CONTRACTS with Professor Bellia
I.
Fall 2008
The Importance of Promise
1. Introduction
2. What is a Promise?
Contract: a promise or set of promises for the breach of which the law gives a remedy and the
performance of which the law in some way recognizes as a duty (a very common definition of
contract).
“A contract is a promise or set of promises for the breach of which the law gives a remedy, or the
performance of which the law in some way recognizes as a duty.” Restatement (Second) of
Contracts.
Unilateral Contract = Promisor offers a conditional payment satisfied only at the completion of the
action.
Bilateral Contract = A promise is exchanged for a promise.
Quasi-Contract: A quasi-contract may exist when four elements exist:
1. A benefit conferred upon defendant by plaintiff;
2. Appreciation of benefit by defendant;
3. Acceptance and retention of benefit by defendant; and
4. Retention of such benefit would be unjust without payment.
When assessing the potential existence of a quasi-contract, the manifest intent is the important
factor, not the actual intent.
3. Theories of Promissory Liability
Formalist Theory
- Formalism means adherence to a norm’s prescription without regard to the background reasons
the norm is meant to serve.
- This approach, formalism, looks to the form of a prescription – that it is contained in an
authoritative rule – rather than to the substantive ends or means it was meant to achieve.
- Court should not:
1. Design “default” rules to fill gaps in the agreement;
2. Grant excuse for mistakes or changed circumstances that the parties do not explicitly address;
3. Engage in contextual interpretation that looks beyond the contract’s explicit terms;
4. Incorporate relational norms, such as cooperation and good faith, when adjudicating disputes;
5. Impose pre-contractual liability and blur the line between contract and tort liability.
Realist Theory
- Realism prefers flexible standards to be applied in contexst and gave the courts discretion in
cases where the rigid application of rules appeared to cause injustice.
- Characteristics of Realism:
1. Adjudication involves a series of policy choices made in context;
2. There is a preference for substance over form and standards over rules;
3. More attention is given to equitable factors;
4. Emphasis is put on how the contracting parties behaved;
5. There is a sensitivity to imbalances in bargaining power.
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CONTRACTS with Professor Bellia
II.
Fall 2008
The Bases of Promissory Liability
1. The Consideration Requirement
Consideration is a term of art which is specific to law. Consideration reflects a bargain or a bargain
relationship, which is usually a good exchanged for money. Consideration involves a “thing” (good,
service, etc.) which is exchanged through a bargaining process. This process is one which both parties
mutually induce.
(A) History and Definition
Historical definition: Consideration is Either Benefit to Promisor or Detriment to Promisee.
Restatement definition: Consideration as Bargained-For Exchange
Restatement (Second) § 71:
1. To constitute consideration, a performance or a return promise must be bargained for.
2. A performance or return promise is bargained for if it is sought by the promisor in exchange
for his promise and is given by the promisee in exchange for that promise.
3. The performance may consist of: (a) an act other than a promise, or (b) a forbearance, or (c)
the creation, modification, or destruction of a legal relation.
4. The performance or return promise may be given to the promisor or to some other person. It
may be given by the promisee or by some other person.
(B) Bargain Requirement
The Bargain Requirement simply implies that the items exchanged must have been significant
enough to induce the consideration.
This is the Peppercorn Theory of consideration. Generally, courts do not inquire as to the adequacy
of consideration. The Peppercorn Theory states that the value the parties ascribe to a item as
seemingly insignificant as a peppercorn are to be held as significant as the parties intend.
As an operating principle, the Bargain requirement…
1. Provided a natural formality to channel human conduct and insure deliberation;
2. Protected and structured the important market transaction;
3. Expanded legal protection by supporting the executor exchange – a promise for a promise –
and shielding the creative or idiosyncratic bargainer from later claims that the agreed
exchange was disproportionate; and
4. It permitted a fuller development of remedies that protected the plaintiff’s expectation
interest, that is, the value to the plaintiff of the agreed exchange.
See Hamer v. Sidway, 27 N.E. 256 (1891).
Uncle promises nephew $5,000 for refraining from drinking and smoking until age 21.
Nephew complies and informs uncle who grants nephew the money.
Uncle suggests that money stay with uncle until nephew is more mature.
Nephew agrees, but uncle dies before nephew receives money.
Nephew sues for money.
Estate claims there was no contract because there was no consideration
Court held that the nephew’s waiver of legal right (his waiver of right to smoke and drink)
provided the sufficient consideration to satisfy the bargain/inducement requirement.
Therefore, court held that there was a contract.
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(C) Mixed Motives and Nominal Consideration
See Thomas v. Thomas, 114 Eng. Rep. 330 (1842).
John Thomas left his houses to his brother Samuel Thomas (and his executors) in the John
Thomas will with certain payment arrangements.
On the day he died, in front of two witnesses, he declared that his wife should have either the
house in which he lived and all that it contained, or an additional sum of £100 instead
thereof.
Samuel Thomas and the defendant (Samuel’s executors) were made aware of John Thomas’
intentions. They then executed the agreement.
The plaintiff, Eleanor Thomas lived in that house until the death of Samuel Thomas.
After Samuel Thomas and one of the co executors to his estate died, the remain co executor
refused to execute the agreement. He (the defendant) “turned the plaintiff out of possession.”
The defendant argued that a part of the consideration proved being omitted in the declaration.
Court: There was consideration to this agreement.
The Restatement version states that the “fact that what is bargained for does not of itself induce the
making of the promise does not prevent it from being considered for the promise.
(D) Limits of the Consideration Doctrine
(1) Adequacy of Values Exchanged
See Browning v. Johnson, 422 P.2d 314 (1967)
Dr. Browning and Dr. Johnson entered a contract of sale, which stipulated that Dr. Browning
would sell his practice and equipment to Dr. Johnson.
However, before the contract’s effective date, Dr. Browning changed his mind.
Instead, Dr. Browning promised to pay Dr. Johnson $40,000 to give up the sale contract.
After several months passed, Browning brought this action for declaratory judgment.
The trial court ruled that the sale contract lacked mutuality and was too indefinite to be
enforceable. The trial court also ruled that the contract canceling the sale contract was
supported by “adequate consideration.”
The appellate court affirmed the trial court.
Court: Because Browning’s inducement caused detriment to Johnson, there is support for
Browning’s $40,000 promise.
It does not matter what is being bargained for, so long as there is consideration.
See also Apfel v. Prudential-Bache Securities, Inc., 616 N.E.2d 1095 (1993)
Apfel to give paperless system rights to Prudential.
Prudential to pay Apfel for system.
Prudential stops paying Apfel after few years but before contract ends. Prudential argues that
since the technology is not novel, they should not have to pay.
Court found that Prudential breached, because there was adequate consideration at the time
the contract was formed.
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(2) Pre-existing Duty Rule
The performance or the promise to perform a pre-existing duty does not constitute consideration.
Example: Debtor owes Creditor $1,000. The parties agree that Creditor will accept $500 in full
settlement. Debtor pays the agreed $500; Creditor sues for the remaining $500. Creditor
wins.
The rule also applies to the modification of an existing contract in which one party undertook to
do something additional and the other performed (or promised to perform) that which he/she
had already agreed to perform.
Example: Contractor agrees to build a garage. Owner promises to pay $5,000. Contractor
refuses to perform unless Owner pays an additional $1,000. Owner promises to pay the
additional amount. However, Owners subsequent promise is unenforceable, because there
was a pre-existing duty of the Contract to perform without additional $1,000.
See Levine v. Blumenthal, 184 A. 457 (1936).
On April 16, 1931, Plaintiffs leased to Defendants store premises for the purposes of retail
women’s merchandising.
It was a two year lease beginning May 1 with option for three year renewal.
Rent was $2,100 for first year, and $2,400 for second year, due in monthly installments.
Before the commencement of the second year, Defendants advised that they would be unable
to pay the increased rent. If they were forced to pay the increase, they would be forced to
be removed from premises altogether or forced out of business.
Plaintiff allowed the defendant to pay the first year’s rate for eleven months of the second
year.
Defendants did not pay for the last month.
Plaintiff now seeks the balance of each month’s rent for the second year (the sum necessary
to meet the full cost) as well as the full cost of the last month of the second year.
Court held that the oral alteration was not sufficiently supported by consideration and,
therefore, does not form a binding contract.
See also Alaska Packers’ Assoc. v. Domenico, 117 Fed. 99 (1902).
Appellees (Domenico) entered a written contract, in which they agreed to sail on a vessel
provided by the Appellant (Alaska Packers’). Appellees were to essential do what the
agent of APA and the captain requested.
In exchange, the Appellees were to be paid $50 or $60 and “two cents for each red salmon in
the catching of which he took part.”
The Appellees refused to work before the return trip, unless they were given $100.
Fishing Co. agreed to the demands of $100 instead of the previously agreed amounts.
Upon return, the Appellant informed Appellees they would only be paid the originally
stipulated amount.
Court held that because the Appellees had already agreed to render the exact services, there
was no benefit to the promise or detriment to the promisor, i.e., there was no
consideration for this ascension to the contract modification.
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(3) Mutuality of Obligation
Both parties must be bound or neither party is bound.
If one or more of the parties in a contract have a discretionary “out,” then there is no mutuality of
obligation, and, therefore, there is no contract.
See Rehm-Zeiher Co. v. F.G. Walker Co., 160 S.W. 777 (1913).
Rehm-Zeiher is to receive their yearly order of Whiskey from Walker.
However, for “any unforeseen reason,” Rehm-Zeiher may opt out of the contract at his
discretion.
Court held that because of Rehm-Zeiher’s complete discretion, there is no support for
consideration. Therefore, the contract is unenforceable.
2. Moral Obligation
(A) Restitution and Quasi-Contract
Quasi –contract: Different cases describe the elements of quasi-contracts in different ways.
However, the most common articulation is three-fold:
1.) Benefit conferred
2.) With an expectation to pay
3.) With contention that retention of benefit would be unjust without paying for benefit.
Example: Work supposed to be at House A. Painter accidently paints House B. Does the owner of
House B have to pay? Answer: Retention would be unjust if House B owner knowingly allowed
painter to continue to paint.
Relevant factor: Did the beneficiary have an opportunity to reject the benefit?
If the beneficiary avails himself of the benefit, then a quasi-contract is created by his actions.
(B) Moral Obligation
Moral obligation may stand in the place of consideration in order to create a binding contract.
Promise + Consideration = Contract
or
Promise + Moral Obligation = Contract
Quick Notes:
- Moral obligation creates the possibility that, in cases where a legal debt has been wiped out
by the statute of limitation but the debtor promises to pay anyway, the debt can be revived by
the subsequent promise.
- An enforceable contract may be created when a material benefit may be conferred with the
expectation of pay and a subsequent promise to pay is made.
o Example: A car is taken into a mechanic for an oil change, but mechanic also fixes
transmission. Under quasi-contract, this is not enough to oblige payment to mechanic.
However, if car owner promises to pay for extra work, then the promise could be binding.
- Material Benefit + Promise (without expectation to pay) =(may)= create a binding contract
See Mills v. Wyman, 20 Mass. 207 (1825).
Wyman Jr. becomes ill after a voyage at sea and Mills cares for him.
Wyman Sr. promises to reimburse Mills for care of Wyman Jr.
Wyman had a moral obligation to reimburse Mills for helping Wyman Jr. in a time of great need.
Therefore, the moral obligation coupled with Wyman’s promise created a binding contract.
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See also Webb v. McGowen, 168 So. 196 (1935).
Webb saves McGowen’s life, which cost Webb serious bodily injury and permanent disability.
McGowen ageed to pay Webb $15 every 2 weeks until Webb died.
McGowen paid until 2 weeks after Webb’s death, but Webb estate sued for missing installments.
Court held that where the promise to care for, improves and preserves the property of the
promisor though done without his request, it is sufficient consideration for the promisor’s
subsequent agreement to pay for the service because of the material benefit received.
3.
Promissory Estoppel
PROMISE + RELIANCE
“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”
~ Restatement (Second) of Contracts § 90 (1981).
Elements of Promissory Estoppel include (according to Restatement § 90):
a. A promise
b. Promisor should reasonably anticipate that the promise will lead the promise to act or to refrain
from acting.
c. Promise does induce action or forbearance.
d. Injustice is avoided only by enforcement.
See Ricketts v. Scothorn, 77 N.W. 365 (1898).
Ricketts told Scothorn that he would pay her $2,000 plus interest. Plaintiff alleged that the
consideration for such a payment was that she quit her job.
Because the defendant intentionally influence the plaintiff to alter her position for the worse on the
faith of the note being paid when due, it would be grossly inequitable to permit the maker, or his
executor, to resist payment on the ground that the promise was given without consideration.
Court found that the facts and circumstances created equitable estoppel and that this estoppel is
sufficient for consideration.
See alsoAllegheny College v. National Chautauqua County Bank of Jamestown, 159 N.E. 173 (1927).
Mary Yates Johnston pledged $5,000 to Allegheny College to be paid within 30 days after her death.
Johnston’s provision was that a scholarship be named after her.
With this pledge, Johnston sent her first contribution of $1,000.
The college accepted the money and created the scholarship.
Johnston later gave notice to the college that she repudiated the promise.
Once the college accepted partial payment, this constitutes consideration, and they were so bound by
the terms of the contract.
The donor was not at liberty to gain the benefit of such an undertaking upon the payment of part and
disappoint the expectation that there would be payment of the residue.
Court held that the duty assumed by the plaintiff (Allegheny College) is sufficient consideration to
make this an enforceable contract.
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4. Formal Requirements: The Statute of Frauds
Certain promises cannot be supported by consideration without a writing.
For example, Contracts for the sale of land must be evidence by a writing. However, when a promise
for the land induced one to move out based upon the reliance that one had that land may or may not
be enforceable. Some courts uphold promissory estoppel in the absence of consideration via writing
in a statute of frauds case.
Statute of Frauds is a concept that specifies a necessary form (usually a writing) is needed for
enforceability, in addition to a promise already supported by consideration.
“Within” – Contracts “within” the statute of frauds must be evidenced by a writing.
“Outside” – Contracts “outside” the statute of frauds need not be evidenced by a writing.
(A) General Scope and Effect
Originally, the Statute of Fraud’s British provision read as follows:
Section 4: [N]o action shall be brought
(1) Whereby to charge any executor or administrator upon any special promise, to answer for
damages out of his own estate;
(2) Or whereby to charge the defendant upon any special promise to answer for the debt, default or
miscarriage of another person;
(3) Or to charge any person upon any agreement made upon consideration of marriage;
(4) Or upon any contract or sale of lands, tenements or hereditaments, or any interest in or
concerning them;
(5) Or upon any agreement that is not to be performed within the space of one year from the making
thereof;
Unless the agreement upon which such action shall be brought, or some memorandum or note
thereof, shall be in writing, and signed by the party to be charged therewith or some other person
thereunto by him lawfully authorized.
[The Statute of Frauds goes on to include the sale of goods which cost over ten pounds, a price
which has been increased in contemporary standards to be $500.]
(B) “Within the Statute”
(1) The “One Year” Clause
Many Statute of Frauds provisions mandate a writing for contracts the performance of which is
not to occur within one year. Courts have traditionally construed these provisions narrowly
when determining whether the performance was to be completed, initiated, etc. within one year.
See Prof. Bull Riders, Inc. v. AutoZone, Inc., 113 P.3d 757 (2005).
Professional Bull Riders sues AutoZone for breach of contract.
The contract is formed in Dec. 2000 and is to end in Dec. 2002.
Court says that because there is an alternative that allows AutoZone to complete in one year,
there is a possibility that this contract is outside the statute of frauds.
Because the contract is outside the statute of frauds, the writing requirement is non-existent.
IMPORTANT: If there is any possibility that a contract could be performed, within its terms,
within one year, then it becomes outside the statute of frauds.
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One Side Rule
“Where any of the promises in a bilateral contract cannot be fully performed
within a year from the time of the formation of the contract, all promises in
the contract are within [the one-year clause of the Statute of Frauds], unless
and until one party to such a contract completely performs what he has
promised. When there has been such complete performance, none of the
promises in the contract is [within such provision].”
~ Restatement (Second) § 130.
(2) Contracts for the Sale of Goods
The Uniform Commercial Code (“UCC”), where enacted, governs all contracts for the sale of
goods. The UCC has Statute of Frauds provisions that apply to the sale of goods over $500.
Because the UCC is currently under revision, this $500 limit may soon rise to $5,000.
A “good” is something moveable. In the example of a furnace, part of a furnace is a good,
whereas part of a furnace is a service (i.e. installation). The predominant factor (good or
service) is what dictates whether or not these provisions fall under goods contract laws or
services contract laws.
The Statute of Frauds for the sale of goods does not dispense with the consideration requirement.
With or without writing, consideration is still needed to make the agreement legally binding.
UCC § 2-201
A contract for the sale of goods with a price of greater than $500 is not enforceable without the
contract in writing.
Subsection 3 – If a contract does not need a writing, but valid in other respects (i.e.
supported by consideration) are enforceable if the goods are exclusively for the buyer,
and the process for completing that order is underway. [paraphrased]
Exceptions:
Subsection 3(b)
If, a party admits the existence of a contract in a pleading, testimony, or otherwise in
court, then a writing is unnecessary.
Subsection 3(c)
With respect to goods which have been delivered.
Codification of the one-side rule.
(3) Interests in Realty
All versions of the Statute of Frauds purport to cover oral agreements to convey an interest in
land.
Restatement (Second) of Contracts § 125(l): a “promise to transfer to any person any interest in
land is within the statute of frauds.”
See Sullivan v. Porter, 861 A.2d 625 (2004).
Merval Porter orally agreed to sell his property to Sullivan for $350,000 with a $20,000
down payment.
Per discussions with Merval, Sullivan only paid $3,000 of the down payment and would give
the rest to Porter at the signing of the title.
Sullivan assumed custody of the house.
Sullivan had the house appraised and found it worth $250,000 but wrote that she would stick
to the $350,000 figure.
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Porter replied that he would rather sell the property at $450,000 and required a $50,000 down
payment.
Court ruled that because of Sullivan’s part performance as well as Porter’s misrepresentation,
there was a valid contract in place.
No writing is required under the part performance exception.
(C) Compliance with the Statute
- Historically, the criteria for the statute of frauds is unraveling, because the ability for evidencing
contracts is progressively getting greater and greater.
See Crabtree v. Elizabeth Arden Sales Corp., 110 N.E.2d 551 (1953).
In this case, one document by itself did not satisfy the requirements of the statute of frauds.
Writings need: identify (1) the parties, (2) the subject matter, and (3) the essential terms.
However, several writings together satisfied all the elements of the statute of frauds.
Majority of Jurisdictions say that if the writings in their totality fairly reference the same subject
matter, then the writing component is satisfied.
(D) Effect of Non-Compliance
- Voidable – When a contract required a writing but a writing is absent, then the contract is
voidable. If the parties carry through a voidable contract, then the full performance upholds even
a voidable contract.
See DF Activities Corp. v. Brown, 851 F.2d 920 (1988).
The defendant moved to dismissed on the grounds that this case, as alleged, falls under the
statute of frauds. So, this type of contract would require a writing.
Plaintiff wanted to proceed to a deposition that would counter the defendant’s claim in her
affidavit that there was no contract.
Court ruled that one can collect under promissory estoppel if there was reasonable reliance on
the promise, even if the statute of frauds mandates a writing and a writing is absent.
(Jurisdictions are mixed on this assertion.)
III.
Introduction to Contract Remedies
Basic Policies
Two Principal Remedies:
1. Specific Performance: Court orders breaching party to perform. This type of remedy is the
exception, not the norm.
2. Monetary Award.
2. Measuring and Compensating Loss
As monetary awards are generally the remedy granted in contracts cases, there are three methods for
determining the amount of loss to compensate.
1. Expectation Method – This method attempts to compensate the injured party according to the
monetary benefit they would have expected had the breach not occurred. In order to use this
methodology, one’s expectation of damages need to be predicted with some reasonable
certainty.
2. Reliance Method – The reliance approach seeks to put the injured party in the position it
would have been in, had the promise never been made. This methodology computes the
damages based on the harm made in reliance of the promise.
3. Restitution – This method attempts to recover any benefit conferred onto the breaching party.
This is the process of disgorging an unjust enrichment.
1.
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See Sullivan v. O’Connor, 296 N.E.2d 183 (1973).
Patient (Sullivan) sued doctor after a botched surgery did not improve her beauty, but actually
disfigured her.
In this case, specific performance would not cure the breach, it may even make the breach worse.
This Chart demonstrates the Court’s mentality in the Sullivan case
Type of Damage
Reliance
Expectation
Paid Doctor’s Fee
Yes
No
Out of Pocket Expense for Hospital Costs
Yes
Yes b/c 3rd Op.
Pain and Suffering for 1st and 2nd Operations
Yes
No
rd
Pain and Suffering for 3 Operation
Yes
Yes
Court
Yes
Yes
Waived
Damages are limited to what is reasonably foreseeable, which is why damages for emotional distress
are rarely awarded in breach of contract cases. Exceptions to this rule regarding emotional
distress damages may be surrogate motherhood contracts as well as mishandling caskets and
corpses in funeral homes.
Specific Performance
- Specific Performance is applicable if there is no adequate monetary remedy available.
- Again, specific performance is the exception, not the rule, for breach of contract remedies.
- See Curtice Bros. Co., v. Catts, 66 A. 935 (1907).
Plaintiff runs a tomato canning business and Defendant was under contract to sell the entire
product produced by Plaintiff.
Defendant breached and Plaintiff seeks specific performance for breach of contract.
Normally, the difference between the contract price and the market price would be the
applicable method for calculating the monetary damages in such a case.
However, there is no market for these tomatoes.
Because the court could not develop another suitable method for calculating damages, the
court ordered specific performance.
- Consequential Damages: These types of damages are distinguished from direct damages, which
are the damages that are reasonably expected to flow from the breach. Instead, consequential
damages address the unique circumstances of a particular case.
- There are four rules guiding consequential damages:
1. Consequential damages must be reasonably foreseeable. The burden in on the injured party
to inform the breaching party of the extent of the consequential damages.
2. Reasonable certainty of the amount of damages is also required.
3. Duty to Mitigate – the injured party has a duty to mitigate the consequential damages before
they become worse.
4. Causation – the consequential damages must actually be caused by the breach.
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See Hadley v. Baxendale, 156 Eng. Rep. 145 (1854).
Mill broke a crank shaft and there was an unexpected delay in its return from the repair co.
Mill wants lost profits from the days the mill was shut down.
Court did not award damages because the repair company could not reasonably foresee the
expectation damages.
Had the mill informed the repair company that the entire mill was shut down, then, perhaps,
the case is stronger for an expedited repair and thus expectation damages.
**The rule in this case (the necessity to inform the repair team of the urgency) is to be
enforced in order to provide reasonably foreseeable expectations.
IV.
The Bargain Relationship - This is the objective theory of contracts. The existence of a contract is
defined by the virtue or lack of terms such as “a meeting of the minds,” “mutual assent,” etc.
1. The Agreement Process
(A) Ascertainment of Assent
See Embry v. Hargadine, McKittrick Dry Goods Co., 105 S.W. 777 (1907).
Embry’s employment contract expired on December 15, 1903.
On December 23, 1903, Embry told McKittrick that unless he had another contract for the next
year, Embry would quit.
McKittrick replied: “Go ahead, you’re all right; get your men out and don’t let that worry you.”
Embry thought contract was renewed.
Embry’s employment was terminated the following March.
McKittrick never intended to enter into a contract by his words.
However, McKitterick’s intent was irrelevant.
The court held that since a reasonable person would have thought there was a contract by
McKittrick’s terms, therefore a contract exists.
See also Lucy v. Zehmer, 84 S.E.2d 516 (1954).
Lucy wants to buy the Zehmer farm.
On December 20, 1952, Zehmer writes “We hereby agree to sell to W.O. Lucy the Ferguson
Farm complete for $50,000, title satisfactory to buyer.”
When Lucy offered to seal the arrangement with a $5 bind, Zehmer realized that Lucy was
serious. Zehmer then informed Lucy that he had no intention to sell the property.
Mrs. Zehmer later testified that she only signed the document after she was told it was a joke.
Zehmer sues to enforce the contract.
Court held that “[i]n the field of contracts, as generally elsewhere, ‘We must look to the outward
expression of a person as manifesting his intention rather than to his secret and unexpressed
intention.”
A party’s undisclosed intention is immaterial except when an unreasonable meaning which he
attaches to his manifestations is known to the other party.
See also Cohen v. Cowles Media Co., 501 U.S. 663 (1991).
Cohen promises information.
Cowles promises confidentiality.
Court found that this promise was not legally enforceable, because Cowles did not intend to be
legally bound.
One party who implicitly does not intend to assume legal obligation is not legally bound.
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(B) Implied-in-Fact Agreement
See Wrench, LLC v. Taco Bell Corp., 256 F.3d 446 (6th Cir. 2001).
Taco Bell shows interest in Wrench-created Chihuahua image.
The two companies cannot work out an agreement, but Taco Bell indicates they would like to
continue to try.
Taco Bell soon hires new ad agency and later uses Chihuahua image like Wrench image.
The question is whether or not an implied contract exists between Taco Bell and Wrench for the
use of the “Psycho Chihuahua” idea in exchange for an undetermined compensation.
Court found that the Plaintiff’s had presented enough evidence to show the existence of an
implied contract.
OBJECTIVE THEORY THREE COMPONENTS: Offer, Acceptance, and Consideration.
(C) Offer
- Offer is the manifestation of willingness to enter into a bargain, so made as to justify another
person in understanding that his assent to that bargain is invited and will conclude it.
- Advertisements are generally not offers. Advertisements are invitations to make an offer. Due
to limited availability, businesses cannot be expected to extend an offer to everyone who sees the
advertisement.
- See Lefkowitz v. Great Minneapolis Surplus Store, 86 N.W.2d 689 (1957).
The Lefkowitz defies the rule of advertisements, but it clearly defines when an advertisement is
an offer.
Defendant advertised the sale of furs worth $139.50 for only $1 to first come first served
customers.
Plaintiff arrives at store first to buy furs at the advertised price.
Plaintiff is denied because the house rules state that the sale is only available to women.
The trial court and appeals court found that this was a clear offer, which was accepted, thus
creating a binding contract.
“The test of whether a binding obligation may originate in advertisements addressed to the
general public is ‘whether the facts show that some performance was promised in positive
terms in return for something requested.’”
- Only after an offer has been made do any legal powers exist.
A ----------------------(offer)------------------> B
(liability)
(Power of Acceptance)
- Circumstantial factors may inform a jury that a contract did exist.
Factors may include:
1. Course of dealing: Have the parties dealt with one another in the past? What is their
common understanding?
2. Usage of trade: Is there a standard of communication for guiding these transactions
within the industry?
3. Law: How does the law inform what a reasonable understanding is?
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(D) Acceptance
(1) By Promise
- A promise for a promise is referred to as a bilateral contract.
- See Hendricks v. Behee, 786 S.W.2d 610 (Mo. Ct. App. 1990).
Behee sends Smith a written offer to purchase land.
Smith signs the contract and then holds the agreement for a few days.
After Smith had signed the contract, but before he sent it to Behee, Behee revokes his offer.
Court upheld a default rule and held that an uncommunicated intention to accept an offer is
not an acceptance.
**Important Note: Because the offeror is master of the offer and his free to create the
provisions specifying the mode of acceptance, he/she may indicate that the offeror does
not need to be notified of acceptance if the offeror so chooses.
- See Ever-Tite Roofing Corp. v. Green, 83 So.2d 449 (1955).
Green sent an offer to the roofing company which becomes binding upon “written
acceptance” or “upon commencing performance of the work.”
The roofing company loaded up their trucks with all the supplies and headed over to Green’s
house where they found the other roofing company already there.
Ever-Tite sued for breach of contract.
Court held a reasonable-person standard would conclude that by loading up the trucks, and
driving to the job site, the roofers had commenced their performance, even though they
never touched the house.
In this case that “commencement of performance” clearly dispenses with the default rule set
forth in Hendricks, which says that “[a]n uncommunicated intention to accept an offer is
not an acceptance.”
- As was learned in the Corinthian Pharm. Systems case, the UCC has certain default rules.
The UCC states that if the offeree would reasonably understand that starting performance is
acceptance, then the offer could be accepted by starting performance.
However, even if this is the case, if the offeree is not notified within a reasonable amount of
time, the offer has expired.
(2) By Performance
- At the completion of performance, the act of performance marks both completion of the
contract as well as full performance of that contract. This is a unilateral contract.
- The offeror is the master of the offer, and he/she can determine how the offer is to be
accepted. In the lack of specification, certain default rules apply.
- Example: “I’ll give anyone who finds my dog $500.” Acceptance is going out and finding
the dog and bringing it to the owner.
- See Carlill v. Carbolic Smoke Ball Co., 1 Q.B. 256 (1893).
Carbolic places ad promising money for people who get sick while using their product.
Although the general rule is that advertisements are not offers, this case differs from the
general rule due to its specificity.
Court held that a reasonable person would infer that the offer exists only when this time
period extends to a reasonable length.
Court held that the contract did exist and came into existence when the consumer properly
began using the product with the condition of becoming sick.
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See Glover v. Jewish War Veterans of United States, 68 A.2d 233 (1949).
June 5, 1946 – Maurice Bernstein was murdered.
June 7, 1946 – Jewish War Vets post advertisement offering reward for information
leading to the arrest of Bernstein’s murderer.
Neither Mary Glover, nor her husband were aware of a reward at the time they furnished
vital information to the police.
Court holds that mutual assent is necessary, but mutual assent is non-existent if one party
is unaware of an offer.
Rejection and its implications. See Scoular v. Denney, 151 P.3d 615 (2006).
Denney is a grain farmer; Scoular is a grain company.
Standard Operating Procedure for the two parties is selling without a contract beforehand.
May 30, 2002 – Denny indicated a desire to sell his millet (not yet grown) for $5 per
hundredweight, and, relying on Denney’s offer, Scoular sold the millet.
Scoular was unsuccessful in informing Denney of the sale, and Denney delivered millet
to alternative grain company.
Once an offer is rejected (which is a question for a jury) there is no more power of
acceptance.
If the offer still stands, then was the re-selling of grain acceptance by performance?
Arguably no, because the performance necessary to accept would be payment to Denney.
(3) By Conduct or Silence
- Silence cannot be acceptance in the absence of intent.
- An offeror is not reasonable in taking silence as an acceptance without a manifestation of
intent. However, the offeror is the master of his/her offer. So, if he offers something and
says that the offeree should remain silent to accept, then a contract could exist. Later, if the
offeror revokes his offer under such circumstances, the offeree has a cause of action, because
the offeree complied with the offeror’s terms of acceptance and created a contract.
- See Russell v. Texas Co., 238 F.2d 636 (1956).
Silence + exercising dominion over the item offered = Contract.
- See Ammons v. Wilson Co., 170 So. 227 (1936)
Through salesman (Tweedy), Wilson Co. “booked” Ammons for sixty thousand pounds
of shortening and seven and one-half cents per pound.
Tweedy had represented appellee in that territory for six or eight months. Each time,
orders were accepted and shipped not later than one week from the time they were
given.
Wilson (Appellee) waited 12 days before declining to accept.
Court ruled that previous dealings between parties that make silence a reasonable
manifestation of assent support the notion of acceptance by silence.
(4) Time When Acceptance Effective
- The Mailbox Rule
o Unless the offer provides otherwise, (a) an acceptance made in a manner and by a
medium invited by an offer is operative and completes the manifestation of mutual assent
as soon as put out of the offeree’s possession, without regard to whether it ever reaches
the offeror.
o The mailbox rule is a default rule, because the parties can contract around it. The
mailbox rule only exists when the contract is mute on the subject of the terms of
acceptance.
o Mailbox rule only applies to acceptances.
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(5) Nature and Effect of Counter-Offer
- A counter offer is a rejection of the initial offer.
- See Minneapolis & St. Louis RR Co. v. Columbus Rolling-Mill Co., 119 U.S. 149 (1886).
A counter offer has to include some term that changes the original offer in order to be
considered a rejection of the original offer and a creation of a new offer.
- The Mirror-Image Rule
To accept, the acceptance must be a mirror image of the offer. An acceptance cannot be an
acceptance of something different.
- The Mirror-Image Rule and the Sale of Goods (governed by UCC)
Typically, the buyer submits to the seller a purchase order, which includes terms
including the quantity, the price, who pays for shipping, seller’s warranty, etc.
The Seller would then submit an acknowledgement of the purchase order with the goods
included, which sets the terms of the sale, such as limits to the warranty, who pays
shipping, forum selection clause, etc.
According to the mirror image rule, this is not and acceptance. This would be a counteroffer according to the mirror image rule.
If the buyer receives the goods and uses them, then they are forming a contract via
acceptance through conduct.
See DTE Energy Technologies, Inc. v. Briggs Electric, Inc. 2007 WL 674321.
Court rules that terms which materially alter a contract are not part of said contract.
See also Textile Unlimited, Inc. v. A . . BMH & Co., 249 F.3d 781 (2001).
Textile Unlimited sends a purchase order to A . . BMH and BMH fills the order and
sends Textile Unlimited an invoice and order acknowledgement along with order.
Order acknowledgement includes (1) a provision stating that unless A . . BMH is notified
within 24 hours of receipt the acceptance is final and (2) a forum selection clause in
the event of a dispute.
Court invokes UCC § 2-207(3) and holds that “[c]onduct 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.”
(E) Assent in Electronic Commerce
See Specht v. Netscape Communications Corp., 306 F.3d 17 (2002).
Because historical precedent does not apply seamlessly to technological developments, the court
espoused the “reasonable-person” standard when applying historical rules to their analogous
modern-day equivalents.
(F) Termination of Offer
See Dickinson v. Dodds, 2 Ch.D. 463 (1876).
Dodds (Defendant) submitted a written offer to Dickinson (Plaintiff) to sell real estate, which
expired at 9:00 on Friday morning.
Dickinson learned that Dodds began offering the property to another (Allan).
After Dickinson learned of Dodds’ later offer to Allan, Dickinson accepted the offer in writing,
but the acceptance never reached Dodds.
However, Dickinson found Dodds and accepted the offer before 9:00 on Friday.
At this point, Dodds had already sold the property to Allan.
Dickinson sued for specific performance.
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Court applied the Restatement view, and held that an offeree’s power of acceptance is terminated
when the offeror takes definite action inconsistent with an intention to enter into the proposed
contract and the offeree acquires reliable information to that effect (as Dickinson did).
Common law rule: In order to revoke an offer, you must use a manner of communication that is
equally effective as the manner in which the offer was made.
(G) Irrevocable Offer: Option Contracts
- A promise to hold open an offer is a gratuitous promise unless it is supported by consideration.
**This is the only time when nominal consideration is acceptable.
- Two ways to hold open an offer for a definite period of time:
Method #1
A ------promises to convey land for $30, if within 2 weeks A gets $20,000
---------- > B
Contract creates additional rights and duties.
A has duty to convey the land, if B pays money in 2 weeks.
B has right to land, if he pays $30 now, then pays $20,000 within 2 weeks.
-
Method #2
A --------------land for $20,000 --------------------- > B
A -------------offer to hold offer for 2 weeks ------ > B
A < ------------------------ $30 -------------------------- B
An offer is binding as an option contract it it (a) is in writing and signed by the offeror, (b)
recites a purported consideration for the making of the offer, and (c) proposes an exchange on
fair terms within a reasonable time.
(H) Irrevocable Offer: Reliance
- A promise which the promisor should reasonably expect to induce action or forbearance of a
definite and substantial character on the part of the promise and which does induce such action or
forbearance is binding if injustice can be avoided only by enforcement of the promise.
- See Drennan v. Star Paving Co., 333 P.2d 757 (1958).
Drennan asks for bids that need to be submitted by 8:00pm on July 28, 1955.
Defendant submitted the lowest bid.
Plaintiff accepted the Defendant’s bid and reported the Defendant as the subcontractor.
The next day, Defendant informs Plaintiff that Defendant made a mistake and could not perform
the contract.
Plaintiff had relied on Defendant’s bid to compute his own bid.
Court ruled that Defendant’s offer is irrevocable because of reliance (promissory estoppel).
2. Insufficient Agreement
(A) Defective Formulation
See Raffles v. Wichelhaus, 159 Eng. Rep. 375 (1864) – The Peerless Case
Raffles agreed to sell Wichelhaus all the cotton that was on the ship named Peerless.
Wichelhaus arrived in October and found a ship named Peerless but his cotton was not on it.
Raffles shows up in December on a ship named Peerless but there was no buyer.
Raffles sues for breach of contract.
Court ruled that there was no mutual assent to this agreement, because a reasonable observer
would conclude that the two parties were not, in fact, agreeing on the same transaction.
Without a true agreement, or “mutual assent,” there is no contract.
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See also Konic Int’l. Corp. v. Spokane Computer Servs., Inc., 708 P.2d 932 (1985).
Konic Salesman says the price is, “fifty-six twenty.”
Spokane thought the price was $56.20, but Konic Salesman meant the price was $5,620.00.
Two weeks pass before Spokane contacts Konic and explains that they do not want the
equipment due to the price discrepancy.
Spokane refuses to pay and Konic sues.
Court held that there was no contract because the Restatement says:
There is no manifestation of mutual assent to an exchange if (1) the parties attach materially
different meanings to their manifestations and (2) neither knows or has reason to know the
meaning attached by the other.
(B) Indefinite Agreements
See Vitney v. Ditmars, 111 N.E. 822 (1916).
Plaintiff (Varney) is an architect who hires on with Defendant (Ditmars)
Defendant told Plaintiff that “I am going to give you $5 more a week; if you boys will go on and
continue the way you have been and get me out of this trouble and get these jobs started that
were in the office three years, on the 1st of January I will close my books and give you a fair
share of my profits.”
Defendant later fired Plaintiff for insubordination after Plaintiff remained home on election day,
took ill, and stayed home the remainder of November.
Court ruled that the two parties contracted for an ambiguous term, “fair share of profits,” and
therefore there is no contract, because there was no agreement on what was actually
contracted for.
See also Griffith v. Clear Lakes Trout Co., 152 P.3d 604 (2007).
Parties contract around the term “market size.”
Clear Lakes interprets “market size” to indicate a fluctuating standard, whereas Griffith defines
“market size” as 1 lb.
Court looked at the course of performance evidence. The course of performance evidence in this
case is that the parties operated under this contract and the Griffith definition for three years
without a dispute.
Therefore, the parties were operating as if there was a contract and as if they knew what the
terms of the contract entailed. Court found that there was a contract because this term was
not indefinite in the minds of the parties.
(C) Incomplete and Deferred Agreement
See Metro-Goldwyn-Mayer, Inc. v. Scheider, 360 N.E.2d 930 (1976).
The contract between these two parties left open the start date of the movie.
Court used the industry standard to fill in the gaps.
But see Joseph Martin, Jr., Deli., Inc. v. Schumacher, 417 N.E.2d 541 (1981).
Court held that the open term is so fluid and material that the court does not have the authority to
fill in the gap.
General Rule: Courts easily and routinely fill in open price terms. The general theory is that parties
can contract around open terms simply by expressly mentioning these terms in the contracts.
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See also Oglebay Norton Co. v. Armco, Inc., 556 N.E.2d 515 (1990).
Oglebay agrees to ship Armco’s iron ore at a price to be mutually agreed upon.
The parties have a very long-standing and intertwined relationship, but were not able agree upon
a specific price.
Court held that:
(1) The parties intended to be bound by the contract, even without a specific price
mechanism.
(2) Court could specify a reasonable rate.
(3) Court is empowered to appoint a mediator to exercise equitable jurisdiction.
The trend regarding incomplete agreements or deferred agreements is to go the direction of Oglebay.
In assessing these cases, consider the two theories of contract law, efficiency and will theories.
UCC, however, mandates that the quantity be specified for an enforceable contract.
(D) Remedies for Incomplete or Indefinite Agreement
See Hoffman v. Red Owl Stores, Inc., 133 N.W.2d 267 (1965).
Red Owl Stores began working with Hoffman to allow Hoffman a franchise.
Hoffman takes several major steps to prepare.
Red Owl says that he is not ready, and does not extend an offer to Hoffman.
Although there was no formal offer, this is a case of promissory estoppel.
Court held that the mere fact that there is reliance on a parent commitment does not equate to
recovery in the case of incomplete agreements. The necessary components for recovery are
(1) Promise, and (2) reasonable reliance.
V.
Avoidance of Contract
1. Mistake
- Mistake defenses are often asserted but rarely successful.
- Definition: Mistake is when the parties have a misconception as to the facts or terms of the contract
to which they agreed.
- Two types of Mistake:
1. Mutual Mistake – both parties are mistaken
2. Unilateral Mistake – one party is mistaken
Mutual Mistake
- See Beachcomber Coins, Inc. v. Boskett, 400 A.2d 78 (1979).
Plaintiff bought a coin from Defendant thinking it was of a certain value.
Both parties were mistaken as to the authenticity of the coin.
Court held that in the event a mutual mistake, the contract is voidable by the adversely affected
party, unless the adversely affected party bears the risk of mistake.
-
Voidable: When one party seeks the remedy of rescission (to rescind or set aside the contract), the
contract is said to be voidable.
See Restatement § 154 – If the contract stipulates that the buyer has the burden of bearing the risk of
mistake, then that adversely affected buyer cannot evoke mutual mistake.
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Unilateral Mistake
- More stringent criteria for granting rescission.
- See Boise Junior Coll. Dist. V. Mattefs Constr. Co., 450 P.2d 604 (1969).
Court developed a Five-Part Test for granting rescission in the event of a unilateral mistake.
1. Mistake must be material.
2. Enforcement in Unconscionable.
3. No gross negligence/recklessness on the mistaken party.
4. Alternative party prejudiced by enforcement.
5. Prompt notice given.
-
See Restatement § 153 – When Mistake of One Party Makes a Contract Voidable
Where a mistake of one party at the time a contract was make 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. . . , and
(a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or (b)
the other party had reason to know of the mistake or his fault caused the mistake.
2. Fraud
Fraud is like unilateral mistake. Fraud is an inherently malleable doctrine, because a rigid rule would
enable fraud-feasors to go slightly beyond the scope of fraud to avoid such a standard.
A. Misrepresentation of Fact.
See Laidlaw v. Organ, 15 U.S. 178 (1817). Professor Bellia’s favorite case.
News that that the War of 1812 had ended was made public on April 19, 1815.
Defendant had not heard the news and asked plaintiff if there was any news that would indicate that
a change in price of the commodity they were trading.
Plaintiff remained silent.
Court held that the Plaintiff had a duty to get an answer to his question and not simply allow a non
answer to inform his actions. Therefore, there was no fraud.
Court held that the plaintiff is not bound to disclose.
See Vokes v. Arthur Murray, Inc., 212 So.2d 906 (1968)
Dance studio misrepresented their opinion that a woman was a talented dancer in order to solicit her
to take more classes.
Court held that a misrepresented opinion is akin to a misrepresentation of fact.
Five types of Misrepresentation of Fact:
1. Misrepresentation of Opinion
2. Blatant Misrepresentation.
3. Half-truth.
4. Concealment.
5. Duty to Disclose. This duty exists when:
a. Disclosure is necessary to prevent a previous assertion from being fraud.
b. Disclosure would correct a mistake of the other party as to a basic assumption of
which that party is making the contract and if non-disclosure amounts to a failure to
act in good faith and in accordance with reasonable standards of fair dealing.
c. Disclosure 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. The other party is entitled to know the fact because of a relationship of trust and
confidence between them (fiduciary).
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B. Fraud in the Inducement.
Fraud in the Inducement renders a contract voidable, i.e., the defrauded party can void a contract if
he/she so chooses.
C. Fraud in the Execution.
Example: Someone comes to your door and offers Girl Scout cookies and says all you have to do is
sign here. You sign, then they tell you that the actual document is a contract agreeing to sell your
house for X amount.
This contract is void, i.e., there is no contract at all.
3. Unconscionability
Uncoscionability grants relief in two forms:
1. Procedural
a. Unfair surprise
b. Absence of meaningful choice
2. Substantive
a. Oppression.
UCC codifies unconscionability (see UCC § 2-302)
(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) When it is claimed or appears to the court that the contract or any clause thereof may be
unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its
commercial setting, purpose and effect to aid the court in making the determination.
Unconscionability exists when:
The parties have mutually manifested their assent to the bargain.
The problem is that something is askew in the way the contract came about.
This is not mistake, this is not fraud. It is a difficult doctrine to frame.
Essentially, the terms of the agreement are so unreasonable that the contract is unenforceable.
4. Illegality
On the basis of contract law, the contract is enforceable. However, on the basis of criminal law, the
contract is unenforceable.
Two questions exist in the presence of illegality
1. Is the contract enforceable?
2. Assuming the contract is unenforceable, will the court award restitution?
Often times, the court will not address the second question and will not award restitution.
Example:
A asks B to drive a package from Cleveland to South Bend and be there in 3 hours.
B would have to break the law in order to fulfill the contract.
A paid B $1,000 for this service.
If B breaches and A sues for breach, A is unlikely to recoup the $1,000, because the court
tries to avoid restitution for illegal contracts.
Contracts Counter to Public Policy
Currently, the courts balance the interests in enforcing the contract against public policy in favor on
non-enforcement.
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Courts take three different approaches:
1. The covenant is not reasonable in scope or duration and therefore not enforceable.
2. “Blue pencil” approach. The court could limit the contract by striking through provisions of
the contract. (Rarely followed).
3. Courts adjust the overbroad covenant to the point that it gets reasonable. (This is the trend.)
When a conflict exists between statutory provisions and common law, the statutory provision wins,
because the legislatures make the laws.
Courts must engage in balancing tests when the contract is juxtaposed with a public policy concern.
Example: An individual legally purchases a gun from a gun dealer. After the sale, the buyer
informs the gun dealer that he intends to use the gun against another person. The gun dealer
stops the buyer at the door and chooses not to honor the contract.
VI.
Performance of the Contract
1. The Scope and Content of the Obligation
(A) The Parol Evidence Rule a.k.a the “Unoffficial, Impenetrable Doctrine of First Year Law School”
A party is generally not permitted to introduce evidence of a contract outside the written agreement
when the written agreement is said to be a total integration of the agreement.
Total Integration: A writing is said to be a total integration if it is said to be the final, exclusive
outline of the agreement.
Partial Integration: A writing is said to be a final manifestation of the terms supplied.
Tests:
1. Appearance Test – Looks solely at the 4-corners of the document and asks whether it appears
that the writing is a total integration or only a partial integration. (Outdated Test).
2. Natural/Ordinary Inclusion Test – This tests asks whether one would naturally or ordinarily
put the prior (oral) agreement in writing.
Procedural Elements: A judge, not a jury, decides whether or not the parol or oral evidence is to be
admitted in court. This is due to the fact that one cannot unring a bell.
Parol Evidence Rule does NOT apply to separate or independent agreements.
Parol Evidence Rule ONLY applies to prior agreements. It does not apply to subsequent
agreements.
(B) Interpretation
See Pac. Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 442 P.2d 641 (1968)
Justice Traynor establishes an approach for interpreting contracts.
Step 1: Look at the plain language of the contract.
Step 2: If, and only if, the plain language is “reasonably susceptible” to an alternative meaning
should extrinsic evidence be considered.
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See also Frigaliment Imp. Co. v. B.N.S. Int’l Sales Corp., 190 F.Supp. 116 (1960).
Within the contract between the two parties, the term, “chicken,” is ambiguous.
Parol Evidence:
1. Exchange of cable grams. (Court did not find that this established anything).
2. Trade usage of the term. (Court found this evidence equivocal).
3. Federal Regulation. (Court found this evidence compelling).
4. Keep reading for the price and its relation to “chicken.” (Court found that this evidence
suggests and understanding between the parties).
5. Course of Performance. (Under the circumstances, Court found this less compelling).
Court concluded that “chicken” is ambiguous, and, therefore, parol evidence is acceptable.
Court held that the drafter of the contract has the burden of proving the meaning of a term.
For interpretation through the use of parol evidence the most compelling forms are:
Course of Performance, course of dealing, and usage of the trade/industry.
2. The Duty of Good Faith
Good Faith pertains to contracts in existence, and good faith duty is triggered by the formation of a
contract. This is different from fraud, mistake, and unconscionability, because those concepts
pertain to contract formation, whereas good faith exist only after a valid contract is formed.
Example of Good Faith: In the event that a sale is contingent upon the buyer’s satisfaction, that buyer’s
satisfaction or dissatisfaction must be expressed in good faith.
Three Categories of Good Faith:
1. Reserved Discretion
2. Duty to Cooperate
3. Employment Contracts
Reserved Discretion
“under an agreement that appears by word or silence to invest one party with a degree of discretion
is performance sufficient to deprive another party of a substantial portion of the agreement’s value,
the parties’ intent to be bound by an enforceable contract raises an implied obligation of good faith
to observe reasonable limits in exercising that discretion, consistent with the parties’ purpose or
purposes in contracting.” Centronics Corp. v. Genicom Corp., 562 A.2d 187 (1989).
Courts will not read the duty of good faith to do away with a clear contractual right. If a contract
contains explicit provisions that may violate good faith, the duty of good faith will not supersede the
expressed portions of a contract.
See Patterson v. Meyerhofer, 97 N.E.472 (1912).
Patterson agrees to sell houses to Meyerhofer.
Patterson did not yet own the houses, but planned to buy the houses at auction.
Meyerhofer decides to buy the houses at the auction, thereby undermining Patterson.
Patterson sues.
The court holds that a party cannot undermine the contract.
Court: “In the case of every contract there is an implied undertaking on the part of each party that he
will not intentionally and purposely do anything to prevent the other party from carrying out the
agreement on his part.”
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As a practical matter, legal briefs do not talk about will theory and efficiency theory. However, some
judges have an underlying bias towards one theory. By looking at the policy reasons underlying a
good faith duty can tailor an argument to the appropriate audience.
Employment
Two types of employment contracts: Employment at-will and Employment at term
Law long protected employment at-will and the courts would not hold parties to imposed standards.
Now, statutes protect “at-will” employees from termination beyond good-faith.
3. Allocation of Risk: Conditions
(A) Express Conditions
(1) Nature and Effect
Certain terms have the label of conditions. These conditions are characterized by:
The Restatement (Second) defines conditions as, “an event, not certain to occur, which must
occur, unless its non-occurrence is excused, before performance under a contract becomes
due.”
See Dove v. Rose Acre Farms, Inc., 434 N.E.2d 931 (1982).
The chicken farm instituted an incentive program with very strict conditions for receiving the
bonuses.
Plaintiff was working towards his bonus under the incentive program and had nearly fulfilled all
of the requirements.
Plaintiff became ill in the last week and was forced to go to the hospital.
Because of his absence, Plaintiff did not meet the incentive program requirements and the farm
denied Plaintiff his bonus.
Court held that the rules were clear to the plaintiff and the contract’s purpose was to combat
tardiness and absenteeism.
Conditions are to be strictly adhered to and enforced.
In this case, the conditions are “conditions precedent,” because the condition has to be fulfilled
before the duty matures.
(2) Excuse of Conditions
Waiver = intentional relinquishment of a known right.
Election Waiver = after a condition has not been satisfied, a party can chose (or elect) to waive
the condition.
A party can also decide to waive a condition before the condition is not satisfied.
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See Clark v. West, 86 N.E. 1 (1908).
Plaintiff would complete a three-volume law book series.
The plaintiff “was not to write any other books unless requested so to do by the defendant.”
The plaintiff “agrees to totally abstain from the use of intoxicating liquors during the continuance
of this contract.”
The plaintiff would get $2 per page for each page prepared by the plaintiff and accepted by the
defendant. If the plaintiff abstains from intoxicating liquor, he would get an additional $4
per page.
Court found that the defendant waived the condition because defendant knew of violations of the
condition but still accepted the plaintiff’s completion.
Example: Bellia adds a wing to a house.
The builder gets $12 when the framing is done.
The builder gets $12 when the drywall is done.
If the builder needs cash in hand, and Bellia agrees, Bellia is waiving the condition,
but not the framing component of the contract.
See also Ferguson v. Phoenix Assurance Co. of N.Y., 370 P.2d 379 (1962).
Plaintiff (Ferguson) was insured under Defendant’s (Phoenix’s) burglary and robbery policy.
Plaintiff’s drug store was burglarized on March 8, 1960.
The amendment to the safe burglary insurance contract defined that safe burglary is covered,
“provided such entry shall be made by actual force and violence, of which force and violence
there are visible marks made by tools, explosives, electricity or chemicals upon the exterior
of . . .”
The damages safe only had damage marks on the interior, but not the exterior.
Court draws a distinction between the coverage of the policy and the evidence of the loss.
Court balances the interests of the insurance company and the interests of the consumers.
Against the general trend court finds for the Plaintiff and holds that the insurance company’s
conditions are without merit.
General, Historical Progression:
Conditions are firm Conditions can be waived. Conditions can be excused when there is no prejudice.
(B) Constructive Conditions: Where nothing is expressly said about the order of performance, the court
fills in the order.
Generally, where one performance can happen instantaneously, and the
other performance can happen over time, the performance that takes time
goes first.
(1) Historical Development
See Kingston v. Preston, 99 Eng.Rep. 437 (1773).
Preston is to hand over his business to Kingston if Kingston works for several years under
Preston, pays Preston, and provides Preston with financial security.
Court established three types of covenants:
1. Independent – Covenants are independent of one another.
2. Dependant – Performance of one party is dependent on prior performance by another
party.
3. Mutual conditions – The performances are exchanged simultaneously.
Court ruled that Preston would not have to surrender his business before he received the security.
Doing so would defeat the purpose of security.
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Contemporary Approach
See Palmer v. Fox, 264 N.W. 361 (1936).
Fox was to pay installments to Palmer for a deed of land.
Palmer also agreed to cinderize the road leading the land.
After the final payment was receive, Palmer would render the deed to Fox.
As a constructive condition, Palmer must cinderize the road before the final payment is made.
Court held that “the modern rule is that stipulations are to be construed to be dependent or
independent according to the intention of the parties and the good sense of the case.”
Installment payments are Independent Covenants.
The Test for the Dependence/independence of Covenants:
Had Fox failed to pay his first installment payment, suit could be brought for Fox’s breach,
because the installment payment is not dependent upon a performance by the other party.
(2) Avoidance of Forfeiture
See Jacobs & Young v. Kent, 129 N.E. 889 (1921).
Plaintiff builds a house for Defendant.
Defendant refuses to pay, because the wrong type of pipe was used in the construction.
The pipe used is of equal quality.
As a general rule, perfect performance does not exist.
Court held that when one party is constructing something for another party, a condition of a duty
to pay is substantial performance, not perfect performance.
Court weighed the purpose to be served, the desire to be gratified, the excuse for deviation from
the letter, and the cruelty of enforced adherence.
4. Impracticability
Impracticability comes in two forms: (1) existing impracticability; and (2) supervening impracticability.
(A) Existing Impracticability
See United States v. Wegematic Corp., 360 F.2d 674 (1966).
Government accepts Defendant’s bid for a computer system.
Delivery on the contract was made impossible by engineering difficulties.
Court rejected Defendant’s impracticability defense, because this was an existing impracticability.
Court looked to the Restatement, which says:
“Where at the time a contract is made, a party’s performance under it is impracticable without
his fault because of a fact of which he has no reason to know and the non-existence of which is a
basic assumption on which the contract is made, no duty to render that performance arises,
unless the language or circumstances indicate the contrary.”
However, if one has some reason to know about a circumstance, as Defendants did, then
impracticability is no defense.
Difference Between Existing Impracticability and Mutual Mistake:
Existing Impracticability – performance is impracticable.
Mutual Mistake – mistake by both parties upon the agreed exchange.
(B) Supervening Impracticability
Supervening Impracticability is the existence of circumstances that present themselves after the
formulation of the contract and render performance of that contract impracticable.
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Performance is made impracticable:
1. Without fault.
2. The non-occurrence of the event was a basic assumption of the parties.
Supervening Impracticability succeeds where:
1. The thing contracted for is destroyed; or
2. The person to perform dies or becomes incapacitated; or
3. A performance has become illegal.
Example: A person with credit card debt dies. Impracticability is no defense to non-payment,
because that specific person is not crucial to the performance of the contract. His estate
is still capable of paying the debt.
Example: A famous singer dies before she has the chance to perform at the concert. Only that
specific singer can fulfill the role the ticket holders contracted for. This is a case of
impracticability.
When determining impracticability, the court asks if there are any reasonable alternatives.
(C) Frustration of Purpose
Frustration of Purpose is the existence of circumstances that present themselves after the formulation
of the contract and render purpose of that contract frustrated.
Purpose is frustrated:
1. Without fault.
2. The non-occurrence of the event was a basic assumption of the parties.
Only difference between Frustrated Purpose and Impracticability is that “purpose” is substituted in
for “performance.”
Example: Invading forces take over Castle Point and kick me out of my apartment. The
performance is not rendered impossible, because I can still mail in my rent check.
However, the purpose of my renting the apartment as a place to live has been frustrated.
Paradine v. Jane (1647) would have said that the parties bear the risk and that the rent is
still due.
Krell v. Henry (1903) changes the approach. This case holds that the parties did not
expressly deal with the possibility of the cancelled processing. However, their purpose
was for view the procession, so the purpose was frustrated. Therefore the contract is
void.
Moral of the story: Build unforeseen circumstances into the contract and attempt to address
potential externalities.
VII.
Breach of Contract and Remedies
Two Actions for an Injured Party:
1. Offensive Measures – If the work has not been completed, offensively, the injured party
would want to bring action for a breach.
2. Defensive Measures – If work has not been completed, defensively, the injured party would
not pay for work not completed.
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1.
Fall 2008
Right to Suspend Performance Upon Prospective Inability or Breach
See Hochster v. De La Tour, 118 Eng.Rep. 922 (1853).
In April, De La Tour hires Hochster as a courier for the June 1 Tour.
On May 11, De La Tour informs Hochster that there would be no tour.
On May 22, Hochster sues.
On June 1, the Tour should have started.
Court held that there was a problem of anticipatory repudiation.
Court held that the anticipatory repudiation cancels the contract.
Court explains that for an express repudiation to qualify as a repudiation, it must be an explicit, clear,
and unequivocal repudiation.
See Taylor v. Johnston, 539 P.2d 425 (1975).
Timeline
1. Contract formed for Stud services
2. Stallion sold. Letter sent to plaintiff informing plaintiff that he is “released for reservation”
[REPUDIATION??]
3. Arrangements made in KY for stud services. [REPUDIATION RETRACTION]
4. Requests for appointments. Shareholder conflicts. [REPUDIATION???]
5. Plaintiff breads elsewhere.
6. Plaintiff files for breach.
Courts held that there was an anticipatory repudiation. However, the repudiation was not accepted, the
contract was not canceled, and the repudiation was retracted by defendant’s agreement and actions.
Implied repudiation was not an actual repudiation. The Plaintiff’s acted rashly by giving up and finding
an alternative stud services.
Court held that there are two types of repudiation.
1. Express repudiation.
2. Implied repudiation – for an implied repudiation to be correct, it must be out of the power to
perform. Essentially, implied repudiation only exists when performance is impossible. This is
different from performance becoming impracticable. (See the requirements for impracticability)
If there is reliance, then there are grounds for equitable estoppel.
Uniform Commercial Code § 2-609 – The Road to Victory
Essentially, this provision demands assurances. When no assurances are forthcoming within a
reasonable time not to exceed thirty (30) days, then repudiation is assumed.
2. Compensatory Damages
Three ways for calculating damages.
1. Expectation – General rule. This measure captures reliance.
a. Direct Damages – damages one would expect to flow from a breach in the normal course.
b. Consequential damages – See Hadley v. Backendale (spelling?). Additional damages that are
reasonably foreseeable from the breach of the specific contract.
c. Incidental damages – damages that it requires to mitigate the damages.
2. Reliance
3. Restitution – value of the benefit that the party of the contract has conferred on the other party.
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(A) Breach or Repudiation by Payor
Example: Building/construction contract. House for $100,000.
Contractor fully performs, but owner refuses to pay. The damages would be the amount
of the contract.
Contract signed, but there is no performance before owner breaches –
a. The expectation measure would be the difference the expected profit the
contractor would have realized.
Contractor signed, there is partial performance, and owner breaches –
a. If there has been substantial performance, and the contract is not divisible, the
damages = (the contract price) – (the cost to complete)
b. If the contractor spent over the cost of the contract, then how do you assess this
based on a reliance measure?
The two restitution measures:
a. Cost avoided
b. Net enrichment
(B) Breach or Repudiation by Supplier
Example #2 Breach by the Payor of Goods.
a. Resale (UCC 2-706)
Contract price – resale price
b. Market (2-708)
Contract price – market price
c. Profit (UCC 2-708(2))
When there is no resale market for the good, use the profit price.
d. Price (UCC 2-709)
3.
Equitable Remedies
This is the exception, not the rule, in contract remedies.
UCC § 2-716 states that specific performance is to be used for unique goods.
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