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1) Consideration
a) Two types of contract: unilateral (promise in exchange for performance) and bilateral
(exchange of promises).
i) In unilateral contracts (e.g., “I’ll pay you $50 if you return my dog Pip”), the
performance is itself the consideration; the counter-performance is the thing that
makes the contract. You can’t be sued if you don’t meet the condition, but if you do
and don’t receive the $50, you can sue.
(1) Example: “Williston’s tramp” (“If you go to that clothing store across the street,
you can have an overcoat on my credit.”)
(a) Going across the street is a condition on the promise, but not a bargained-for
condition; it doesn’t provide consideration for the promise, and the promise is
thus unenforceable even if the tramp does cross the street and present himself
to the haberdasher. (But if the clothing store had been miles away and the
tramp had suffered detriment, then the promise might be enforceable by way
of reliance.)
ii) Example: “I’ll pay you $50 if you return my dog Pip” is unilateral, but “I’ll pay you
$50 if you promise to return my dog Pip” is bilateral, so that the promise to return Pip
is binding.
iii) Restatement § 32 (Invitation of Promise or Performance)
(1) In case of doubt an offer is interpreted as inviting the offeree to accept either by
promising to perform what the offer requests or by rendering the performance, as
the offeree chooses.
iv) Restatement § 62 (Effect of Performance by Offeree where Offer Invites Either
Performance or Promise)
(1) Where an offer invites an offeree to choose between acceptance by promise and
acceptance by performance, the tender or beginning of the invited performance or
a tender of a beginning of it is an acceptance by performance. Such an acceptance
operates as a promise to render complete performance.
(2) Example: if invited to choose between promising to cross the Brooklyn Bridge or
actually doing so you opt for the latter, it constitutes acceptance by performance
and a kind of implied promise.
b) For a contract to be enforceable, the promisor must receive something in return for his
promise. Gratuitous promises will generally not be enforced (subject to the reliance
exception).
c) Formality (intent to enter into legal relation)
i) Congregation Kadimah Toras-Moshe v. DeLeo (Mass. 1989)
(1) Decedent makes oral promise to give $25,000; temple sues his estate for the
money. Held, for decedent/promisor. No consideration (because no benefit to the
promisor nor detriment to the promisee), and no reliance (because temple did no
more than make a budget allocation); furthermore there is a presumption against
enforcing oral promises without consideration.
d) Bargained-for consideration
i) Restatement § 71 (Requirement of Exchange)
(1) To constitute consideration, a performance or a return promise must be bargained
for.
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ii)
iii)
iv)
v)
vi)
(2) A performance or return promise is bargained for if it is sought by the promisor in
exchange for his promise and is given by the promise in exchange for that
promise.
(3) Consideration an include “an act other than a promise,” a “forbearance” [Hamer],
or the “creation, modification, or destruction of a legal relation.”
Restatement § 81 (Consideration as Motive or Inducing Cause)
(1) The fact that what is bargained for does not of itself induce the making of a
promise does not prevent it from being consideration for the promise.
(2) The fact that a promise does not of itself induce a performance [Earle] or return
promise does not prevent the performance or return promise from being
consideration for the promise.
Hamer v. Sidway (N.Y. 1891)
(1) Uncle promises nephew $5,000 for forbearing to drink, smoke, or gamble until he
turns 21. Nephew fulfills this promise, but the uncle then refuses to pay him until
he becomes more mature. Nephew then sues the uncle’s estate. Held, for the
nephew/promisee. Consideration need not be a promise; here, the nephew’s
forbearance (relinquishing a legal right) was itself the consideration. The extent
of the benefit received by the uncle doesn’t matter; courts generally don’t enquire
into the adequacy of consideration.
(2) (This is a unilateral promise, with the nephew’s forbearance as a condition; but
note that here, unlike Williston’s tramp, the fulfillment of the condition
constitutes consideration because it was bargained for, i.e., it was the end in itself,
not merely the means to an end.)
Earle v. Angell (Mass. 1892)
(1) Aunt tells her nephew that she will give him $500 if he comes to her funeral. He
does, and then sues for the money. Held, for the nephew. Doesn’t matter that the
nephew might have gone anyway, nor that the aunt was no longer alive to receive
the “benefit” of his attendance.
Whitten v. Greeley-Shaw (Me. 1987)
(1) Plaintiff keeps a mistress and makes a number of promises to her.
Mistress/defendant promised not to call him at home or the office. Held, for the
mistress/defendant. There was no bargain for this promise, since the mistress
herself inserted it into the agreement, and hence no consideration. (But wasn’t the
continuation of the affair, with all it entailed, itself a consideration? Perhaps the
real issue is that there was a quid pro quo, just not one the law would recognize.)
Duncan v. Black (Mo. 1959)
(1) Defendant contracts to sell land to plaintiff, with a provision that the plaintiff
receives a 65-acre cotton allotment with the land. After defendant refuses to give
the allotment the next year, defendant gives plaintiff a $1500 note sued on here.
Held, for defendant. Because there is no way of guaranteeing that there will be an
allotment to give the plaintiff in subsequent years, the contract was not
enforceable and thus the settlement doesn’t constitute consideration. Defendant
had been selling something that wasn’t his to give, so that there was really no case
at all being settled. (Fried thinks this result is bogus; was the potential lawsuit
really so frivolous as to make the consideration nothing, especially when the
plaintiff might have had no way of knowing this at the time?)
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e) Benefit received (by defendant)
i) Restatement § 86 (Promise for Benefit Received)
(1) A promise made in recognition of a benefit previously received [Mills, Webb] by
the promisor from the promise is binding to the extent necessary to prevent
injustice.
ii) Mills v. Wyman (Mass. 1825)
(1) Plaintiff cared for defendant’s estranged son; defendant then sent a letter
promising payment but later revoked the promise. Held, for defendant. There
was no consideration because the father derived no benefit: he didn’t request the
help, and the son was independent. The obligation was purely moral.
iii) Webb v. McGowin (Ala. 1935)
(1) Plaintiff crippled himself to save defendant’s life in the workplace; defendant then
promised to pay him for the rest of his life. Plaintiff sues to recover payments
after defendant’s estate stops the payments. Held, for the plaintiff. “It is well
settled that a moral obligation is a sufficient consideration to support a subsequent
promise to pay where the promisor has received a moral benefit, although there
was no original duty or liability resting on the promisor.”
(2) Distinguishable from Mills because there was a personal benefit to the
defendant/promisor, and given the plaintiff’s serious injury, the moral obligation
might have been stronger too.
iv) In re Schoenkerman’s Estate (Wis. 1940)
(1) Plaintiffs are sister- and mother-in-law of decedent, who asked them to manage
his household and care for his children and executed promissory notes on which
they now sue. Held, for plaintiffs. The promissory notes acknowledge a moral
obligation sufficient to represent “consideration” on the plaintiffs’ part.
v) In re Crisan’s Estate (Mich. 1961)
(1) Old woman is brought unconscious to the hospital and receives medical services
before her death, never recovering consciousness. Doctor sues for payment.
Held, for plaintiff. There is a “promise implied by law” to pay; although there
was no actual meeting of the minds, it is presumed that she would have consented
to pay had she been able to.
f) Reliance (detriment to plaintiff)
i) Restatement § 90 (Promise Reasonably Inducing Action or Forbearance)
(1) A promise which the promisor should reasonably expect to induce action or
forbearance on the part of the promise or a third person and which does induce
such action or forbearance is binding if injustice can be avoided only by
enforcement of the promise. The remedy granted for breach may be limited as
justice requires.
(2) Charitable subscriptions or marital settlements are binding without proof of action
or forbearance induced.
(a) Comment (b): “The promisor is affected only by reliance which he does or
should foresee, and enforcement must be necessary to avoid injustice.
ii) (Note that just because reliance serves as the “consideration” for a given contract
under § 90 doesn’t mean that reliance will be the measure of damages; the standard
remains expectation damages even in cases where reliance supplies the
consideration.)
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iii) Kirksey v. Kirksey (“Sister Antillico”) (Ala. 1845)
(1) Defendant induced plaintiff, his sister-in-law, to move to his residence (“I will let
you have a place to raise your family…”); after two years, he told her to move out
of the house he had given her. Held, for defendant. Promise was a “mere
gratuity,” and defendant’s move was insufficient as “consideration.” (But it was
clearly reliance, which the court didn’t consider.)
(2) Distinguishable from Schoenkerman in that there was on promise of money, and
hence no acknowledgment of obligation; nor was there any benefit conferred on
the defendant, only a detriment to the plaintiff. Also distinguishable from Hamer
because the promise here was gratuitous rather than conditional, even if it is
questionable in both cases whether the defendant really got a benefit.
iv) Feinberg v. Pfeiffer (Mo. 1959)
(1) Defendant agrees to pay plaintiff $200 monthly after retirement; new president of
defendant corporation stops payments on the basis that they are mere gratuities.
Held, for plaintiff, under Restatement § 90: the plaintiff relied on the promise to
her detriment in choosing to retire.
v) Ricketts v. Scothorn (Neb. 1898)
(1) Decedent promises to pay plaintiff $2,000 a year so that she wouldn’t need to
work anymore. Plaintiff did so, and now seeks to recover from defendant’s estate.
Held, for plaintiff. There was no consideration on the plaintiff’s part, since the
money was given as a gratuity with no expectation of anything in return; but there
is equitable estoppel on grounds of reliance. Defendant specified or at least
foresaw that the gift would induce the plaintiff to leave work. Thus his estate is
estopped from asserting lack of consideration.
(2) (Note that resigning work here and in Feinberg wasn’t consideration; the
benefactor hadn’t said “IF you quit your job, THEN I will give you this money,”
but rather merely “WHEN you quit the job I will give you money.” Quitting the
job wasn’t sought in return for the promise of money in the same way that
forbearance was sought in return for the promise in Hamer.)
vi) Allegheny College v. National Chataqua County Bank (N.Y. 1927) (Cardozo, J.)
(1) Defendant promised $5,000 to the college after her death, requesting that a fund
be established in her name; she gave $1,000 while alive and then repudiated her
promise right before her death. College sues to collect the rest of the money.
Held, for plaintiff. The naming of the future scholarship after the defendant
approaches consideration. (But was it really consideration or just a condition for
the defendant’s donation?) The contract, says Cardozo, is bilateral; the
consideration for each promise is the other promise. The moment the money was
accepted, there was an assumption of a duty to do whatever was necessary to
maintain the memorial. (Fried thinks this “implied promise” is BS.)
(2) Cardozo also notes the possibility of promissory estoppels in charitable
subscription cases, but doesn’t have to reach the issue given that he finds
consideration. In so doing he anticipates Restatement § 90
vii) Siegel v. Spear (N.Y. 1923)
(1) Furniture company promises plaintiff they will insure his furniture while they
store it for him; they don’t, and it is destroyed in a fire. Held, for plaintiff;
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defendant’s offer to insure was relied upon by plaintiff. (Cited by Cardozo in
Allegheny.)
viii) D’Ulisse-Cupo v. Board of Directors of Notre Dame High School (Conn. 1987)
(1) School board fails to rehire teacher despite representations that she’ll receive a
new contract. Teacher sues on contractual theory of promissory estoppels and tort
claim of negligent misrepresentation. Court distinguishes the two claims. Claim
of promissory estoppel is rejected because the representations were “neither
sufficiently promissory nor sufficiently definite,” but negligent misrepresentation
stands (because this claim doesn’t require proof that the statements were
promissory.)
ix) Hoffman v. Red Owl Stores (see below)
x) Baird v. Gimbel Bros. (see below)
xi) Drennan v. Star Paving Co. (see below)
g) Adequacy of consideration
i) Restatement § 208 (Unconscionable Contract or Term)
(1) If a contract or term thereof is unconscionable at the time the contract is made a
court may refuse to enforce the contract, or may enforce the remainder of the
contract without the unconscionable term, or may so limit the application of any
unconscionable term as to avoid any unconscionable.
(a) Comment (c): Inadequacy of consideration does not of itself invalidate a
bargain, but gross disparity in the values exchanged may be an important
factor in a determination that a contract is unconscionable and may be
sufficient ground, without more, for denying specific performance …
Ordinarily, however, an unconscionable contract involves other factors as well
as overall imbalance.
(b) Comment (d): Gross inequality of bargaining power, together with terms
unreasonably favorable to the stronger party, may confirm indications that the
transaction involved elements of deception or compulsion, or may show that
the weaker party had no meaningful choice, no real alternative, or did not in
fact assent or appear to assent to the unfair terms.
ii) U.C.C. § 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.
(a) Purpose 1: “The basic test is whether, in the light of the general commercial
background and the commercial needs of the particular trade or case, the
clauses involved are so one-sided as to be unconscionable under the
circumstances existing at the time of the making of the contract … The
principle is one of the prevention of oppression and unfair surprise and not of
disturbance of allocation of risks because of superior bargaining power.”
iii) Courts generally don’t enquire into the adequacy of consideration; usually even a
“peppercorn” is enough.
iv) Batsakis v. Demotsis (Tex. 1949)
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(1) In wartime Greece, defendant is unable to get money from the U.S. and borrows
drachmas from plaintiff instead, promising to pay $2,000 when the loan itself is
worth $25. Defendant argues that the consideration is inadequate and the contract
shouldn’t be enforced. Held, for plaintiff. “Inadequate consideration” argument
is rejected; the drachmas themselves are consideration, regardless of how
inadequate. (It’s not as if the exchange had been $2,000 for 25 dollars, which
would really just be a gift of $1975.)
v) American Home Improvement, Inc. v. MacIver (N.H. 1964)
(1) Defendants pay a huge sum of money for something which the court says was
worth much less in terms of value of the goods and services. Held, for defendant.
Court refuses to enforce the contract on grounds of unconscionability. Court
finds the value of goods and services by subtracting the commission paid to
plaintiff and interest/carrying charges from the total. (Fried thinks this is bogus:
the commission is a kind of overhead which should be paid; and by this logic,
executory contracts can always be rescinded by a promisor who hasn’t gotten
anything in return.)
vi) Waters v. Min Ltd. (Mass. 1992)
(1) Plaintiff’s ex-convict boyfriend convinced her to sell an annuity immediately
exchangeable for $189,000 (and worth $694,000 in the long run) for $50,000.
Plaintiff had no legal representation, and the contract was drawn up in unusual
and intimidating circumstances. Plaintiff sues to rescind on grounds of
unconscionability. Held, for plaintiff. Not only was there a gross disparity in the
values exchanged, but also a gross disparity of bargaining power. Adequacy
usually isn’t taken into account to determine consideration, but inadequacy does
factor into the determination of unconscionability.
(2) Distinguishable from Batsakis:
(a) Conditions here were caused by the other party; in Batsakis, the situation was
brought about by Nazi invasion of Greece.
(b) (But note that here too, as in Batsakis, there was still consideration. The swap
wasn’t $20 now for $10 now; there was a question of cash value over time,
which is a sum not fixed by law but rather by the parties.)
h) Contract Revisions and Preëxisting Duty
i) Restatement § 73 (Performance of Legal Duty)
(1) Performance of a legal duty owed to a promisor which is neither doubtful nor the
subject of honest dispute is not consideration; but a similar performance is
consideration if it differs from what was required by the duty in a way which
reflects more than a pretense of a bargain.
ii) Restatement § 89 (Modification of Existing Contract) (qualifies § 73)
(1) A promise modifying a duty under a contract not fully performed on either side is
binding:
(a) If the modification is fair and equitable in view of circumstances not
anticipated by the parties when the contract was made; or
(b) To the extent provided by statute; or
(c) To the extent that justice requires enforcement in view of material change of
position in reliance on the promise.
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iii) (Basic rule: “you can’t sell the same thing twice.” If B hires A at $90 per week for
one year and the parties later agree to modify to a salary of $100 per week, the salary
is unenforceable because there is no detriment to A and no benefit to B – A was
already obligated to perform and B already entitled to that performance.)
iv) Alaska Packers’ Association v. Domenico (9th Cir. 1902)
(1) Plaintiffs are fishermen who enter into a contract with Alaska Packers, agreeing to
fish for salmon for $50; once they arrive at the cannery in remote Alaska, they
demand a bigger contract ($100) and say they’ll leave otherwise. Packers make
the modification, but then deny the validity of the contract when plaintiffs seek
pay in accordance with it. Held, for defendant. There was no consideration in the
supposed modification of the original contract because defendants were only
getting what they had already bought and paid for.
(2) (Even if there had been consideration, the court probably would have refused to
enforce this contract as unconscionable given the circumstances: if the canning
company didn’t agree to modify, the entire shipment would be lost. Given that
they were in remote Alaska and had little time, Packers couldn’t simply have sued
the plaintiffs for breach.)
v) Schwartzreich v. Bauman-Basch, Inc. (N.Y. 1921)
(1) Parties agree that Schwartzreich (plaintiff) will work at $90 a week; before
starting work, Schwartzreich then receives an offer from a competitor and tells
Bauman he will work for $100 a week; a new contract is signed after the original
contract is destroyed. Held, for plaintiff. The original contract can be rescinded
consensually, and the mutual promises of the new contract then serve as
consideration since there was a moment at which there was no obligation. There
was, in effect, an intermediary contract in which each side agreed to release the
other from its obligation. (Fried calls this the “Bauman-Basch fiddle,” questions
whether the time frame was really so clear since the old contract was ended at
almost the same time.)
(2) Effect of Restatement § 89: is the “new information” that has come to light the
fact that plaintiff’s services are worth more than was known initially?
vi) Goebel v. Linn (Mich. 1882)
(1) Defendants, brewers, contracted with plaintiffs, an ice company; the next winter’s
ice crop was ruined due to warm weather. Defendants’ beer would have spoiled
without ice, and so they entered into a new agreement to pay a higher amount of
money. Defendants paid the higher sum until one month when they paid at the
original, lower rate. Held, for plaintiffs. Defendants aren’t arguing lack of
consideration but rather “circumstances amounting to duress,” which aren’t really
present: the ice company didn’t create the situation (nature did, unlike Alaska
Packers, where the plaintiffs themselves did). Furthermore, plaintiffs had the
option to sue for breach initially and never did; if it had really been that
unconscionable, they wouldn’t have abided by the contract for over eight months.
vii) U.C.C. § 2-209 (Modification, Rescission and Waiver)
(1) An agreement modifying a contract within this Article needs no consideration to
be binding.
(2) Does away with the doctrine of Alaska Packers – but probably wouldn’t change
the result. The court would probably just say the contract was unconscionable.
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i) Illusory promises (really no consideration)
i) Restatement § 77 (Illusory and Alternative Promises)
(1) A promise or apparent promise is not consideration if by its terms the promisor or
purported promisor reserves a choice of alternative performances unless
(a) Each of the alternative performances would have been consideration if it alone
had been bargained for;
(b) One of the alternative performances would have been consideration and there
is or appears to the parties to be a substantial possibility that before the
promisor exercises his choice events may eliminate the alternatives which
would not have been consideration.
ii) Wickham and Burton Coal Co. v. Farmers Lumber Co. (Iowa 1920)
(1) Wickham contracts to sell coal at $1.50 a ton to Farmers; the contract allows
Farmers to order as much coal as it wants, or none at all. Farmers orders a large
quantity of coal after the price of coal rises. Wickham then refuses to sell,
arguing that there is no contract. Held, for Wickham. The buyer never promised
to buy any coal at all, so that there is no mutuality of obligation and no
consideration.
iii) Implied Promises
(1) Wood v. Lucy, Lady Duff-Gordon (N.Y. 1917) (Cardozo, J.)
(a) Wood contracts with Lucy for the right to sell her designs and endorsements
in exchange for 50% of the profits; Lucy then enters into a deal with someone
else and breaks the contract, arguing that Wood’s promise was illusory
because he didn’t actually bind himself to do anything. Held, for Wood.
Cardozo finds an implicit promise “to use reasonable efforts to bring profits
and revenues into existence.” (See Restatement § 205.)
(b) (Fried thinks this is more Cardozan BS, and that the honest solution to this
problem is to create an option contract in Wood under Restatement § 87, with
Wood paying for the option to market Lucy’s designs. Fried also wonders if
this “implied promise” would work against Wood. Here Cardozo reads in a
promise only to hold the maker of a real promise (i.e., Lucy) liable; would he
be more averse to implying a promise so as to hold the maker of that implied
promise liable?)
(2) Restatement § 205 (Duty of Good Faith and Fair Dealing)
(a) Every contract imposes upon each party a duty of good faith and fair dealing
in its performance and its enforcement.
(3) U.C.C. § 2-306 (2) (Output, Requirements, and Exclusive Dealings) (adopts
Lucy)
(a) A lawful agreement by either the seller or the buyer for exclusive dealing in
the kind of goods concerned imposes unless otherwise agreed an obligation by
the seller to use best efforts to supply the goods and by the buyer to use best
efforts to promote their sale.
(4) Omni Group, Inc. v. Seattle-First National Bank (Wash. 1982)
(a) Buyer agrees to purchase land contingent on a satisfactory engineer’s
feasibility report. Held, that this isn’t an illusory promise. Promises
dependent on a condition aren’t necessarily illusory; because the judgment of
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“satisfactoriness” must be made in good faith, the buyer didn’t have unfettered
discretion.
(b) (Not an option contract because no money was given by the buyer in
exchange for the option to purchase.)
(c) General rule: “if the happening of the condition is outside the control of the
party who makes the promise, the promise is not illusory and does not fail for
lack of consideration.”
iv) Termination clauses
(1) Gianni Sport v. Gantos, Inc. (Mich. 1986)
(a) Buyer/defendant contracts to buy clothing from seller/plaintiff, but reserves
the right to terminate orders of unshipped or late goods at any time. Held, for
plaintiff. The termination clause is unconscionable, and the defendant’s
promise illusory, because it was unreasonable and because the defendant had
superior bargaining power.
(2) Gurfein v. Werbelovsky (Conn. 1922)
(a) Buyer sues seller for refusing to ship glass under a contract that gave buyer
the right to cancel at any time before shipment. Held, for buyer/plaintiff.
There is sufficient consideration here because the buyer’s right to cancel
lasted only up until the time of shipment; if the seller shipped the good, the
buyer had to pay at that point. This minute consideration was apparently
enough.
(b) (Note that here the buyer wants the goods and is demanding performance; in
Gianni, it was the seller who was trying to enforce the contract.)
(3) Corenswet v. Amana Refrigeration, Inc. (5th Cir. 1979)
(a) Plaintiff seeks to enjoin termination of a wholesale distributorship terminable
for any reason at any time within 10 days’ notice, arguing the termination was
arbitrary and capricious. Held, for defendant. The contract is enforceable;
contracts may be terminable without cause when specified by the terms of the
contract. Inserting a good faith requirement would make almost all
termination-without-cause clauses invalid.
2) Formation
a) U.C.C. § 2-204 (Formation in General)
i) A contract for sale of goods may be made in any manner sufficient to show
agreement, including conduct by both parties which recognizes the existence of such
a contract.
ii) An agreement sufficient to constitute a contract for sale may be found even though
the moment of its making is undetermined.
b) U.C.C. § 2-206 (Offer and Acceptance in Formation of Contract)
i) Unless otherwise unambiguously indicated by the language or circumstances
(1) An offer to make a contract shall be construed as inviting acceptance in any
manner and by any medium reasonable in the circumstances… [i.e., inviting
acceptance either as a bilateral or unilateral contract – cf. Restatement § 32]
c) Making of agreements
i) Objective standard
(1) Hotchkiss v. National City Bank of New York (S.D.N.Y. 1911) (L. Hand, J.)
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(a) “A contract has, strictly speaking, nothing to do with the personal or
individual intent of the parties. A contract is an obligation attached by the
mere force of law to certain acts of the parties, usually words, which
ordinarily accompany and represent a known intent. If, however, it were
proved by twenty bishops that either party, when he used the words, intended
something else than the usual meaning which the law imposes upon them, he
would still be held…”
(2) Embry v. Hargadine-McKittrick Dry Goods (Mo. 1907)
(a) Disputed facts: employee Embry claims that his boss told him to keep
working after his contract was about to expire, and employer claims that he
was busy at the time and said he would “take it up later.” Employer claims no
intent to rehire plaintiff. Held, for plaintiff. Employer’s intent doesn’t matter;
the court takes an objective approach and considers what a reasonable man
would infer from the employer’s words and acts. Remanded for trial because
there is still an open question of fact as to who said what. While it is the role
of the court to interpret ambiguous written words in a contract, ambiguous
oral words go to the jury.
(b) Does this end up producing a kind of contract by way of negligence, and
hence a blurring of contract and tort?
(3) Texaco, Inc. v. Pennzoil Co. (Tex. 1997)
(a) Pennzoil is in negotiations with Getty to purchase some of its oil reserves, and
Texaco comes along and takes the deal away from them. Pennzoil sues
Texaco for tortious interference with contract; Texaco argues that there never
was a contract between Texaco and Getty because there was never a formal
instrument, only the memorandum referring to such an instrument. Issue is
whether Getty intended to be bound. Held, for Pennzoil (plaintiff). Whether
or not Getty intended is beside the point; what matters is that they had
behaved and spoken in ways assuming an intent to be bound. The terms of the
contract were sufficiently definite.
(4) Empro Mfg. Co. v. Ball-Co Mfg. Inc. (7th Cir. 1989) (Easterbrook, J.)
(a) Parties sign a letter of intent, but defendant Ball-Co negotiates with a third
party afterward and reneges. Letter noted that the purchase would be “subject
to” certain conditions; but plaintiff insisted that the binding effect depended
on intent alone. Held, for defendant. “Intent” is objective and not subjective.
“Subject to” isn’t always conclusive, depending on the context; but here the
conditions made it clear that a binding effect was being avoided.
(b) Easterbrook notes that letters of intent serve a valuable function in allowing
“agreement by stages”: “Letters of intent and agreements in principle often,
and here, do no more than set the stage for negotiations on details.”
ii) Subjective standard (intent to be bound)
(1) Keller v. Holderman (Mich. 1863)
(a) Keller gives Holderman a check for $300 in exchange for a watch worth about
$15, which he keeps until the day of trial and then offers to return; Holderman
had no money in the bank when he drew the check, and had intended to insert
a condition that would prevent his being liable on the check. Held, for
defendant. There was no contract here; the whole transaction between the
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parties “was a frolic and a banter – the plaintiff not expecting to sell, nor the
defendant intending to buy the watch at the sum for which the check was
drawn.”
(b) Where neither party intends a contract, even if the words make it look like
there is one, there is no contract. By contrast, Embry is a case where one
party did intend there to be a contract and reasonably thought there was one,
such that there is indeed a contract.
(2) Moulton v. Kershaw (Wis. 1884)
(a) Plaintiff orders 2,000 barrels of salt from defendant after receiving what it
claims was an offer of sale; defendant then withdraws the letter in question.
Held, for defendant. The letter wasn’t a promise, just an offer to negotiate;
defendant wasn’t promising the salt, but just saying that he had salt and that if
the plaintiffs wanted to promise to buy it, he might promise to sell it. It was
simply an invitation to negotiate. (The result would have been different if the
defendant’s letter had said “all you can order,” or specified an amount.)
(b) (Cf. Lefkowitz: advertising is usually not an offer, but “FIRST COME FIRST
SERVED” specification is promissory.”)
d) Indefiniteness
i) Restatement § 33 (Certainty)
(1) Even though a manifestation of intention is intended to be understood as an offer,
it cannot be accepted so as to form a contract unless the terms of the contract are
reasonably certain.
(2) The terms of the contract are reasonably certain if they provide a basis for
determining the existence of a breach and for giving an appropriate remedy.
(3) The fact that one or more terms of a proposed bargain are left open or uncertain
may show that a manifestation of intention is not intended to be understood as an
offer or as an acceptance.
ii) U.C.C. § 2-204 (3) (Formation in General).
(1) Even though one or more terms are left open a contract for sale does not fail for
indefiniteness if the parties have intended to make a contract and there is a
reasonably certain basis for giving an appropriate remedy.
iii) U.C.C. § 2-305 (1) and (4) (Open Price Term)
(1) 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 of delivery
if:
(a) Nothing is said as to price; or
(b) The price is left to be agreed by the parties and they fail to agree; or
(c) The price is to be fixed in terms of some agreed market or other standard as
set or recorded by a third person or agency and it is not so set or recorded.
(2) Where, however, the parties intend not to be bound unless the price be fixed or
agreed and it is not fixed or agreed there is no contract.
iv) Joseph Martin, Jr. Delicatessen v. Schumacher (N.Y. 1981)
(1) Martin enters a lease with Schumacher with renewals “to be agreed upon” and
now sues for specific performance to extend the lease at a reasonable figure.
Held, for Martin. The contract is unenforceable because its terms are too
indefinite. There was nothing more than an agreement to make an agreement; the
12
contract must be specific enough for the promise to be ascertainable, because
otherwise courts would just end up imposing their own conceptions.
(2) Cf. U.C.C. § 2-305 (not applicable to sale or lease of real property): if no price is
set, fair market price or reasonable price governs.
v) Lafayette Place Associates v. Boston Redevelopment Authority (Mass. 1998) (Fried,
J.)
(1) Plaintiff sues for breach, and defendant argues that there was no binding contract
due to indefiniteness. Held, for defendant: the city is not in breach because the
plaintiff didn’t fulfill its own obligations, BUT there was a binding contract.
Absolute specificity is not required. Although the price was left open, procedures
were specified in the contract for determining it (as was not the case in Martin).
Fried notes that contracts should allow parties to bind themselves in the face of
contingencies, as they did here.
vi) Hoffman v. Red Owl Stores, Inc. (Wis. 1965)
(1) Hoffman seeks to join the Red Owl franchise, and relies on Red Owl’s assurances
about the required amount of capital, meanwhile selling his business, buying a
store to gain experience, and buying an option on a site for the would-be franchise
store. Red Owl then raises the price, at which point Hoffman terminates the
negotiation. Held, for Hoffman. There was no contract, because no mutual
agreement was reached on the details of the proposal, but there was reliance
pursuant to Restatement § 90. Hoffman is awarded reliance damages only, i.e.,
damages which reflect his detrimental change of position. (The norm is
expectation damages, which aren’t given here.)
(2) Is this really more like a tort misrepresentation case? Unlike other reliance cases,
there is no explicit promise here, only reliance on a representation. Cf. D’UlisseCupo (tort for negligent misrepresentation rather than contract because
representations weren’t sufficiently promissory).
(3) Chirelstein: “As applied in Red Owl, promissory estoppel was not merely a
substitute for consideration or a device for converting an offer into a binding
contract – in effect, there was no offer. Rather, Section 90 was made to ‘serve as
a distinct basis of liability, without regard to theories of bargain, contract, or
consideration, and with its own special damage standard.’” § 90 is now
effectively “imposing fair-dealing requirements on parties engaged in precontractual negotiations.” (Cf. Gilmore, Death of Contract.)
e) Misunderstanding
i) To constitute acceptance, the consideration must be the consideration which the
offeror or promisor sought in return for his bargain. The promisor must get the
return which is sought for, not something else.
ii) Restatement § 20 (Effect of Misunderstanding)
(1) There is no manifestation of mutual assent to an exchange if the parties attach
materially different meanings to their manifestations and
(a) Neither party knows or has reason to know the meaning attached by the other;
or
(b) Each party knows or each party has reason to know the meaning attached by
the other.
13
(2) The manifestations of the parties are operative in accordance with the meaning
attached to them by one of the parties if
(a) That party does not know of any different meaning attached by the other, and
the other knows the meaning attached by the first party.
(b) That party has no reason to know of any different meaning attached by the
other, and the other has reason to know the meaning attached by the first
party.
(3) [Effectively says that if one party knows what the other does, then they are stuck
with that meaning.]
iii) Raffles v. Wickelhaus (Peerless) (Court of Exchequer 1864)
(1) Parties contract for cotton delivery “ex Peerless,” but there are in fact two ships
named Peerless sailing from Bombay. Plaintiff ships his cotton in the December
Peerless, and defendant refuses to accept or pay for it, arguing that he had in mind
the October Peerless. (Cotton prices had gone up in the intervening period due to
the Civil War.) Held, for defendants. There was no “consensus ad idem, and
therefore no binding contract.” Neither side should be bound to a contract they
didn’t make; the contract each party made is different from the one that the other
party thought it had made.
(2) How should the loss be split in a relationship like this? It isn’t as if Raffles and
Wickelhaus were strangers (unlike the parties in a tort case). Would a more
equitable result have been to split the loss between them?
(3) Fried questions whether Wickelhaus was really unaware of there being two
Peerless ships; if he had the October Peerless in mind, why didn’t he try to claim
cotton from that ship when it arrived?
(4) Holmes’s radically “objective” interpretation: “If there had been but one
‘Peerless,’ and the defendant had said ‘Peerless’ by mistake, meaning ‘Peri,’ he
would have been bound. The true ground of the decision was not that each party
meant a different thing from the other … but that each said a different thing. The
plaintiff offered one thing, the defendant expressed his assent to another.”
f) Termination
i) Restatement § 36 (Methods of Termination of the Power of Acceptance)
(1) An offeree’s power of acceptance may be terminated by
(a) Rejection or counter-offer by the offeree, or
(b) Lapse of time, or
(c) Revocation by the offeror, or
(d) Death or incapacity of the offeror or offeree.
(2) In addition, an offeree’s power of acceptance is terminated by the non-occurrence
of any condition of acceptance under the terms of the offer.
ii) Lapse of time: Textron, Inc. v. Froelich (Pa. 1973)
(1) Seller offers broker two lots of steel rods at stated prices over the phone; broker
calls back five weeks later and agrees to buy, and seller replies “fine.” Rods
aren’t delivered and buyer sues. Defendant argues the offer had elapsed after the
first conversation ended. Held, for plaintiff. When no time for expiration for a
power of acceptance is specified, the power terminates “at the end of a reasonable
time,” with “reasonableness” a question of fact to be assessed by the jury. Not all
offers terminate at the end of conversation.
14
iii) Death or incapacitation: Davis v. Jacoby (Cal. 1934)
(1) Mr. and Mrs. Whitehead are an infirm elderly couple; Mr. Whitehead makes an
offer to Mr. Davis and his wife (Mrs. Whitehead’s niece) that if they come care
for him everything will be left to Mrs. Davis in the will. Mr. Davis writes back to
accept; Mr. Whitehead commits suicide before they arrive, but they come and
care for Mrs. Whitehead until her death. The will then bequeaths everything to
someone else. Defendants argue that the offer was unilateral, and that only
performance would equal acceptance. Held, for plaintiffs. Mr. Whitehead’s letter
was an offer and Mr. Davis’s reply an acceptance. The presumption is in favor of
bilateral contracts (Restatement § 31); Mr. Whitehead presumably wanted the
comfort and assurance of a promise to come. Nor did Mr. Whitehead’s death
constitute revocation. He had already received the letter of acceptance before his
death, and services were to continue after his death (i.e., care for Mrs.
Whitehead.)
iv) Revocation
(1) Restatement § 25 (Option Contracts)
(a) An option contract is a promise which meets the requirements for the
formation of a contract and limits the promisor’s power to revoke an offer.
(2) Restatement § 45 (Option Contract Created by Part Performance or Tender)
(a) (1) Where an offer invites an offeree to accept by rendering a performance
and does not invite a promissory acceptance, an option contract is created
when the offeree tenders or begins the invited performance or tenders a
beginning of it.
(b) (2) The offeror’s duty of performance under any option contract so created is
conditional on completion or tender of the invited performance in accordance
with the terms of the offer.
(c) Comment f. What is begun or tendered must be part of the actual performance
invited in order to preclude revocation under this Section. Beginning
preparations, though they may be essential to carrying out the contract or to
accepting the offer, is not enough. Preparations to perform may, however,
constitute justifiable reliance sufficient to make the offeror’s promise binding
under § 87(2).
(3) Restatement § 87 (Option Contract)
(a) An offer is binding as an option contract if it:
(i) Is in writing and signed by the offeror, recites a purported consideration
for the making of the offer, and proposes an exchange on fair terms within
a reasonable time; or
(ii) Is made irrevocable by statute.
(b) An offer which the offeror should reasonably expect to induce action or
forbearance of a substantial character on the part of the offeree before
acceptance and which does induce such action or forbearance is binding as an
option contract to the extent necessary to avoid injustice.
(i) [§87(2) is akin to §90, except the actual thing requested hasn’t been
performed yet, only preparatory steps. Would apply to Red Owl.]
(4) Dickinson v. Dodds (Eng. C.A. 1976)
15
(a) Dodds agrees to sell property to Dickinson at a particular price, and adds as
postscript that the offer is to be “left over until Friday, 9 AM.” Dickinson
tries to accept on Friday morning and finds that he is too late, with Dodds
selling to someone else on Thursday and Dickinson aware of this. Held, for
defendant (Dodds). The document, although it began “I hereby agree to sell,”
was really just an offer. There was no meeting of the minds; nor, from an
objective standpoint, was this an option contract, given the lack of
consideration. “This promise, being a mere nudum pactum, was not
binding…” Since Dickinson knew that an offer had been made to someone
else on Thursday, he should reasonably have known that the offer was no
longer on the table.
(b) Cf. UCC § 2-205 (but not applicable here because this isn’t a sale of goods)
(5) U.C.C. § 2-205 (Firm Offers) (certain option contracts don’t require
consideration)
(a) 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.
(6) Petterson v. Pattberg (N.Y. 1928)
(a) Pattberg promises a reduction in Petterson’s mortgage in exchange for $780 in
cash; Petterson goes to Pattberg’s house to pay, and Pattberg tells him at the
door that the mortgage has been sold. Petterson has to pay the full amount to
a third party, and sues Pattberg for the difference. Held, for defendant
(Pattberg). The contract was unilateral and thus revocable at any time before
performance; since the plaintiff had not yet tendered the money, defendant
had time to withdraw (no matter how small the window of time might have
been).
(b) Dissent (Andrews): Petterson had in effect performed, and performance was
only made impossible by Pattberg himself. The act requested by Pattberg as
“consideration” included performance by Pattberg himself, namely accepting
the money; Petterson had done his part and given the consideration Pattberg
wanted.
(c) Cf. Restatement § 45 (creation of an option contract by part performance)
(7) Brackenbury v. Hodgkin (Me. 1917)
(a) Defendant writes to plaintiff, her daughter, and offers her use of the home and
inheritance if she and her husband come to care for her. The daughter and
son-in-law did so, but relations became strained until the defendant deeded the
home to her son instead; the son then served the plaintiffs with notice to quit.
Plaintiffs seek a reconveyance to the mother and an adjudication that the
mother holds title with trust in their favor. Held, for plaintiffs. The contract
here was unilateral, and the plaintiffs accepted the offer by moving to Maine
and beginning performance.
(b) Cf. Davis: distinguishable because performance here had already begun,
whereas in Davis the plaintiffs had only prepared to go before the alleged
16
revocation. Here, Restatement § 62 would apply (“tender or beginning of the
invited performance or a tender of a beginning of it is an acceptance by
performance”).
(8) Carlill v. Carbolic Smoke Ball Co. (English Court of Appeal 1892)
(a) Defendants manufacture a medical device an advertise a 100 pound reward to
anyone who gets sick after taking the treatment three times a day. The
plaintiff claims the reward. Held, for plaintiff. The lack of particularity
(anyone can claim the reward) doesn’t make this promise nonbinding. Nor
did the plaintiff need to precede her performance with notification. As for
consideration, the advertisers accrue a commercial advantage from the use of
their device, and consumers receive some detriment.
(b) “No notice” analogy: “If I advertise to the world that my dog is lost, and that
anybody who brings the dog to a particular place will be paid some money,
are all the police or other persons whose business it is to find lost dogs to be
expected to sit down and write me a note saying that they have accepted my
proposal?”
(9) James Baird Co. v. Gimbel Bros. (2nd Cir. 1933) (L. Hand, J.)
(a) Baird, a general contractor, makes a successful bid for a job based on a low
quote from Gimbel, a subcontractor; Gimbel then withdraws the offer. Held,
for defendant (Gimbel). The mere entry of bids was not enough to constitute
acceptance by Baird; Gimbel was looking for acceptance via a return promise.
Hand refuses to apply promissory estoppel here. “In commercial transactions
it does not in the end promote justice to seek strained interpretations of those
who do not protect themselves.”
(b) Chirelstein: “If the Gimbel rule were followed, general contractors would be
obliged to add a premium to their bids in order to reflect the risk that one or
another of their subcontractors might revoke before acceptance.”
(c) (Fried: Restatement § 87, which applies to offers, might produce a different
result here.)
(10)
Drennan v. Star Paving Co. (Cal. 1958) (Traynor, J.)
(a) Facts are basically identical to Baird. Held, for plaintiff. Defendant had
reason to expect reliance by the plaintiff. The plaintiff bound himself in
reliance on the defendant’s terms, and the defendant wanted precisely this
result: “It was to [defendant’s] own interest that the contractor be awarded the
general contract; the lower the subcontract bid, the lower the general
contractor’s bid was likely to be and the greater its chance of acceptance and
hence the greater defendant’s chance of getting the paving subcontract.
Defendant had reason not only to expect plaintiff to rely on its bid but to want
him to.”
(b) Chirelstein: “Promissory estoppel is a one-way street in this context.”
Drennan would be free to shop around after getting the contract for an even
lower bid than Star’s, since Drennan wasn’t bound to award the subcontract to
Star. Thus Traynor claims that Drennan’s § 90 claim would be forfeited if he
had gone on to enquire from other subcontractors after being awarded the
contract.
g) Means of acceptance
17
i) Counter-offers
(1) Livingstone v. Evans (Supreme Court of Alberta 1925)
(a) Defendant offers land for $1800; plaintiff replies that he’ll pay $1600;
defendant refuses and writes, “Cannot reduce price”; plaintiff then accepts the
$1800 offer. By this point defendant has sold to someone else. Question is
whether plaintiff’s reply ended the offer. Held, for plaintiff. Plaintiff’s reply
was a counter-offer, which amounts to a rejection of the original offer; BUT
defendant’s reply, “Cannot reduce price,” constituted a renewal of the original
offer.
ii) Mailbox Rule
(1) Restatement § 63 (Time When Acceptance Takes Effect)
(a) Unless the offer provides otherwise,
(i) An acceptance made in a manner and by a medium invited by an offer is
operative and completes the manifestation of mutual assent as soon as put
out of the offeree’s possession, without regard to whether it ever reaches
the offeror; but
(ii) An acceptance under an option contract is not operative until received by
the offeror.
(b) [Prevents offeror from revoking once the offeree has put his acceptance in the
mail; makes sense insofar as the offeree may have taken costly steps and
rejected other offers in accepting.]
(2) Restatement § 40 (Time When Rejection or Counter-Offer Terminates the
Power of Acceptance)
(a) Rejection or counter-offer by mail or telegram does not terminate the power of
acceptance until received by the offeror, but limits the power so that a letter or
telegram of acceptance started after the sending of an otherwise effective
rejection is only a counter-offer unless the acceptance is received by the
offeror before he receives the rejection or counter-offer.
(3) European rule: acceptance is valid on receipt.
(4) Problem of the overtaking rejection (“Romeo and Juliet problem”)
(a) (Rejections are only effective on receipt.)
(b) Overtaking acceptance (Restatement § 40): Acceptance mailed after rejection
isn’t effective until received, and only if received before the rejection. But
what about a rejection mailed after the acceptance and overtaking it?
(c) Calamari/Perillo: “However, there is significant authority, including the
Restatement, that a contract is formed [by overtaking rejection, despite the
fact that it goes against offeror’s expectations]. Otherwise the offeree could
speculate at the offeror’s expense by seeing how the market went. If it moved
in the offeree’s favor he would allow the acceptance to stand. If it moved in
the offeror’s favor, the offeree could use an earlier-arriving communication to
undo the acceptance. This would be unfair because if the offeror is bound by
the offeree’s communication this should also be true of the offeree.”
(d) Fried’s suggestion: When offeree snail-mails an acceptance and then emails
an overtaking rejection, this creates an option in the offeror to treat it as a
contract or not.
iii) Acceptance via Silence
18
(1) Restatement § 69 (Acceptance by Silence or Exercise of Dominion)
(a) Where an offeree fails to reply to an offer, his silence and inaction operate as
an acceptance in the following cases only:
(i) Where an offeree takes the benefit of offered services with reasonable
opportunity to reject them and reason to know that they were offered with
the expectation of compensation. [Day v. Caton]
(ii) Where the offeror has stated or given the offeree reason to understand that
assent may be manifested by silence or inaction, and the offeree in
remaining silent and inactive intends to accept the offer.
(iii)Where because of previous dealings or otherwise, it is reasonable that the
offeree should notify the offeror if he does not intend to accept. [Hobbs v.
Massasoit]
(2) Day v. Caton (Mass. 1875)
(a) Plaintiff builds a wall, half of which is on the defendant’s land; defendant
objects to jury instruction that if plaintiff built expecting defendant to pay and
defendant had reason to know, then a promise can be inferred. Held, for
plaintiff. Mere expectation on the plaintiff’s part isn’t enough, but silence can
be interpreted as assent depending on the circumstances. “If a party, however,
voluntarily accepts and avails himself of valuable services rendered for his
benefit, when he has the option whether to accept or reject them, even if there
is no distinct proof that they were rendered by his authority or request, a
promise to pay for them may be inferred.”
(3) Hobbs v. Massasoit Whip Co. (Mass. 1893) (Holmes, J.)
(a) Plaintiff sends eel skins to defendant, who keeps them until they go bad and
doesn’t pay, never notifying plaintiff of the rejection. Defendant objects to
jury instruction that verdict for the plaintiff is proper when defendant says
nothing while “having reason to suppose that the man who has sent them
believes that it is taking them.” Held, for plaintiff. The parties here were
nonstrangers, since defendants had purchased skins several times before.
Given the circumstances, sending the skin imposed a duty to act on the
defendant’s part. (It isn’t as if the plaintiffs had sent unsolicited goods.)
(4) Morone v. Morone (N.Y. 1980)
(a) Parties lived together as partners and acted as “husband and wife.” Plaintiff
now alleges express and implied contracts compensating her for domestic
services, breached by defendant. Held, in part, for plaintiff. “New York
courts have long accepted the concept that an express agreement between
unmarried persons living together is as enforceable as though they were not
living together, provided only that illicit sexual relations were not ‘part of the
consideration of the contract.’” But no implied contract should be found in
domestic relations, since “it is not reasonable to infer an agreement to pay for
the services rendered when the relationship of the parties makes it natural that
the services were rendered gratuitously.”
(5) Hurley v. Eddingfield (Ind. 1901)
(a) Defendant was plaintiff’s doctor; messenger went to the doctor to tell him
plaintiff was seriously ill and tendered his fee, but defendant refused to render
19
aid; plaintiff then died as a result. Held, for defendant. Doctor can practice
on his own terms. [No acceptance by silence.]
iv) Battle of the forms
(1) Common law rule was known as the mirror image rule: offeree’s response
constitutes acceptance only if it is the mirror image of the offer. (Counteroffers
are thus outright rejections of the original offer.) Rejected in U.C.C. § 2-207.
(2) U.C.C. § 2-207 (Additional Terms in Acceptance or Confirmation)
(a) (1) A definite and seasonable expression of acceptance or a written
confirmation which is sent within a reasonable time operates as an acceptance
even though it states terms additional to or different from those offered or
agreed upon, unless acceptance is expressly made conditional on assent to the
additional or different terms.
(b) (2) The additional terms are to be construed as proposals for additions to the
contract [i.e., they only become part of the contract if consented to by the
offeror]. Between merchants such terms become part of the contract unless:
(i) (a) the offer expressly limits acceptance to the terms of the offer;
(ii) (b) they materially alter it; or
(iii)(c) notification of objection to them has already been given or is given
within a reasonable time after notice of them is received
(c) (3) Conduct by both parties which recognizes the existence of a contract is
sufficient to establish a contract for sale although the writings of the 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.
(d) [Courts usually find that conflicting terms “knock out” one another; other
U.C.C. provisions then fill in the missing provisions.]
(3) Idaho Power Co. v. Westinghouse Electric Corp. (9th Cir. 1979)
(a) Idaho sends an enquiry for the price of equipment to Westinghouse;
Westinghouse sends back a quote along with terms and conditions limiting its
liability. Idaho responds with an order containing additional terms
“superseding all previous agreements,” but no terms as to liability. Idaho sues
for breach of express and implied warranties after the equipment fails. Held,
for defendant (Westinghouse). Idaho’s order constituted acceptance; and the
language of the order doesn’t indicate that Idaho was making its acceptance
“conditional on assent to the additional or different terms.” Nor did the
“superseding” provision “knock out” the disclaimer of liability.
h) Assent to standardized forms
i) Restatement § 211 (Standardized Agreements)
(1) Except as stated in Subsection (3), where a party to an agreement signs or
otherwise manifests assent to a writing and has reason to believe that like writings
are regularly used to embody terms of agreements of the same type, he adopts the
writing as an integrated agreement with respect to the terms included in the
writing.
20
ii)
iii)
iv)
v)
(2) Such a writing is interpreted wherever reasonable as treating alike all those
similarly situated, without regard to their knowledge or understanding of the
standard terms of the writing.
(3) Where the other party has reason to believe that the party manifesting such assent
would not do so if he knew that the writing contained a particular term, the term is
not part of the agreement.
(a) (Basically a kind of mistake doctrine – but why should this only be true for
standardized agreements?)
Mundy v. Lumberman’s Mutual Casualty Co. (1st Cir. 1986) (Breyer, J.)
(1) Plaintiff, a lawyer, sues insurer for inadequate notice after a change in policy
limiting recovery for theft. Form read, “NEW EASY TO READ POLICY …
THERE ARE SOME COVERAGE CHANGES,” but plaintiff says he didn’t read
the change. Held, for defendant. “Even a casual reading of the mailed material
would have given the plaintiffs adequate notice.”
Richards v. Richards (Wis. 1994)
(1) Defendant employs plaintiff’s husband as a trucker; plaintiff wants to ride with
him, and signs a “passenger authorization form” which is really an exculpatory
contract releasing defendant for liability even from intentional and reckless
conduct by third parties. Exculpatory contracts are generally disfavored, and the
court concludes that this one violates public policy. The title (“Passenger
Authorization”) doesn’t signal the exculpatory nature of the contract; the release
is extremely broad; and the standardized nature of the agreement gives no
opportunity for negotiation or bargain. No single reason is conclusive, but
together they make it violative of public policy.
(2) (Fried questions what difference the standardized agreement and the “lack of
opportunity for discussing and negotiating” really makes. Life is full of “take it
or leave it” situations (e.g., could you really negotiate over the cost of postage
stamps?) in which there isn’t necessarily reason to think there is no meeting of the
minds.)
Broemmer v. Abortion Services of Phoenix (Ariz. 1992)
(1) Plaintiff goes to an abortion clinic and signs a bunch of forms before the abortion,
one of which was an agreement to arbitrate. Defendant later moves to dismiss
plaintiff’s malpractice suit on grounds of the arbitration agreement. Held, for
plaintiff. Court takes a more subjective approach, questioning how there could
really have been a meeting of the minds given the plaintiff’s lack of education and
extreme emotional stress at the time. The contract was one of adhesion, and no
explanation of the arbitration clause was given to the plaintiff. “Contracts of
adhesion will not be enforced unless they are conscionable and within the
reasonable expectations of the parties.”
Silverstein v. St. Paul (2d Cir. 2003)
(1) Plaintiff insureds, who were leasing space in the WTC, engaged an insurance
broker to set up a multi-layered insurance program providing $ 3.5 billion
insurance on a "per occurrence" basis. In soliciting insurers, the broker circulated
information regarding the proposed placement that included a "broker" form. The
case addressed whether the events of September 11, 2001 constituted one or two
"occurrences" for the purpose of determining policy limits. In addition, as of
21
September 11, 2001, only one of the insurers had issued a final policy,
necessitating an individualized inquiry to determine the terms of each insurance
binder. The court held that the binders issued by three of the insurers were issued
on the basis of negotiations involving the broker form, a copy of which had been
provided to each insurer by the broker. The parties intended and understood the
binders to incorporate the terms of the form except as expressly modified. Under
the definition in the form, the events of September 11th constituted a single
occurrence as a matter of law. A second form of a fourth insurer was subject to a
different rule by its terms and required consideration of extrinsic evidence.
i) Mistake
i) Mutual mistake
(1) Restatement § 152 (When Mistake of Both Parties Makes a Contract
Voidable)
(a) Where a mistake of both parties at the time a contract was made as to a basic
assumption on which the contract was made has a material effect on the
agreed exchange of performances, the contract is voidable by the adversely
affected party unless he bears the risk of the mistake under the rule stated in §
154.
(b) In determining whether the mistake has a material effect on the agreed
exchange of performances, account is taken of any relief by way of
reformation, restitution, or otherwise.
(2) Restatement § 154 (When a Party Bears the Risk of a Mistake)
(a) A party bears the risk of a mistake when
(i) The risk is allocated to him by agreement of the parties, or
(ii) He is aware, at the time the contract is made, that he has only limited
knowledge with respect to the facts to which the mistake relates but treats
his limited knowledge as sufficient, or
(iii)The risk is allocated to him by the court on the ground that it is reasonable
in the circumstances to do so.
(3) Sherwood v. Walker (Mich. 1887)
(a) Plaintiff agrees to buy a cow from defendant, who told him it was barren;
defendant refuses to deliver it after discovering after the sale agreement that it
is pregnant, and plaintiff sues in replevin. Held, for defendant. There was a
mutual mistake of material fact. The cow wasn’t what was contracted for by
either party; what was contracted for was a cow for beef, not a breeder, and
the sale agreement reflected that valuation. Furthermore, the mistake was
substantial and went “to the very nature of the thing.”
(b) Dissent: notes that plaintiff, despite hearing the cow was barren, believed that
it might be made to breed, and thus acquired the cow taking a gamble. Both
parties were ignorant and took a chance, and since the defendant had superior
knowledge and was the cheapest cost avoider, he should bear the risk of the
cow being pregnant.
(c) Calamari/Perillo: “One explanation for the decision is that in any contract
parties take certain risks, but do not take risks of the existence of facts
materially affecting their bargain which both shared as a common presupposition. In deciding which facts are vital and basic to their bargain one
22
must search the facts for unexpected, unbargained for gain on the one hand
and unexpected, unbargained for loss on the other.”
(d) Chirelstein: “Experts dealing with non-experts cannot make ‘mistakes’ as to
the intrinsic value of the property being sold.”
(e) (Note that Sherwood is distinguishable from Raffles: in the latter there was no
mutual assent so that a contract was never formed, while here there was assent
(a specific cow had been identified) but mutual mistake. The issue in
Sherwood is quality, not identity; the minds met but were mistaken.)
(4) Beachcomber Coins, Inc. v. Boskett (N.J. 1979): both parties believed a
counterfeit coin was real, and plaintiff now sues for rescission; held, for plaintiff,
that there is no contract due to mutual mistake. Result would be different if
plaintiff had knowingly assumed the risk (i.e., unilateral mistake).
(5) Hinson v. Jefferson (N.C. 1975)
(a) Defendant sold land to plaintiff, knowing it would be for residential use;
plaintiff was denied a septic permit due to the water table, of which the
defendant didn’t know at the time of sale. Plaintiff now seeks rescission due
to mutual mistake. Held, for plaintiff. Restrictions on the deed to residential
purposes created an implied warranty of habitability which wasn’t met here.
Plaintiff was furthermore a consumer, not a developer, so that she wasn’t
purchasing it to make a profit from it (and therefore wasn’t bearing the risk).
(b) “We hold that where a grantor conveys land subject to restrictive covenants
that limit its use to the construction of a single-family dwelling, and, due to
subsequent disclosures, both unknown to and not reasonably discoverable by
the grantee before or at the time of conveyance, the property cannot be used
by the grantee, or by any subsequent grantees, … for the specific purpose to
which its use is limited by the restrictive covenants, the grantor breaches an
implied warranty arising out of said restrictive covenants.”
ii) Unilateral mistake
(1) Restatement § 153 (When Mistake of One Party Makes a Contract Voidable)
(a) Where a mistake of one party at the time a contract was made as to a basic
assumption on which he made the contract has a material effect on the agreed
exchange of performances that is adverse to him, the contract is voidable by
him if he does not bear the risk of the mistake under the rule stated in § 154,
and
(i) The effect of the mistake is such that enforcement of the contract would be
unconscionable, or
(ii) The other party had reason to know of the mistake or his fault caused the
mistake.
(2) Casebook comment: “The ‘exceptional’ case awarding relief [for unilateral
mistake] usually has involved a party who knew of and, saying nothing, claimed
the benefit of, another’s mistake.”
(3) Kronman: Risk of mistake represents a societal cost, and the risk should be
assigned to the cheapest cost avoider.
(4) Elsinore Union Elementary School District v. Kastorff (Cal. 1960)
(a) Defendant, a contractor, makes a clerical error in calculating its bid, which the
school district accepts unknowingly; contractor then notifies the district of the
23
mistake, but it refuses to rescind the contract. Held, for defendant. The
contract was unfair, inequitable, and unintended, and defendant sought to
rescind it within a reasonable period of time. Relief is generally granted for
clerical or mathematical errors.
(5) S.T.S. Transport Services, Inc. v. Volvo White Truck Corp. (7th Cir. 1985)
(rationale for rescission of clerical errors): “The reason for the special treatment
for such [clerical] errors, of course, is that they are difficult to prevent, and that no
useful social purpose is served by enforcing the mistaken term. No incentives
exist to make such mistakes; all the existing incentives work, in fact, in the
opposite direction. There is every reason for a contractor to use ordinary care.”
(6) McRae v. Commonwealth Disposals Commission (High Court of Australia 1951)
(a) Parties contract for the sale of a wrecked oil tanker off the Barrier Reef.
Plaintiffs went to find the tanker at great cost, but it turned out that the boat
didn’t exist. Held, for plaintiff. The court reads in an implied provision that
there was in fact a tanker at the specified place. Buyers didn’t assume the
risk, but merely relied on what the defendant said. Contract is void, and
plaintiffs are entitled to reliance damages.
3) Interpretation
a) Statute of frauds
i) Requires agreement to be put into writing for certain types of contracts:
(1) Interests in land
(2) Promises to answer for the debt, default, or miscarriage of another
(3) Sales of goods over $500 (U.C.C. § 2-201)
(4) Contracts not to be performed within one year
(5) Contracts in consideration of marriage
ii) U.C.C. § 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.
(2) 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 ten
days after it is received.
(3) A contract which does not satisfy the requirements of subsection (1) but which is
valid in other respects is enforceable
(a) If the goods are to be specially manufactured for the buyer and are not suitable
for sale to others in the ordinary course of the seller’s business and the seller,
before notice of repudiation is received and under circumstances which
reasonably indicate that the goods are for the buyer, has made either a
substantial beginning of their manufacture or commitments for their
procurement; or
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(b) If the party against whom enforcement is sought admits in his pleading,
testimony, or otherwise in court that a contract for sale was made, but the
contract is not enforceable under this provision beyond the quantity of goods
admitted; or
(c) With respect to goods for which payment has been made and accepted or
which have been received and accepted.
b) Parol evidence rule
i) Restatement § 209 (Integrated Agreements)
(1) An integrated agreement is a writing or writings constituting a final expression of
one or more terms of an agreement.
(2) Whether there is an integrated agreement is to be determined by the court as a
question preliminary to determination of a question of interpretation or to
application of the parol evidence rule.
(3) Where the parties reduce an agreement to a writing which in view of its
completeness and specificity reasonably appears to be a complete agreement, it is
taken to be an integrated agreement unless it is established by other evidence that
the writing did not constitute a final expression.
(4) [Examples: A and B have a written contract for A’s house and an oral contract for
A’s car; the car is a distinct, separate agreement, so that the oral contract can be
sued upon. But if the oral contract was instead to paint the house, then the written
contract would be deemed integrated.]
ii) Restatement § 213 (Effect of Integrated Agreement on Prior Agreements (Parol
Evidence Rule))
(1) A binding integrated agreement discharges prior agreements to the extent that it is
inconsistent with them.
(2) Comment b.: Whether a binding agreement is completely integrated or partially
integrated, it supersedes inconsistent terms of prior agreements. To apply this
rule, the court must make preliminary determinations that there is an integrated
agreement and that it is inconsistent with the terms in question. Those
determinations are made in accordance with all relevant evidence, and require
interpretation both of the integrated agreement and of the prior agreement … The
integrated agreement must be given a meaning to which its language is reasonably
susceptible when read in the light of all the circumstances.
iii) Restatement § 214 (Evidence of Prior or Contemporaneous Agreements and
Negotiations)
(1) Agreements and negotiations prior to or contemporaneous with the adoption of a
writing are admissible in evidence to establish
(a) That the writing is or is not an integrated agreement;
(b) That the integrated agreement, if any, is completely or partially integrated;
(c) The meaning of the writing, whether or not integrated;
(d) Illegality, fraud, duress, mistake, lack of consideration, or other invalidating
cause;
(e) Ground for granting or denying rescission, reformation, specific performance,
or other remedy.
iv) Restatement § 216 (Consistent Additional Terms)
25
(1) Evidence of a consistent additional term is admissible to supplement an integrated
agreement unless the court finds that the agreement was completely integrated.
(2) An agreement is not completely integrated if the writing omits a consistent
additional agreed term which is
(a) Agreed to for separate consideration, or
(b) Such a term as in the circumstances might naturally be omitted from the
writing. [Mitchill]
v) U.C.C. § 2-202 (Final Written Expression: Parol or Extrinsic Evidence)
(1) Terms with respect to which the confirmatory memoranda of the parties agree or
which are otherwise set forth in a writing intended by the parties as a final
expression of their agreement with respect to such terms as are included therein
may not be contradicted by evidence of any prior agreement or of a
contemporaneous oral agreement but may be explained or supplemented
(a) By course of dealing or usage of trade or by course of performance; and
(b) By evidence of consistent additional terms unless the court finds the writing to
have been intended also as a complete and exclusive statement of the terms of
the agreement.
vi) Chirelstein: “When applicable, the parol evidence rule renders unenforceable oral
agreements entered into prior to the adoption of a written contract.”
vii) Partial versus total integration
(1) Partial integration: document is intended to be final, but not to include all details
of the parties’ agreement. No evidence of contradictory prior agreements can be
included.
(2) Total integration: final expression of an agreement, intended to include all details.
No evidence of prior agreements, regardless of whether they are contradictory or
supplementary.
(3) “Four corners rule”: judge determines whether integration is total or partial only
via the document itself.
(4) “Corbin” rule: judge considers all available evidence in determining integration
viii) Mitchill v. Lath (N.Y. 1928)
(1) Parties had a written contract for the sale of defendant’s farm. Defendant orally
promised as part of the transaction to remove an icehouse, but failed to keep this
promise; plaintiffs now sue for specific performance. Held, for defendant. The
oral agreement is unenforceable under the parol evidence rule, as determined by a
three-part test for admissibility of prior agreements:
(a) The agreement must be collateral, i.e., capable of being expressed in a
separate agreement.
(b) Agreement must not contradict express or implied provisions of the written
contract. (Expressio unius suggests that it would have been contradictory.)
(c) Agreement must be one that the parties wouldn’t ordinarily be expected to
embody in the writing.
(i) (This is the requirement which isn’t met here; the majority finds that if
such an agreement were made it would have been in the contract, given
how closely it was related to the sale of the land.)
(2) Chirelstein: “A prior oral agreement to sell separate property for an independent
consideration is obviously admissible; a prior agreement to pay more or less than
26
the price named in the written contract for the very things conveyed thereby is
obviously not. The hard case, of course, is one in which the prior oral agreement
adds to the obligations of one of the parties rather than contradicting a written
term, but at the same time plainly falls within the scope of the written contract
because it relates to the same subject-matter … Read strictly, Mitchill holds that
prior oral agreements are enforceable only if they entail separate consideration on
the part of the promisee; if not, the written contract is nearly always decisive of
the parties’ obligations.”
ix) Hatley v. Stafford (Ore. 1978)
(1) Hatley contracts with Stafford to rent land for growing wheat, leaving an option
for Stafford to buy the land back at no more than $70 per acre; Stafford then cuts
the wheat crop many months later and retakes possession. Hatley argues that
there was an oral agreement that the buyout provision would only last 30 to 60
days. Held, for plaintiff (Hatley). The oral agreement didn’t contradict any
express provisions of the written contract and thus wasn’t inconsistent. Nor was
the oral term necessarily one that would naturally be written; court notes
circumstances including the parties’ lack of business experience and bargaining
power, along with the unreasonable result that a too-literal reading of the contract
would produce.
x) Hayden v. Hoadley (Vt. 1920): court reads in an implied provision of “within a
reasonable time” in excluding parol evidence pertaining to deadline.
c) Ambiguity
i) Restatement § 201 (Whose Meaning Prevails)
(1) Where the parties have attached the same meaning to a promise or agreement or a
term thereof, it is interpreted in accordance with that meaning.
(2) Where the parties have attached different meanings to a promise or agreement or
a term thereof, it is interpreted in accordance with the meaning attached by one of
them if at the time the agreement was made
(a) That party did not know of any different meaning attached by the other, and
the other knew the meaning attached by the first party; or
(b) That party had no reason to know of any different meaning attached by the
other, and the other had reason to know the meaning attached by the first
party.
(3) Except as stated in this Section, neither party is bound by the meaning attached by
the other, even though the result may be a failure of mutual assent.
ii) Restatement § 204 (Supplying an Omitted Essential Term)
(1) When the parties to a bargain sufficiently defined to be a contract have not agreed
with respect to a term which is essential to a determination of their rights and
duties, a term which is reasonable in the circumstances is supplied by the court.
iii) Restatement § 212 (Interpretation of Integrated Agreement)
(1) The interpretation of an integrated agreement is directed to the meaning of the
terms of the writing or writings in the light of the circumstances, in accordance
with the rules stated in this Chapter.
(2) A question of interpretation of an integrated agreement is to be determined by a
trier of fact if it depends on the credibility of extrinsic evidence or on a choice
among reasonable inferences to be drawn from extrinsic evidence. Otherwise a
27
question of interpretation of an integrated agreement is to be determined as a
question of law.
(3) Comment d.: “General usage as to the meaning of words … is commonly a proper
subject for judicial notice without the aid of evidence extrinsic to the writing.
Historically, moreover, … questions of interpretation of written documents have
been treated as questions of law in the sense that they are decided by the trial
judge rather than by the jury…”
iv) (Note that the admissibility of extrinsic evidence in interpretation is different from the
parol evidence rule. Here the question isn’t whether evidence of prior agreements is
admissible, but rather whether evidence of meaning is.
v) Bethlehem Steel Co. v. Turner Construction Co. (N.Y. 1957)
(1) Contract contains an escalation clause. Held, for plaintiff; there is no real
ambiguity because escalation clauses always work the same way. “When a
contract is clear in and of itself, circumstances extrinsic to the document may not
be considered and where the intention of the parties may be gathered from the
four corners of the instrument, interpretation of the contract is a question of law
and no trial is necessary to determine the legal effect of the contract.”
(2) [Four corners rule: New York courts only consider extrinsic evidence of intent
when the contract language is deemed ambiguous, a question of law with
reference to the text alone.]
vi) Cofman v. Acton Corp. (D. Mass. 1991)
(1) Distinguishes contractual interpretation from interpretation of art. There is a
difference between accidental and intentional absence – namely, the intent of the
parties.
vii) Pacific Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co. (Cal. 1968)
(Traynor, C.J.)
(1) In a contract to remove and replace a cover on plaintiff’s turbine, defendant
agrees to perform “at its own risk and expense” and indemnify plaintiff against
“all loss and damage resulting from injury to property.” Issue is whether the
indemnification covered plaintiff’s property as well as third parties; defendant
seeks to admit evidence that it did not. Held, for defendant. Four-corners rule is
rejected in favor of a more purposivist approach. “The test of admissibility of
extrinsic evidence to explain the meaning of a written instrument is not whether it
appears to the court to be plain and unambiguous on its face, but whether the
offered evidence is relevant to prove a meaning to which the language of the
instrument is reasonably susceptible.” The court isn’t saying that extrinsic
evidence can be considered only after a finding of ambiguity, but rather that
circumstances have to be considered in determining whether there is in fact
ambiguity. (The question of ambiguity is one for the court only; thus the judge
would consider the extrinsic evidence and only then, if it meets the threshold of
ambiguity, pass it along to the jury.)
viii) Trustees of Boston College v. Big East Conference (Mass. 2004)
(1) B.C. wants to leave the Big East and join the ACC. To leave the Big East, the
rule is that you have to pay $1 million and delay 12 months, but a new
amendment, initially favored by Father Leahy of B.C., raises the penalty to $5
million and 27 months. Held, for B.C. The $5 million liquidated damages clause
28
is a penalty clause which shouldn’t be enforced. Furthermore, there is a conflict
between two sections of the Big East Constitution regarding amendment
procedures. Court rules that when two sections are in conflict, the more specific
trumps the more general.
ix) Frigaliment Importing Co. v. B.N.S. International Sales Corp.(S.D.N.Y. 1960)
(1) “The issue is, what is chicken?” Plaintiff thinks contract specified “young
chicken, suitable for broiling and frying”; defendant, “any bird of that genus that
meets contract specifications on weight and quality.” Held, for defendant.
“Defendant’s subjective intent would not be significant if this did not coincide
with an objective meaning of ‘chicken,” evidenced by USDA regulations,
dictionaries, some trade usage, and what plaintiff’s own spokesman had said.
Plaintiff had the burden of showing that the narrower meaning was being used,
and failed to meet this.
4) Policing the Bargain
a) Freedom of Contract and Public Policy Limitations
i) Two types of freedom (Isaiah Berlin): freedom to contract (with whomever you
choose) and freedom from contract (only making those contracts that you want).
(Unger)
(1) Unger’s paradigm: “Venice” (the world of contracts, business, law, masculine,
Old Testament, etc.) versus “Belmont” (private community, equity, feminine,
New Testament). “This is the form of life classical contract theory claims to
describe and seeks to define – an existence separated into a sphere of trade
supervised by the state and an area of private family and friendship largely
thought not wholly beyond the reach of contract. Each half of this life both denies
the other and depends upon it.”
ii) Sheets v. Teddy’s Frosted Foods, Inc. (Conn. 1980) (Peters, J.)
(1) Plaintiff, Sheets, is a quality control manager with a terminable-at-will contract;
he is fired in retaliation for attempting to ensure compliance with a food and drug
statute, and now sues for wrongful discharge and breach of an implied contract of
employment. Held, for plaintiff. The termination violated public policy. Even
though the contract was terminable at will, public policy imposes certain limits on
the right to terminate at will. Here, the employee’s choice was between
jeopardizing his employment or risking criminal sanction; he shouldn’t be put to
such a choice.
iii) In the Matter of Baby “M,” A Pseudonym for an Actual Person (N.J. 1988)
(1) Adoptive parents contract with a surrogate mother to carry and bear a child and
then turn it over; surrogate later refuses to turn it over, and adoptive parents sue.
Held, the contract is invalid because violative of public policy and state statutes
prohibiting acceptance of money for adoption. The child is turned over to the
adoptive parents not because of the contract but because it would be in the child’s
best interests. Issues with the contract include the disparate bargaining power
which may amount to a coercion of the surrogate; the difficulty of determining in
advance who will raise the child and of how attached the surrogate will be to it;
and the disregard of the child’s own best interests.
29
(2) Classic “Belmont/Venice” argument: “There are, in a civilized society, some
things that money cannot buy … values that society deems more important than
granting to wealth whatever it can buy, be it labor, love, or life.”
b) Duress
i) Robert Nozick: “A party is coerced when the offer that he is given is one that he
would rather not have been given” – e.g., “your money or your life.”
ii) Restatement § 174 (When Duress by Physical Compulsion Prevents Formation
of a Contract)
(1) If conduct that appears to be a manifestation of assent by a party who does not
intend to engage in that conduct is physically compelled by duress, the conduct is
not effective as a manifestation of intent.
iii) Restatement § 175 (When Duress by Threat Makes a Contract Voidable)
(1) If a party’s manifestation of assent is induced by an improper threat by the other
party that leaves the victim no reasonable alternative, the contract is voidable by
the victim.
(2) If a party’s manifestation of assent is induced by one who is not a party to the
transaction, the contract is voidable by the victim unless the other party to the
transaction in good faith and without reason to know of the duress either gives
value or relies materially on the transaction.
iv) Restatement § 176 (When a Threat is Improper)
(1) A threat is improper if
(a) What is threatened is a crime or a tort, or the threat itself would be a crime or
a tort if it resulted in obtaining property,
(b) What is threatened is a criminal prosecution,
(c) What is threatened is the use of civil process and the threat is made in bad
faith, or
(d) The threat is a breach of the duty of good faith and fair dealing under a
contract with the recipient.
(2) A threat is improper if the resulting exchange is not on fair terms, and
(a) The threatened act would harm the recipient and would not significantly
benefit the party making the threat,
(b) The effectiveness of the threat in inducing the manifestation of assent is
significantly increased by prior unfair dealing by the party making the threat,
or
(c) What is threatened is otherwise a use of power for illegitimate ends.
v) Silsbee v. Webber (Mass. 1898) (Holmes, J.)
(1) Plaintiff’s son worked for the defendant and confessed to embezzlement; plaintiff
met with defendant, who told her that he would have to tell the infirm and
unstable father about what had happened. (Defendant knew of the father’s
condition.) Afraid that the husband would go insane, plaintiff gave defendant a
share in her father’s estate, and now sues for restitution. Held, for plaintiff; case
is remanded for jury trial. “If a party obtains a contract by creating a motive from
which the other party ought to be free and which, in fact, is, and is known to be,
sufficient to produce the result, it does not matter that the motive would not have
prevailed with a differently constituted person, whether the motive be a
fraudulently created belief or an unlawfully created fear.” [Subjective standard]
30
(2) Dissent (Knowlton): calls for a more objective standard (“that degree of severity,
either threatened and impending or actually inflicted, which is sufficient to
overcome the mind and will of a person of ordinary firmness.”
vi) Austin Instruments, Inc. v. Loral Corp. (N.Y. 1971) (“economic duress”)
(1) Loral is awarded a Navy contract during WWII and has a subcontract with Austin,
which then bids on a second Navy contract via Loral; Austin tells Loral it will
stop delivering parts under the existing subcontract unless Loral consents to price
increases and awards it the second subcontract. Loral finally accepts after Austin
stops delivery; Austin now sues to recover the rest of the payment on the second
subcontract, while Loral sues for damages representing the price increases under
the first subcontract. Held, for defendant (Loral). Mere threat of breaching a
contract is not enough to establish economic duress unless the threatened party
had no other option – which Loral did not at the time. Nor could Loral have
accepted Austin’s breach and sued for damages, since it needed to obtain the parts
quickly in order to keep its government contract.
vii) Hackley v. Headley (Mich. 1881)
(1) Plaintiff sues to recover compensation for cutting logs after defendant only pays
$4000 out of the $6000 specified in the contract. Plaintiff accepted the amount
and signed a receipt, but claims duress because he needed the money immediately
and defendant had said “sue me if you want.” Held, for defendant. Duress here
was “of the goods,” not of the person. The plaintiff’s financial necessity wasn’t
created by the defendant’s action, unlike Loral or Alaska Packers.
viii) See also Alaska Packers, Batsakis, Waters, Goebel
c) Unconscionability
i) Restatement § 208 (Unconscionable Contract or Term)
(1) If a contract or term thereof is unconscionable at the time the contract is made a
court may refuse to enforce the contract, or may enforce the remainder of the
contract without the unconscionable term, or may so limit the application of any
unconscionable term as to avoid any unconscionable result.
(2) (Note that unconscionability is assessed at the time the contract was made, not in
hindsight.)
ii) U.C.C. § 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.
(2) Purposes: “The principle is one of the prevention of oppression and unfair
surprise and not of disturbance of allocation of risks because of superior
bargaining power.”
iii) Lochner v. New York (1905)
(1) New York law restricts bakery workers’ hours and is challenged under the 14th
Amendment. Issue is whether the law falls under the state’s police powers or
whether it interferes with rights to purchase and sell labor under the 14th
Amendment. Held, the law is unconstitutional as a violation of due process and
freedom to contract. There is no effect on the general public, only bakers; there is
31
no particular health hazard to bakers; and health laws like this could be passed to
interfere with just about all employment.
(2) Dissent (Harlan): notes unequal bargaining power of bakers and occupational
hazards
(3) Dissent (Holmes): “This case is decided upon an economic theory which a large
part of the country does not entertain … It is settled by various decisions of this
court that state constitutions and state laws may regulate life in many ways which
we as legislators might think as injudicious or if you like as tyrannical as this, and
which equally with this interfere with the liberty to contract … The Fourteenth
Amendment does not enact Mr. Herbert Spencer’s Social Statics.”
iv) Campbell Soup Co. v. Wentz (3d Cir. 1949)
(1) Campbell seeks specific performance from Wentz, a farmer. Held, for defendant.
The liquidated damages provision in the contract is unconscionable, as is a
provision excusing Campbell from accepting carrots under certain circumstances
while prohibiting the seller from selling anywhere else without Campbell’s
agreement.
v) Henningsen v. Bloomfield Motors, Inc. (N.J. 1960)
(1) Contract for car sale included a waiver of the implied warranty of merchantability
in fine print on the back of the form. Held, for plaintiff. The contract was a
standardized contract of adhesion, so that there was no bargaining with respect to
the waiver.
vi) Williams v. Walker-Thomas Furniture Co. (D.C. Cir. 1965)
(1) Contract for furniture sale contains a clause allowing seller to keep a balance on
monthly payments for all items and to repossess all items if there is a default on
one of them. Plaintiff challenges this as unconscionable. Held, remanded for a
determination of unconscionability. Court cites Henningsen: “Unconscionability
has generally been recognized to include an absence of meaningful choice on the
part of one of the parties together with contract terms which are unreasonably
favorable to the other party. Whether a meaningful choice is present in a
particular case can only be determined by consideration of all the circumstances
surrounding the transaction. In many cases the meaningfulness of the choice is
negated by a gross inequality of bargaining power. The manner in which the
contract was entered is also relevant to this consideration.”
(2) (Note that here the defendant doesn’t have monopoly power as in Henningsen;
Walker-Thomas is a “classic ghetto merchant.”)
(3) Chirelstein: “In finding, or at least strongly suggesting, that the cross-collateral
provision should be regarded as unconscionable, the Court in Walker-Thomas also
in effect decreed that Ms. Williams and other low-income people who want to buy
home-appliances on time must in the future pay more for credit … The question,
ultimately, is whether Judge Wright or the Walker-Thomas Furniture Company is
in a better position to make a ‘meaningful choice’ on behalf of Ms. Williams and
other consumers. The choice will be made, in effect, by one or the other. Hence,
arguably, the unconscionability doctrine operates not as a means of controlling or
intervening in people’s lives, but as a device by which the choice-function is
allocated to a court, rather than to the other contracting party, where the
circumstances show that the consumer cannot choose for herself.”
32
d) Duty to disclose
i) Restatement § 161 (When Non-Disclosure Is Equivalent to an Assertion)
(1) A person’s non-disclosure of a fact known to him is equivalent to an assertion that
the fact does not exist in the following cases only:
(a) Where he knows that disclosure of the fact is necessary to prevent some
previous assertion from being a misrepresentation or from being fraudulent or
material.
(b) Where he knows that disclosure of the fact would correct a mistake of the
other party as to a basic assumption on which the other party is making the
contract and if nondisclosure of the fact amounts to a failure to act in good
faith and in accordance with reasonable standards of fair dealing.
(c) Where he knows that disclosure of the fact would correct a mistake of the
other party as to the contents or effect of a writing, evidencing or embodying
an agreement in whole or in part.
(d) Where the other person is entitled to know the fact because of a relation of
trust and confidence between them.
ii) Restatement § 162 (When a Misrepresentation Is Fraudulent or Material)
(1) A misrepresentation is fraudulent if the maker intends his assertion to induce a
party to manifest his assent and the maker
(a) Knows or believes that the assertion is not in accord with the facts, or
(b) Does not have the confidence that he states or implies in the truth of the
assertion, or
(c) Knows that he does not have the basis that he states or implies for the
assertion.
(2) A misrepresentation is material if it would be likely to induce a reasonable person
to manifest his assent, or if the maker knows that it would be likely to induce the
recipient to do so.
iii) Restatement § 163 (When a Misrepresentation Prevents Formation of a
Contract)
(1) If a misrepresentation as to the character or essential terms of a proposed contract
induces conduct that appears to be a manifestation of assent by one who neither
knows nor has reasonable opportunity to know of the character or essential terms
of the proposed contract, his conduct is not effective as a manifestation of assent.
iv) Restatement § 164 (When a Misrepresentation Makes a Contract Voidable)
(1) If a party’s manifestation of assent is induced by either a fraudulent or a material
misrepresentation by the other party upon which the recipient is justified in
relying, the contract is voidable by the recipient.
(2) If a party’s manifestation of assent is induced by either a fraudulent or a material
misrepresentation by one who is not a party to the transaction upon which the
recipient is justified in relying, the contract is voidable by the recipient, unless the
other party to the transaction in good faith and without reason to know of the
misrepresentation either gives value or relies materially on the transaction.
v) Restatement § 168 (Reliance on Assertions of Opinion)
(1) An assertion is one of opinion if it expresses only a belief, without certainty, as to
the existence of a fact or expresses only a judgment as to quality, value,
authenticity, or similar matters.
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(2) If it is reasonable to do so, the recipient of an assertion of a person’s opinion as to
facts not disclosed and not otherwise known to the recipient may properly
interpret it as an assertion
(a) That the facts known to that person are not incompatible with his opinion, or
(b) That he knows facts sufficient to justify him in forming it.
vi) Restatement § 169 (When Reliance on an Assertion of Opinion Is Not Justified)
(1) To the extent that an assertion is one of opinion only, the recipient is not justified
in relying on it unless the recipient
(a) Stands in such a relation of trust and confidence to the person whose opinion
is asserted that the recipient is reasonable in relying on it, or
(b) Reasonably believes that, as compared with himself, the person whose opinion
is asserted has special skill, judgment, or objectivity with respect to the
subject matter, or
(c) Is for some other special reason particularly susceptible to a misrepresentation
of the type involved.
vii) Situations where there is a duty to disclose
(1) Statute or regulation requiring disclosure
(2) Positive efforts at concealment
(3) Lack of full disclosure amounting to a half-truth
(4) Supervening events or new information reveals to a party that his earlier goodfaith statement is no longer true
(5) Certain transactions, e.g., insurance
(6) Fiduciary duty
viii) Laidlaw v. Organ (1817) (Marshall, J.)
(1) Plaintiff has contract to purchase tobacco from defendant, which is properly
delivered; defendant then retakes possession two days later, outraged that plaintiff
didn’t tell him about the Treaty of Ghent ending the War of 1812 and causing
tobacco values to rise. (Defendant had asked plaintiff if he knew anything that
would enhance prices, and plaintiff had kept silent.) Held, that the case has to go
to the jury to determine whether or not the plaintiff’s silence constituted a denial.
Parties weren’t “bound to communicate,” but also “must take care not to say or do
any thing tending to impose on the other.”
(2) (Policy concerns: encouraging parties to do research, but discouraging insider
trading.)
ix) Reed v. King (Cal. App. 1983)
(1) Plaintiff purchases home from defendant where there had been a multiple murder;
plaintiff was never informed of this. Held, for plaintiff. Failure to disclose made
this contract one of either unilateral mistake or misrepresentation. The history
was a materially-affecting fact insofar as it had an effect on market value.
(2) (Distinguishable from Laidlaw insofar as here it is the seller who has information
that the buyer doesn’t; the seller should be expected to have more knowledge than
the buyer ever will, so that the duty of discovery shouldn’t fall on the buyer.)
x) Hill v. Jones (Ariz. App. 1986)
(1) Plaintiffs buy a home from defendants with history of termite infestation.
Defendants had hidden a damaged spot beneath a plant. Held, for plaintiffs.
Seller has a duty to disclose material facts which he knows about, knows that the
34
other party doesn’t know about, and which the other party couldn’t have found
out with reasonable inquiry. Materiality is a question for the jury.
5) Performance and Non-Performance
a) Express conditions
i) A condition can be either a condition precedent (which “must exist or occur before a
duty of immediate performance of a promise arises”) or a condition subsequent
(which “will extinguish a duty to make compensation for breach of contract after the
breach has occurred”); the former puts the burden of proof on the plaintiff, the latter
on the defendant. (Restatement, Second does away with this distinction.)
ii) Restatement § 227 (Standards of Preference With Regard to Conditions)
(1) In resolving doubt as to whether an event is made a condition of an obligor’s duty,
and as to the nature of such an event, an interpretation is preferred that will reduce
the obligee’s risk of forfeiture, unless the event is within the obligee’s control or
the circumstances indicate that he has assumed the risk [Parsons].
iii) Gray v. Gardner (Mass. 1821)
(1) Defendant contracts to buy sperm oil from plaintiff, paying unconditionally 65
cents per gallon and another 85 cents per gallon unless a greater quantity of oil
arrives this year between April 1 and October 1 than the previous year. Issue is
whether a certain ship, the Lady Adams, “arrived” at Nantucket on October 1,
when it had not yet anchored. Held, for plaintiff. The condition is interpreted
strictly, so that the condition isn’t met until the ship is anchored. Burden is on
defendant to show that this condition has not met. The condition was “a kind of
wager as to the quantity of oil, which should arrive at the ports mentioned, before
a certain period.”
(2) This is a condition subsequent, not condition precedent. (Conditions precedent
put the burden of proof on the plaintiff; conditions subsequent, on the defendant.)
(3) (Fried: Strict enforcement here is analogous to expiry of insurance policies. You
wouldn’t get cut any slack because your home burned down the day after your fire
insurance policy expired.)
iv) Parsons v. Bristol Dev. Co. (Cal. 1965) (Traynor, C.J.)
(1) Bristol hires Parsons as an architect; Parsons starts work on the second phase of
the project and is paid 25% of his fee before defendant fails to get a construction
loan on which the second phase was contingent. Plaintiff sues for restitution.
Issue is whether or not the obtainment of a loan was a condition. Held, for
defendant. Loan was a condition. Plaintiff had gone ahead with work despite
knowing that funds hadn’t yet been obtained. He knew or should have known
that he was only going to get paid out of the loan money, and assumed the risk.
(2) Distinguishable from Algernon Blair (where plaintiff also sought restitution)
because here there was no breach by the defendant; the contract entitled Bristol to
halt the project if they didn’t get financing. Defendant hadn’t wrongly benefited.
b) Constructive conditions
i) Restatement § 234 (Order of Performances)
(1) Where all or part of the performances to be exchanged under an exchange of
promises can be rendered simultaneously, they are to that extent due
simultaneously, unless the language or the circumstances indicate the contrary.
35
ii) Restatement § 238 (Effect on Other Party’s Duties of a Failure to Offer
Performance)
(1) Where all or part of the performances to be exchanged under an exchange of
promises are due simultaneously, it is a condition of each party’s duties to render
such performance that the other party either render or, with manifested present
ability to do so, offer performance of his part of the simultaneous exchange.
[Kingston]
iii) U.C.C. § 2-611 (Retraction of Anticipatory Repudiation)
(1) Until the repudiating party’s next performance is due he can retract his
repudiation unless the aggrieved party has since the repudiation cancelled or
materially changed his position or otherwise indicated that he considers the
repudiation final.
iv) U.C.C. § 2-307 (Delivery in Single Lot or Several Lots)
(1) Unless otherwise agreed all goods called for by a contract for sale must be
tendered in a single delivery and payment is due only on such tender but where
the circumstances give either party the right to make or demand delivery in lots
the price if it can be apportioned may be demanded for each lot.
v) Nichols v. Raynbred (King’s Bench 1615); Kingston v. Preston (King’s Bench 1773)
(1) Before Kingston v. Preston, which established mutual interdependence, courts
construed promises in a bilateral contract as independent. If A doesn’t keep his
promise to B, B can sue; if B in turn doesn’t fulfill his promise, A can sue back.
(2) Kingston: plaintiff apprenticed himself to a merchant for a number of years under
the agreement that he would get the business upon the master’s retirement
provided that he could produce the requisite security. Defendant refused to hand
over the business after plaintiff failed to provide the security. Held, for defendant.
The apprentice’s security was a condition precedent, so that the defendant’s
promise was not independently enforceable.
(3) Chirelstein: “As Lord Mansfield observed in Kingston … bilateral contracts can
generally be divided into two subclasses – those that contemplate a simultaneous
exchange of performances and those that assume a performance by one party in
advance of, and as a condition to, performance by the other.”
vi) Lafayette Place Associates v. Boston Redevelopment Authority (Mass. 1998) (Fried,
J.)
(1) Contract was for LPA to buy a parcel of land and produce the money by the end
of the year, the “drop-dead date.” LPA contends that the city breached by not
turning over the land at that date; the city argues that LPA wasn’t ready to
perform by that date. Held, for the city. “One party cannot put the other in
default unless he is ready, able, and willing to perform and has manifested this by
some offer of performance.” This is in keeping with the principle of Kingston: if
you show up on the date performance is due, you can only put the other party in
default if he has already repudiated the contract or else if you yourself are ready,
willing, and able to pay.
vii) Conley v. Pitney Bowes (8th Cir. 1994)
(1) Plaintiff is injured in an accident and denied disability benefits. Employment
contract required that plaintiff exhaust all administrative remedies, but the letter
denying plaintiff’s benefits didn’t inform him of appeal procedures. Held, for
36
plaintiff. The duty to inform plaintiff of appeal procedures is a constructive
condition precedent to the plaintiff’s duty to exhaust administrative procedures,
since it logically has to come first.
viii) Stewart v. Newbury (N.Y. 1917)
(1) Plaintiff contracts to build for defendant; payment schedule is never written out,
and plaintiff assumes payment “in the usual manner”: 85% every thirty days and
15% at completion. Defendants refused to pay until completion; plaintiff
responded by breaching, and now sues for expectation damages (i.e., the
contractual payment). Held, for defendant. “Where a contract is made to perform
work and no agreement is made as to payment, the work must be substantially
performed before payment can be demanded.” (Builder might have been entitled
to restitution damages capped by the contract price, on the other hand.)
ix) Howard v. Federal Crop Insurance Corp. (4th Cir. 1976)
(1) Plaintiff sues to recover loss on tobacco crop from insurance company, which
claims that by cutting the damaged tobacco and plowing the field the plaintiffs
violated a portion of the policy which was a condition precedent. Issue is whether
the clause in question was a covenant or a condition precedent. Held, for
plaintiffs; the clause was a covenant. Presumption is in favor of promises
(covenants) over conditions precedent when there is any ambiguity; also in
accordance with Restatement § 227, reducing risk of “forfeiture.” Plaintiffs
“breached” this covenant, but this doesn’t excuse defendants from performance.
(Practical issue: how can defendants’ “damages” from plaintiffs’ plowing be
assessed?)
c) Impossibility and Impracticability
i) Restatement § 263 (Destruction, Deterioration or Failure to Come Into Existence
of Thing Necessary for Performance)
(1) If the existence of a specific thing is necessary for the performance of a duty, its
failure to come into existence, destruction, or such deterioration as makes
performance impracticable is an event the non-occurrence of which was a basic
assumption on which the contract was made.
ii) Taylor v. Caldwell (King’s Bench 1863)
(1) Plaintiff contracts to use defendant’s music hall for a production; the music hall
burns down (through neither party’s fault) before the period specified, and the
plaintiff sues for lost profits. Held, for defendant. Although no stipulation was
made in the contract, the court reads in an implied condition that the music hall
continue to exist. “In contracts in which the performance depends on the
continued existence of a given person or thing, a condition is implied that the
impossibility of performance arising from the perishing of the person or thing
shall excuse the performance.” Parties undertook their obligations with the
assumption that the music hall would continue to be there.
iii) Tompkins v. Dudley (N.Y. 1862)
(1) Builder contracts to build a school, which burns down before completion; trustees
of the school district sue builder for money advanced by them on the contract and
for damages from nonperformance. Held, for plaintiffs. Here, the defendant isn’t
the builder himself but rather his insurers. Distinguishable from Taylor insofar as
the bonding company is in the business of insuring against losses like this.
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iv) American Trading and Production Corp. v. Shell International Marine, Ltd. (2d Cir.
1972)
(1) Ship owner sues the charterer (Shell) for quantum meruit after the Suez Canal was
closed and the cargo was shipped around the Cape of Good Hope instead.
Plaintiff argues that the closure of the canal rendered the original contract
impossible and thus discharged it, and that they are now entitled to compensation
for the benefit they provided. Held, for defendant. There was no contract to
deliver via the Suez Canal, merely a contract to deliver. The Suez Canal might
have been the best method of delivery but not the exclusive one. Additional
expense alone doesn’t establish commercial impracticability. Owner had
responsibility to insure, and could have mitigated loss by not continuing on the
Suez route despite the risk of closure.
d) Frustration of Purpose
i) Restatement § 265 (Discharge by Supervening Frustration)
(1) Where, after a contract is made, a party’s principal purpose is substantially
frustrated without his fault by the occurrence of an event the non-occurrence of
which was a basic assumption on which the contract was made, his remaining
duties to render performance are discharged, unless the language or the
circumstances indicate the contrary. [Krell]
ii) Restatement § 377 (Restitution in Cases of Impracticability, Frustration, NonOccurrence of Condition or Disclaimer by Beneficiary)
(1) A party whose duty of performance does not arise or is discharged as a result of
impracticability of performance, frustration of purpose, non-occurrence of a
condition or disclaimer by a beneficiary is entitled to restitution for any benefit
that he has conferred on the other party by way of part performance or reliance.
[Fibrosa rule]
(2) Qualified by Restatement § 272(2): “the court may grant relief on such terms as
justice requires, including protection of the parties’ reliance interests.”
iii) U.C.C. § 2-614 (Substituted Performance)
(1) Where without fault of either party the agreed berthing, loading, or unloading
facilities fail or an agreed type of carrier becomes unavailable or the agreed
manner of delivery otherwise becomes commercially impracticable but a
commercially reasonable substitute is available, such substitute performance must
be tendered and accepted. [Suez Canal cases]
iv) U.C.C. § 2-615 (Excuse by Failure of Presupposed Conditions)
(1) Except so far as a seller may have assumed a greater obligation and subject to the
preceding section on substituted performance:
(a) Delay in delivery or non-delivery in whole or in part by a seller who complies
with paragraphs (b) and (c) is not a breach of his duty under a contract for sale
if performance as agreed has been made impracticable by the occurrence of a
contingency the non-occurrence of which was a basic assumption on which
the contract was made 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.
(b) Where the causes mentioned in paragraph (a) affect only a part of the seller’s
capacity to perform, he must allocate production and deliveries among his
38
customers but may at his option include regular customers not then under
contract as well as his own requirements for further manufacture. He may so
allocate in any manner which is fair and reasonable.
(c) The seller must notify the buyer seasonably that there will be delay or nondelivery and, when allocation is required under paragraph (b), of the estimated
quota thus made available for the buyer.
(2) Purpose: “This section excuses a seller from timely delivery of goods contracted
for, where his performance has become commercially impracticable because of
unforeseen supervening circumstances not within the contemplation of the parties
at the time of contracting.”
v) U.C.C. § 2-616 (Procedure on Notice Claiming Excuse)
(1) Where the buyer receives notification of a material or indefinite delay or an
allocation justified under the preceding section he may by written notification to
the seller as to any delivery concerned, and where the prospective deficiency
substantially impairs the value of the whole contract under the provisions of this
Article relating to breach of installment contracts, then also as to the whole,
(a) Terminate and thereby discharge any unexecuted portion of the contract; or
(b) Modify the contract by agreeing to take his available quota in substitution.
vi) Different from mistake (Raffles, Sherwood) because mistake existed at the time the
contract was made (ex ante); frustration occurs after the making of the contract (ex
post).
vii) Krell v. Henry (Court of Appeal 1903)
(1) Defendant rents plaintiff’s flat to view Edward VII’s coronation parade, and
refuses to pay after the coronation is postponed due to Edward’s illness. Held, for
defendant. Occurrence of the coronation was an implied condition of the contract.
The contract was founded on the use of the flat for viewing the parade, and the
flat had been advertised for that very purpose.
(2) Defendant also made a counterclaim for the 25 pounds he had already paid as a
deposit, but this was dismissed. Why should the plaintiff get this windfall? Why
can’t there be a recover in quantum meruit?
(a) Chirelstein: “A possible inference is that Henry was prepared to view the
deposit as a kind of liquidated damage figure – as if the parties had agreed that
Krell could retain that amount (but would receive no more) even if the parade
was cancelled – and that the Court, in effect, approved what it took to be a
reasonable settlement of a difficult controversy.”
viii) Fibrosa (House of Lords 1943)
(1) British manufacturers agree to install textile machineries for a Polish company;
this becomes impossible after WWII begins. Held, that Fibrosa is entitled to
restitution of the 1000 pounds it paid the manufacturers, without any deduction
for the manufacturers’ reliance expenses.
(2) Parliament responds with the Law Reform (Frustrated Contracts) Act, allowing
restitution along with deduction of reliance expenses if it is “just to do so.” But
even so these reliance expenses are only deductible from the restitution; there is
still no recovery for “naked reliance” under this rule.
ix) Angus v. Scully: builder contracts to move a house which burns down halfway. Held,
that the builder is entitled to quantum meruit because he produced a benefit by
39
moving the house halfway. Fried likes this ruling. What happened was a
“contractual accident” envisioned by neither party, so that the parties are “in the boat
together” and it makes sense for them to split the loss.
e) Perfect-tender rule
i) U.C.C. § 2-601 (Buyer’s Rights on Improper Delivery)
(1) Subject to the provisions of this Article on breach in installment contracts and
unless otherwise agreed under the sections on contractual limitations of remedy, if
the goods or the tender fail in any respect to conform to the contract, the buyer
may
(a) Reject the whole; or
(b) Accept the whole; or
(c) Accept and commercial unit or units and reject the rest.
ii) U.C.C. § 2-508 (Cure by Seller of Improper Tender or Delivery; Replacement)
(1) Where any tender or delivery by the seller is rejected because non-conforming
and the time for performance has not yet expired, the seller may seasonably notify
the buyer of his intention to cure and may then within the contract time make a
conforming delivery.
(2) Where the buyer rejects a non-conforming tender which the seller had reasonable
grounds to believe would be acceptable with or without money allowance the
seller may if he seasonably notifies the buyer have a further reasonable time to
substitute a conforming tender. [Bartus]
iii) Oshinsky v. Lorraine Mfg. Co.: failure to deliver by specified date constitutes
nonconforming tender.
iv) Filley v. Pope: shipment from Leith rather than Glasgow is nonconforming (probably
because letters of credit are issued against the bill of lading from a specified ship)
v) Prescott and Co. v. J.B. Powles and Co.: only 240 of 300 specified crates of onions
are shipped due to WWI restrictions; buyer refuses to accept, and seller resells at a
loss and sues buyer for the difference; held, for buyer. Seller can’t sue on this
contract without full performance, even if he might have had a defense had he been
sued.
(1) Probably different under the U.C.C. § 2-612 (no “substantial impairment” of
value of the whole contract)
vi) Bartus v. Ricciardi: seller doesn’t deliver specified hearing aid model but rather a
“new and improved” model which buyer rejects; buyer then refuses to buy the
original bargained-for model. Held, for seller. Under U.C.C. § 2-508, seller has
option to cure and may substitute a conforming tender if there were reasonable
grounds to believe that there would be acceptance, even if the contractual period had
expired.
vii) Beck and Pauli Lithographing Co. v. Colorado Milling and Elevator Co.: different
standard for unique goods/artistic labor because these aren’t resaleable. Defendant
entitled to damages for delay, but can’t refuse the goods.
viii) Plante v. Jacobs (Wis. 1960)
(1) Plaintiff builder seeks to recover unpaid contract balance from defendants, who
counterclaim that there was no substantial performance, breach of contract, and
faulty workmanship, including a wall that was one foot off where it was supposed
to be. Held, for plaintiff. Unless a contract is a sale of goods, substantial
40
performance means that the promisor has got to keep his promise. Holding that
the defendants don’t need to pay would amount to a forfeiture.
(2) Cf. Jacob and Youngs v. Kent (but even more troubling here because living-room
dimensions are probably more important than the pipe brand – thus making this
even more of an “ugly fountain.”)
6) Remedies
a) Expectation damages
i) Aim of expectation damages (the normal measure) is to “put the promise in as good a
position as he would have occupied had the defendant performed his promise.”
ii) Restatement § 347 (Measure of Damages in General)
(1) Subject to the limitations stated in §§ 350-53, the injured party has a right to
damages based on his expectation interest as measured by
(a) The loss in value to him of the other party’s performance caused by its failure
or deficiency, plus
(b) Any other loss, including incidental or consequential loss, caused by the
breach, less
(c) Any cost or other loss that he has avoided by not having to perform.
iii) Restatement § 348 (Alternatives to Loss in Value of Performance)
(1) If a breach delays the use of property and the loss in value to the injured party is
not proved with reasonable certainty, he may recover damages based on the rental
value of the property or on interest on the value of the property.
(2) If a breach results in defective or unfinished construction and the loss in value to
the injured party is not proved with sufficient certainty, he may recover damages
based on
(a) The diminution of the market price of the property caused by the breach, or
(b) The reasonable cost of completing performance or of remedying the defects if
that cost is not clearly disproportionate to the probable loss in value to him.
[“Economic waste” rule]
(3) If a breach is of a promise conditioned on a fortuitous event and it is uncertain
whether the event would have occurred had there been no breach, the injured
party may recover damages based on the value of the conditional right at the time
of breach.
(4) Comment c.: Illustrations
(a) A contracts to build a house for B for $100,000 but repudiates after doing part
of the work and being paid $40,000; other builders can complete it for
$80,000. B gets $20,000 in damages: $80,000 cost of completion less the
$60,000 cost avoided.
(b) A contracts to build a house for B for $100,000, but its foundations crack;
repairs cost $30,000 but increase the value by only $20,000. B is entitled to
the $30,000 cost of remedying the defects. (Not “clearly disproportionate.”)
iv) U.C.C. § 2-708 (Seller’s Damages for Non-Acceptance or Repudiation)
(1) Subject to subsection (2) and to the provisions of this Article with respect to proof
of market price, the measure of damages for non-acceptance or repudiation by the
buyer is the difference between the market price at the time and place for tender
and the unpaid contract price together with any incidental damages provided in
this Article, but less expenses saved in consequence of the buyer’s breach.
41
(2) If the measure of damages provided in subsection (1) is inadequate to put the
seller in as good a position as performance would have done then the measure of
damages is the profit (including reasonable overhead) which the seller would have
made from full performance by the buyer, together with any incidental damages
provided in this Article, due allowance for costs reasonably incurred and due
credit for payments or proceeds of resale.
v) U.C.C. § 2-712 (“Cover”; Buyer’s Procurement of Substitute Goods)
(1) After a breach within the preceding section the buyer may “cover” by making in
good faith and without unreasonable delay any reasonable purchase of or contract
to purchase goods in substitution for those due from the seller.
(2) The buyer may recover from the seller as damages the difference between the cost
of cover and the contract price together with any incidental or consequential
damages as hereinafter defined (§ 2-715), but less expenses saved in consequence
of the seller’s breach.
(3) Failure of the buyer to effect cover within this section does not bar him from any
other remedy.
vi) U.C.C. § 2-713 (Buyer’s Damages for Non-Delivery or Repudiation)
(1) Subject to the provisions of this Article with respect to proof of market price, the
measure of damages for non-delivery or repudiation by the seller is the difference
between the market price at the time when the buyer learned of the breach and the
contract price together with any incidental and consequential damages provided in
this Article, but less expenses saved in consequence of the seller’s breach.
(2) Market price is to be determined as of the place for tender or, in cases of rejection
after arrival or revocation of acceptance, as of the place of arrival.
vii) Hawkins v. McGee (N.H. 1929)
(1) Plaintiff goes in for a hand surgery, with doctor guaranteeing to make the hand
“100% perfect”; instead, the outcome is a disaster. Trial court awards plaintiff
damages to compensate for the permanent injury resulting from the operation as
well as the pain and suffering caused by the operation; defendant appeals
damages. Held, for defendant. The measure of expectation damages should be
the difference between the value of the promised perfect hand and the value of the
hand as it was after the operation (diminished value). Pain and suffering
shouldn’t be compensated because they would be incident even to a successful
surgery and were part of plaintiff’s “consideration.”
viii) Groves v. John Wunder Co. (Minn. 1939)
(1) Wunder leases Groves’s sand and gravel property, and agrees to leave it at a
uniform grade at the end of the lease, which he never does. Trial court awards
Groves $12,000 – the value of the land had it been graded minus its current value
(i.e., the same measure as Hawkins). Groves appeals, seeking instead the cost of
completion (estimated at $60,000). Held, for plaintiff. Court notes that Wunder
“willfully and intentionally” breached the contract. Court also distinguishes
contracts to construct improvements like this from situations where a completed
structure needs to be remedied at disproportionate cost (“economic waste” – i.e.,
Jacob and Youngs).
(2) (The reason that the difference between cost of completion and diminished value
was so vast was due to the Great Depression.)
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(3) Chirelstein: “Should we therefore regard the Court’s decision as having provided
a ‘windfall’ – that is, an undeserved benefit – to Groves and a corresponding
penalty to Wunder? Answer: no. As the court implied, Groves, as lessor, had
really paid in advance for the grading work when it agreed to accept a rent of
$105,000. If Wunder had not undertaken to grade the land at the expiration of the
lease, then, obviously, Groves would have had to look forward to doing that job
itself and at its own expense. In the latter event, the rent initially agreed to by the
parties would necessarily have been higher … There was no evidence whatever
that they intended their duties to be affected by ups and downs in the real estate
market (or the stock market or the economy in general).”
ix) Peevyhouse v. Garland Coal and Mining Co. (Okl. 1962)
(1) Plaintiffs lease their farm to Garland for five years, with lease providing that
Garland will fill in all strip-mining pits and smooth the surface at the end.
Plaintiffs sue for cost-of-completion damages but are awarded only diminished
value damages. Held, diminished value damages are proper. Court rejects
Groves, and says that the purpose of the contract was just the economic recovery
of coal so that the remedial work was only “incidental to the main object
involved.” Court doesn’t think the Peevyhouses should get a “windfall,” i.e., a
greater amount in damages than they would have gained by full performance.
(2) Fried thinks both Peevyhouse and Groves are wrongly decided. The farm in
Peevyhouse has a personal, noneconomic value for the plaintiffs which Groves’
land does not, so that the Peevyhouses should be even more entitled to cost-ofcompletion damages. Peevyhouse is an “ugly fountain” case under Restatement §
346, Groves a “dry oil well.” If the Peevyhouses are limited to diminished-value
damages, they can never contract to have their land repaired, because everyone
that comes and contracts with them can promise to do the contract, breach it, and
not have to pay damages.
x) Jacob and Youngs, Inc. v. Kent (N.Y. 1921) (Cardozo, J.)
(1) Defendant contracts to have plaintiff build a home with “Reading” pipe; plaintiff
uses otherwise identical “Cohoes” pipe. Defendant directs plaintiff to reinstall the
pipe at great expense; plaintiff refuses to do so and seeks payment. Held, for
plaintiff. There was no difference whatsoever in value between the two kinds of
pipe, and the brand name doesn’t matter; Cardozo doesn’t think the kind of pipe
should mean anything to a homeowner. Since plaintiffs substantially performed,
the defendant isn’t relieved of his duty to pay.
(2) Cardozo also notes that the breach wasn’t willful or intentional, just careless.
Might willful breach be grounds for imposing cost-of-completion damages
instead (see Groves)?
(3) Dissent (McLaughlin): plaintiff didn’t perform its contract, and defendant is
entitled to get what he bargained for.
(4) Chirelstein: “In a sense, therefore, the essence of the Jacob and Youngs decision
resides in a kind of ‘finding’ by Judge Cardozo that some consumer preferences
are simply too remote and idiosyncratic to be taken seriously.”
xi) Acme Mills and Elevator Co. v. Johnson (Ky. 1911)
(1) Farmer makes a forward contract to sell July 29 wheat to plaintiff at $1.03 a
bushel. Instead he sells to someone else on July 13 at $1.16 a barrel. On July 24
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the price of wheat plummets, and on July 29, the date of delivery, the price was
only a dollar a bushel – less than the contract price. Acme sues for the $0.13 per
barrel profit earned by Johnson (i.e., restitution damages). Held, for defendant.
“In contracts for the delivery of personal property at a fixed time and at a
designated place, the vendee is entitled to damages against the vendor for a failure
to comply and the measure of damages is the difference between the contract
price and the market price of the property at the place and time of delivery.”
Johnson’s breach was efficient and actually to Acme’s benefit, since the cost of
wheat went down at the time of breach. Any argument for Acme would have to
hinge on the idea that it was Acme’s wheat which Johnson sold on July 13; but
Acme hadn’t bought July 13 wheat worth $1.16, rather July 29 wheat worth $1.
xii) Laurin v. DeCarolis Construction Co., Inc. (Mass. 1977)
(1) Seller removes gravel from the lot of land he sells to buyer; buyer seeks
compensation for value of removed gravel. Held, for buyer. Buyer is awarded
the fair market value of the gravel removed, even though the property value is the
same as it was before removal. Plaintiff bought the land as it was, so that the
gravel was part of the deal in contemplation; it is distinguishable from Acme Mills
insofar as the commodity here is not fungible.
xiii) Louise Caroline Nursing Home, Inc. v. Dix Construction Corp. (Mass. 1972)
(1) “Compensation is the value of the performance of the contract, that is, what the
plaintiff would have made had the contract been performed … The plaintiff is
entitled to be made whole and no more … The measure of the plaintiff’s damages
… can only be in the amount of the reasonable cost of completing the contract
and repairing the defendant’s defective performance less such part of the contract
price as has not been paid.” Here, it cost plaintiff no more to get the job
completed by another contractor, so that plaintiff wasn’t entitled to any damages.
xiv) Efficient breach theory
(1) Posner (and Holmes) are big proponents: goods find their way to those who value
them most.
(2) Friedmann: takes a deontological approach, emphasizing the breach of a promise.
If we have efficient breach, why don’t we recognize “efficient conversion?” A
converter can’t simply take your property and pay the market price if it’s worth
more to them.
(3) Craswell: can a contract be disaggregated?
b) Limits on recovery of expectation damages
i) Duty to mitigate
(1) Restatement § 350 (Avoidability as a Limitation on Damages)
(a) Except as stated in Subsection (2), damages are not recoverable for loss that
the injured party could have avoided without undue risk, burden, or
humiliation.
(b) The injured party is not precluded from recovery by the rule stated in
Subsection (1) to the extent that he has made reasonable but unsuccessful
efforts to avoid loss.
(2) Rockingham County v. Luten Brdge Co. (4th Cir. 1929)
(a) County revokes bridge contract (with some uncertainty) after contractor has
expended $1900 on labor; contractor continues to build bridge anyway, then
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sues for its contract price. Held, for defendants. Plaintiff can only recover the
amount expended prior to the revocation plus the profits that would have been
realized had the project been completed. Plaintiff has a duty not to increase
the damages resulting from defendant’s breach rather than building what
amounted to a useless bridge.
(b) (Counterargument: might Luten have been unsure as to whether the revocation
was definite? Were they really seeking to pile on the damages or were they
just afraid of being sued for breach themselves?)
(3) Parker v. Twentieth-Century Fox Film Corp. (Cal. 1970)
(a) Plaintiff (Shirley MacLaine) contracted with defendant to play the lead in a
musical which was canceled; defendant then offered her a role in a Western
instead, along with a slightly different contract (e.g., no approval rights).
MacLaine declined, and sued for money due under the contract and damages.
Defendant argues she failed to mitigate by declining the Western role. Held,
for plaintiff. The general rule is that a wrongfully discharged employee is
entitled to the agreed-upon salary less the amount earned from other
employment; but that other employment must be comparable. Defendant had
the burden of showing that the other employment was substantially similar.
The Western was “different and inferior” employment, which MacLaine had
no duty to accept.
(b) Distinguishable from Luten Bridge: Luten involved a duty not to aggravate;
this case involves a duty to affirmatively mitigate via an entirely different
employment contract.
(4) Billetter v. Posell (Cal. 1949)
(a) Defendants employ plaintiff as a “floor lady and designer,” and tell her that
they have decided to employ someone else in her role while offering her the
place of another floor lady at a lower salary. Plaintiff refuses and then sues
for the remainder of her salary. Held, for plaintiff. “An employee is not
required to perform the same work for less pay in mitigation of damages.”
Nor are plaintiff’s unemployment benefits deductible as compensation
received in mitigation.
(5) Leingang v. City of Mandan Weed Board (N.D. 1991): plaintiff’s constant
overhead costs are not included as deductible cost-of-performance expenses.
ii) Consequential damages
(1) Restatement § 351 (Unforeseeability and Related Limitations on Damages)
(a) Damages are not recoverable for loss that the party in breach did not have
reason to foresee as a probable result of the breach when the contract was
made. [Hadley]
(b) Loss may be foreseeable as a probable result of a breach because it follows
from the breach
(i) In the ordinary course of events; or
(ii) As a result of special circumstances beyond the ordinary course of events,
that the party in breach had reason to know.
(c) A court may limit damages for foreseeable loss by excluding recovery for loss
of profits, by allowing recovery only for loss incurred in reliance, or otherwise
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(2)
(3)
(4)
(5)
if it concludes that in the circumstances justice so requires in order to avoid
disproportionate compensation.
Restatement § 353 (Loss Due to Emotional Disturbance)
(a) Recovery for emotional disturbance will be excluded unless the breach also
caused bodily harm or the contract or the breach is of such a kind that serious
emotional disturbance was a particularly likely result.
U.C.C. § 2-715 (Buyer’s Incidental and Consequential Damages)
(a) Incidental damages resulting from the seller’s breach include expenses
reasonably incurred in inspection, receipt, transportation, and care and custody
of goods rightfully rejected, any commercially reasonable charges, expenses
or commissions in connection with effecting cover and any other reasonable
expense incident to the delay or other breach.
(b) Consequential damages resulting from the seller’s breach include
(i) 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
(ii) Injury to person or property proximately resulting from any breach of
warranty.
Hadley v. Baxendale (Court of Exchequer 1854)
(a) Plaintiffs are millers whose shaft breaks; they contract with defendants to
have it sent “immediately” and hastily to the engineer for repair, but the
defendants delay. Plaintiffs sue for lost profits during the time in which the
mill was inoperative. Held, for defendant. Plaintiffs can’t recover because
the loss was not a foreseeable result of the breach. Damages should be “such
as may fairly and reasonably be considered either arising naturally … from
such breach of contract itself, or such as may reasonably be supposed to have
been in the contemplation of both parties, at the time they made the contract,
as the probable result of the breach of it.” Had the circumstances been
known, the defendant might have sought to limit its liability under the terms
of the contract.
(b) (Implication: was plaintiff the cheapest cost avoider, since most mills would
be expected to keep a backup shaft in their possession?)
(c) Chirelstein: “The rule of the Hadley case – that damages are not recoverable
for loss that was not reasonably foreseeable by the party in breach at the time
of contracting – can be linked to the familiar proposition that ‘contract,’
unlike tort, is a species of absolute liability … Coupling absolute liability for
breach with exposure to unlimited consequential damages, however, could be
devastating to the promisor and especially in the case of routine over-thecounter transactions like the carriage contract in Hadley would impose a risk
upon the promisor which far outweighs the modest benefit that he might
expect to realize from the transaction itself.”
Lamkins v. International Harvester (Ark. 1944): plaintiff buys lights for his
tractor which are delivered a year late, then sues for consequential damages; held,
for defendant, since nothing about the transaction shows that defendant knew or
should have known that the plaintiff expected him to take on such huge liability
for a night-grown crop.
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(6) Victoria Laundry (Windsor) Ltd. v. Newman Industries, Ltd. (K.B. 1949):
defendant delivers a boiler six months late; held, for plaintiffs. Plaintiffs can
recover loss of business profits because they were reasonably foreseeable;
defendant knew it was supplying a boiler for industrial laundry use.
(7) Heron II (House of Lords 1967)
(a) Defendant’s ship is under contract to transport sugar from Romania to Basra;
as a result of their delay, the price of sugar has fallen because another ship had
arrived first. Held, for plaintiffs; plaintiffs are entitled to the difference
between price at delivery and the price at the contracted-for time of delivery.
Part of the risk entailed in shipping.
(8) Bebchuk and Shavell: the most economically-efficient system for consequential
damages is one in which only the high-valuation buyers communicate their
valuation to sellers, which is precisely the outcome to which Hadley creates an
incentive.
iii) Uncertain damages
(1) Restatement § 352 (Uncertainty as a Limitation on Damages)
(a) Damages are not recoverable for loss beyond an amount that the evidence
permits to be established with reasonable certainty.
(2) Freund v. Washington Square Press, Inc. (N.Y. 1974)
(a) Freund, an author, signs a publishing contract with WSP’s predecessor, which
agrees to give him an advance and to publish if it doesn’t terminate within 60
days of receipt. After granting the advance, they refuse to publish, having
never terminated the agreement within the allotted period. Freund sues for
damages and specific performance, with damages for delay in academic
promotion, loss of royalties, and cost of self-publication. Held, for defendant.
There was no contract to print or bind the book, only to publish it in the way
that commercial publishers do, so that the cost of self-publication was
properly awarded in the trial court. Royalties were not ascertained with
adequate certainty.
(b) (Perhaps Freund should have sued for reliance damages instead?)
(3) Fera v. Village Plaza, Inc. (Mich. 1976): sufficient testimony to estimate lost
profits for a new business.
c) Reliance damages
i) Restatement § 349 (Damages Based on Reliance Interest)
(1) As an alternative to the measure of damages stated in § 347, the injured party has
a right to damages based on his reliance interest, including expenditures made in
preparation for performance or in performance, less any loss that the party in
breach can prove with reasonable certainty the injured party would have suffered
had the contract been performed. (Armstrong Rubber)
(2) (Burden of proof is on defendant to show that nonperformance would have
actually saved the plaintiff money – e.g., if the exhibition in Security Stove had
been a disaster. Plaintiffs shouldn’t be able to always recoup their losses in a
losing contract by way of reliance damages.)
ii) Goodman v. Dicker (D.C. Cir. 1948)
(1) Defendants induce plaintiff to incur expenses in preparing for a “dealer franchise”
to sell Emerson Radio products, but never grant the franchise. Plaintiffs sue for
47
breach; defendants argue that no liability would have arisen even if the franchise
had been granted and cancelled (since it was terminable at will) and that the
agreement is thus unenforceable. Held, for plaintiff. Defendants are estopped
from denying the contract due to plaintiff’s detrimental reliance. Court doesn’t
deal with the terms of the franchise, but rather the promise that there would be a
franchise. Plaintiff is awarded reliance damages only, not loss of profits.
(2) (Note that here the expectation was zero, given that the franchise was terminable
at will, whereas in Hoffman there was at least some expectation.)
iii) Security Stove and Manufacturing Co. v. American Railway Express Co. (Mo. 1932)
(1) Parties contract to ship plaintiff’s invention to an exhibition by a certain date;
defendant doesn’t deliver the crucial package. Plaintiff sues for reliance damages
(e.g., the hiring of a space at the exhibit and the traveling expenses). Held, for
plaintiff. Defendant had notice of the particular circumstances such that it was
responsible for consequential damages. But any profits were purely speculative,
such that plaintiff is only entitled to reliance damages (and not expectations).
iv) L. Albert and Son v. Armstrong Rubber Co. (2d Cir. 1949) (L. Hand, J.)
(1) Armstrong buys four machines from Albert to recondition scrap rubber; two
machines are delivered in 1943, and the other two not until late 1945, when WWII
is over and there is no more need. Armstrong, the buyer, seeks reliance damages
for the costs of the foundation it built for the machines. Held, for Armstrong. But
Albert can reduce Armstrong’s recovery by showing any losses that would have
been incurred by performance, since the risks of Armstrong’s contract shouldn’t
be imposed on Albert. “It is often very hard to learn what the value of the
performance would have been; and it is a common expedient, and a just one, in
such situations to put the peril of the answer upon that party who by his wrong has
made the issue relevant to the rights of the other.”
d) Restitution damages
i) Restatement § 373 (Restitution When Other Party Is in Breach)
(1) Subject to the rule stated in Subsection (2), on a breach by nonperformance that
gives rise to a claim for damages for total breach or on a repudiation, the injured
party is entitled to restitution for any benefit that he has conferred on the other
party by way of part performance or reliance. [Algernon Blair]
(2) The injured party has no right to restitution if he has performed all of his duties
under the contract and no performance by the other party remains due other than
payment of a definite sum of money for that performance. [Oliver v. Campbell]
ii) Restatement § 374 (Restitution in Favor of Party in Breach)
(1) Subject to the rule stated in Subsection (2), if a party justifiably refuses to perform
on the ground that his remaining duties of performance have been discharged by
the other party’s breach, the party in breach is entitled to restitution for any
benefit that he has conferred by way of part performance or reliance in excess of
the loss that he has caused by his own breach.
(2) To the extent that, under the manifested assent of the parties, a party’s
performance is to be retained in the case of breach, that party is not entitled to
restitution if the value of the performance as liquidated damages is reasonable in
the light of the anticipated or actual loss caused by the breach and the difficulties
of proof of loss.
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iii) U.C.C. § 2-718 (Liquidation or Limitation of Damages; Deposits)
(1) (2) Where the seller justifiably withholds delivery of goods because of the buyer’s
breach, the buyer is entitled to restitution of any amount by which the sum of his
payments exceeds
(a) The amount to which the seller is entitled by virtue of terms liquidating the
seller’s damages in accordance with subsection (1), or
(b) In the absence of such terms, twenty percent of the value of the total
performance for which the buyer is obligated under the contract or $500,
whichever is smaller.
(2) (3) The buyer’s right to restitution under subsection (2) is subject to offset to the
extent that the seller establishes
(a) A right to recover damages under the provisions of this Article other than
subsection (1), and
(b) The amount or value of any benefits received by the buyer directly or
indirectly by reason of the contract.
(3) (4) Where a seller has received payment in goods their reasonable value or the
proceeds of their resale shall be treated as payments for the purposes of
subsection (2); but if the seller has notice of the buyer’s breach before reselling
goods received in part performance, his resale is subject to the conditions laid
down in this Article on resale by an aggrieved seller.
iv) United States v. Algernon Blair (4th Cir. 1973)
(1) Plaintiff is a subcontractor about 25% of the way through a project when the
owner breaches. Plaintiff stops work (as he is entitled to do) and seeks the cost of
labor and equipment. Because complete performance of the contract would have
resulted in a loss for the plaintiff (and there would thus be no expectation
damages), he sues for quantum meruit instead. Held, for plaintiff. “The measure
of recovery for quantum meruit is the reasonable value of performance …
undiminished by any loss which would have been incurred by complete
performance.” Reasonable value is “the amount for which such services could
have been purchased from one in the plaintiff’s position at the time and place the
services were rendered”; the contract price may be indicative, but not conclusive.
v) Oliver v. Campbell (Cal. 1954)
(1) Plaintiff, a lawyer, represents defendant in a divorce; defendant dismisses plaintiff
before the signing of the court findings, and plaintiff seeks restitution. Held, for
defendant. Plaintiff can only recover the unpaid balance of the contract fee.
Performance was in effect complete.
vi) Britton v. Turner (N.H. 1834)
(1) 9 ½ months into a 12-month contract, plaintiff/employee leaves unjustifiably.
Plaintiff was to be paid $120 at the end of the year, and now sues for $100, the
“reasonable value” of the labor he provided to defendant. Held, for plaintiff.
Plaintiff is entitled to the reasonable value of the work he provided, less any
damages incurred by defendant as a result of the breach; plaintiff’s damages,
however, are capped by the contract price. (Otherwise there would be an
incentive to breach, defeating the entire purpose of the contract.)
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(2) (Note that here, unlike Algernon, the party in breach is now also the party seeking
restitution – and at a quantity above the contract price! Hence the cap on
damages, which doesn’t apply when it’s the other party in breach.)
vii) Kehoe v. Rutherford (N.J. 1893)
(1) Plaintiff, a builder, agrees to pave a street for $2700; having completed 60% of
the work, his costs already amount to $3000 and he estimates a total cost of $5000
on completion. Defendant, the municipality, then breaches. Plaintiff argues he is
entitled to reasonable value rather than the contract price. Held, for defendant.
Plaintiff is awarded a proportionate share of the original contract price: 60% of
$2700 or $1620. The balance is absorbed by the plaintiff himself.
(2) (Chirelstein on other damage options: restitution would grant Kehoe $3000 (more
than the contract price); reliance would grant him reliance costs ($3000) less
anticipated loss from full performance ($2300), or $700.)
e) Liquidated damages
i) Restatement § 356 (Liquidated Damages and Penalties)
(1) Damages for breach by either party may be liquidated in the agreement but only at
an amount that is reasonable in light of the anticipated or actual loss caused by the
breach and the difficulties of proof of loss. A term fixing unreasonably large
liquidated damages is unenforceable on grounds of public policy.
ii) U.C.C. § 2-718 (Liquidation or Limitation of Damages; Deposits)
(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 actual harm
caused by the breach, the difficulties of proof of loss, and the inconvenience or
non-feasibility of otherwise obtaining an adequate remedy. A term fixing
unreasonably large liquidated damages is void as a remedy.
iii) City of Rye v. Public Service Mutual Insurance Co. (N.Y. 1974)
(1) Contract specifies that developer must pay $200 for every day the completion of a
project has been delayed. Held, for defendant. Alleged harms suffered by
plaintiff (a municipality) from delay are de minimis at best. The court finds no
reasonable relationship between the alleged harm and the $200 a day liquidated
damages, which is really more of a penalty. The court also notes the unequal
bargaining power between the city and developer, along with the fact that the city
had the power to delay completion indefinitely if it so desired (making the
contract extortionate).
iv) Lake River Corp. v. Carborundum Co. (7th Cir. 1985) (Posner, J.): finds liquidated
damages clause unenforceable because it failed to reflect the cost avoided by plaintiff
in not having to perform (and thus deters efficient breach by failing to recognize
expenses avoided). Plaintiff is entitled to expectation damages (unpaid contract price
less costs of completion) alone.
v) Muldoon v. Lynch (Cal. 1885)
(1) Defendant contracts for a monument to be built for her dead husband, with a
clause specifying that the contractor will pay $10 per day over the specified one
year. The project is delayed for two years. Plaintiff now seeks the unpaid
balance; defendant seeks to deduct the liquidated damages. Held, for plaintiff.
Damages here serve a punitive, not a compensatory, role. Courts refuse to
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enforce liquidated damages when parties apparently intended them as a penalty,
as seems to be the case here. Nothing in this case suggests compensable damages.
(2) (Fried: This is a “first cousin to the ugly fountain case.” Since the damages are
nonquantifiable, would this prevent parties from ever contracting for monuments
like this? But unlike the ugly fountain case, we can’t simply determine damages
by cost of performance; we would have to ask how much money compensates the
widow for “two years of heartache.”)
vi) Wilt v. Waterfield (Mo. 1954)
(1) Plaintiffs make a $1900 down payment on a $19,000 property; defendant breaches
and sells to someone else for $26,000 instead. Plaintiffs sue for difference
between contract price and market value at time of performance ($7,000);
defendant argues that liquidated damages clause specified 10% of the agreed price
of sale, or the $1900 down payment. Held, for plaintiffs. The 10% is
disproportionate and arbitrary because it doesn’t take into account the various
possibilities of breach – in other words, if the contract was breached because the
defendant cut some of the lespedeza crop, that breach probably isn’t anywhere
close to $1900.
vii) Vines v. Orchard Hills, Inc. (Conn. 1980) (Peters, J.)
(1) Plaintiffs contract to buy a condo from defendant and make a down payment.
Plaintiffs breach and seek to recover the 10% down payment as restitution; the
contract specifies the down payment as liquidated damages. Held, for defendant.
In order to recover, the purchaser must show unjust enrichment on the defendant’s
part. Since the plaintiffs themselves are in default, the burden is on them to show
the invalidity of the clause. The actual damages were not less than the specified
amount; damages are assessed at the time of breach. Remanded to give plaintiffs
another opportunity to proffer evidence to support this claim.
(2) Fried: the liquidated damages problem can be completely avoided by specifying
the 10% down payment as an option price, to be deducted from the final price if
the house was purchased.
f) Specific performance
i) Restatement § 360 (Factors Affecting Adequacy of Damages)
(1) In determining whether the remedy in damages would be adequate, the following
circumstances are significant:
(a) The difficulty of proving damages with reasonable certainty,
(b) The difficulty of procuring a suitable substitute performance by means of
money awarded as damages, and
(c) The likelihood that an award of damages could not be collected.
ii) Restatement § 367 (Contracts for Personal Service or Supervision)
(1) A promise to render personal service will not be specifically enforced. [Lumley]
iii) U.C.C. § 2-716 (Buyer’s Right to Specific Performance or Replevin)
(1) Specific performance may be decreed where the goods are unique or in other
proper circumstances.
iv) Van Wagner Advertising Corp. v. S&M Enterprises (N.Y. 1986)
(1) Landowner leases billboard space to plaintiff, then sells property to defendant,
who terminates lease; plaintiffs seek specific performance. Held, for defendant.
Specific performance is a default rule in real estate transactions, but this is a lease
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rather than sale. Court rejects plaintiffs’ argument based on the space and
location of the property, because all property is physically unique; what really
matters is economic interchangeability, and in particular the uncertainty of
valuation. There isn’t such a great uncertainty here, so that the plaintiffs are
awarded the value of a nine-year lease in damages instead.
v) Curtice Bros. Co. v. Catts (N.J. Chancery 1907): specific performance is proper for
contract of sale of defendant’s tomato crop. There was no way to ensure that the crop
could be replaced in time, so that the need was extraordinary.
vi) Lumley v. Wagner (Lord Chancellor’s Court 1852): specific performance can’t be
obtained to require opera singer Wagner to sing at the Royal Opera House, but
specific performance can be obtained against Covent Garden to prohibit her from
singing there.
vii) Theory
(1) Posner: upholds common-law preference for expectation damages, noting that
specific performance creates transaction costs and deters efficient breach.
(2) Schwartz: notes difficulty of monetizing damages and determining speculative
profits, and counters the “transaction costs” argument by noting that a seller of
goods can cover just as well as a buyer.
(3) (Fried: compare to the debate between “cost of completion” and “diminished
value” in Groves, the former more akin to specific performance.)