment on facts and
circumstances--continuum between objective and subjective standard.
Contracts as allocation of risk
Example of situation where a subjective (good faith) standard would make more
sense: someone promises to paint a portrait of you, and you will purchase it if you
are satisfied. A reasonable person standard would probably make more sense in
this case.
Eastern Air Lines v. Gulf Oil Corporation
[415 F.Supp 429] 1975 US District Court Southern District of Florida (cb76)

Gulf promised to sell all oil Eastern needs in certain locations in US at a price set
by an index.
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Gulf's defense is 'lack of mutuality' and 'indefiniteness'. I.e., lack of consideration:
Gulf is subject to Eastern's whim, Eastern might not require anything, thus 'their
promise in return is illusory, doesn't amount to anything.'
But real reason Gulf wants to quit contract is because they don't want to sell
Eastern any oil at this price (rather than legal theory that Eastern might not buy
any oil).
Gulf instigated new ten year contract--even though old agreement was still valid-and Eastern agreed.
"Requirements contract issue"
For next class, read promissory estoppel assignment. Seth Jackson and Karen Goldenberg
TA group will be 'on'.
Friday, January 18, 2002 (Class 7)
Optional assignment: if you read on some topic dealing directly or indirectly with this
course and post a review on TWEN, can get 'extra credit'. Example: 'The Lost Lawyer'
book in the library.
Need to learn the details of these cases, important to know the client, also keeps work
interesting and non-repetitive.
Eastern Air Lines v. Gulf Oil Corporation
(continued)
[415 F.Supp 429] 1975 US District Court Southern District of Florida (cb76)
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Example: oil supplier agrees to supply you with 60 gallons of home heating oil at
$1.50/gallon, you later want to get out (oil prices drop) because lack of
consideration. No likely possible defense.
Similarly, if oil prices rise and supplier wants to get out, still no defense.
Why set price in advance? Allocates risk.
Risk: Degree of uncertainty
Forward Contract: Contract for something in the future (vs. spot market,
purchasing something now)
If Eastern had contracted with Gulf for 10,000 gallons of oil per day at 12 specific
locations at a specific price for ten years, there would be no defense of no
consideration.
Very unlikely that this sort of contract would ever exist, since conditions change
over ten years, demand, price, business climate, etc., change, neither party would
want to restrict themselves to this degree.
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What value of a 5 year contract? Requirements clause allows parties to commit
to supplying required quantity over time. Increases certainty (even if it isn't
entirely certain).
Since airplanes are flying from city to city, they could increase or decrease their
demand on Gulf Oil depending on price of oil vs. fixed price agreed upon with
Gulf.
Price was based on Platts Oilgram report of West Texas Sour.
Price controls were put on oil at the price of oil preceeding embargo.
Argument against price control: doesn't create incentive for finding new oil. Thus
embargo was just on 'old oil', so there would still be incentive to find new oil.
Picked baseline level of extraction pre-embargo to measure 'old oil'. Anything
above that would be 'new oil'.
Price at gas stations was 'blended' price, reflecting mixture of 'old oil' and 'new
oil'.
West Texas Sour posting in Platts Oilgram continued at 'old' price, under price
controls.
Court was hostile to begin with, people this contract was initiated by Gulf. Bias in
contracts towards interrupting contract against its author.
Court is skeptical that events were entirely unforeseeable, given that there had
already been a war and an embargo. Gulf could have protected itself against this
possibility.
Relational contract: lasts over long period of time, creates relationship between
parties. Marriage contract is relational contract. Majority of contracts fall into this
category, even where contract is terminable by one of the parties.
Can also lead to vulnerabilities, since each side is invested in contract. Gulf may
have expected Eastern to pay higher price because of relationship and Eastern's
investment in getting oil from Gulf. Enforcing contract probably cost millions of
dollars in legal fees alone.
More relational a contract is, the more the law sets up standards--duty to act in
specific ways.
Eastern's duty: to set requirements in good faith.
Uniform Commercial Code 2-306: Output, Requirements and Exclusive Dealings:
o A term which measures the quantity by the output of the seller or the
requirements of the buyer means such actual output or requirements as
may occur in good faith, except that no quantity unreasonably
disproportionate to any stated estimate or in the absence of a stated
estimate to any normal or otherwise comparable prior output or
requirements may be tendered or demanded.
o Section 1-201, definitions that apply throughout UCC. Good faith is
further defined in section 2-103, includes reasonable commercial
standards of fair dealing in trade.
o 1-203 imposes good faith requirement on all sections.
Wood v. Lucy, Lady Duff-Gordon
[118 N.E. 214] 1917 Court of Appeals of New York (cb83)
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Lady Duff-Gordon is 'designer' who allows her name to be put on products for
marketing purposes.
Wood agreed to market Duff-Gordon's license. She would get 50% of royalties
from Wood's deals.
Meanwhile, Duff-Gordon licensed her name and kept all the profits separate from
Wood.
Duff-Gordon claims there was no consideration--that Wood didn't promise to do
anything.
Several recent biographies of Cardozo (could be reviewed for class).
Cardozo found implied promise on the part of Wood. Relational contract,
dependence of parties on each other, vulnerability, exclusive dealing. Similar to a
requirements contract.
Cardozo imposes standard of reasonable efforts in this case. Duff-Gordon could
have sued Wood had he not made reasonable efforts to market her name.
UCC: 2-306(2)--best efforts.
TA Group for Tuesday with Rebecca Rose, Io Cyrus is 'on'.
Tuesday, January 22, 2002 (Class 8)
Exclusive Dealings Arrangement: why distribute through one company when you can
distribute through many? Distributors might not invest in product if it will help other
distributors too.
(see Boston Globe example: car advertisements are actually being paid for by car
company, not be distributor, through allowances)
Theory of giving property rights to inventors is person who bears costs of development
does not gain benefits.
In Lucy, Lady Duff-Gordon case, Cordozo finds obligation in duty to market DuffGordon's fashions; reveals bias towards wanting to upheld contract (mutual
vulnerabilities).
Reliance as a Basis for Enforcement
Example 1: Grandfather promises to pay for law school if you promise to go. You
promise. No problem with consideration--promise for a promise.
Example 2: If you go to law school, he will pay for first year's tuition. Then you go to law
school, he refuses, you see, grandfather claims lack of consideration. Unilateral contract,
no problem with consideration.
Ricketts v. Scothorn
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Granddaughter relied on promise of money, quit job.
Even though grandfather's promise was not conditioned on granddaughter's
quitting job, there was still some expectation that she would quit her job.
Feinberg v. Pfeiffer
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Reasonable expectation of promising pension is that person will retire. Thus valid
reliance interest.
Moving away from seal/consideration tests, more towards 'equitable' basis. General
principle of civil liability: if you do something which reasonably you can expect will
harm, damage, effect me in a way on which I can rely, the law will find a remedy,
whether in torts, contract, etc..
Restatement 90 labels 'promise reasonably inducing definite and substantial action'
(rather than promissory estoppel).
Equitable estoppel: somebody makes a statement, knowing or reasonably expecting
someone to rely on statement, person relies on statement, then sues. Turns out statement
was false, but person is estopped from denying truth of statement.
Example: person claims to be Donald Trump's partner in public forum, Trump is there,
doesn't deny it, person gets line of credit on this basis. Trump is then estopped from
denying he is partner.
Promissory estoppel extends basis from misrepresentation of fact to mere promise.
First Restatement of Contracts: history of Corbin and Williston. Section 90 authored by
Corbin as a way to deal with situations that weren't fitting as well into Williston's
classical views.
Cohen v. Cowles Media Company
[479 N.W.2d 387] 1992 Minnesota Supreme Court
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Person suing newspaper who revealed his identity after promising confidentiality
under theory of promissory estoppel.
Does equitable doctrine provide more arbitrary decision-making for courts? Make
outcome less predictable?
D & G Stout v. Bacardi Imports
[923 F.2d 566] 1990 7th Circuit Court of Appeals
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General had exclusive right to distribute rum in Northern Indiana. Bacardi
promised to keep General as exclusive distributor, but when General decided not
to sell their business, Bacardi pulled out.
Exclusive distributorship agreement was terminable at will.
Remedy may differ depending on consideration basis vs. promissory estoppel.
Group for Friday's class: Sean's group.
Friday, January 25, 2002 (Class 9)
Promissory Estoppel
Difference between First Restatement 90 and Second Restatement 90: deleted
requirement that reliance be of definite and substantial character. Requirement was
initially included to allow promissory estoppel into First Restatement (despite no case
law on the subject). By Second Restatement, reliance itself was considered to be enough
of a basis of consideration.
Second Restatement: remedy for breach may be limited as justice requires. Damages
may not be expectancy damages but rather just reliance damages.
Promissory Estoppel is highly debated:
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To what extent is reliance principle of 90 overtaking bargain principle of 75?
Contract law being reintegrated into general liability/torts framework (Grant
Gilmore, "Death of Contract")
Elements of Promissory Estoppel: promise, reliance, justice would only be served
by giving some remedy. Gilmore nad others had seen reliance as central to
promise; recent scholars have found that the central element of the doctrine has
become the promise. Often courts will enforce a promise when there was not real
reliance when it is really the promise they are based on.
Alternative theories: economic activity should be basis for enforcement.
Descriptive: You are describing something. Descriptive argument between set of
scholars is disagreement on what is reality, or on what cases stand for.
Normative: What should be the case.
As emphasis moves more towards promise from reliance, then expectation damages
begins to make more sense as basis for damages. (Third debate: what should remedy
be?).
Cases where facts are extreme to one side or another are generally not litigated since it's
not worth it for either side. Most cases are at the margin; one would expect roughly 50%
on each side. Yet, promissory estoppel cases prevail very rarely; contract cases in general
prevail ten times as often.
D & G Stout v. Bacardi Imports
(continued)
[923 F.2d 566] 1991 Seventh Circut Court of Appeals
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Even though either party could have terminated distributorship deal, court did not
find this to constitute lack of consideration.
Did Indiana look at promise or reliance in finding promissory estoppel?
o Appears to focus on reliance to General's detriment rather than assurance
that was given.
o Court also wants to use reliance damages, in analogy to at will employee
who incurs moving expenses
Capital Asset: Value of all cash you can get from it.
Present Value Analysis: Opposite process from compounding interest. Takes
future dollars and finds their value today. Discounting--a dollar two years from
now is not the same as a dollar today.
Bacardi's argument: General's capital asset was what it sold for, since agreement
was terminable at will. No expectation damages. (i.e., Bacardi was not an asset
that General had to sell.) In fact, when National purchased General, they probably
wouldn't have kept Bacardi anyway since they had their major competitor's
account.
But Court finds basis of damages is National's reduced bargaining power, not the
lack of capital asset, therefore finding in Plaintiff for reliance damages.
Restitution
Cotnam v. Wisdom
[104 S.W. 164] 1907 Arkansas Supreme Court
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Wisdom is suing estate of Harrison (Cotnam is administrator).
Wisdom is surgeon who was called to scene of accident, performed surgery,
wants compensation for services rendered.
No actual consideration--Harrison never promised anything to Wisdom.
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Idea of '''implied contract' (=quasi-contract, constructive contract); Action in
Restitution.
Difference between implied in fact (parties believe they have contract even if
they don't use contract language, demonstrated by words and actions) and implied
in law (court is constructing a contract).
Quantum meriut: 'how much is the merit'.
Focal point for action in restitution is gain of defendant.
Supreme Court overrules lower court's estimation of damages based on expected
payment rather than reasonable value of services. This was not a contract,
damages should not be calculated as if it were.
For Monday or Tuesday, prepare assignment 8 (Nature of Assent).
Monday, January 28, 2002 (Class 10)
(Assignment 7)
Restitution
When you can't recover on traditional contract grounds nor on reliance grounds,
restitution is 'another way around the field'.
Callano v. Oakwood Park Homes
[219 A.2d 332] 1966 New Jersey Superior Court
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Oakwood was seller, Pendergast was potential buyer. Pendergast contracted with
Callano to do some landscaping work.
Pendergast dies, family cancels sale, Oakwood sells to the Grantges for more.
(this as likely the reason Oakwood let Pendergast family out of purchase--they
knew they could get more).
"In cases based on quasi-contract liability, the intention of the parties is entirely
disregarded, while in cases of express contracts and contracts implied in fact the
intention is of the essence of the transaction. In the case of actual contracts the
agreement defines the duty, while in the case of quasi -contracts the duty defines
the contract. Where a case shows that it is the duty of the defendant to pay, the
law imparts to him a promise to fulfill that obligation."
Why did Callano sue Oakwood Park Homes rather than Pendergast? Cost of suing
well exceeds recovery for breach of contract; however, possibility of restitution
damages could outweigh litigation costs. No 'repeat offender' incentive to litigate.
Why can't Callano sue Grantges? Grantges were not unjustly enriched--they paid
for shrubbery.
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Court won't grant relief because they don't want people to be able to substitute
one person's obligation for another's. Callanos could have sued Pendergast (even
though it wouldn't have been economical). Court does not want to give person
'more than benefit of the bargain'--giving them the benefit of two contractual
liabilities rather than one.
Court might allow liability when relationship between party that made contract
and party that was benefitted is much closer. E.g., if one person has express
authority to act for another.
When plaintiff's loss is not equal to defendant's gain, damages become difficult
issue. Under restitution theory, damages should be defendant's gain, but this does
not always seem just.
When there is a 'thorny' liability issue, sometimes you will decide there is no
liability in the first place.
Pyeatte v. Pyeatte
[661 P.2d 196] 1982 Arizona Court of Appeals
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Wife sues husband after working to pay for his law school and then he seeks
divorce rather than supporting her through graduate school as promised.
Court generally presume gratuity with respect to spousal services, but allow
recovery on restitution theory given extraordinary services.
Court overturns $23,000 award (graduate school tuition) since that would imply
they were actually enforcing the contract. Instead, plaintiff should be
compensated for services rendered, since this was the unjust enrichment.
Posner's theory: person decides to donate certain amount over period of time. Promisee
can't be sure they will receive the money, even if it promisor is sure, since promise is not
legally binding. Under Present Value Analysis, Promisor will need to give a lot more
money to give a gift equal to that which they wanted to if the promise were actually
binding.
Nature of Assent
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Subjective vs. Objective standard: subjective test--'meeting of minds'. 20th
century has move towards objective standard.
Lucy v. Zehmer
[84 S.E.2d 516] 1954 Virginia Supreme Court
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Lucy is suing Zehmer on theory that Zehmer broke promise to sell farm for
$50,000.
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Zehmer's excuse: they were drinking, joking, didn't intend to make promise.
Lucy: Zehmer and his wife signed, didn't say that it was a joke loud enough for
Lucy to hear. $50,000 was reasonable price. Reliance -- went out and got funds to
purchase farm.
What factors may have moved towards 'assent'? ('subjective' vs. 'objective' standard).
Will try to cover all of The Offer materials for tomorrow.
Tuesday, January 29, 2002 (Class 11)
If test is subjective test of what promisor actually intended, then focus of inquiry will be
on promisor.
If test is objective test, then focus of inquiry will be on promisee.
Subjective test focusing on promisee: Could the promisee have reasonably believed this
to be valid offer, and is there evidence that he actually did believe it?
Over twentieth century, test moved from being more subjective to being more objective.
Why?
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Objective test becomes common denominator.
Minimizes litigation, minimizes problems of proof (cost, volume of litigation)
Common trend of elimination of doctrine that requires difficult proof
Markets: when you are no longer dealing face-to-face, no longer opportunity to
gauge 'face-value' intent.
Part of trend towards objectivity in other disciplines
Who can, with least cost, avoid difficult situtation? Generally promisor. Just like
ambiguous writings are usually interpretted against the author.
May discriminate against less sophisticated promisors
Efficiency now being used not in pareto superior sense but in Caldor-Hicks sense.
Gentleman's Agreements
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Dominate mode of distributing securities is through underwriters in investment
banking.
Underwriters distribute securities to the public.
Agreement is usually not signed until the day before going public, but large
amount of resources are put into agreement before it is ready to go.
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Governed by letter of intent, by which the underwriter states that it intends to
distribute stock to the public, signed by both parties but includes provision that
'this is not legally binding'.
Still respected, however, as it is valuable for future business. Reputation market.
Contract may exist even if it hasn't actually been written down if there is agreement at
end of complex negotiation. If you want to make sure that contract is not binding yet,
start with agreement that there will be no agreement until all terms are agreed upon and
put into writing.
Can be held responsible for inducing breach of contract. e.g., Texaco v. Pennzoil,
[729 S.W.2d 768], in which Getty Oil was in negotiations to be purchased by Pennzoil.
Texaco purchased Getty, was then sued by Pennzoil and lost with punitive damages,
bankrupted company.
Offer
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Corbin's functional definition of offer: when one person confers upon another the
power to create contractual relations between them. Act of offeror operates to
create in the offeree a power, thereafter the voluntary act of the offeree alone will
operate to create contract.
Owen v. Tunison
[158 A. 926] 1932 Maine Supreme Judicial Court
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Owen, plaintiff, suing Tunison, after claiming to have accepted Tunison's offer to
sell Drug Store for $16,000.
Tunison wrote: "...it would not be possible for me to sell it unless I was to receive
$16,000.00 cash."
Court finds Tunison's letter did not constitute an offer.
How to create situation more in Tunison's favor?
o "I would not consider any offer less than $16,000."
o "This is not an offer."
In Owen's favor?
o "I will sell it to you for $16,000."
Harvey v. Facey
1893 Jamaica Privy Council
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Plaintiff telegraphed defendant, asking if he would sell Bumper Hall Pen, and
lowest cash price.
Defendant responded only with cash price, did not say if he would sell.
Court finds there was no offer. Several possible reasons:
o
o
o
Lack of definiteness of terms.
Seriousness of real estate transactions.
Town wanted to purchase land, public policy might favor town.
Fairmount Glass Works v. Crunden-Martin Wooden
Ware Co.
[51 S.W. 196] 1899 Kentucy Court of Appeals
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Fairmount gave price quote on jars to Crunden-Martin. Crunden-Martin agreed,
then Fairmount was sold-out and could not fulfill order.
Court finds that terms given by Fairmount would constitute an offer in the
business.
Defendant's argument: quote was not an offer, quote was an invitation to an offer.
Second argument: not all terms were stated, not enough to be an offer.
Third argument: plaintiff stated new terms, thus it was a counter-offer, not an
agreement.
Quotes are generally not considered to be offers, since you may quote more
people than you can actually sell to.
'For immediate acceptance' language in Fairmount's telegraph, court finds to
constitute an offer.
Court doesn't find defendant's argument about 'strictly first-quality goods'
compelling as to constitute a counter-offer--standard business practice.
For Friday, finish Offer materials, do Acceptance reading. Brian Polk's T.A. group is on
for Friday.
Friday, February 1, 2002 (Class 12)
(Assignments 8-9)
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Usage of Trade
Course of dealing
Course of performance
Advertisements
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Corbin's conception: does an ad confer about its viewer the power to create a
contract?
No--there is not an indefinite supply; everyone who views ad cannot necessarily
accept.
Lefkowitz v. Great Minneapolis Surplus Store
[86 N.W.2d 689] 1957 Minnesota Supreme Court
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Ad for items 'First Come First Served', when man arrives the store claims there is
a 'house rule' of 'women only'.
Normally advertisements are not considered to be contracts. In this case, however,
'first come first served' creates an exception, traditional 'indefinite supply'
problem not applicable here.
Even though intent of ad may have been to sell to women, court may find
enforcing this policy distasteful as objective intent.
Building Contracts
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Bid: includes work that the contract will do themselves and bids from
subcontractors.
Owner calls for bids from contracters, who negotiate with subcontractors;
ultimately contractor submits bid to owner which may be the actual offer.
Elsinore Union Elementary School District v. Kastorff
[353 P.2d 713] 1960 California Supreme Court (cb143)
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Kasteroff submitted bid to school district, made error when calculating final bid,
accidentally omitted plumbing cost.
Contractor is offeror in this case, school district is offeree, accepts the offer.
Kasteroff wants to get out of contract next day, based on clerical mistake.
No real reliance by school board--contractor called them the next day. Argument
againts the school board.
On the other hand, want general contractors to be careful, maybe hold them
responsible for their mistakes. If we don't hold people responsible for their
mistakes, school districts and others will not be able to depend on the bids.
Acceptance
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Voluntary act by the offeree whereby he accepts the offer.
International Filter Co. v. Conroe Gin, Ice & Light Co.
[277 S.W. 631] 1925 Texas Appeals Commission (cb132)
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Timeline--where was the offer on the timeline?
The words accepted in this case indicated the offer.
Acceptance was actual approval by Executive Officer.
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Letter on 2/14 was notification of acceptance, not acceptance itself.
If acceptance varies in any way from terms of offer, this is considered to be a
counter-offer, not an acceptance.
In most cases, offeree must communicate the fact that it has accepted the offer,
otherwise offeror is not bound. This communication may not be identical,
however, to what we call the acceptance.
White v. Corlies & Tift
[46 N.Y. 467] 1871 New York Appeals Court (cb136)
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White, plaintiff, is builder. Corlies wants to have building renovated.
Next week: bring statutory supplement, UCC materials. In particular, look at 2-207 of
UCC and proposed revision. For Monday, finish The Accepatnce and go on to
Termination of the Power of Acceptance. Andrew Weiner's TA group will be 'on'
Monday.
Monday, February 4, 2002 (Class 13)
(Assignment 10)
Acceptance: Exercise of power conferred by offer to create legally binding agreemnet.
Offer and acceptance are not always signified by the words 'offer' and 'accept'.
Sometimes 'I accept' actually can constitute an offer.
Ever-Tite Roofing Corporation v. G.T. Green
[83 So. 2d 449] 1955 Louisiana Appeals Court
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Ever-Tite signed contract to do work on Green's building. While they were doing
credit check, Greens hired another company to start work. Ever-Tite is suing for
breach of contract.
Greens made offer, Ever-Tite accepted.
Acceptance was performance--yet this was not sufficient in the White case.
But Contract specified that performance would constitute acceptance--this was
contained in the offer.
Court concluded that Ever-Tite's commencement of work constituted acceptance.
Greens received notice of acceptance when Ever-Tite showed up to start work.
Why wasn't the presence of other company revocation of offer?
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Too late to revoke offer once it has been accepted. Court found Ever-Tite
preparing for work to constitute acceptance, not the showing up.
Notification of acceptance need not be the same act as the acceptance itself. In
this case, the notification and acceptance were different.
Frequently find in contractual situations involving something to be made, credit checks,
etc., there will be a provision of approval by home office.
Allied Steel and Conveyors v. Ford Motor Company
[277 F.2d 907] 1960 6th Circuit Court of Appeals
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Allied Steel was selling machine to Ford. Contract included indemnity clause
holding Allied liable for all negligence of Allied's employees.
Ford is offerer, purchase order is offer. Did Allied exercise power of
acceptance?
Original clause made Allied responsible for all negligence due to their employees
working in Ford Plant. Later agreement included clause making Allied liable for
all negligence due to Ford's employees working on Allied's product in Ford Plant.
Original contract had voided second clause (holding Allied liable for Ford's
employees); later order included contract without that clause voided.
If contract with new terms had not yet been accepted by Allied, why was it
binding?
o Acceptance is not considered to be return of acknowedgment, but rather
the commencement of purpose; when Allied delivered product, they
became bound by new agreement.
o Court reads acknowedgment clause of contract to indicate means of notice
but not precluding acceptance by performance:
 'This purchase order agreement is not binding until accepted.
Acceptance should be executed on acknowledgment copy which
should be returned to buyer.'
Indemnity provision is very similar to insurance: assigns risk to party better able
to shoulder or prevent risk.
Indemnifying Ford against all negligence include that of its own employees when
working on Allied's machine reduces problem of having to compute comparative
fault, etc..
UCC Categories, UCC 1-205, UCC 2-208:
o Usage of trade: trade custom in that trade, usages that people in trade
should be reasonably expected to know.
o Course of dealing: Looks at relationship between parties, over time.
o Course of performance: Contract that calls for repeated performance, see
how parties have dealt with that performance.
Under course of dealing approach, would assume contract was that Ford would
be indemnified only against Allied's employees, since that is how that dealt before
(court did not use this construction, however).
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Hierarchy of interpretation: starts with words of contract itself. But in this case
the contract is not actually signed by both parties; acceptance in form of
delivering new machine might indicate acceptance of old terms.
Corinthian Pharmaceutical Systems v. Lederle
Laboratories
[724 F. Supp. 605] 1989 United States District Court for Southern District of Indiana
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Lederle is seller of vaccine (defendant), Corinthian is purchaser (plaintiff).
Lederle increased price of vaccine in response to liability suits. Corinthian heard
prices were increasing and ordered 1000 vials (usually ordered 100 or less).
Corinthian placed order over automated telephone system.
Lederle sent 50 vials at old price, with invoice noting price increase, saying they
could purchase the rest of the vials at the new price.
Corinthian wants to establish that there was a contract which would obligate
Lederle to supply 1000 vials at cheaper price.
Corinthian claims Lederle's pricelist constituted an offer which they accepted.
Court rejects this argument--pricelist is not considered an offer.
Corinthian then claims that shipment of partial order constituted acceptance of its
offer.
o UCC 2-206(1)(b): an order or other offer to buy goods for prompt or
current shipment shall be construed as inviting acceptance either by a
prompt promise to ship or by the prompt or current shipment of
conforming or non-conforming goods, but such a shipment of nonconforming goods does not constitute an acceptance if the seller
seasonably notifies the buyer that the shipment is offered only as an
accommodation to the buyer.
Shipment of 'non-conforming goods' does not indicate acceptance, however, as
long as there is timely notice. 'Non-conforming' in this case means different
quantity.
Corinthian is obviously trying to tack advantage of Lederle; this must influence
Court's reading of UCC 2-206.
Termination of Power of Acceptance
Circumstances where power to accept no longer exists:
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Lapse of Offer
Once offer is rejected
Offerer's death or incapacity
When offer has been revoked, prior to acceptance

Firm Offer: An offer during which a certain period cannot be revoked.
Dickinson v. Dodds
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Dickinson was given until Friday to decide whether to accept offer.
Dodds revoked offer before Friday.
Since there was no consideration, offer could be revoked at any time.
Be sure to bring UCC tomorrow.
Tuesday, February 5, 2002 (Class 14)
(Assignments 10-12)
Firm offer cannot be revoked during its period--power of termination is given up for
time being.
Ragosta v. Wilder
[592 A.2d 367] 1991 Vermont Supreme Court (cb181)
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Wilder was offerer (defendant), Ragosta offeree (plaintiff). Offer was to sell real
estate (known as 'The Fork Shop').
Wilder claims Ragosta could no longer accept, since offer had been revoked.
Ragosta claims Wilder could not revoke, because he gave Wilder a certain period
of time in which to respond (essentially a firm offer).
Ragosta firms claims Wilder promised to give him certain amount of time to
accept, court finds there was no consideration. Although Ragosta tendered $2,000
deposit, Wilder sent it back uncashed. Furthermore, receipt of deposit was not
bargained for.
Alternative basis: Ragosta relied to his detriment on the promise; thus it is too
late to reverse, thus law must grant remedy.
Court won't agree to promissory estoppel, because plaintiff would have incurred
costs anyway.
Equitable estoppel: no false representation of fact, thus no equitable estoppel.
UCC 2-205: Firm Offers
o 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 period of irrevocability exceed
three months; but any such term of assurance on a form supplied by the
offeree must be separately signed by the offeror.
o
o
UCC definitions--some are set out in general definitions 1-201, then are
specifically defined in their particular sections. Some are only defined in
their sections and not in general definitions.
Some provisions (i.e., firm offer, statute of frauds) applies only to
merchants.
Firm offer is kind of option contract. Contract where one party holds the option, has
right or power to exexercise option, but is not bound to do so. Used extensively in
securities tradings.
Purpose of interpretation: language has to be interpreted in context, not always visible
from language. Used by Llewelyn in UCC development, explains extensive comments in
UCC.
Mirror Image Rule: under common law, if one makes an offer, and reply to offer is not
identical to original offer, then it constitutes a counteroffer rather than an acceptance.
Last Shot Doctrine: another way of talking about Mirror Image Rule. Last party
sending something in writing back which was then acting upon by both parties is the
contract.
Battle of the forms: Even though buyers and sellers were sending each other forms that
differed, they thought they were binding contracts. Legal realism--mirror image rule
does not reflect reality of how people think about contracts.
Standardized forms: advantage--saves transaction costs. Disadvantage--not always the
same form between parties; buyers and sellers forms rarely agree.

UCC 2-207: Additional Terms in Acceptance or Confirmation:
o "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" -- rejects mirror image rule.
o "unless acceptance is expressly made conditional on assent to the
additional or different terms." -- return to common law approach-counteroffer.
o "The additional terms are to be construed as proposals for addition to the
contract." -- are these considered additional or different?
o Between merchants such terms become part of the contract unless:
 the offer expressly limits acceptance to the terms of the offer; (or)
 they materially alter it; or
 notification of objection to them has already been given or is given
within a reasonable time after notice of them is received.
o 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 the
particular contract consist of those terms on which the writings of the
parties agree, together with any supplementary terms incorporated under
any other provisions of this Act.
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Focus on these terms for Friday on Battle of the Forms cases and past cases.
Rachel Kreusen's group is 'on' on Friday.
Friday, February 8, 2002 (Class 15)
(Assignment 12)
(missed beginning of class, sorry!)
Dorton v. Collins & Aikman Corp.
[453 F.2d 1161] 1972 6th Circuit Court of Appeals
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If you make your acceptance expressly conditioned on its additional and different
terms, it becomes a counteroffer.
Issue of whether arbitration provision had become part of contract.
UCC 2-207: Subsection (2) is viewed as a proposal.
Carpet Mart must show that other side materially altered contract for it to
constitute counterproposal.
Arbitration clause might be part of offer:
o If it was discussed in negotiations.
o Usage of trade
As a matter of law, Court holds that arbitration clause does not materially alter
contract.
There are UCC exceptions to 'silence is not acceptance rule'; see UCC 2-606, 2201.
C. Itoh & Co. (America) Inc. v. Jordan Int'l Co.
[552 F.2d 1228] 1977 7th Circuit Court of Appeals (cb210)
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Seller was Jordan, buyer was Itoh.
Court considers offer to consist of Itoh's purchase order; acceptance was
acknowledgement form.
Court skips UCC 2-207 (2), looks at 2-207 (3), finds contract is based on terms
which agree between offerer and offeree. Ends up with arbitration clause not
being binding.
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When is lawyer involved in 'battle of the forms'?? In drafting the initial
standardized form, or in deciding whether to adopt trade association's
standardized form. Costs would be too high if lawyers were involved in each sales
transaction.
Court is ironically saying that seller is better off if they had never mentioned
arbitration clause rather than putting it in contract, since UCC says you
supplement these contracts with usage of trade (which includes arbitration in this
case).
What you sell is different from remedy provided.
James Todd's group will be 'on' on Monday.
Monday, February 11, 2002 (Class 16)
(Assignments 13-14)
UCC 2-207 was responding to pre-UCC law that, in commercial transactions, when
response to offer was not identical to original offer, it constituted a counter-offer rather
than an acceptance. Llewelyn found, however, that this was not how businesses were
functioning.
Under pre-code law, acceptance of goods constituted acceptance of counter-offer,
therefore those terms were binding. Last shot doctrine -- the last of the documents
between the two parties would be controlling. Llewelyn wanted to move away from
mirror image rule and from last shot doctrine.
2-207 functions:
1. to tell if there is a contract between the parties
2. to tell us the terms of the contract if there is one
(see irony comments from Friday's class--moving from 2-207 (2) to 2-207(3).)
C. Itoh & Co. (America) Inc. v. Jordan Int'l Co.
[552 F.2d 1228] 1977 7th Circuit (cb210)
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Seller's argument is that 'dispute are usually settled by arbitration' -- thus through
1-205 arbitration should be incorporated.
Court holds that because arbitration was in original document but not in response,
thus through 2-207, there is no binding arbitration! Would have been better to
leave out arbitration entirely.
Northrop Corp. v. Litronic Industries
[29 F.3d 1173] 1994 7th Circuit (cb212)
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Litronic offered to sell printed wire boards to Northrop.
Litronic's form constitutes the offer (rather than the buyer's purchase order which
is usually considered to be offer).
Issue of whether additional means additional or different in UCC.
Significant difference between 90 day warranty and unlimited warranty (under the
code)
Posner adopts the 'gap-filling' interpretation--discrepant terms fall out and are
replaced by a suitable UCC provision and use Illinois Law.
Using UCC gap-fillers gets to 'neutral ground', even though this is not his
preferred ground. Erie doctrine requires Posner to adopt Illinois law in diversity
case.
Default Rule: Rule provided by statute that parties can contract around. Very different
from criminal law--no contracting out of default rules in criminal law.
UCC 1-102(3): (3) The effect of provisions of this Act may be varied by agreement,
except as otherwise provided in this Act and except that the obligations of good faith ,
diligence, reasonableness and care prescribed by this Act may not be disclaimed by
agreement but the parties may by agreement determine the standards by which the
performance of such obligations is to be measured if such standards are not manifestly
unreasonable.
F.O.B.: 'free on board' -- seller will place sold item on means of transportation.
Can contract around terms specified in UCC (e.g., F.O.B.) but in absence of that default
rules will be used.
By making default rule the same as majority/expected rule, then parties won't be
surprised by court's interpretation in case of conflict without contractual specification.
Some default rules don't go by majoritian philosophies, known as penalty default rules.
Warranties: 2-312, 2-316. Parties can contract around implied warranty of
merchantibility. Seller has superior information, needs to make clear if there is no
implied warranty of merchantibility. Rule is not neutral but is a penalty rule against
seller--since they have the information about the limitations on the warranty.
Companies often exclude all warranties include warranty of merchantibility, and then
state express warranty.
Step-Saver Data Systems, Inc. v. Wyse Technology
[939 F.2d 91] 1991 United States Court of Appeals (cb204)
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Step-Saver is buyer, TSL is seller of software.
ProCD?, Inc. v. Zeidenberg
[86 F.3d 1447] 1996 United States Court of Appeals (cb217)
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ProCD? is seller plaintiff, Zeidenberg is buyer defendant.
Buyer resold software against restrictive license
Court in Step-Saver saw contract as stopping at certain point in time, after which
nothing more becomes part of the contract; this court has much more dynamic
view that contract is changing so long as buyer still has option to say no. Buyer
could have said no, I don't accept these terms, I want my money back, but did not.
Buyer in Step-Saver had seen warrantee limitation many times (142).
Read all pre-contractual liability for tomorrow (223-251). Ryan Schiff's section will be
'on'.
Tuesday, February 12, 2002 (Class 17) (Assignment 13)
Default Rules
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Good example of default rule, UCC 2-509:
o (Risk of Loss in the Absence of Breach) section 4: The provisions of this
section are subject to contrary agreement of the parties and to the
provisions of this Article on sale on approval (Section 2-327) and on effect
of breach on risk of loss (Section 2-510).
Can contract around default rules, but otherwise they apply.
Statutory scheme default rule: rule provided when no other situation in statute
applies (slightly different sense of default rule.
Warranty/Exclusive? Remedy Issues
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UCC 2-719 (2) provides: Where circumstances cause an exclusive or limited
remedy to fail of its essential purpose, remedy may be had as provided in this Act.
Even if wrapper says item can't be returned if opened, 2-719 (2) allows for return
if, for example, there is nothing inside wrapper once it's opened (i.e., problem you
couldn't discover until opened).
Arbitrage
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Process whereby you purchase in one market at low price and sell in another
market at higher price.
In theory, allows inequality between markets to be erased.
Other Loose Ends
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Misplaced Strategies example on cb216
o Buyer included arbitration clause in purchase order, seller's invoice was
silent on arbitration but specified that any additional or conflicting terms
were conditioned on buyer's acceptance.
o Proposed 2-207 revision:
 Deals exclusively with terms of contract (not whether or not there
is a contract)
 'Knock-out' provision
 Allows for such things as usage of trade from 2-205.
Often, we conceive of buyer as 'little guy' and seller as 'big guy' and want rules to
be biased against seller. This may be dated conception, however. In modern
economy, the reverse is often the case.
Could technology be replacing the battle of the forms?
o Seller sets up website listing what it sells, at various prices. When you
click to purchase, you have to read terms and conditions, and click to
accept. If there were a later dispute, would not be 2-207 type dispute.
Precontractual Liability

Cases where courts grant relief when a contract has not been signed. Usually done
on bases we have already explored:
o Restitution
 Party A and Party B have been negotiating; in process of
negotiating, A gives something of value to B; may be basis for
restitution claim.
 Paradigmatic case: architect and developer are in process of
negotiating, developer doesn't end up hiring architect but does use
architect's designs in final project.
o Reliance (Promissory Estoppel)
 Reasonable reliance, where injustice would be done if no relief
were granted.
Drennan v. Star Paving Co.
[333 P.2d 757] 1958 California Supreme Court (cb225)

General contractor got bid from subcontractor, used bid as part of general bid to
get project and was awarded project. Later, subcontractor said they made an error,
and refused to do work for bid amount.
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Star Paving is offeror, Drennan is offeree. No contract prior to acceptance,
however. Star Paving revoked its offer before Drennan could accept it.
Generally not thought that use of subcontractor's bid constitutes an acceptance.
Court finds for plaintiff on reliance basis:
o Not unusual to see large spread in bids, Drennan thus had no basis for
expecting bid was mistake. (i.e., Drennan was not in bad faith.)
o Drennan went directly to Star Paving to accept their offer. Had Drennan
approached other subcontractors after being awarded the bid, court would
not have found for Drennan.
o Drennan was fairly diligent in finding another subcontractor, is only suing
for difference in cost.
o Star Paving submitted bid hoping Drennan would get contract--it would
have wanted Drennan to rely on its bid. Convinces reader that this result
is fair to both sides--because ex ante, this is what the sub-contractor would
have wanted, regardless of what he is saying now.
Sense in this case that contract law is approaching torts: lots of discussion of
'reasonability'.
o "...it would not follow that defendant had no duty to exercise reasonable
care in preparing its bid."
Holman Erection Co. v. Orville e. Madsen & Sons, Inc.
[330 N.W.2d 693] 1983 Minnesota Supreme Court (cb231)
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Holman is subcontractor, suing Orville after it listed Holman as its subcontractor
in calculating its bid, but failed to select Holman as actual subcontractor.
Plaintiff claims that by listing him as subcontractor, defendant accepted offer.
Court holds that listing does not constitute acceptance; policy and precedent
doesn't establish listing as binding.
Holman argues that there is supposed to be reciprocity in contracts--court
responds that subcontractors do the same work and submit the same bids to all the
contractors.
Court is supporting system of last-minute bids, to discourage bid shopping.
On the other hand, under this system, bid shopping can still occur silently after
general contractor is awarded the contract.
Hoffman v. Red Owl Stores
[133 N.W.2d 267] 1965 Wisconsin Supreme Court (cb235)
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Hoffman wanted to open up Red Owl Store. Moved around, did many different
things, in reliance on Red Owl's directions about how he could become franchise
owner.
Ultimately, negotiations fall through when Red Owl requires certain conditions
that Hoffman can't meet.

In this case, never reached an 'offer/acceptance' stage (unlike Drennan or
Holman). There was reliance along the way of negotiations, but there was never
an offer.
For Friday, read through 'Definiteness' section. Will completely finish the chapter on
Friday, next week 'Statute of Frauds'.
For Friday, Michael Havens' group is 'on'.
Friday, February 15, 2002 (Class 18)
(Assignment 14)
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Where was the benefit ('unjust enrichment') of the party who died in Cotnam v.
Wisdom? Party's probability of living increased, thus even though he died he
received a benefit.
Similarly, subcontractor has greater chance of being selected when they submit a
low bid, thus they receive a benefit.
UCC 1-203. Obligation of good faith:
o Every contract or duty within this Act imposes an obligation of good faith
in its performance or enforcement.
But Code does not require good faith in negotiations.
Tendency in American law: both freedom to contract and freedom from contract.
Thus no obligation of good faith in negotiating contract.
Cyberchron Corp. v. Calldata
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Cyberchron was in negotiations to produce computer defense equipment, some
disagreement over weight.
Never came to definitive contract. Lower court found that, even though there was
never a contract, Cyberchron could get some reliance damages.
Court awarded damages on basis of Promissory Estoppel, looks at whether there
was clear and foreseeable reliance.
Court find that Calldata had also exerted pressure--unconscionable injury.
TIAA v. Tribune--TIAA had given letter of intent and tried to pull out, court fund
that contract existed even though it was not yet reflected in final agreement.
At same time the Calldata was telling Cyberchron to keep working, it was
negotiating with another party.
Generally no obligation to disclose something you know but other party does not
know in contracting process--but court can view things in terms of good faith,
bad faith, and unconscionability.
Basis of decision is not that there was a contract, but that there was reliance.
Channel Home Centers v. Grossman
cb244
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Grossman was in process of acquiring mall, wanted to best financing, was
negotiating with Channel. Grossman issue letter of intent, claimed it would not
negotiate with other parties.
Bad faith of Grossman--exception to no good faith requirement. Court constructs
good faith to negotiate given the facts.
Requirement of Definiteness

Why have requirement of definiteness?
o If it's not definite enough, hard for court to come up with remedy.
Toys v. Burlington
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Toys leased space from Burlington, with provision for renewal.
Later, Toys wanted to renew lease, Burlington wanted to charge 'prevailing rate'
in Mall, disagreement about what 'prevailing rate' was.
Most frequent basis for finding contract was not definite enough is price
Consideration for option: part of general lease, in which promises went both
ways.
UCC 2-305. Open Price Term:
o 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...
Implies that there is a market reference for setting price.
UCC was designed around commodities transactions--can always find 'market
price'.
For Tuesday's class, read 263-298. Assignments 15-16 Statute of Frauds.
Dimple's TA group will be 'on' on Tuesday.
Tuesday, February 19, 2002 (Class 19)
(Assignments 14-15)
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Requirement of definiteness
Oglebay Norton Co. v. Armco, Inc.
[556 N.E.2d 515] 1990 Ohio Supreme Court (cb257)
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Armco and Oglebay had long term contract with price set by publication which
was no longer published, or alterantively based on similar contract rates for
leading vessel operators.
Court finds contract to be binding, despite ambiguity in price system, because
parties intended for contract to be relational contract:
o Extends over period of time, not everything is foreseeable (bounded
rationality)
o Need to have mechanisms for setting price since time-span is long
Courts will be more adverse to letting parties out of relational contracts than
other contracts on basis of lack of definiteness, because relational contracts will
always be less definite than other contracts.
Statute of Frauds
(cb263)
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Reasons for requiring writing
o Shows whether someone is lying or not
o Similar reasons to consideration--evidentiary, cautionary, channeling
o Makes intent clearer
o Encourages specificity
o Historical record
o 'Unfixity costs'--costs born because over time, people's memory of exactly
the same thing will differ
Negatives
o Lack of writing can allow people who intended to be bound at time of
contract to get out of it
England has done away with Statute of Frauds--is it really necessary for us?
Differences between California and Connecticut Statutes:
o California Statute probably dominated by interests of Lending Institutions
o Connecticut more traditional contract basis
Particular strictness with respect to brokerage agreements
o High potential for dishonesty
o Disparity in information
Power Entertainment, Inc. v. National Football League
Properties, Inc.
[151 F.3d 247] 1998 5th Circuit Court of Appeals (cb268)

Accommodation party: the surety promises to pay the obligee if the obligor
fails to pay. Usually the obligee would be suing the surety to force them to pay.
In this case, the typical roles are reversed--the surety is suig the obligee.
Langman v. Alumni Association of the University of
Virginia
[442 S.E.2d 669] 1994 Virginia Supreme Court (cb272)
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Issue of hold harmless clause.
University of Virginia is moving to dismiss claim on basis of statute of frauds
For Friday: finish up Statutes of Fraud materials. Eric Slagle's group is 'on'.
Friday, February 22, 2002 (Class 20)
(Assignment 16)
Statute of Frauds
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Why the one-year clause?
o Risks of unfixity
Significance--we expect more significant contracts to be put in writing. Thus, we
are more comfortable imposing statute of frauds on significant contracts, since
we will be more suspicious of them being binding when they aren't in writing.
Lifetime employment cases
o Because lifetime employment contract could be 'completed' in less than
one year, courts often don't require such a contract to be in writing-counterintuitive because usually a 'lifetime' contract will be longer than a
fixed employment contract, which does need to be in writing.
Recording Issues
o How much of contract has to be in writing for it to be valid under statute
of frauds?
o Who has to sign for contract to be valid?
o What does it mean to 'sign' a contract?
o Does everything need to be in one writing?
Answer to these questions is a 'muddle', but:
Key provisions needs to be in writing.
Fields where full provisions would need to be in writing: surety, real estate.
Other fields: would just need evidence that agreement exists, in writing.

Mental leap: if you prove that you have satisfied statute of frauds, you have
proved that agreement exists. But in fact satisfying statute of frauds only means
you have passed an initial bar.
In re Arbitration between Acadia Company & Irving
Edlitz
[165 N.E.2d 411] 1960 New York Court of Appeals (cb279)
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Edlitz, employee, had contract with Acadia providing for mandatory arbitration in
the event of a dispute. Original contract was in writing, then extended orally.
Edlitz is suing employer in State Court; employer wants case to be decided in
arbitration.
In New York, agreement to arbitrate needs to be in writing.
Court finds oral extension of original written contract to be sufficient; extension is
not new contract, it integrates original contract which was in writing.
Who must sign contract?
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Some jurisdictions hold that both parties must sign written agreement required.
Vast majority require that the party that has been charged must have signed.
There is some asymmetry in majority rule in that charged party might not have
had a comparable cause of action had they been aggrieved.
What does it mean to sign?
o Something that evinces the fact that party intended something of legal
significance, then they authenticated the document.
UCC 2-201: Formal Requirements; Statute of Frauds.
1. Except as otherwise provided in this section a contract for the sale of goods for
the price of $500 or more is not enforceable by way of action or defense unless
there is some writing sufficient to indicate that a contract for sale has been made
between the parties and signed by the party against whom enforcement is sought
or by his authorized agent or broker. A writing is not insufficient because it omits
or incorrectly states a term agreed upon but the contract is not enforceable under
this paragraph beyond the quantity of goods shown in such writing.
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Various standards are used as to 'sign'. Sometimes just written signature;
sometimes notarized signature; in the case of securities transactions, often bank
seal is required.
Exception in UCC for transactions between merchants: Between merchants if
within a reasonable time a writing in confirmation of the contract and sufficient
against the sender is received and the party receiving it has reason to know its
contents, it satisfies the requirements of subsection (1) against such party unless

written notice of objection to its contents is given within 10 days after it is
received.
Frequent example, where grain dealer contacts a number of farmers for price on
grain, grain dealer sends in order, then farmer refuses to perform (because grain
prices have gone up). Question then becomes whether farmer is a merchant.
Johnson Farms v. McEnroe?
[568 N.W.2d 920] 1997 North Dakota Supreme Court (cb285)
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Johnsons trying to force McEnroes? to complete sale of land.
IRS code provides for avoiding capital gains tax when there is a 'like-kind'
exchange of land.
Difficult to find one piece of property that matches for like-kind exchange.
Johnsons will either be reimbursed for full acreage or Johnson Farms will be
compensated for their damages.
Court adopts 'broad flexible approach' in accordance with Powell and Rohan 'Real
Property' book.
For Monday, after break, read next assignment on capacity.
Spring Break (February 23-March 2)
Notes continue in ClassNotesContractsPhillips2 for faster loading...
Monday, March 4, 2002 (Class 21)
(Assignments 16-17)
Johnson Farms v. McEnroe?
(continued)
[568 N.W.2d 920] 1997 North Dakota Supreme Court (cb285)

Statue of Frauds exception--UCC 2-201(3)(a): if seller has custom made goods
for buyer, can get around statute of frauds.
Monarco v. Lo Greco
[220 P.2d 737] 1950 California Supreme Court (cb291)
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Castiglias purchased farm in California. Natale and Carmela tell Christie he will
get farm if he doesn't get education and stays and works on farm for life.
Natale and Carmela each executed a will for land to go to Christie--thus this part
was in writing. But Christie's consideration (of staying on farm) was not in
writing.
Plaintiff is Natale's grandson (Monarco). Before Natale died, he changed his will
to give property to his grandson Monarco. Monarco is bringing suit to force
Carmela and Christie off land; they counterclaim that Christie should have land;
Monarco claims statute of frauds.
Justice Traynor finds reliance and unjust enrichment to justify lifting the bar of
the statute of frauds.
Traynor finds that Monarco cannot bring statute of frauds defense on basis of
estoppel.
Previous estoppel cases relied on party making representation that statute of
frauds does not apply (or would not be used)--this element not present in this
case.
Traynor explains, however, that basis of earlier estoppel cases is reliance on
promise (i.e., where that promise includes statement about statute not applying).
Why does Traynor use estoppel rather than unjust enrichment as basis of
decision?
o Unjust enrichment would require restitution damages, very hard to
calculate--how much was Monarco benefitted by Christie working on farm
for life?
Why not say Natale's will was consideration for Carmela's will?
UCC 2-201 (3)(b): resembles estoppel; can't claim there was no contract, once
you have admitted in pleadings that there was a contract for sale but not beyond
the quantity of goods admitted.
UCC 1-103: traditional equitable principles apply (including estoppel) unless
displaced by other provisions of UCC. So: can broader principles of estoppel be
applied under UCC, beyond that provided by 2-201 (3)(b)? Does 2-201 (3)(b)
displace estoppel principle?
Halstead v. Murray
[547 A.2d 202] 1988 New Hampshire Supreme Court (cb296)
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Halstead sued Murray for zoning violation on his property. Settlement was made
where Murray would sell property to Halstead. Halstead signs contract, then
Murray refuses, wants more money for land.
Murray claims statute of frauds--contract for sale of land needs to be in writing.
Writing was only executed by Murray's attorney, and there is no writing
authorizing Murray's attorney to act as Murray's agent.
Substantially all statutes of fraud require agent authorization to be in writing if
represented person does not sign contract himself.
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Court suggests unity theory--no need for written authorization in this case. If
Murray doesn't like decision of his agent, he can sue his attorney.
Dissent: suggests floodgate of litigation against people's attorneys. Unlikely to
really happen, though.
Capacity to Contract

Barriers to Contract--you either have the right to contract or not
o Analogous to Civil Procedure: either have standing or not.
o Constitutional Law: citizenship barriers. Graded (resident aliens, etc..), but
sets up right to 'enter' legal system vs. not.
o Criminal Law: capacity to commit a crime.
Kiefer v. Fred Howe Motors, Inc.
[158 N.W.2d 288] 1968 Wisconsin Supreme Court (cb301)
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Kiefer, under 21 and married with child, wants to recover price of car he
purchased after it malfunctioned. Contract had statement that he represented
himself to be 21.
Void vs. voidable contract. Voidable contract allows minor to terminate contract
(once he is of majority) at his option. Voidable contract gives option to minor.
Party dealing with minor assumes risk that contract may be reversed. If contract is
void, then either side can argue that there is no contract.
Minor was emancipated--how does interact with capacity to contract?
General exception to minor's lack of capacity: necessities.
Court wanted to find way to disaffirm the contract since the car was defective,
thus interprets necessary in very narrow way.
Tomorrow: finish capacity to contract and do next section. Read assignment 18. Justin
Calverone's group is 'on'.
Tuesday, March 5, 2002 (Class 22)
(Assignments 17-18)
Kiefer v. Fred Howe Motors, Inc.
(continued)
[158 N.W.2d 288] 1968 Wisconsin Supreme Court (cb301)

Court suggests a legislative solution would be better.
Ortelere v. Teachers' Retirement Board
[250 N.E.2d 460] 1969 New York Court of Appeals




Ortelere, close to death, change benefits to receive increased pension
compensation, in turn giving up death benefits for her spouse. Died two months
later.
Husband sues, claiming election was invalid, because decedent lacked mental
capacity to make change in policy.
Court reverses lower court, allowing husband to claim benefits, saying the
Retirement Board knew or should have known that Ortelere did not have capacity
to make decision.
Test is not whether person knew what they were doing, but whether they had
capacity to do otherwise. Borrowed standard from criminal law 'capacity to
crimes'.
Cundick v. Broadbent
[388 F.2d 157] 1967 10th Circuit Court of Appeals


Cundicks claim that he was mentally incompetent; he sold his property for much
less than it was worth.
Court not convinced.
McKinnon? v. Benedict
[157 N.W.2d 665] 1968 Wisconsin Supreme Court



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Benedicts promised to McKinnon? not to cut down trees, make any improvements
close to McKinnon?'s property, in return for small loan ($5,000) to start resort.
Benedicts' resort failed, then while McKinnons? were aware Benedicts decided to
build trailer park.
Supreme Court is reversing trial court's injunction, based on equities of parties.
Court finds inadequate consideration, disparate bargaining power. Benedict was
retail jeweler, McKinnon? had worked for the government.
Court seems to be manipulating certain facts in defendant's favor.
Suit for equitable relief--thus court 'weighs the equities'.
Tuckwiller v. Tuckwiller
[413 S.W.2d 274] 1967 Missouri Supreme Court




Mrs. Tuckwiller agreed to take care of Mrs. Morrison for the rest of her life in
return for will of estate.
Mr. Tuckwiller is Mrs. Morrison's nephew.
Mrs. Tuckwiller quits job to take care of Mrs. Morrison for the rest of her life, but
it turns out Mrs. Morrison doesn't live very long, died before new will was
executed with attorney, although Mrs. Morrison said she wanted agreement to be
followed on the way to hospital.
Court wants to look at situation prospectively--how fair it was at the time, not in
retrospect (when they knew how short Mrs. Morrison would live.)
Read 401-402 and 409-413 in casebook as additional material.

Read assignment #19 (chapter 4-3-a). Ryan Polk's TA group will be 'on' for
Friday.
Friday, March 8, 2002 (Class 23)
(Assignments 17-18)
Unconscionability

Anterior vs. posterior evaluation of fairness. Tuckwiller court looked
2-302. Unconscionable contract or Clause.
(1) If the court as a matter of law finds the contract or any clause of the contract to have
been unconscionable at the time it was made the court may refuse to enforce the contract,
or it may enforce the remainder of the contract without the unconscionable clause, or it
may so limit the application of any unconscionable clause as to avoid any unconscionable
result.

Eisenberg (cb402): Two different tracks for unconscionability, one being fairness,
the other efficiency. Eisenberg would classify something as unconscionable if it is
neither fair nor efficient.
Jones v. Star Credit Corp.
[298 N.Y.S.2d 264] 1969 New York Superior Court (cb409)

Travelling salesman sold freezer for $900 to couple on welfare (up to $1234 with
taxes). Couple had already paid about half at time of suit. Freezer only had value
of $300.


Return on investment tends to be lower in city than in suburbs, hence argument
for charging higher price in city.
Unconscionability might have been remedied had saleman informed couple of
lower price of freezer in suburbs.
Black Industries, Inc. v. Bush
[110 F.Supp. 801] 1953 United States District Court New Jersey (cb320)

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Hoover had contract with United States government during Korean War,
contracting with Black Industries for parts who subcontracted with Bush to
produce the parts.
Black billed Hoover, but parts were shipped from Bush to Hoover.
Black claims that Bush was receiving excessive profits, against public policy
since costs would be passed on to federal government in time of war.
Middleman in this case performs some risk assumption/risk shifting function, also
puts buyer and seller together.
Absent fraud, there is no reason not to enforce this contract between two parties.
Duress



Why is duress a problem? We want to know people actually agreed to contract of
their own free will. (either under subjective or objective theory). Also violates
pareto superior economic model, where at least one of the parties is better off
and the other is at least not worse off.
Pre-existing duty: no consideration, since you've already agreed to do what is
supposed to serve as consideration.
Corbin: suggests we should allow courts to separate honest from dishonest party
rather than trying to fit into the pre-existing duty rule.
Alaska Packers' Ass'n v. Domenico
[117 Fed. 99] 1902 9th Circuit Court of Appeals


Group of workers to go to Alaska for $50 for season, workers demand $100 or
they will go home.
Workers were told they would get $100, but at end of season only got $50. Lower
court awarded packers $100, court of appeals overturns, because they were
already obligated under pre-existing contract to work for $50.
Watkins & Son v. Carrig
[21 A.2d 591] 1941 New Hampshire Supreme Court



Watkins & Son (plaintiff) agreed to excavate a cellar for Carrig, then discovers
there is rock rather than stone under house, asks for higher price which Carrig
agrees at that point to pay but later reneges.
Carrig agrees pre-existing duty rule--Watkins had already agreed to excavate
cellar, thus argues that there was no consideration.
Wouldn't the contractor have assumed the risk that there might be rock under
house?
Monday: complete pressure in bargaining (assignment 19) and finish concealment &
misrepresentation (assignment 20).
Monday, March 11, 2002 (Class 24)
(Assignments 19-20)

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
Review of duress/pre-existing duty rule. UCC does away with consideration for
contractal modifications, but preserves defenses of duress, etc..
Court in Watkins and Sons was essentially saying pre-existing duty rule comes
from the principle of duress. In this case, even though there was a pre-existing
duty of some sort, the new agreement was not arrived at under duress, thus court
will upheld contract modification absent additional consideration.
'Legal' solution (rather than equitable/justice-based) would be to suggest that there
was a brand new contract, although court rejects this reasoning.
Pre-existing duty rule provides form of 'self-help' specific remedy. By agreeing at
the time and then challenging it later, the party gets specific performance that for
irreplaceable contract, and later recovers any damages.
UCC rules for specific performance:
o 2-716. Buyer's Right to Specific Performance or Replevin.
2. Specific performance may be decreed where the goods are unique or in
other proper circumstances.
3. The decree for specific performance may include such terms and
conditions as to payment of the price, damages, or other relief as the court
may deem just.
4. The buyer has a right of replevin for goods identified to the contract if
after reasonable effort he is unable to effect cover 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.
Austin v. Loral Corporation
[272 N.E.2d 533] 1971 New York Court of Appeals

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Loral had contract with Navy for radar sets, subcontracted with Austin to
manufacture gear component. Loral won second navy contract, asked for bids.
Loral wanted only those parts on which Austin was the lowest bidder from
Austin; Austin refused to follow through on first contract unless it was awarded
contract to make all parts, not just ones on which they were lowest bidder. Austin
also demanded increased price on earlier contract.
Loral agreed to Austin's demands as it was unable to find replacement
subcontractor who could provide parts on time.
Loral was subject to penalties (liquidated damages) if it did not make deliveries
on time.
Likely that a majority of Loral's business was with government, thus risk was not
only this contract, but most of its business.
Court discusses issue of economic duress--it finds that Loral did not have another
option for contract, thus it had no choice but to submit, thus this was not a valid
modification. UCC 2-209 does permit modification absent consideration, as long
as party has free will to make decision.
Dissent (following lower courts): found against Loral on the basis that it had not
proved it had no other choice.
Foakes v. Bear Problem




Problem of someone who pays part of debt with note 'paid in full' and party
accepts amount but then sues for remaining debt. Accord and satisfaction.
UCC 1-207: party can write "without prejudice" or "under protest" in accepting
payment without giving away rights. But--amendment says this section does not
apply to accord and satisfaction--in this case go to common law or 3-311 in
case of negotiable instrument.
3-311: If party is tendering lesser amount is in good faith, and amount owed is
unliquidated or subject to bona fide dispute, and claimant obtained payment of
instrument (i.e., other party cashed check), then party is discharged from debt.
Unliquidated means exact amount cannot be determined, or there is a dispute
about amount. Thus, by accepting payment, B is getting benefit of settling the
matter.
Undue Influence
Odorizzi v. Bloomfield School District
[246 Cal. App. 2d 123] 1966 California Court of Appeals


Teacher had been charged with homosexual activity, school district threatened to
publicize his arrest if he didn't resign. Thus, he resigned but was later acquitted of
charges, and seeks to have position restored.
Court found school board exerted excessive pressure on teacher to force him to
resign--exerted overpersuasion.

Court discusses patterns of undue influence, finds many of the elements present.
Concealment and Misrepresentation
Vokes v. Murray
[212 So. 2d 906] 1968 Florida Court of Appeals


Elderly widow was convinced to sign up for and pay for many extra classes at
dance studio after telling her that she was making great progress and was very
talented.
Although case in categorized as misrepresentation case, it seems that fact that she
had signed up for many years of dance lessons was important in court's decision.
Perhaps this should be categorized as undue influence rather than
misrepresentation.
Tomorrow: do two legitimate cases on concealment and misrepresentation and go on to
assignment #21 (up to page 400). Ryan Schiff's TA group is 'on'.
Tuesday, March 12, 2002 (Class 25)
(Assignments 22-23)


Read to end of assignment 23 (page 450) for Friday.
After Assignment 23, skip to assignment 29 (finding the law of contract--page
555).

Ideally, when A contracts with B, there is equal knowledge, skill, status, no bad
behavior, and consideration. How far away from this idealistic paradigm must we
get before a court will intervene?

Swinton and Kannavos Cases: Both deal with situation where parties have
different knowledge. Issue of default rule.
Ideal world might have rule of disclosure. Arguments both for and against
disclosure exist.
Caveat Emptor: suggests an autonomy principle--buyer beware.
Difficulty of having workable rule -- where do you circumscribe disclosure
requirements?
Advantage of having default rule for disclosure
Property right of having information--person should not be forced to give it
away
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Behavioral theories: what will encourage the most efficient/good work (i.e.,
gathering useful information)
Another consideration: Which rule would have the least cost?
Swinton v. Whitinsville Sav. Bank
[42 N.E.2d 808] 1942 Massachusetts Supreme Judicial Court (cb354)

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Bank sold Swintons house that was infested with termites without revealing the
defect.
Question was whether Bank had duty to disclose presence of termites--although
there was no disclosure otherwise.
Termites are not common in Massachusetts, thus court thinks Swintons would not
be likely to ask.
Sensible default rule: whether information known to one side would be suspected
by other side.
If there had been a fiduciary duty, court would be more likely to find duty to
disclose.
Court thinks duty to disclose is too idealistic--rules that contract was valid.
There does not really seem to be a disincentive for seller to discover termites; they
would have other reasons other than for setting price to sell house.
Possible difference for new home builders: duty to disclose--resembles implied
warranty of merchantability.
Kannavos v. Annino
[247 N.E.2d 708] 1969 Massachusetts Supreme Judicial Court (cb357)

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Apartment building, in violation of zoning code, is sold, advertised as having
$9,600 yearly rental income.
Recognizes autonomy principle--anyone can find out law--but still finds duty to
disclose that house is in violation of zoning.
Case can be distinguished from Swinton in that this is not a case of bare
nondisclosure--in fact, there was some disclosure.
Once there is some disclosure, it can't be misleading.
Disclosure needs to be material: would person have made same decision had
information been disclosed?
Fina Supply, Inc. v. Abilene Nat. Bank
[726 S.W.2d 537] 1987 Texas Supreme Court (cb362)

Sometimes statements made, even after purchase has been made, can become
express warranties.
Adhesion Contracts


Reasons for Standardized Contracts
o Standardized contracts allow learning from past mistakes
o Reduce uncertainty (increased level of certainty)--saves time and trouble
o Simplify planning, make superior drafting skills widely available
Disadvantages
o Take-it-or-leave-it proposition
o Can advantage one party who has time/expert advice in preparing form
o Standardize contracts as private law
For next class, Ryan Schiff's group is 'on', then in afternoon, Karen Goldenberg's group is
'on'.
Friday, March 15, 2002 (Class 26)
(Assignments 21-22)

Different continua for deciding whether or not courts will intervene:
o Competition
o Necessity
o Disclosure
o Bargaining Power
o Choice
o Reasonableness
O'Callaghan v. Waller & Beckwith Realty Co.
[155 N.E.2d 545] 1958 Illinois Supreme Court (cb370)

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Tenant fell while crossing paved courtyard, sued for negligence. Lease included
exculpatory clause, plaintiff wants court to find contract unconscionable.
Court holds for defendant landlord--found tenant made no effort to find other
apartment with other lease.
Case for government intervention in common carrier cases is much stronger, since
government is giving carrier a monopoly but granting a license. Housing market
is not regulated in the same way as common carriers.
Exculpatory clause (similar to forum-selection clause in Carnival Cruise Lines,
Inc. v. Shute) can benefit customer too: risk is reduced, expected return is
increased, customer (tenant) can benefit from lower cost.
Dissent: because of housing market (shortage), demand will not go down nor will
price go up--rent control is in effect at this time.



Does exculpatory clause promote negligence? Judge Schaefer's response: this is
exactly what insurance does.
Difference with insurance:
o Premiums can increase if you are negligent
o Insurance company can manage risk, which individual tenant cannot
Currently, most states will strike down exculpatory clauses, either by statute or
judicial decision.
Tickets

Generally expect a ticket, for example, in return for a coat check, to be a receipt.
But company wants ticket to count as contract.
Graham v. Scissor-Tail
[171 Cal.Rptr. 604] 1990 (cb377)

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

Question as to whether arbitration provision should be enforced, based on breach
of contract and losses from a concert
Graham, producer of concert, files suit, since only one of four concerts made
money. Graham probably wanted declaratory judgment since he is party not
paying money.
Graham had entered into this sort of contract many times, thus he must have been
familiar with it.
Key is not that this is adhesion contract, but that forum would be union's
Executive Board, thus not likely to be fair to Graham.
Henningsen v. Bloomfield Motors, Inc.
[161 A.2d 69] 1960 New Jersey Supreme Court (cb380)

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Plaintiff was injured after steering mechanism failed in Chrysler, defendant
claims fine print provision of purchase limited liability to period of 90 days.
UCC requires exclusion of implied warranty to be conspicuously noted.
UCC 2-719: if remedy falls short of essential purpose, remedy may be provided
by UCC.
Consequential damages may be limited unless unconscionable--particularly if
limitation applies to injury to the person.
Continue at 12pm with question of whether disclosure really works.
Friday, March 15, 2002 (Class 27)
(Assignments 22)
(make-up class)


Magnuson-Moss Warranty Act (cb385): administered by Federal Trade
Commission, regulates warranty. Almost no warranty says full warranty under
Magnuson-Moss Act.
Disclosure discussion.
Carnival Cruise Lines, Inc. v. Shute
[499 U.S. 585] 1991 United States Supreme Court (cb389)

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Different from Hennigton Case in that this is not a necessity -- cruise.
Court found that there could be a legitimate business purpose in forum-selection
clause.
Majority assumes Shutes had notice before they even bought a ticket, thus it was
fair. Or: didn't have notice before they purchased tickets, but did when they
purchased tickets and had ability to return tickets for refund.
'Provided you have proper notice of what you're buying', then forum selection
clause is part of what you're buying.
Note 1 (cb396): forum selection clause says action needs to happen in Greece. Court
upheld forum selection clause. No showing that Greek law wouldn't have been fair law.
Views on Unconscionability

Leff
o


Procedural unconscionability is okay, but not substantive
unconscionability. Judges should not go into details of deal, just make
sure the process was okay.
Eisenberg
o Leff's distinction is not tenable. Sets forth continuum of conscionability.
Epstien
o Makes Posner seem like a 'flaming liberal', University of Chicago faculty.
o Freedom to contract--anything that interferes, includig unconscionability
norm, is carried too far
Williams v. Walker-Thomas Furniture Co.
[350 F.2d 445] 1965 DC Circuit Court of Appeals (cb403)

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
Provision in sales contract that says that whenever new item is purchased,
payments are credited on all outstanding items, making it difficult to pay off any
single item.
Buyer only gets title when they've paid for every thing they've purchased; until
then seller has security to take back item.
Payment was allocated with respect to the unpaid portion of the purchase price, in
ratio that reflected outstanding balance of each. Thus there is no point at which
you've paid up any item until you've paid up all of the items.
UCC allows for case law to determine how secured transactions work in
consumer context; allows for this sort of allocation in business context.
---
Monday, March 18, 2002 (Class 28)
(Assignments 22-23)
Armendariz v. Foundation Health Psychcare Services,
Inc.
[6 P.3d 669] 2000 California Supreme Court (cb416)
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As condition of employment, employee had to sign contract requiring arbitration
of wrongful termination disputes.
Plaintiff employees claims sexual harassment/discrimination and want to sue in
Court.
Disagreement between trial and appeals court on whether arbitration provision is
severable.
Agreements now tend to have severability clause. Still depends on how integral
provision is to agreement.
Agreements included ceiling on damages to back-pay, part of unconscionability.
Issue of procedural vs. substantive unconscionability. If one is particularly
strong, the other doesn't need to be as present, but both should be present in some
degree.
Employer wasn't required to arbitrate while employee was. Lacks fairness and
mutuality to some degree.
Advantages of arbitration: more efficient. But when only available to one party,
suggests that efficiency is not the motivation.
Employee could argue that she signed contract for arbitration because she
expected she might be terminate for performance rather than sexual harrasment.
Would expect to arbitrate performance disputes, but not harrasment.
Employer might be suing for trade secrets; could then be suing more than just
former employee, thus arbitration would not work.



Foundation claimed they would bring wrongful termination case to arbitrator as
well. Not explicit, however, thus court discounted this claim.
Problem with arbitration and sexual harrasment: often need multiple plaintiffs.
To revise contracts, would want to have arbitration bind both parties on similar
issues.
Public Policy


Not unique to these cases--at some level, court takes into account public policy in
all cases.
Grounds for Public Policy Rulings:
o Violation of statute
Bovard v. American Horse Enterprises, Inc.
[201 Cal.App.3d 832] 1988 California Court of Appeals (cb425)

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Plaintiff was to sell 'American Horse Enterprises' to James Ralph, which
manufactures marijuana paraphenelia.
Ralph wrote promisory note to Bovard, Bovard conveyed business to Ralph.
Ralph wants to invalidate promisory note on basis that business manufactures
illegal products
Gambling contracts often invalidated because they are illegal
Plaintiff claims contract doesn't violate public policy, because manufacturing drug
paraphenelia itself was not illegal when contract was made, precedent Moran v.
Harris [182 Cal.Rptr. 519] where particular rule in agreement was not prohibited
until after contract was made.
No unjust enrichment by leaving parties where they stand--by self help, Bovard
took back a lot of what he sold.
In Pari Delicto: when both parties are at fault, defendant is in better position.
Example: broker tells clients they should purchase company's stock because
company has discovered gold but market doesn't know yet. Turns out to be false,
clients sue broker. Defense: In Pari Delicto--clients shouldn't have been trading
on insider information to begin with.
Court didn't find players at equal fault in this case: broker is repeat player who
you more likely want to penalize.
Clean Hands: Traditional doctrine that 'if you have unclean hands, you can't come
into a court of equity'. Intent of doctrine is to maintain legitimacy of
court/government.
X.L.O. Concrete Corp. v. Rivergate Corp.
[634 N.E.2d 158] 1994 New York Court of Appeals (cb429)

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X.L.O., subcontractor plaintiff, is suing Rivergate, contractor plaintiff, claiming
Rivergate failed to pay X.L.O. for subcontract work.
Public policy defense is that this would violate Donnelly Act (bid-rigging antitrust statute). Plaintiff's behavior Donnelly act, and Plaintiff's agreement with
defendant implicated this public policy.
Plaintiffs were last concrete contractors to join 'the club'. Thus plaintiffs are
actually 'trying as best they can'--court is not believing characterization of
plaintiffs as 'all bad'.
Not per se case of public policy violation--unlike jurisdictions where gambling is
illegal.
Tomorrow: assignment 29 -- 'determining subject matter to be interpreted'.
Tuesday, March 19, 2002 (Class 29)
(Assignments 23, 29)


Where does Court get its source for public policy?
o Hierarchy of sources:
o Constitutional, statutory, and administrative law
o Common law policies. Historically, policy was more enshrined in case law
that in legislation; balance has shifted towards legislation today.
Issue of covenants not to compete
Hopper v. All Pet Animal Clinic
[861 P.2d 531] 1993 Wyoming Supreme Court (cb436)




All Pet Animal Clinic sued for injunction and damages against vet (Hopper) for
violating covenant not to compete.
Court considers two competing goals: freedom to contract vs. freedom to work.
Court holds that neither policy is dominant, but rather that both are valid and
modifies agreement to respect both policies.
Competing Interests
o Interests of employer
 Needs to be valid business reason apart from wanting to cut off
competition.
 Employer has property interest in its customers.
 Hopper was new vet when employed by clinic, thus firm should be
rewarded for their investment in person without risking that their
investment will be jeopardized by immediate competition.
o
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


Interests of employee: Could enforce covenant without unfairly limiting
employee's choices, because there are a great number of animal practices
(i.e., large animal practice) in Wyoming that wouldn't violate agreement.
o Interests of public
 Free competition, keeps costs down
Court found it was not reasonable to restrict competition for three years, thus
reduced duration to one year.
One year had already lapsed, however, thus defendant 'won'.
Court finds one year to be reasonable balance of three interests. Empirical
judgment.
Implied reasoning: if customers continue to take their small animals to vet for one
year after vet leaves, they are unlikely to change once the agreement expires.
Central Adjustment Bureau, Inc. v. Ingram
[678 S.W.2d 28] 1984 Tennessee Supreme Court (cb442)


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
Earlier in course, we dealt with issue of whether there was consideration for
covenant not to compete, for employees who had signed covenant after beginning
employment. Now question is whether lower court was correct in revising
covenant to reduced time period.
Original covenant said employees could not take any client that had been client of
firm ever, court revised agreement to include only clients that had been with firm
at time employees left.
Court also narrowed geographic scope of agreement (previously nationwide).
Public interest: competition, efficiency of allowing people with skills to work in
their industry.
Court just enforces agreement to the degree it is 'reasonable'--i.e., rewrites
agreement as judge thinks would be reasonable.
Alternative solution: 'Blue pencil' technique--simply eliminate unreasonable
provisions. Very difficult to do within same clause of contract.
DeMuth? v. Miller
[652 A.2d 891] 1995 Pennsylvania Superior Court (cb440)



Non-compete clause includes provision for former employee to pay 125% of
previous 12 month's charges, so as to present disincentive from violating
agreement (otherwise people might violate agreement and hope not to get caught,
since worst result would be lose gains otherwise).
Miller was fired for appearing on television representing a gay and lesbian
coalition. 'Cause' in non-compete agreement included homosexuality.
Court would not recognize protection of discrimination against gays and lesbians
and would not enforce covenant.


Case suggests that there are hierarchies of sources of public policy. The higher the
source, the more likely the court will recognize it in making decision.
Today case might be decided differently--even public opinion counts in court's
hierarchy of 'public policy'.
Simeone v. Simeone
[581 A.2d 162] 1990 Pennsylvania Supreme Court (cb445)
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23-year-old nurse involved with 39-year-old neurosurgeon. They sign pre-nuptial
agreement limiting what wife could get in divorce to $25,000
7 years later, they are separated, then divorced. Wife sues for alimony. Question
is whether pre-nuptial agreement is enforceable by the court.
Majority opinion empathizes with men, concurrence empathizes with women,
dissent likes marriage.
Public policies: unconscionability, protection of spouses, freedom to contract,
preservation of marriage and family relationship.
Dissent believes people are less likely to get divorced if court won't honor
prenuptial agreements.
Majority: prenuptial agreement is contract and should be treated as such.
Courts are now recognizing that both parties are served by prenuptial agreement.
Given high divorce rate and multiple marriages with multiple children from
different marriage, prenuptial agreements can serve to protect other children.
Concurrence: wife had access to counsel.
Assignment for Friday: Parole Evidence.
Friday, March 22, 2002 (Class 30)
(Assignment 29)

Justifications for Parol Evidence Rule
o Prevents fraud
o Check on juries that are too sympathetic to underdog
o Behavioral effect -- incentive to put in writing
o Responsibility
Gianni v. R. Russell & Co.
[281 Pa. 320] 1924 Pennsylvania Supreme Court (cb556)
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Tenant in office building renewed lease; new lease did not allow tenant to sell
tobacco. Tenant claimed that he was offered exclusive right to sell soda, although
this was not in the lease agreement.
Court finds evidence of exclusive right to sell soda is barred by Parol Evidence
Rule.
Materson v. Sine
[436 P.2d 561] 1968 California Supreme Court (cb560)
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Dallas and Rebecca, husband and wife, own ranch as tenants in common, convey
ranch to Medora and Lu (Medora = Dallas' sister) with option to repurchase ranch
for particular price plus value of improvements minus depreciation.
Dallas is now bankrupt. Trustee is acting to protect unsecured creditors. Rebecca
is siding with trustee, because she will get half of property.
Defendants claim that option provision is 'too uncertain to be enforced'--i.e.,
depreciation is not clearly defined. Other argument is that court didn't allow
enough evidence--that option was 'personal' to keep ranch within family.
Dissent: this is form of fraud on creditors.
UCC test: as liberal towards admitting evidence as any parol evidence test.
Fact finder is this case is not a jury but lower court, thus 'subjective jury'
justification for parol evidence rule doesn't apply (although since the rule is being
changed here, it will be changed also in cases with a jury).
Generally with land transfers, law especially requires written record, even though
Traynor is allowing non-written evidence here.
Inconsistency with Traynor's opinion: options are, by default, assignable, thus the
fact that parties did not include provision as to whether or not option was
assignable doesn't necessarily mean they didn't contract one way or the other on
it--rather, you would assume they meant in the contract that the option was
assignable.
Integration or merger clause: provision in contract to state parties' intention that
everything be embodied in this writing.
Lots of cases where integration clauses work, lots of cases where they don't, but
it does increase the probability substantial that a court will not allow in parol
evidence.
For Monday, finish up Parol Evidence, will do Assignment 30. Shawn Farrell's group is
'on'.
Monday, March 25, 2002 (Class 31)
(Assignments 29-30)
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Tuesday, April 2, and Tuesday, April 9, class will start at 1:30pm to
accommodate presentations from decanal candidates.
UCC Parol Evidence Rule:
o Is contract 'final' writing?
o If so, it can't be contradicted, but it can be supplemented. (thus, in
Gianni, evidence as to the promise of the exclusive right to sell beverages
would be admissible).
o Under Materson v. Sine, however, the UCC rule would be a closer call. On
one hand, the restriction on the option that the property had to stay within
the family could be seen as supplementing the option. On the other hand,
could argue that an option is, by default, alienable, thus the restriction
would be considered contradictory.
Parol Evidence rule continues, however, with the exception if writing was
intended to be complete and exclusive terms of agreement.
Merger/integration clauses are often sloppily written and don't answer the
questions as to whether the writing is final and complete and exclusive terms of
agreement.
Collateral agreements are exempt from this rule--that is, agreements which deal
with a 'completely separate' subject matter.
MCC-Marble Ceramic Center v. Ceramica Nuova
d'Agostino
[144 F.3d 1384] 1998 11th Circuit Court of Appeals (cb566)
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Contract was done in Italian, American buyer did not speak Italian.
Buyer, plaintiff, is suing under breach of warranty, probably breach of express
warranty, breach of failure to deliver.
Seller relies on clause on back of standard forms, requiring complaints to be made
by certified mail not more 10 days after receipt of tiles and that seller had right to
cancel for default in payment.
Plaintiff claims he subjectively did not intend to agree to these clauses.
CISG -- International Guidelines for Commercial Contracts -- allow party's
subjective intent to be considered. Most international transactions, however, go to
arbitration rather than a jury, thus less of a justification for parol evidence rule.
Bollinger v. Central Pennsylvania Quarry Stripping
and Construction Co.
[229 A.2d 741] 1967 Pennsylvania Supreme Court (cb567)
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Plaintiff was getting paid so defendant could dump construction waste on his
land.
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Plaintiff alleges that under original oral argument consturction waste would be
buried under topsoil. Originally defendant was doing this, but eventually stopped,
presumably to save money.
Defendant was also removing and replacing topsoil with neighboring landowners.
Evidence suggests that agreement to replace topsoil was omitted by mutual
mistake (or worse, by defendant's fraud), in either case not favorable to defendant.
Court rules for plaintiff, saying evidence could supplement written agreement.
UCC allows for no-oral modification clauses. 2-209(2): A signed agreement
which excludes modification or rescission except by a signed writing cannot be
otherwise modified or rescinded...
No-oral modification clause helps reduce uncertainty, particularly with agents of
business who might be saying different things out in the field.
Ambiguous and vague terms--different issue, but similar question as to how
much extrinsic evidence is admissible in interpretting terms of a contract.
Frigaliment Importing Co. v. B.N.S. International Sales
Corp.
[190 F.Supp. 116] 1960 United States District Court SDNY (cb574)
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Plaintiff, buyer of chickens in Switzerland, defendant is seller of chickens in
United States.
Disagreement as to what 'chicken' means in contract for sale. Buyer claims it
means young chicken for broiling and frying, seller claims it means any chicken
that meets other terms of contract.
In this case, seller already has money, thus buyer needs to come to the United
States and sue for breach of warranty.
1.5-2 pound birds were young anyway, issue was whether heavier birds needed to
be young as well. Plaintiff argues that chickens were supposed to be the same
type in lower and heavier weight.
Defendant responds that contract for apples that includes lighter and heavier
apples does not necessarily imply that they will all be the same type of apple.
Furthermore, argues that agreement incorporates USDA standards, which do not
specify that 'chicken' needs to be 'young chicken'.
Plaintiff argues that trade usage is for 'chicken' to mean 'young chicken',
introduces witnesses who contradict themselves.
Plaintiff has burden to prove breach of warranty, Court is not persuaded that
young chicken was meant in contract.
Raffles v. Wichelhaus
[159 Eng.Rep 375] 1864 Court of Exchequer (cb582)
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Contract for sale of cotton that was to be delivered by Peerlees ship sailing from
Bombay. Buyer refused to purchase, seller is suing for damages.
There were two Peerless ships sailing from Bombay, buyer claims he contracted
to purchase earlier ship, seller claims later ship.
Court finds there was ambiguity as to which term, thus there is 'no meeting of the
minds' and no contract.
For tomorrow, finish off this section of the chapter (p604). Michael Haven's TA group is
'on'.
Tuesday, March 26, 2002 (Class 32)
Oswald v. Allen
[417 F.2d 43] 1969 2d Circuit Court of Appeals (cb584)
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Swiss coin collector intended to purchase all of Allen's Swiss coins, while she in
fact had two collections, the 'Swiss Coin Collection' and the 'Rarity Coin
Collection', and she only intended to sell the former.
Court holds that there is no contract because parties did not mean the same thing
in referring to the collection.
Principles for Allocating Loss -- Decreasing Principles of Culpability
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Intention Principle
o Played out through fraud doctrine. Pin loss on party who commits fraud.
Knowledge
o If one party knows that they should not do something, they will be
assigned loss.
Negligence
Strict Liability
o Where neither of the two parties has acted intentionally, knowingly, or
negligently, then allocate to loss to party who with least cost could have
avoided the loss.
W.W.W. Associates, Inc. v. Giancontieri
[566 N.E.2d 639] 1990 New York Court of Appeals (cb586)
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Buyer suing seller of real property. During negotiations, clause was added stating
that if litigation was unresolved by June 1, 1987, then contract could be cancelled
by either party. Defendants cancelled contract on June 2.
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May 13, buyer said they were willing to go through with purchase regardless of
pending litigation.
Plaintiff claimed that clause was inserted for protection of the plaintiff, thus they
could waive their rights to cancellation, therefore eliminating option.
Contract included merger clause, however, and evidence that clause was added
for the benefit of plaintiff was not material to contract.
Contract was complete and final on its face, thus judge doesn't not go beyond the
'four corners' of the document.
With real property in particular, it is important that writings be accurate and
followed.
Other paragraphs of contract suggest that parties gave absolote rights to one party
or the other in some cases, they could have done it in this case.
Parties were both sophisticated business people, not using form contract.
Other arguments: rewards careful drafting, may reduce litigation.
Arguments for plaintiff: if real benefit was supposed to flow to plaintiff, then
plaintiff had right to waive it. Response: clause benefits both parties.
Pacific Gas & Electric Co. v. G.W. Thomas Drayage &
Rigging Co.
[442 P.2d 641] 1968 California Supreme Court (cb592)
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Plaintiff's property was damaged while defendant was doing work on turbine.
Contract for work included provision that defendant would work "at its own risk
and expense" and "indemnify" plaintiff "against all loss, damage, expense and
liability resulting from injury to property, arising out of or in any way conected
with the performance of this contract."
Issue is whether contract covered plaintiff's property or just indemnified the
plaintiff against lawsuits from third parties, which is usually how this sortof
clause is used.
Traynor argues against 'four corners' or 'plain meaning' rule, takes into account
evidence of how indemnity is usually used.
Doesn't believe that verbal precision is actually possible.
If you don't look at context of words, won't be true to the intent of the parties,
since the parties are using the words 'in context'.
Hurst v. W.J. Lake & Co.
[16 P.2d 627] 1932 Oregon Supreme Court (cb601)
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Defendant contract to purchase 350 tons of horsemeat scraps from plaintiff.
Included provision for discount on tons with less than 50% protein.
Defendant contends that less than 50% protein has trade usage meaning less than
49.5%.
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Court allowed evidence of trade usage, even though word was 'nonambiguous
upon its face'.
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Ejusdem generis: of the same kind--if there is a generality followed by a number
of specifics, interpret the generality on basis of specifics
Exclusio alterius: expression of one thing is exclusion of the other. ('negative
implication').
Noscitur a sociis: it is known from its associates.
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Tucker v. Forty-Five Twenty-Five
[199 So.2d 522] 1967 Florida Court of Appeals (cb603)
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Cantor was hired for seder, with contract requiring cantor to work for second
night if there were a second seder.
Ended up being no second seder, Cantor, who was orthodox, where there is
always second seder, but service was reform, thus second seder was not assumed.
Since contract was a union form, more likely used by musicians rather than hotel,
perhaps reason court interpretted it 'against its author'.
By next Monday, read through 638.
Tuesday, April 2, 2002 (Class 34)
(Assignments 31-32)
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Good Faith is contextually defined.
Franchise Agreements
o Advantage to franchisor: since people own their own franchise, they have
higher motivation to make profit (rather than when just by manager).
o Different allocation of risk and responsibility.
Eastern Air Lines, Inc. v. Gulf Oil Corporation
[415 F.Supp. 429] 1975 Southern District of Florida (cb610)
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Requirements/outputs contracts. UCC 2-306(1).
Output contract: obligates buyer to purchase all seller's output.
Requirements contract: obligates seller to purchase what the buyer needs.
Relates to doctrines of indefiniteness and that promise cannot be illusory. These
contracts don't fail for mutuality of obligation, because we are implying good
faith obligation on both sides (in setting requirements or output).
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Requirements/output contracts can help deal with uncertainty in markets.
Contract must be determined in context of course of dealing, course of
performance, and usage of trade. 1-205, 2-208
o Usage of Trade: industry-wide practice
o Course of Dealing: practice in prior contracts between parties
o Course of Performance: dealings within history of contract (almost
always present in requirements/output contracts).
o Hierarchy: course of dealing takes precedence over usage of trade.
Course of performance takes precedence over both.
In these case, fuel freighting (filling up where it is advantageous) was common in
industry, thus not bad faith.
Market Street Associates v. Frey
[941 F.2d 588] 1991 (cb613)
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Market Street Associates, plaintiff, successor to J.C. Penney.
Sale/lease-back transactions: where you sell your property to someone else who
leases it back to you. Can be used to get capital; also may help with tax codes in
that depreciation can be deducted.
Posner, judge in this case, favors the 'four corners' rule--doesn't want to go outside
of text.
Distinction between using superior knowledge and opportunistic
exploitation/'sharp dealing'.
Posner is very concerned about economic behavioral effect of rules: wants people
to go out and amass information. Won't happen unless you reward them and give
them a quasi-property right, so they don't have to share information with others.
In this case, there was no information for Orenstein to acquire, however.
Posner finds no duty of candor in formation of contract, but duty of candor in
performance of contract. At a minimum person should have said they were
requesting a loan under paragraph 34 of lease, which imposed harsh penalty for
failing to negotiate on repurchase.
Dickey v. Philadelphia Minit-Man Corp.
[105 A.2d 580] 1954 Pennsylvania Supreme Court (cb617)
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Landlord complaining that tenant business has changed its business, generating
less revenue for landlord, wants tenant to be ejected so he can get new tenant.
Tenant has legitimate business purpose, however, which negates 'bad faith'.
Courts frequently find negation of 'bad faith' sufficient to establish 'good faith.'
Next two cases: beyond requirements/output/relational contracts, exclusive
dealing contract, where party is only party that may be dealt with. Rather than
good faith requirement, UCC imposes best faith efforts.
For Friday, read through end of chapter. Dimple's group is 'on' for Friday.
Friday, April 5, 2002 (Class 34)
Bloor v. Falstaff Brewing Company
[601 F.2d 609] US Ct App 1979 (cb619)
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Best efforts to maintain high level of sales. Trustee in bankruptcy (for Ballantine)
claims Falstaff breached best efforts thus triggering the liquidated damages
clause. Falstaff is keeping the beer alive so that it only has to pay minimal
royalties instead of damages. Falstaff claims they were losing money on the beer.
Contract explicitly said "best efforts" so the court took this case to be highpoint.
Also, Judge Friendly was considered one of the leading judges of the last
generation.
o Even if you're losing money you have to make an effort. What's the sense
behind it? You don't have to go into bankruptcy, but you will have to incur
losses. How do we understand this:
o Allocation of risk in the contract based on uncertainty in the market. This
is true even in non-relational contracts such as forward contracts. I
contract for oil delivery 6 months from now based on guestimate-but we
know it's unlikely to be on the mark. But the contract still serves a purpose
of protecting the buyer/seller. We don't allow Falstaff's defense in other
contracts, so we're not going to allow it here.
Measure of damages: tacked on to sales of similarly situated beers.
Notes: Best efforts
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UNIDROIT principles: International convention for the sale of goods.
UNIDROIT is the European analogue to American Restatements, applicable if the
parties drawing up the contract insert statement of applicability. US companies
generally more comfortable with UNIDROIT.
Posner's idea of best efforts: treating all customers the same, including the noncomplaining ones. Olympia Hotels Corp. v. Johnson Wax Dev. (1990).
Lucas v. Hamm (1961): law is so complicated, one hasn't committed malpractice
by not knowing it.
o "As if a single firm": Professors Goetz & Scott theory of jointmaximization criterion. Parties stop once marginal cost exceeds marginal
benefit (marginal revenues).
o Why don't we have situation instead where: (1) manufacturer distributes
its own product. Idea behind exclusive dealing is that you take the
manufacturer's cost and distributors cost (less than the manufacturer on its
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own) and the total cost is less. Thus, more efficient and more competitive
in the market. Taking advantage of capacities and efficiencies of two
parties which are in the aggregate cheaper.
o What should NOT be counted as a cost? The $.50/barrel because it was an
intra-firm exchange-the marginal costs curve (taking into account
exclusive contracts) should exclude the cost therefore going out a lot
further on the marginal revenues than in other arrangements.
o Why do we need a legal standard? To coach you to go beyond the point
you voluntarily go to. The dispute is how much beyond must you go? Best
efforts are as if was an integrated firm.
What underlies this case: (1) Falstaff got its benefit at the beginning of the deal
when it bought out one of its competitors. Now seeking to not have to pay for upfront benefit. (2) Aggregate purchase price in part based on number barrels sold,
based on a minimum. Effectively trying to deny Ballantine the benefit of the
bargain by keeping it alive just as long as doesn't have to pay the liquidated
damages.
Zilig v. Prentice-Hall, Inc.
[717 F.2d 671] 1983 2nd Circuit Court of Appeals (cb626)
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Good faith used in publishing industry; maximizing interest of both parties.
Author wrote a scandalous book about DuPont? and PH agreed to publish at its
expense. PH reserved right to set sales & determine adv. & then decided it was
too controversial & would not sell it anymore. Not governed by Article 2, b/c it's
not sale of goods, it's sale of intellectual property.
R/H: Court can't imply best efforts when conflicts with existing terms of contract;
PH used good faith/best business judgment
Rationale: stayed true to the party's intents and their relationship and associated
risks.
Default Rule: Good Faith & reasonable efforts in publishing industry, or
publishers won't agree given the uncertainties in the industry.
Is this standard only good for the publisher? Not according to the court-finds that
the lower court was wrong in "best efforts"; this is good for both, because we
want publishers to accept books (and since they lose money on many of the books
they publish). This is good for the publishing industry as a whole.
Monday, April 8, 2002 (Class 35)
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Class tomorrow starts at 1:35pm in order to end for Dean presentation.
Goal for today: finish chapter, to start remedies tomorrow.
Bak-A-Lum Corp. of America v. Alcoa Building
Products, Inc.
[351 A.2d 349] 1976 New Jersey Supreme Court (cb634)
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Bak-A-Lum claims Alcoa has violated exclusively distributorship arrangement on
aluminum siding, seeking injunction and damages.
Understanding that Bak-A-Lum would make best efforts to sell Alcoa's
aluminum siding (standard rule under UCC).
Alcoa kept termination of exclusive distributorship arrangement secret from BakA-Lum for as long as possible, so Bak-A-Lum would continue to sell as much as
possible.
Court holds that 7 months wasn't sufficient advanced warning; 20 months would
have been.
Lockewill, Inc. v. United States Shoe Corp.
[547 F.2d 1024] 1976 8th Circuit Court of Appeals (cb638)
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Williams had exclusive distributorship with United States Shoe Corp.
No written contract as to duration or termination.
General rule: when parties perform without duration/termination agreement, then
contract is 'at will', thus no requirement of formal notice of cancellation.
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How to distinguish Lockewill from Bak-A-Lum?
o New Jersey court, like California court, was very active in this period in
changing rules.
o Difference in kind of notice given to parties in both cases
o Key part of Lockewill facts: Williams invested significantly in
arrangement, but has recouped investment with eight years of selling
shoes. Vs. Bak-A-Lum where plaintiff was expanding with expectation that
it would still be the dealer of Alcoa products. Furthermore, Alcoa sales
people urged Bak-A-Lum to stock up more.
o Difference in reliance interest on exclusive distributorship agreement in
two cases.
o More evidence of bad faith on the part of Alcoa, much more ambiguity in
Lockewill.
Sheets v. Teddy's Frosted Foods
[427 A.2d 385] 1980 Connecticut Supreme Court (cb642)
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Plaintiff, Sheets, claiming he was wrongly dismissed as quality control director,
by defendant employer, Teddy's Frosted Foods.
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Lower court found employment was employment at will and thus employer has
right to terminate employee without cause.
Supreme Court decides case under tort law, rather than contract law. Grants 'tort'
of unlawful discharge.
Defendant had drawn employer's attention to numerous violations of FDA
regulations in labelling, claims he was fired for attempting to insure compliance
with FDA.
Publicy Policy consideration: want to promote adherence to FDA rules.
Difference between tort and contract doctrine of wrongful discharge:
o Damages--intentional torts can give rise to punitive damages.
o Don't want to disturb too much existing contract doctrine.
Collateral source rule: in torts, don't consider other sources in reducing damages,
whereas in contract, damages are reduced by other sources.
By switching from contract to tort law, Court puts burden of proof on employee-needs to show that employer had malicious reason for termination, and then
prove it.
Gilmore's 'death of contract'--thesis that tort law is subsuming contract law. Court
is not necessarily subsuming contract with tort, but is finding this to be
appropriate place to apply tort law rather than contract law. (Judge and Gilmore
were on Yale faculty simultaneously).
Different use of pubic policy: in previous cases we've looked at, public policy has
been used defensively (contract should not be enforced because it would violate
public policy). In this case, public policy is being used affirmatively, to craft new
tort/give cause of action.
Arguments against wrongful discharge tort:
o Frivolous litigation
o Threats to employers
o Overturning contract law and right of employer to fire someone at will
Burnham v. Karl & Gelb
[745 A.2d 178] 2000 Connecticut Supreme Court (cb647)
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Plaintiff was dismissed after reporting office's violation of Dental Association
Rules, relying on Connecticut whistleblower statute.
Court upheld dismissal of plaintiff's claim, saying whistleblower statute only
covered reporting of violations of rules from any public body, and State Dental
Association was not public body.
Law develops by analogical application, however, which would have allowed
analogy of Public Body to Dental Association for whistleblower rule.
Public policy issues: economic impact of wrongful discharge doctrine--possibly much
greater than actual damages in lawsuits (because of avoidance behavior).
Balla v. Gambro
[584 N.E.2d 104] 1991 Illinois Supreme Court (cb648)
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Balla went to lengths to prevent employer from purchasing dialysis equipment
that was not in keeping with FDA regulations.
Court is reluctant to extend retaliatory discharge tort doctrine to attorneys, would
adversely effect attorney-client privilege.
Inappropriate for client to bear cost of attorney adhering to Rules of Professional
Conduct.
Rule followed in Jacobson v. Knepper & Moga, [706 N.E.2d 491] (cb650),
allowing no retaliatory discharge tort for attorney who reported his firm's illegal
practices.
Nanakuli Paving & Rock Co. v. Shell Oil Co.
[664 F.2d 772] 1981 9th Circuit Court of Appeals (cb651)
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Nanakuli bought all asphalt requirements from Shell under long-term contract.
Claims that price-protection is a usage of trade in Hawaii and that Nanakuli failed
to protect it.
Issue of which trade usage is being defined for: Nanakuli argues that priceprotection should go across trade barriers--i.e., supplying to asphalt trade, but
Shell is not defined by asphalt trade. Should usage of trade applying to trade of
buyer or seller?
Events occurred during oil embargo. Oil is key ingredient in asphalt product. To
what extent should 'unanticipated' rise in price of raw commodity be shared by
customer?
Court is protecting reliance interest, since Nanakuli had given firm price for its
work on the basis of expected price from Shell.
Columbia Nitrogen Corp. v. Royster Co.
[451 F.2d 3] 1971 4th Circuit Court of Appeals (cb660)
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Contract where someone agreed to take 31,000 tons of phosphate a year, only
took 10% of that, claims trade usage is that this is estimate.
Court agrees to trade usage argument.
Will start remedy discussion tomorrow, assignment #24, Eric Slagle's TA group is 'on'.
Tuesday, April 9, 2002 (Class 36)
(Assignment 24)
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Next four assignments will be shortened into two assignments
No class next Monday for patriot's day
Instead of Assignments 25 and 26, read these pages, for Friday:
o 469-472
o 476-486
o 491-495
o 495-512
Next assignments, combine assignments 27-28 (for Tuesday):
o 521-526
o 536-537
o 542-551
Other materials/assignments will be posted to TWEN website
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Remedies for Breach of Contract
Part 7 of Article 2 of UCC
o Parallel sections for buyer's remedies and seller's remedies for breach of
contract
o 2-703: Catalog of Seller's Remedies, 2-711: Catalog of Buyer's Remedies
o 2-706: Substitute Performance for Seller (resale), 2-712: Substitute
Performance for Buyer (cover)
o 2-708 (1): Market based damages for seller, 2-713: market based damages
for buyer (when price has moved from contract price, damages can be
difference between market and contract price)
o 'Lost Profits'--remedy only available to seller. UCC 2-708 (2)
o 'Accepted Goods'--remedy only available to buyer with respect to
defective accepted goods. UCC 2-714.
o 2-709: action for the price, seller's remedy to force performance, 2-716:
buyer's right to specific performance/replevin.
o 2-710: 'incidental damages', seller's remedy, 2-715: 'incidental and
consequential damages', buyer's remedy
o 2-718: 'liquidated damages' for both seller and buyer.
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What are circumstances where court will go beyond monetary damages?
Klein v. PepsiCo?, Inc.
[845 F.2d 76] 1988 4th Circuit Court of Appeals (cb453)
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Klein was going to buy a jet through UJS from PepsiCo?.
PepsiCo? argues that agreement never resulted in definitive document signed by
both parties and parties planned to create definitive written agreement, thus claims
no contract.
UCC Statute of Frauds, however, is 'bare bones'--telexes, down payment,
performances, etc., satisfy claim that contract existed.
Pepsi agreed to make necessary repairs, thus court finds that condition of repair
was satisfied.
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Court overrules lower court's verdict of specific performance, however, finding
that airplane was not unique as defined under the Virginia Commercial Code
(same as UCC 2-716 in this case).
Historical circumstances of division between equity and chancery courts no
longer apply but still influence preference for damages over specific performance.
Northearn Delaware Industrial Development Corp. v.
E.W. Bliss Co.
[245 A.2d 431] 1968 Delaware Chancery Court (cb464)
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Plaintiff is trying to get specific formance to force Bliss to hire more workers to
finish work faster since mill is being shut down for longer than contract specified.
Impractible for court to supervise additional hiring; might not even be more
effective.
Courts have become more willing to apply specific relief since this case, however.
Sometimes injunction is not more work than calculating damages; also sometimes
it is easier to settle things at once with court supervision (Brown v. Board) rather
than years and years of damages cases.
Laclede Gas Co. v. Amoco Oil Co.
[522 F.2d 33] 1975 8th Circuit Court of Appeals (cb459)
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Laclede Gas Company provided propane gas to communities, had requirements
contract with Amoco.
Amoco raised price, Laclede contested price change, then Amoco wrote to
terminate contract for 'lack of mutuality'.
Contract allowed Laclede to terminate the agreement but not Amoco, thus lower
court found lack of mutuality and thus no contract.
But Laclede wants to buy Amoco's gas, thus claim that promise was illusory is
overruled.
Four arguments against specific performance:
o No mutuality of remedy
o Supervision of court
o Contract is indefinite and uncertain
o Remedy at law is adequate
Court reasoned that specific performance was necessary because it would be
difficult for Laclede to get another long term contract similar to the one it had
with Amoco.
Court holds that 'specific performance may be defeated by remedy at law'-reversing the typical burden (assuming specific performance, putting onus on part
to establish that remedy at law is adequate).
Finally, public policy argument, that oil should be delivered to customers as a
community necessity.
Walgreen Co. v. Sara Creek Property Co.
[966 F.2d 273] 1992 7th Circuit Court of Appeals (cb465)
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Sara Creek agreed to not lease space to any other pharmacy in lease with
Walgreen.
Mall lost anchor tenant, Sara Creek wanted to lease to Phar-Mor, which included
pharmacy.
Plaintiff's counsel seems to be making law and economics argument, appealing to
Posner's other writings.
Argument: no so bad to breach contracts, providing the result is more efficient-can make aggrieved party whole and goods end up with better party.
Posner does not agree with efficient breach theory, in this case, however: with
either specific performance or damages you can have 'efficient breach'--parties
can then negotiate the cost of terminating the contract, rather than having the
court figure out damages.
Damages decided in court are also inaccurate. Private/market forces are more
likely to come up with reliable estimate of damages.
Justin Calvarone's TA group is 'on' for Friday.
Friday, April 12, 2002 (Class 37)
(Assignments 25-26)
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Two main actions available to seller:
o UCC 2-706
 Seller can recover difference between contract price and resale
price
o UCC 2-708
 Seller can recover difference between contract price and market
price
Reason to use market price: shouldn't make aggrieved party have to go through
trouble of finding another buyer.
Reason to use contract price: avoids difficulty of proving market price.
Example: contract price $1000, seller resells for $900, market price was only
$800. How much recovery to permit?
Courts will often award the greater difference, between contract and market.
Gives seller choice of which remedy it wants, although some scholars argue
would be more efficiet to use the same measure always.
UCC 2-704 (2): When manufacture is not complete, seller may either complete
the manufacture and use 2-706 or 2-708 to get damages, or may halt maufacture
and sell scrap, and then sue for profit on deal.
R.E. Davis Chemical Corp. v. Diasonics, Inc.
[826 F.2d 568] 1987 7th Circuit Court of Appeals (cb480)
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Diasonics well selling medical diagnostic equipment to Davis.
Plaintiff buyer had contract with medical facility where equipment was going to
be used, and as a consequence Davis breached its contract with Diasonics.
Defendant ended up selling equipment to another party for same price. Under 2706 (1), no remedy to seller, because there is no contract-resale differential. Also,
under 2-708 (1) if there is no market-contract differential, also no recovery.
Plaintiff buyer had to put down $300,000 deposit, suing to recover deposit.
Common Law largely adopted the replacement theory, and did not allow sellers
to recover for lost profits.
Defendant could argue that it would have made both sales if Davis hadn't
breached, thus it shouldn't return deposit.
Majority of courts allow for lost volume recovery.
Defendant claims standard should be if they had the capacity to fulfill both
orders, they should be allowed lost volume recovery.
Court holds it should be a question of profitability, however, not capacity.
Would it have been profitable for defendant to fulfill both orders? If so, then
plaintiff cannot recover deposit.
Buyer's Remedies
Laredo Hides Co., Inc. v. H & H Meat Products Co.,
Inc.
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Laredo Hides was buyer, H & H was seller. Had to go to Mexican tannery for
product.
Suing for cover, what they had to pay for alternative hides minus the contract
price.
Seller's defense: didn't prove that buyer's bought hides at market price, therefore
differential is not recoverable.
Court does not accept defense; permits recovery under 2-712, which relieves
buyer from proving market price.
Will continue on Tuesday and do additional assignment on liquidate damages and
foreseeability. Ryan Polk's TA group is 'on'.
Tuesday, April 16, 2002 (Class 38)
(Assignment 27-28)
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Next Assignment, for Friday:
o 664-667
o 672-673
o 674-677
o 679-685
o 686-687
o 692-693
o 698-700
o 700-702
o 707-709
o 709-710
o UCC 2-507, 2-511, 2-601, 2-608
Allowed exam materials:
o Statutory supplement or photocopy
o Non-commercial outlines (but not class notes or casebook)
Exam will be 3-5 essay-type questions, based on actual cases
Laredo Hides Co., Inc. v. H & H Meat Products Co.,
Inc.
[513 S.W.2d 210] 1974 Texas Court of Appeals (cb476)
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Buyer has two possible remedies under UCC:
o 2-712: Cover
o 2-713: Market
Seller claimed buyer had not covered with market price; but court responds that
buyer doesn't need to get market price. The point of 2-712 is not to impose too
much burden on buyer of finding market price when seller breaches.
Tongish v. Thomas
[840 P.2d 471] 1992 Kansas Supreme Court (cb495)
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Tongish, farmer, was going to sell seeds at $13 for large and $8 for small.
Market price increased over contract price. Tongish breached contract and sold to
another buyer at higher price.
Original buyer (Coop) was going to resell seeds with small handling fee to
another party.
Buyer was awarded $455 in damages, based on its loss of handling charges.
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Buyer wants damages under 2-713, which would award it difference between
market price and contract price.
Seller's conduct in this case, as contrasted with Allied case, was more culpable-court is more willing to assign greater damages based on market prices because
Tongish's breach of contract was more intentional.
'Permanent Editorial Board' of UCC: current comments to 2-713 suggest that,
where buyer has covered, court should use cover as remedy.
Case where buyer does not cover immediately, but does over time: 2-712 talks
about covering without unreasonable delay. Courts will generally still permit
market damages.
Market based damages are usually fixed at time buyer learns of breach rather than
when contract would have been performed (time of tender).
UCC was drafted with idea that often the buyer would learn of breach after time
of tender, thus damage calculation would go back to time of tender. See UCC 2723. Also, analogous seller's remedies ( 2-706, 2-708): market-based damages
that seller gets are at time and place for tender.
Statute on its face, however, assesses damages when the buyer learned of
breach.
Llewelyn may have meant that damages should be assessed whenever buyer
learns of breach, regardless of whether it is after time of tender.
Three Mitigations on Damages
o Non-aggrieved party must be avoid intentionally increasing damages
o Damages must be foreseeable
o Damages must be calculable with some degree of certainty
Rockingham County v. Luten Bridge Co.
[35 F.2d 301] 1929 4th Circuit Court of Appeals (cb492)
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Aggrieved party continued to build bridge after County breached contract and
said they did not want bridge to be built.
Court will not award damages to seller based on the damages they created for
themselves by continuing work after county cancelled order.
UCC 2-704 permits seller to complete manufacture after breach to avoid loss;
however, a bridge cannot be resold to another party unlike manufactured goods.
Parker v. Twentieth Century-Fox Film Corp.
[474 P.2d 689] 1970 California Supreme Court (cb500)
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Shirley MacLaine? had contract to star in 'Bloomer Girl', studio cancelled contract
but offered her role in 'Big Country, Big Man', which was to be filmed in
Australia with somewhat different terms, but same payment.
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Court does not impose objective test of reasonableness. As long as replacement
contract is different and arguably inferior, aggrieved party has no further duty to
avoid damages.
Current equivalent: if Drew Bledsoe is offered position for another team, and he
refuses to take offer, team could cleam Bledsoe is refusing to mitigate.
Jacob & Youngs v. Kent
[129 N.E. 889] 1921 New York Court of Appeals (cb507)
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Contractor built a house, specifications called for a pipe made by Reading.
Plumber subcontractor installed another brand of pipe, unbeknowst to contractor.
Other pipe is of comparable quality, but different brand.
Buyer refuses to pay remaining amount as architect cannot certify that house is
built to specifications, since different brand of pipe is used.
Argument as to whether promises are dependent or independent. Contractor
claims promises are independent--buyer still has to pay for construction, and then
can sue for damages if they want. Buyer claims he doesn't have to pay if work is
not done as specified.
Cardozo says promises are independent, and that damages should be calculated
based on difference in value, rather than on cost of removing installed pipes and
replacing them with Reading pipes.
Cardozo is trying to avoid waste, mitigate damages. In construction contracts,
there is a rule of 'substantial performance'. When contractor substantially
performs, he is entitled to contract price, and buyer is entitled to any damages
resulting from difference in value.
Friday, April 19, 2002 (Class 39)
(Assignment 38)
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Assignment for Monday
o 740-741
o 748-753
o 772-773
o UCC 2-609, 2-612
o Assignment 39
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Limitations on Damages
o If they were avoidable
Hadley v. Baxendale
[156 Eng.Rep. 145] 1854 Court of Exchequer (cb521)
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Defendants had agreed to return equipment to plaintiff by certain date, failed to do
so, causing Plaintiff's mill to stop working for five days.
Plaintiff seeks lost profits for five days of mill being shut down, and wages that
were paid during that time.
Court finds that mill shut down would not have been foreseeable; defendant might
have expected mill to have extra reserve cranks.
UCC 2-715, adopts Baxendale rule
o (2) Consequential damages resulting from the seller's breach include (a)
any loss resulting from general or particular requirements and needs of
which the seller at the time of contracting had reason to know and which
could not reasonably be prevented by cover or otherwise; and
Ruling 'reigns in' unlimited liability.
Also: suggests that burden of producing information should fall on party who
knows of special requirements. If you impart this information, then other side will
know it and be responsible for it.
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Issue of Certainty
o Bulk of cases dealing with uncertainty in damages concern future profits
o Particular hard with new businesses where it is very hard to calculate
profits
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Liquidated Damages
Wasserman's Inc. v. Township of Middletown
[645 A.2d 100] 1994 New Jersey Supreme Court (cb543)
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Liquidated damages clause provides means for calculating damages if contract is
breached.
Questions posed:
o Are damages functioning to penalize party?
o Who has authority?
Advantages of Enforcing Liquidated Damages
o Avoids uncertainty
o Economically efficient
Disadvantages of Enforcing Liquidated Damages
o Public law should define remedies, not 'private law'
Court applies 'reasonableness' test to determine whether to use liquidated damages
clause
Liquidated damages can't go too far best what damages might have been
(influenced by Article 2 of UCC)
UCC 2-718:
o (1) Damages for breach by either party may be liquidated in the agreement
but only at an amount which is reasonable in the light of the anticipated or
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actual harm caused by the 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.
First two criteria are in tension with each other:
o Liquidated damages are often used when it's very hard to calculate what
damages will be
o So how do you determine whether damages are reasonable with respect to
actual damages?
Also tension between anticipated harm and actual harm. Has to be reasonable
with respect to either.
Trend towards respected liquidated damages provisions.
Conditions
o Express
 Stated in contract.
o Implied (constructive conditions)
 Look at obligations of one party, then on the other, and state that
they are conditioned upon each other, even if it is not found in
contract.
Luttinger v. Rosen
[316 A.2d 757] 1972 Connecticut Supreme Court (cb665)
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Will start with this case on Monday
Rachel Crusan's group will be 'on' for Monday
Monday, April 22, 2002 (Class 40)
(Assignments 34-35)
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Conditions can be express within contract:
Luttinger v. Rosen
[316 A.2d 757] 1972 Connecticut Supreme Court (cb665)
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Purchase of House was conditioned on obtaining mortgage at 8.5% interest.
Buyer could only get mortgage at 8.75%, seller offered to make up the difference,
buyer refused.
Court found buyer had not breached contract.
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How could seller make up the difference?
o Reduce the purchase price so monthly payments would be the same. Since
interest payments are tax-deductible, would not necessarily have to
discount the total difference.
o Seller could help with down payment, guarantee the loan, or provide
financing themselves.
Buyer did not explore any the sellers offer to help, just claimed that contract was
breached and failed to follow through.
Question of how much effort buyer had made in getting mortgage?
o Spectrum from good faith to reasonable efforts to due diligence to best
efforts.
o Contract in question required due diligence.
o Most lawyers interpreted due diligence to quite close to best efforts.
Doubleday & Co., Inc. v. Curtis
[763 F.2d 495] 1985 2d Circuit Court of Appeals (cb679)
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Doubleday made contract for two novels with Tony Curtis, on second novel
received criticisms from editor but declined to have revisions reviewed
'piecemeal'.
Doubleday found novel unpublishable, sued for return of $50,000 advance, Curtis
counterclaimed for breach of contract.
Condition in contract was that novel would be "satisfactory to publisher in content
in form."
Curtis claims that editor was not the one he wanted; publisher claims that Curtis
refused to accept editorial suggestions.
Court requires publisher to act in good faith but will not require editor to perform
skillfully (presumably higher standard than reasonableness). Doesn't want jury to
have decide whether editing is 'skillful'.
Curtis should bear some or all of risk of 'lack of skillful editing'. Writer can 'shop
around' for different publishers.
Third-Party Satisfaction
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Many contracts have condition of third-party's satisfaction.
Frequently used in construction industry, subject to architect's or engineer's
approval.
Jacobs & Young case, contract sued for last payment, payment required certificate
from architect because different brand of pipe was used, and architect wouldn't
issue certificate.
Third Party is often associated with one of the parties, however.
Third Party usually has expert knowledge that party to contract lacks.
Third Party may have professional reputation that depends on
neutrality/professionalism.
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Third Party may also be more likely to work with other party in the future (i.e.,
architect works for home owner, passing judgment on work of contractor, does
not want to undermine ability to get future jobs.)
Peacock Construction Co. v. Modern Air Conditioning,
Inc.
[353 So.2d 840] 1977 Florida Supreme Court (cb674)
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Subcontractors suing general contractor, general contractor claims he doesn't have
to pay because owner went bankrupt and didn't pay general contractor.
Contract included provision that payment would be due to subcontractor "within
30 days after the completion of the work included in this subcontractor, written
acceptance by the Architect and full payment therefor by the Owner."
Court held that provision addressed 'when payment would be made' rather than
'whether payment would be made'.
Court doesn't want to put burden on subcontractors, since they will be put out of
business if they have to bear burden of non-payment.
Same contract was used for both subcontractors, thus was drafted by general
contractor, so if ambiguous should be interpreted against author.
Also, subcontractor doesn't deal with developer/owner at all, general contractor
on the other hand can require bond or guarantee.
Constructive Conditions
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Contract does not explicit condition one party's duty on other party's performance,
but Court imposes constructive conditions of exchange.
Best example in UCC 2-507 (1) and UCC 2-511 (1): buyer's duty to pay is
conditional on seller's tender of delivery
Sometimes give harsh results, causing forfeiture, resulting in some mitigating
doctrinee:
o Waiver
 Payment for work is conditioned on architect's approval; if party
pays prior to approval, may have waived condition.
o Estoppel
o Elections
 Buyer's obligation is conditional on obtaining certain mortgage
terms. Buyer doesn't get terms, but goes ahead with purchase.
Buyer is electing to obligate itself regardless of condition being
fulfilled.
Strict vs. Substantial Performance
o UCC 2-601: If goods or tender of delivery fail with respect to any part of
contract, buyer doesn't have to accept and pay for goods.
o
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Much easier to resell goods than property, thus permitting buyer to refuse
purchase is not unfair.
o UCC 2-508: Allows seller to remedy improper tender or delivery if buyer
rejects under 2-601.
Acceptance is not necessarily congruent with possession.
o Acceptance: 2-606: buyer has reasonable opportunity to inspect goods,
reports nonconformity, or acts inconsistent with seller's ownership.
Revoking acceptance: reverses transaction. If there is substantial impairment of
value to buyer, acceptance may be revocable. Becomes harder as time goes on.
Subjective test used by courts--looks at particular buyer in question.
o Sometimes easier to revoke acceptance than reject initially.
Material for tomorrow:
o Contracts often allocate risk between parties. As time passes, there is less
uncertainty. Assessement of risk may differ substantially; one party might
not have agreed had they known at time of contracting what they now
know. If we allow people to get out of contracts because circumstances
have changed, you are subverting allocation of risk. Next cases give
situation where parties are allowed to get out of contract because
circumstances or facts have changed.
Tuesday, April 23, 2002 (Class 41)
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Contracts allocate risk of future change. E.g., price, but also may other factors.
As performance approaches, uncertainty goes down, additional information
becomes available.
To what extent, if at all, do we allow parties to get out of commitments in light of
new facts?
UCC 2-609 (1):
o Right to Adequate Assurance of Performance
o A contract for sale imposes an obligation on each party that the other's
expectation of receiving due performance will not be impaired. When
reasonable grounds for insecurity arise with respect to the performance of
either party the other may in writing demand adequate assurance of due
performance and until he receives such assurance may if commercially
reasonable suspend any performance for which he has not already received
the agreed return.
If you have reasonable grounds to believe you might not get return performance,
but there is risk of being found in breach yourself if you withhold performance.
Can request adequate assurance of due performance if you have reasonable
grounds.
UCC 2-609 (4):
o
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After receipt of a justified demand failure to provide within a reasonable
time not exceeding thirty days such assurance of due performance as is
adequate under the circumstances of the particular case is a repudiation of
the contract.
If assurance of due performance is not received within 30 days, then other party is
in breach.
Mutual Mistake of Fact
Stees v. Leonard
[20 Minn. 494] 1874 Minnesota Supreme Court (cb786)
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Builders keep on building on quicksand, owner sues.
Soil was very different from what both parties thought soil would be. Question is
who should legitimately bear risk of this happening?
Today respective positions of owner and architect might be shifted.
Renner v. Kehl
[722 P.2d 262] 1986 Arizona Supreme Court (cb789)
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Plaintiffs purchased land for growing jojoba, but later discovered there wasn't
sufficient water for growing jojoba, plaintiffs sue for recission on basis of mutual
mistake.
Courts are likely to allow mutual mistake of fact if parties are left exactly where
they would have been before contract.
Unusual in this case that court is not leaving parties where they were--it is
allowing recission of deal.
Mutual Mistake of Fact seems to be another way of getting to result when there is
no warranty available to court.
Estate of Nelson
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Seller has more information than buyer, has made mistake, thus court is less
charitable towards seller, since it could have gotten information.
Diamond in the Rough/Pregnant?-Cow Case
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Other circumstances where future facts mean promise doesn't need to fulfilled-more mutual mistake of fact cases.
Impracticability of Performance
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Extension of impossibility of performance.
Taylor v. Caldwell
[122 Eng. Rep. 309] 1863 King's Bench (cb801)
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Taylor contracted with Caldwell to give concerts for four days. Included condition
that hall be in condition for concert.
Fire occurred that was not fault of either party, making hall unfit for performance.
Taylor, plaintiff who leased hall for concert, sues defendant for breach of
contract.
Problem: there was no hall at this point, it was destroyed by fire.
When it is impossible to perform, party is excused from performance.
Modern contract law has expanded doctrine to include impracticability.
Problem with impracticability doctrine: subverts contract's role as allocation of
risk.
On the other hand, impossibility may be too rigid a doctrine, courts need some
flexibility to change deal.
UCC 2-615:
o Excuse by Failure of Presupposed Conditions
o Except so far as a seller may have assumed a greater obligation and
subject to the preceding section on substituted performance...
 (force majeur clause, condition by which seller can get out of
contract, e.g., seller shall not be responsible for acts of God, acts of
war, etc..)
Compare UCC 2-509:
o Risk of Loss in the Absence of Breach
o (4): the provisions of this section are subject to contrary agreement of the
parties...
2-615 doesn't seem to allow parties to 'provide otherwise'. Seller can only get out
of greater obligations, not lesser.
2-615:
o (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 or by compliance in good
faith with any applicable foreign or domestic governmental regulation or
order whether or not it later proves to be invalid.
o A basic assumption upon which the contract was made did not turn out
that way.
o Assumption must have been extraordinarily basic to the contract.
o Must be unforseeable--if it was foreseeable, then that was the purpose of
contract.
Transatlantic Financing Corporation v. United States
[363 F.2d 312] 1966 United States D.C. Court of Appeals (cb805)
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United States chartered vessel to carry cargo from United States to Iran.
Usual route was through Suez Canal, but because of trouble in Canal, trip
incurred increased cost.
Plaintiff sued to recover additional cost.
Elements of impracticability:
o Something unexpected must have occurred
o Risk must not have been allocated by agreement or by custom.
o Occurrence must have rendered performance commercially impracticable.
Court holds that only one element was satisfied--that something unexpected
occurred.
Holds that alternative route shows that risk was allocated by custom.
10% additional cost of voyage is not sufficient to be commercially impracticable.
Eastern Air Lines, Inc. v. Gulf Oil Corporation
[415 F.Supp. 429] 1975 Southern District of Florida (cb823)
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Gulf claims that West Texas Sour index is commercially impracticable; but Gulf
was still using index for other transactions.
Court holds Gulf has no impracticability claim.
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Friday will do third party beneficiaries. James Todd's TA group is 'on'.
Will not cover half measures.
Friday, April 26, 2002 (Class 42)
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General Problem: How do we deal with increasing information as time of
performance nears?
o Contract serves purpose of allocating risk; lack of information at time of
contract is part of the contract.
o If there is a very basic assumption that turns out to be wrong (both parties
are fundamentally mistaken), courts will put both parties back where they
were. Mutual mistake of fact.
o Impossibility of Performance--expanded to impracticability. Often
claim is that 'it will cost a lot more', but contracts allocate price risk, so
usually this claim is viewed skeptically.
Frustration of Purpose
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Issue of whether buyer can get out of contract because of supervening events
between time of contracting and time of performance.
Frustration of purpose applies primarily to buyer.
UCC 2-615: Impracticability of performance has become contract doctrine
allowing seller to get out of contracts, even outside of Article 2 cases. Has lead
courts to adopt frustration of purpose doctrine, to allow buyer to get out of
contract. Although not in UCC, most courts will supplement UCC with
frustration doctrine under UCC 1-103.
Example of frustration of purpose:
o Contracted to rent vacation home for month of August on Martha's
vineyard for purpose of sitting on beach. By August, hurricanes have
already hit and no longer possible to sit on beach. Purpose has been
frustrated--should buyer get out?
If intervening event was foreseeable (as in bad weather on Martha's Vineyard),
then court is less likely to allow claim of frustration of purpose because parties
could have included event in contract.
If person leasing house on the cape advertised specifically on the vacationing
issue, and that seemed to be at the heart of the contract, might be able to get out of
it under frustration of purpose. I.e., if promisee is involved in very basic
assumption that turns out to be false. This might not be true in Martha's Vineyard
case--people might have other reasons for wanting to go there than to sit on the
beach.
Under which circumstances do people get lost profits? Court avoids question by
saying buyer can get out of contract under frustration of purpose in Chase
Precast Corp. v. John J. Paonessa Co.. Aggressive use of doctrine.
Much more 'stingy' use of doctrine in Posner's opinion in Northern Indiana Public
Service Co. v. Carbon County Coal Co..
Prime issues in course:
o What promises will the law enforce?
o How do we interpret those promises?
o What do we mean by enforce?
o Are there circumstances under which the law will allow people to get out
of promises?
o Who may enforce the promise?
Third-Party Beneficiaries
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Similarity between third-party beneficiary issue and other legal issues:
o Tort Law: To whom are duties owed?
o Civil Procedure: Who has standing to bring suit?
o Regulatory Law: Can someone bring an action under a statute that doesn't
explicitly grant a cause of action? (ask whether the legislature intended to
benefit class of people who are bringing suit)
Pros and Cons of Third-Party Beneficiaries
o
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Promisee may be dead, Seaver v. Ransom [120 N.E. 639] 1918 New York
Court of Appeals (cb865). Third-party is only party who can bring suit.
o Judicial Efficiency: rather than having one party sue another, who sues
another, can permit recovery directly.
o Traditional notion of reciprocity in contract: Party 1 should not be able to
sue Party 2, if Party 2 cannot sue Party 1.
o Judicial efficiency plays in as 'con', as well, since it permits more parties
to sue.
Under First Restatement, creditor and donee beneficiaries could sue. But could
not sue as incidental beneficiary.
Modern terminology allows intended beneficiaries to sue.
Septembertide Publishing, B.V. v. Stein & Day, Inc.
[884 F.2d 675] 1989 2d Circuit Court of Appeals (cb878)
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Septembertide was successor to corporation that was equivalent to author of
book--Higgins.
Higgins contracted with Stein & Day for softcover version, S & D would make
payments to Higgins.
Stein & Day contracted to market softcover to New American Library, NAL
would make payments to Stein & Day. This contract was made first, in
contemplation of Higgins contract.
One of S & D's secured creditors was Bookcrafters USA. Bookcrafters was
perfected secured party, could claim assets of S & D owed to others.
Higgins wants to get beyond S & D (since its assets can be claimed by
Bookcrafters), so attempt to pursue NAL directly, so payments don't get to S & D.
Sues NAL on Third-Party Beneficiary theory.
Court allows 3rd-party beneficiary claim, finding both parties intended benefit.
Intent that satisfies court is knowledge. Actual knowledge may not even be
necessary, simply 'chargability of knowledge' can satisfy third-party beneficiary.
Grigerik v. Sharpe
[721 A.2d 526] 1998 Connecticut Supreme Court (cb871)
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Buyer told seller he wouldn't purchase property if he couldn't build on it. Engineer
got Sharpe (engineering company) to do tests, showing that buyer could put in
septic tank.
Buyer purchased property, then was told by town that he couldn't put in septic
tank.
Court holds that both parties needed to have intent to benefit third-party.
Foreseeability does not suffice for intent
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