CONTRACTS OUTLINE

Prof. Stone, 1st Semester

Allison Garton

I. CONTRACT
a. Voluntary agreements between consenting adults, NOT
regulatory legislation or agencies making the contracts,
but private, free people
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II. ECONOMIC ANALYSIS OF LAW

a. Goal is to “maximize societal welfare”
i. More goods for more people at a lower cost,
therefore more happiness
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III. PREREQUISITES FOR WEALTHY SOCIETY

a. Respect for private property rights
b. Respect for the transfer (by contract) of these rights
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IV. EFFICIENT BREACH

a. An intentional breach of contract and payment of damages
by a party who would incur greater economic loss by
performing under the contract
b. Benefits:
i. Aggrieved party still gets made whole
ii. Now there are more contracts (more pieces of the
“pie”)
iii. Breacher of contract is still responsible for damages,
but is able to get the benefit of another more
lucrative contract
iv. Market (people, workers, etc.) all get a bigger slice of
the pie
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V. REGULATION OF CONTRACT BREACHES

a. How does market react to those who breach?
i. Trust might be lost and people will not want to
contract with them anymore
b. When do we want more formal regulations of breaches?
i. When there is opportunism
1. Fraud

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 2. Duress
ii. When there is a sequential breakdown that results
1. when it is time-related
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VI. REMEDY IN EQUITY

a. Cost of performance

VII. REMEDY AT LAW

a. Monetary damages
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VIII. LEVELS OF CONTRACT PERFORMANCE

a. MATERIAL BREACH
i. A substantial breach of contract usually excusing the
aggrieved party from further performance and
affording it the right to sue for damages
ii. Total breach of main K terms
b. SUBSTANTIAL PERFORMANCE
i. Performance of the primary, necessary terms of an
agreement
ii. Doctrine: the rule that if a good-faith attempt to
perform does not precisely meet the terms of the
agreement, then the agreement will still be
considered complete if the essential purpose of the
contract is accomplished
c. FULL, COMPLETE, SATISFACTORY PERFORMANCE
i. The successful completion of a contractual duty
usually resulting in the performer’s release from any
past or future liability
ii. Performance completed to the satisfaction of both
parties
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IX. EXPECTANCY INTEREST

a. The value of whatever the person reasonably anticipated
the performance was to be (“Benefit of the Bargain”)
b. Compensation awarded for the loss of what a person
reasonably anticipated from a transaction that was not
completed

X. RELIANCE INTEREST
a. The interest a non-breaching party has in recovering costs
stemming from that party’s reliance on the performance of
the contract

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 XI. RESTITUTION INTEREST
a. Damages restore the benefits that the injured party
conferred upon the breaching party prior to the breach
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XII. COVER
a. The purchase on the open market, by the buyer in a breach
of contract dispute, of goods to substitute for those
promised but never delivered by the seller
i. UCC § 2-712: the buyer can recover from the seller
the difference between the cost of the substituted
goods and the original contract price
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ON TEST
1. what are the issues
2. what are the rules of laws that relate to these issues
3. analysis (attempt to apply rules of law to facts to resolve the
issue)
a. argue yes and no by applying law to the facts
b. give arguments on both sides **** most important
4. Reach a conclusion
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DAMAGE THEORIES

GENERAL DAMAGES
The usual ordinary remedy: give non-breaching party his
expectation interest (Cost of completion/performance)

EXPECTANCY
THEORIES
EXPECTANCY INTEREST
a. The value of whatever the person reasonably anticipated
the performance was to be (not based on injured party’s

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 hopes i.e., gusher of oil, but on actual value the contract
would have had if performed)
b. Compensation awarded for the loss of what a person
reasonably anticipated from a transaction that was not
completed

CASE EX: Hawkins v. McGee

Dollar value promised MINUS dollar value delivered PLUS
Incidental & Consequential losses MINUS loss avoided =
Expectancy Damages

RESTATEMENT § 347: Injured party has a right to damages based on

expectation interest measured by:
(a) the loss in the VALUE to him of the other party’s
performance caused by its failure, PLUS
(b)any other loss, INCIDENTAL OR CONSEQEUNTIAL,
caused by the breach, LESS
(c) any AVOIDED COST OR LOSS, avoided by not having to
perform

DIMUNITION OF VALUE
Used to figure damages when using the Cost of Performance rule would
result in P being a better position than he was if K was completed

CASE EX: Peevyhouse

 Remedy at law= monetary damages
 Cost of completion would be economically wasteful
 Lesser remedy than cost of completion
o Lost value/ diminution of value rule
D’s promise to restore land after strip mining was uncompleted. P was
entitled to cost of performance, but this would result in economic
waste as land would increase in value only by $300 and C.O.P. was to
be $29k.
A. Formula: MC($29k) > MB($300) = Economic Waste ($28.7k)

RESTATEMENT § 348-2(a)(b) : If a breach results in defective or

unfinished construction and the loss in value is not sufficient for the
injured party, they may recover damages based on:
(a) the diminution in the market price of the property
caused
by the breach

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 (b) the reasonable cost of completing performance IF that
cost is not clearly disproportionate to the probable loss
in value (cost of performance)

RATIONALE :
 Efficient use of resources in society
 This is basically the court mitigating (§350) the damages
 Cost of completion is greater than benefit: if we continue to
do this, society will go broke and the economy will go
bankrupt
 May not be a perfect solution but it is the lesser moral evil
(least imperfect choice)

COASE CONTRACT THEOREM

Coase Theorem: contract around the damages to maximize efficiency…
put a remedy into the contract, keep in mind that contracts are
not perfect so plan for breaches

This serves as a lesson to future contracting parties to draw the

contract carefully and plan for all uncertainties. Courts are not there to
re-write the contracts so write them carefully the first time!!

Don’t let transaction costs eat up all of your profits

Allows us to contract around the pitfalls of the law

AVOIDANCE OF ADDITIONAL LOSS

The injured party cannot recover damages for loss that could have
been avoided if that party had taken appropriate steps to do so.

CASE EX: Rockingham

 Waste of resources by building a bridge nobody wanted
 Expectation interest is only lost profits
 What is wealth-maximizing in the long run
Co. backed out of bridge building K and Luten completed performance.
Court held that once Luten has been notified they are required to stop
and not rack up damages. Entitled to recover (lost profits + work
completed + reliance cost i.e. architecture plans).

RESTATEMENT § 350: Damages are not recoverable for loss that the
injured party could have avoided without undue risk, burden or
humiliation

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RATIONALE:
 Luten can only recover Lost profits:
 What would (P) have made on the deal if he’d been allowed to
perform
 Bring in expert witnesses
 Profit PLUS Reliance damages MINUS any loss avoided
(returned scraps he didn’t
have to use)

Full contract price less expenses= damages

Restitution 370-373
MITIGATION
(P) can’t recover if they don’t try to avoid loss

Mitigation is a technique of “substantial performance”

CASE EX: Hussey v. Holloway

Breach of K for employment K. Employee not obligated to accept offer
of lesser employment as mitigation and is entitled to expectancy
interest from original K.

RESTATEMENT § 350: Damages are not recoverable for loss that the
injured party could have avoided without undue risk, burden or
humiliation

1. Use reasonable effort and due diligence to find

comparable performance
“Comparable”: chef take on job as short order cook:
NO
pastry chef take on job slightly different
than pastry: YES
2. Injured party is not required to engage in a business
that is not of the same general character as her
previous one, in order to mitigate.

RATIONALE:
• (P) can sell his time only once
• Require offset or it would be a windfall
• Mitigate to avoid waste of labor or resources

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MITIGATION AND LOST PROFITS
2 part test: ???????

CASE EX: Olds v. Mapes

D has K w/P to do work for owner. D breaks K1 w/P and P recontracts
w/ owner to finish the job. D wants profits made from K2 and is
entitled to total profits from both if proof can be provided that he
could do both.

Court agrees with (D): amount of breach is not reduced by the (P)’s
earning on a second contract
made subsequent to the breach
 Olds mitigated which should not be punished

Is the 2nd contract independent of the 1st? Yes:

 there may be new independent risk in the 2 nd contract
therefore he doesn’t owe contractor anything
o labor costs may go up
o cost of raw materials may change
o weather may go bad
 must look at these new risks ex ante (NOT ex post: after it has
happened) because (P) does not have the advantage of 20-20
hindsight perspective like we do after the job has been
completed
o should look at what the risks they actually had to deal
with from the beginning, not what we found the actual
risks to be when it is all said and done

If the subcontractor did not have incentive to complete the contract by

contracting with owner then owner would have to go out and find
a 3rd party to complete it (adds on transaction and search costs)

RATIONALE: Opportunity cost

 1 supply of labor in Hussey vs. multiple supply of labor in
construction (management of capital)
 No offset of profits of 2nd job in measure of damages in 1 st
job
Got 2 independent contracts
More supply in business environment than in labor
More risk in business environment than in labor
 Contractor’s time did not belong to the (D) like the lady in
the Hussey case where her time belonged to her employer
 Discrimination on the basis of economics allows the
benefits to exceed the costs

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A. Lost Profits on a new business
1. Usually not awarded, but sometimes when P would
recover no expectancy b/c he has lost no economic benefit,
may try to gain some potential lost profits.
2. Owner must show some facts
a. Projection of profits
b. Based on both similar business in the area and his
profits since opening.
3. Argue N: Merely projections, different neighborhoods –
what is to say that P would have done any better in the
original building, also his subsequent profits could be
based on seasonal sales that will misrepresent his figures.
4. Point is court cannot make up a figure out of thin air:
argue Y and N.

OVERHEAD EXPENSES:
 Fixed costs such as rent or normal business expenses are not
saved by a breach and therefore are NOT deducted from
damages

LOST VOLUME SELLERS AND PROFITS

One should not assume that a similar transaction after the breach must
be a substitute for the broken contract. It should only be treated
as such if it is clear that the plaintiff would not or could not have
entered it in the absence of breach.

For instance: A huge appliance store has lots of fridges. A buyer says
he’ll buy the fridge, but then breaches. Seller then sells that
fridge to someone else. Because the seller has a stock of
identical products, it had another one to sell to the second buyer
even if the first buyer had not breached. It could have therefore
sold 2 fridges instead of 1, and the breach has the effect of
reducing its VOLUME OF SALES. If the seller can establish such a
lost volume situation, the second sale is NOT A SUBSTITUTE, and
its proceeds should not be treated as reducing the loss from the
breach, and the seller is entitled to recover its FULL PROFIT
expected under the breached transaction.

CASE EX: Diasonics

U.C.C. § 2-708(2): If the measure of damages provided in subsection

(1) or

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 in § 2-706 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 or CONSEQUENTIAL damages.

RATIONALE: 3 part test for lost volume seller (could have made both
sales thus losing a profit)
1. Does seller have the capacity to make the sale
2. Would it be profitable to make both sales
3. Would he have made the 2nd sale absent the breach

NON-LOST VOLUME SELLER: Offset the profit of k2 to determine

damages of k1: area of specially manufactured goods (not a
volume seller)
 Unique goods (a painting) can’t claim lost volume,
must claim offset
 Ex: Volume carpet business, on k1 he has to cut apt.
for triangle shape room, person he is installing it for
breaches, seller tries to sell the scraps, not a volume
seller in this contract

QUANTITY DISCOUNTS
CASE EX: Nobs Chemical, USA, Inc. v. Koppers Co., Inc.
Seller cannot recover quantity discount which he lost on account of
breach by Buyer.

RESTATEMENT § 2-710: Incidental damages to an aggrieved seller

include any commercially reasonable charges, expenses, or
commissions incurred in stopping delivery, in the transportation,
care and custody of goods after the buyer’s breach, in
connection with return or resale of the goods or otherwise
resulting from the breach.

RATIONALE:
 Nobs just saved something and did, not a new charge
 Quantity discounts are considered an extra benefit not received
 If Nobs had paid for storage of the chemical then that would be a
charge that he could recover under § 2-710 for incidental
damages
 Benefit forgone does not equal a cost reasonably INCURRED

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COVER
CASE EX: Durawood Treating Co. v. Century Forest Industries, Inc.
A crosstie company (P) K’d w/ another (D) to buy crossties to sell to
Buyer (B). D breached causing P to make crossties internally b/c of
increased market price. P asks for
1) cover for cross ties (actual damages),
2) Lost profits from internal cover (potential profits)
3) Lost profits from K w/ B.

UCC § 2-712: Cover; Buyer’s procurement of substitute goods

1. After a breach the buyer may cover by making in good
faith and without reasonable delay any reasonable
purchase of or contract to purchase goods in substitution
for those due from the seller
2. Buyer may recover as damages the difference between
the cost of cover and the contract price plus incidental
and consequential damages, less expenses saved
Court says Durawood cannot recover potential and lost profits.

RATIONALE:
 Potential profits: if Dura-wood had purchased ties from someone
else, its facilities would not have been tied up and they would
have been able to enter into new or different contracts, thereby
allowing Dura-wood to have overall lower costs.
o Century should not be obligated to pay for Dura-wood’s
poor choice.
 Lost profits: Dura-wood received an actual damage award that
considered the difference b/w the cost of cover and the contract
price. So, Dura-wood had already been compensated for the fact
that producing its own ties was more expensive than buying
them from Century, thus to give another $13,000 would be
double recovery

CONSEQUENTIAL DAMAGES:
In some cases, a buyer may not be able to make a substitute
transaction and may suffer consequential damages as a result of
the breach.

If the breach has caused further losses in OTHER transactions or

endeavors that were DEPENDENT upon the contract then those
would be considered consequential damages.

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UCC § 2-715: Describes consequential damages as claimable damages
when the seller, at the time of contracting, had reason to know of
and which could not have reasonably been prevented by cover.

MARKET VALUE
When is market value used?
 If the aggrieved party DID NOT enter into a substitute transaction
(cover/mitigation), then they are entitled to sue for loss based on
a hypothetical substitute, valued at the market rate
o Market rate would be determined through testimony of
expert witnesses

UCC § 2-713: allows the buyer the market-contract difference

as damages

 The market price may also be used as the basis for calculating
damages when the plaintiff DID enter a substitute transaction,
but the principle of mitigation makes it INAPPROPRIATE to award
damages.
o This may happen when the market was rising and the
plaintiff waited too long before making the substitute
contract, or they chose an unreasonably expensive
substitute.

WARRANTIES
A. What is a warranty? A promise by the seller that goods will have
certain qualities.
B. Types of Warranties
 Express Warranties (§2-313): A warranty created by the overt
words or actions of the seller. Under the UCC, and express
warranty is created by any of the following:
1. an affirmation of fact or promise made by the
seller to the buyer relating to the goods that
becomes the basis of the bargain
2. a description of the goods that becomes part of
the basis of the bargain
3. a sample or model made part of the basis of the
bargain
a. “Puffing” usually does not amount to an express warranty
as long as it is Sellers
opinion.

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 b. The test is “whether the seller assumes to assert a fact of
which the buyer is ignorant, or whether he merely states
an opinion or expresses a judgment about a thing […].”
c. In order to recover for breach of express warranty, the
warranty must be “part of the basis of the bargain”
between the parties.

 Implied Warranty (§ 2-314): A warranty arising by operation

of law because of the circumstances of a sale, rather than by
the seller’s express promise. An implied warranty does not
require reliance as an element of a buyer’s recovery

CASE EX: Overstreet v. Norden Labs- A vet (P) buys new

medicine from Norden (D) that is warranted to prevent disease on
account of D’s literature. Drug does not work, mares abort foals
and P sues for breach of warranty.
i. The expressed warranty was relied on by P.
ii. Alternative Product Rule: Consequential damages
(lost foals) are only awarded consistent w/ 2-715 if:
1. An alternative product was available
2. This product would have been used.
iii. Court held that Alternative Product Rule was followed
here so P can only recover for K price (cost of
medicine) and not from effects of disease.
iv. Warranty in this case was expressed (stated in
literature) so reliance on this was required.

Foreseeability
Foreseeablity acts as a limit on expectancy damages.

Damages are foreseeable when, at the time of making the contract,

the party who ultimately breached reasonably should have realized
that those damages would be a likely consequence of the breach.
1. §351(1)—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 K was made.
2. § 351(2)—Loss may be foreseeable as a probable result of a
breach because it follows from the breach (a) in the ordinary
course of events, or (b) as a result of the special
circumstances beyond the ordinary course of events, that
the party in breach had reason to know.
3. § 351(3)—A court may limit damages for foreseeable loss by
excluding recovery for loss of profits, by allowing recovery
only for loss incurred in reliance, or otherwise if it concludes

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 that in the circumstances justice so requires in order to
avoid disproportionate compensation
4. U.C.C. 2-715 (inclusion of incidental/consequential damages)

CASE EX: Hadley v. Baxendale

 The special circumstances must be known to BOTH parties at
the time the contract was made in order for the (D) to be
liable for lost profits resulting from the breach

 (D) did not enter into a special contract to bear all the
consequences of the non-delivery of the shaft. They were
merely bound to carry it safely and deliver it within a
reasonable time.

 Parties should contract the special circumstances into the

contract from the outset, let (D) know about special
circumstances at the time of the contract

Issues on damages:
1. General damages: naturally flowing damages from the
contract (i.e., contract price, cost of transportation generally)
Restatement 351-2(a)
a. loss may be foreseeable as it stems naturally from the
breach
i. This includes all easily imaginable direct damages,
but also those consequential damages that should
be OBVIOUS to the breacher without any special
or particular knowledge
2. Special damages: damages beyond the ordinary general
damages, something unique and in addition to Restatement
351-2(b)
a. special circumstances beyond the ordinary course of
events
b. must be known and communicated to BOTH parties at
the time the contract is entered into (notice and
knowledge)
i. can’t expect the (D) in the transportation business
to know all about the mill business (too high of a
cost of information)
ii. what if the mill had a back up shaft, transportation
company would not know about this

CASE EX: Morrow v. First National Bank of Hot Springs

 Arkansas court ruled that a bank did not have to pay a coin
collector for coins that were stolen b/c bank did not let

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 collector know that safety deposit boxes were available as
agreed.
 Tacit Agreement Test:
1. To recover, D must prove more than mere knowledge or
foreseeability, but rather D must have tacitly (implied
even though it is not explicitly expressed) agreed to
assume the responsibility of the special damages/value
of coins.
2. P can recover 351(a) general damages, but not market
price of coins 352(b) specific damages b/c D didn’t
“tacitly” agree to the terms.
3. Special damages argument: Bank was told exactly why
he needed boxes at the time K was made

In this case, there is no proof supporting the finding that the

bank, in return for box rentals of $75, agreed in effect to
issue a burglary insurance policy to the plaintiffs in the
amount of $32,000.
How do we link this case to Hadley: until the coins are in the
possession of the bank, who is in the best position to
contract for safe keeping...Morrow needs to internalize the
risk

ON THE EXAM, GIVE THE LAW!!! §351—General and Special

Damages;
Is there knowledge? Is there a tacit agreement?
1. Mere notice of loss possibility OUTSIDE of contract terms is not
foreseeable

2. Hadley: Mere Notice is not sufficient under foreseeability

3. Not just that some damages might happen, but must foresee the
loss which actually occurred as being covered by the terms of the
contract

4. Damages must be foreseeable and certain, not speculative

5. The loss must be the probable result of the breach of the contract
terms

SPECIAL DAMAGES
Restatement § 353: Loss Due to Emotional Disturbance
 Recovery for emotional disturbance will be excluded
UNLESS the breach also caused bodily harm or the contract

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 or the breach is of such a kind that serious emotional
disturbance was a particularly likely result.

Restatement § 355: Punitive Damages

 Punitive damages are not recoverable for a breach of
contract UNLESS the conduct constituting the breach is
also a tort for which punitive damages are recoverable

CASE EX: Ainsworth v. Combined Insurance Co. of America

Insurance company refuses to pay claim court awards punitive
damages b/c of “oppression” and a “bad faith” breach of K. Statute
allowed this recovery. Jury awarded (P) $200,000 in compensatory and
$5.9 million in punitive. May create a “slippery slope” of increased tort
damages (CONTORT).

Oppression: more of a tort term, but this is what the court hangs this
case on
 Court gets its authority to give punitive damages from:
Nevada Statute which says punitive damages can be awarded
where the (D) has been guilty of fraud, malice or oppression
 Court relies on the inference that Combined was obstinate
and unjustified in their refusal to pay

CASE EX: Seaman’s Direct Buying Service, Inc. v. Standard Oil Co. of
California
Breach of “covenant of good faith and fair dealing” gets one big oil
company huge punitive damages from another big oil company.
1. Point is that no clear rule of law is followed and punitive damages
don’t belong in K. No
clear legal standard for determining “good faith bad faith”.

CASE EX: Club Mediterranean, S.A. v. Stedry

Stone went absolutely nuts over this. The court awarded punitive
damages to a family whose vacation was ruined b/c the hotel
was not what the company made it out to be. The court found
“some elements of fraud”, Stone says really an award for
“almost fraud.” which is not a tort required under § 355.

A. Why do we grant punitive damages: to punish and deter. But this

only works if their conduct is egregious. Punitive damages are
usually not granted for contract damages b/c they are not
FORESEEABLE. §355 is so extreme as to need an additional tort
b/c the action should be very extreme to permit punitive
damages.

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B. How might punitive damages violate Hadley v. Baxendale: was
punishment contemplated by the parties at the time of the
contract? Usually NO.

C. If you combine tort punishment with contract remedies you

violate and destroy the sanctity of contracts and turn it
into a negative tort environment rather than the
supposed environment of trust that is supposed to
prevail in contracts.

D. Exception: if you have a clear tort (extreme wrongdoing) then you

can involve punitive damages when the conduct is horrendous.

STEPS TO FOLLOW WHEN

DETERMINING DAMAGES
 What type of damages are they seeking?
 Is there mitigation?
 Is there reliance?
 Was there a warranty?
 Do they need specific performance or monetary damages?
 Is there a foreseeability problem?
 Are the damages speculative §352?
 §353 loss due to emotional disturbance (must be foreseeable and
serious emotional disturbance)?
 Punitive damages (Ainsworth- Stone says case was articulated
badly) §355 k not Tort!! No tort in Ainsworth case, but court
screwed it up saying that oppression was found (oppression was
likened to the tort of being obstinent, but just don’t have the
guts to call it a tort).

RELIANCE THEORIES
RELIANCE INTEREST
Restatement § 349: Damages recovered are those expenses that
injured party incurred in reliance of K 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 K been performed.

CASE EX: Security Stove v. American Railway Express Co.

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Promised to deliver stove for convention, and (D) breaches b/c one of
twenty-one packages was not delivered ((P) can’t set up stove at
convention). Ordinary damages would be the contract price
(shipping costs) (Expectancy interest) and lost profits (but can’t
prove here b/c possible sales are too speculative). (P) wants
expenses incurred before contract, reliance interest. (P) relied
on these expenses in entering the contract. (D) says (P) would
have gone to the convention anyway and incurred expenses, and
expenses were made prior to the contract (§349). Expenses
were not caused by the breach (§351—foreseeable). Court says
(P) put (D) on notice about the importance of delivery on time
(Hadley), so breach was the proximate cause of the loss.

Fits under Hadley b/c (D) might have known of specific circumstances
(time constraints)

CONFLICT IN RELIANCE CASES

Rule of Prior Expenses: Claim expense incurred prior to the contract
provided that it was such as would reasonably be in
contemplation (moment of entering into the contract was it
foreseeable) of the parties as likely to be wasted if the contract
was broken

CASE EX: Anglia Television (pg. 79) Yes for prior expenses
 more certainty in this case, more stability
 some say this is more like the Stove case
CASE EX: Dempsey Fight (pg. 80) No for prior expenses, only after
contract can get expenses
 this is a speculative business with profits that are not stable
and based on public whim
 harder to prove damages

How do you calculate profits if it’s a new business?

1. Bring in expert testimony.
2. Look at comparable businesses. It will be resolved as a fact
question for the jury.

Can you contract around to avoid the problem?

1. If you fear that lost profits would be too speculative, stipulate
what the profits would be.
(liquidated damages clause).

RELIANCE AND EXTRA PAIN

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CASE EX: Sullivan v. O’Conner
Bad face lift case. P seeks to recover from Dr. who failed to deliver
what he promised. Court allows P to recover reliance interest.
1. Court could have used any three measures of recovery
(McGee), Be able to argue all three.
2. Court here awards not benefits foregone, but cost
incurred/relied beyond the pain expected (2 more
operations).
Reliance interest was chosen here b/c expectancy or restitution interest
would not adequately compensate for the wasted pain suffered
Contract interest of Hawkins: expectancy measure, performance
promised less what is delivered, profits or benefits foregone
Sullivan interest: reliance interest, expenses or losses
 Not what you expect a good nose job to be, but for losses
incurred (reliance)
 Trying to undue the harm
 P is asking for recovery under physical pain and suffering,
bodily harm
 Why do we allow the physical in this case but not in Hawkins?
o Look at medical testimony to see if it goes above and
beyond what was expected
o Did not rely on the pain and suffering above and beyond
what one would normally expect in this type of
operation that was endured to correct the botched
operation (recover on reliance interest)
 Reliance damages are like expenses: costs born in the pain
and suffering
o She relies on experiencing no more pain than ordinarily
experienced in the operation.
o She relies on no pain of having two more operations on
her nose.

RELIANCE AND LOST PROFITS

Restatement § 351: Unforeseeability and Related Limitations on
Damages
(1) 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.
(2) Loss may be foreseeable as a probable result of a breach
because it follows from the breach

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 a. in the ordinary course of events, or
b. as a result of special circumstances beyond the ordinary
course of events, that the party in breach had reason to know.
(3) A court may limit damages for foreseeable loss by excluding
recovery for loss of profits, by allowing recovery only for loss
incurred in reliance, or otherwise if it concludes that in the
circumstances justice so requires in order to avoid
disproportionate compensation.

CASE EX: Freund v. Washington Square Press

Publisher reneges on K to publish book, (P) seeks royalties and other
damages.

What is Freund asking for?

1. Specific performance: wants him to publish the book
 Court won’t grant this because the normal remedy is
monetary (remedy at law)
 Not a good idea to have specific performance because
there is bad blood and cooperation will be difficult
2. Money for delaying academic promotion
 Court won’t allow because there are a lot of other variables
that go into the determination of promotion so it is too
uncertain (§ 351)
 We don’t know if a book is enough to get him a promotion
3. Lost profits from royalties
 Don’t allow cause would have produced a windfall
 Would be speculative as to amount (§ 351(2))

Freund says he had expectation of D publishing his book

o While there is an expectation there is no way to measure the
damages
1. Damages must be foreseeable (§351)
2. Plaintiffs must show evidence to show damages
with reasonable certainty (§352)

Court allowed:
 Court allowed nominal damages (6 cents) to deter future
breaches and give rules of law.
 Any restitution interest awarded? Yes, the manuscript was given
back to him

CASE EX: Ferrel v. Elrod

P agreed to lease building for cosmetology school, lessor reneges and
P sues for lost profits for 9 months spent looking for another
location

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1. Yes to damages: Good track record since opening and showing
profits, compare other businesses in area that are similar for 9
months profits.
2. No to damages: Lost profits in a new business are too speculative
to figure and award (not certain § 352).
Bring in the expert testimony!!

RESTITUTION
THEORIES
RESTITUTION INTEREST
Purpose of restitution: wipe the slate clean, return benefits conferred,
return parties to status quo that they had prior to entering the
contract so each party can go contract with others

Difference b/w reliance and restitution:

 Reliance, like expectation, is conceived of as a remedy based on
affirmation of the contract, it is an enforcement of the contract
 Restitution is premised on the theory of disaffirmance, it treats
the breach as having caused the contract to fall away

Restatement § 370:
A party is entitled to restitution under the rules stated in this
Restatement only to the extent that he has conferred a benefit
on the other party by way of part performance or reliance.

Restatement § 373: Restitution when other party is in breach.

(1) The injured party is entitled to restitution for any benefit that he
has conferred on the other party
(2) No payment if all duties are performed besides due payment

CASE EX: Bollenback v. Continental Casualty Co.

Bollenback had purchased an insurance policy but the insurance
company would not pay when Bollenback stated a claim based
on their statement that BB missed a payment in 1959. BB wants
to rescind the entire K and get all his premiums back. Court says
that he can get restitution for all premiums paid up to 1959 b/c
that is when Ins. Comp. stopped covering him for their purposes.

20
All premiums paid to BB would overcompensate, but he gets the offset
of benefits received less benefits rendered b/c Continental would have
technically covered him up until 1959.

 Courts relied on: Restatement §373 & §374

o Return of all benefits conferred on the P less any
benefits the P received from the D

MEASURE OF RESTITUTION INTEREST

Restatement § 371:
 If a sum of money is awarded to protect a party’s restitution
interest, it may as justice requires be measured by either
a) the reasonable value to the other party of what he
received in terms of what it would have cost him to
obtain it from a person in the claimant’s position, or
b) the extent to which the other party’s property has
been increased in value or his other interest’s
advanced

CASE EX: pg. 96, #12

(A) contracts to work as a consultant for (B) for a fee of $50,000,
payable at the end of the year. (B) wrongfully discharges (A) at
the end of 11 months. (A) can recover in restitution based on the
reasonable value of his services.
If the reasonable value of A’s service is $60,000, can A recover
$60,000?
Yes sometimes: benefits paid less benefits received, court is reforming
the contract (this is bad because you are looking at it from after
the fact and the company was not expecting this when they
made the contract) (also violates the consideration rule)
Reason for sometimes giving 60: “as justice requires” in § 371
RESTITUTION AND THE UCC
UCC Buyers Remedies Options
1. buyer may cancel and recover any down payment §2-711
(bollenback) RESTITUTION
2. buyer may cover, seek substitute good and have damages too
(incurred in getting cover) (§2-711, 2-712) plus incidental and
consequential damages RELIANCE
3. buyer may receive pure damages §2-713(market price when
learned of breach + incidental and consequential ), 14, 15 Like
#2, but no cover

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 4. buyer may sue under equity and get specific performance (when
would this happen? For specially manufactured goods, unique
goods, antiques, artwork) §2-716 SPECIFIC PERFORMANCE
Ramirez v. Autosport

FACTS: Ramirez contracted to purchase a camper van from Autosport

and he traded in his old van in exchange. The new camper was
found to have scratched paint, and missing hookups. Ramirez
did not accept the camper. Ramirez returned 2 more times but
the camper was not fixed and they had sold his old van.

HOLDING: The UCC preserves the perfect tender rule to the extent of
permitting a buyer to reject goods for any nonconformity.
Nonetheless, that rejection does not automatically terminate the
contract. A seller may still effect a cure (a seller’s right under
the UCC to correct a nonconforming delivery of goods, usu.
within the contract period) and prevent unfair rejection and
cancellation by the buyer.

ANALYSIS: Previous thought focused on the “Perfect Tender Rule” in

which sellers were required to deliver goods that complied
exactly with the sales agreement. Chief objection to this rule
was that buyers could reject goods for minor nonconformities
and force the loss on the seller.

UCC § 2-601: A buyer may reject goods if they fail in any

respect (even minor defects) to conform to the contract BEFORE
ACCEPTANCE

UCC § 2-602: Rejection must be made within a reasonable time

after the delivery

UCC § 2-508: If goods are rejected because of nonconformity,

the seller has the right to cure  correct a nonconforming
delivery of goods

UCC § 2-608: AFTER ACCEPTANCE, the buyer may revoke

acceptance only if the nonconformity substantially impairs the
value of the goods to him
 Protects the seller from revocation for trivial defects
 Revocation of acceptance: is like rejection, but occurs
after the buyer has accepted the goods

UCC § 2-607(4): After buyer accepts goods, he has the burden

to prove any defect

22
  If buyer does not accept, but rejects goods, the burden
is on the seller to prove that the nonconformity was
corrected.

Durfee v. Rod Baxter Imports

FACTS: Durfee purchased a new Saab. While driving home a buzzer
activated. Went back to the dealer and got it turned off. Next
the shift lever came off, then the car began to stall all the time.
During the next 9 months Durfee went to the dealer 5 times to
get stuff fixed. After 9 months, he informed the Saab distributor
that he would not take the car to get fixed anymore.

PROCEDURE: Durfee sued to revoke his acceptance and cancel the

contract. Trial court held that the defects did not justify
rescission and just gave him minor money for breach of warranty.
Minn. Sup. Ct. reversed, holding that revocation of acceptance
was proper.

ANALYSIS:
UCC § 2-608 lays out the following requirements for an effective
revocation of acceptance:
1. Goods must be nonconforming
2. Nonconformity substantially impairs the value of the
goods to the buyer
3. Buyer must have accepted goods on the reasonable
assumption that the nonconformity would be cured
4. Nonconformity was not cured in a reasonable time
5. Buyer must notify the seller of his revocation
6. Revocation must occur within a reasonable time after
discovery of nonconformity
7. Buyer must take reasonable care of the goods for which
he has revoked acceptance
Saab contends that the defects did not substantially impair the
value of the car because they were easily repairable. Court
found that the numerous minor defects in addition to the
repeated stalling DID show substantial impairment.

Saab contends that a provision in the owner’s manual limits (P)’s

remedies to the repair or replacement of defective parts.
 UCC § 2-719: there can be a contract that limits a
remedy and specifically says it has to be a repair and
replacement clause
 However, this above mentioned “exclusive remedy” fails
if its essential purpose deprives the party of the value of
the good

23
 In this case the court found that since the Saab kept having to be
fixed then the exclusive remedy failed in its essential purpose, so
(P) could still revoke the acceptance.

(P) seeks to recover both consequential and incidental damages

in addition to the purchase price. Court found that no
consequential damages could be shown, but the repair and
maintenance costs were expenses reasonably incurred in caring
for the car therefore they were recoverable as incidental
damages [UCC § 2-715(1)]

Implied in K Concept (Hypothetical K)

A. Three vehicles to recover in K law
1. Express K (O+A+C=K)—offer and acceptance through
words
2. Implied in Fact—offer and acceptance through acts and
conduct
3. Implied in Law (Quantum meruit)—offer and acceptance
through knowledge
B. Hypo K allows a party to recover where he would not
otherwise, most often when
there wasn’t even an attempt at a K but it can be implied
from the actions of the parties and P is entitled to some
recovery
C. Damages awarded can be any of the three, but usually
restitution or reliance
1. Restitution where P has conferred some benefit on D in
their relationship
2. Reliance where P has relied on the performance of D
and has suffered some
form of legal detriment to that effect.
D. Reasons to Imply a K
1. See if have high information costs in the facts (person
unconscious)
2. Go to the statistical probability question (most people in
society would want a
contract)
E. A logical doctrine?
1. Does not make sense
a. Freedom to make and break K is impaired
b. Parties should set terms, not courts
c. D is forced into a contractual agreement
d. Slippery slope of forced agreements

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 e. K law should leave business judgment and value
judgment to parties
2. Makes sense
a. Not making party pay offers unjust enrichment,
free lunch
b. Incentives for Drs. To come to the aid of those in
need
c. High statistical probability that parties would
enter into K anyway if
info. costs were low.

Cotnam v. Wisdom [371(a)—Reasonable Value of Benefit Rendered]—

Implied Contract
FACTS: Harrison was thrown from a street car and sustained massive
injuries which rendered him unconscious. While unconscious,
Wisdom performed a difficult operation on him to try and save
his life but he still died. Wisdom sued to get money for the
services rendered on Harrison.
Contract by implication of law: a constructed/implied contract is
not an actual contract, but a promise implied by law where there
was no contract, mutual understanding, or promise. It is a legal
fiction intended to allow recovery for doctors who render services
on infants, insane people, drunks, and unconscious people.

Where is the contract? Implied contract in law b/c one of the parties is
unconscious
3 Types of contract:
1. Express contract
2. Implied in fact
3. Implied in law ***
Must prove a contract: it might just be a gift (Good Samaritan)

What is the legal vehicle for acceptance? The law creates it (Implied in
law) (aka, quasi contract, constructive contract, quantum merit)
Quantum merit: pg. 107
 must have knowledge, so it won’t work for this case

Is the implied in law contract reasonable?

NO:
 no meeting of the minds
 contracts are private voluntary agreements but in this case
the courts are putting on the contract (legal fiction)
 (D) is forced into the contract so no freedom, imposition of
values of some on others (leave choices to the private parties)

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  Problems with §371 “as justice requires” is a blank check for
unbridled oppression
YES:
 Professionals expect to be paid
 Doctor is not doing it as a gift
 It would be a windfall for the victim if they got services
without paying for them
 Why might Cotnam have wanted the services? It was an
emergency so he probably would have wanted help and aid
 We want to encourage doctors to render aid in emergencies
and be compensated

Hypothetical K:
Would there be a high or low statistical probably that the parties would
have wanted the K?
1. Are the transaction costs high or low?
a. Low= No implied contract
b. High= Is there a high or low statistical probability that
victim would have wanted contract in same or similar
circumstances?
2. What incentives are created by finding for the doctor in this
case?
a. Maximizes safety and health of all
b. Marginal cost = fees, marginal benefits= big societal
health and safety
3. What disincentives are created by not finding for the doctor?
a. Doctors won’t want to help, minimizes safety and health
of society

EX: What if the victim didn’t believe in doctors. High transaction cost
to figure this piece of information out. So doctor still would get
fees.
 We are in an efficiency mode b/c of the emergency situation.

EX: Someone is standing outside your apartment playing the violin.

You enjoy it. They come to your door asking for payment.
 Is he entitled to fees?
o NO, b/c there are low transactions costs (parties could have
done this on their own, so court is not going to step in).
You received some enrichment from the music, but it is not
unjust enrichment. You are enriched in the factual sense,
but not the legal sense. Violin player could have entered
into a voluntary contract, unlike doctor and unconscious
person, but failed to do so, so tough break.

26
 o This would still be no under quantum merit, b/c he did not
“know” whether the services were being performed for
him. Could have been playing by mistake for him when he
was supposed to be playing for his neighbor (no fees).

If we ever do find quantum merit, implied contract, what are the

damages going to be?
RESTITUTION
Restatement § 371(a): Benefits rendered= Cotnam case

EX: Receive CD in mail with offer to buy more for cheap price. You use
the CDs and don’t pay. Any contract basis for recovery by CD
company?
 Without statute 39 USCA § 3009: Yes, b/c there a contract
implied in fact, you use them after they said they wanted you
to pay.
 With statute 39 USCA § 3009: No, b/c it says the merchandise
will be treated as a gift.
o “Merchandise mailed without the prior expressed request
or consent of the recipient may be treated as a gift by the
recipient.”
o Why did they create this? To keep people from being
defrauded (law by fear) look at Club Med to determine 5
elements of fraud
 Stone says this statute is a crock and does not like it at all!! It
is basically just buying votes by giving people free CDs. This
is an interference with private contracting.

Michigan Railroad v. State

Restatement § 371(a): Benefits rendered= Cotnam case

In RR case: $6.85/ton
Restatement § 371(b): Benefits received= Michigan RR Coal case
In RR case: $3.40/ton

 Mistake law wipes out the expressed contract so seller has to argue
implied in fact contract
 Finds State is liable for something…only question is what are the
proper damages?
o $6.85 v. $3.40 Courts have a choice “as justice requires”
 How do you define “as justice requires”?
 In RR case there is an Indiana statute which says you
should contemplate only bid amounts, therefore the

27
 difference becomes a gift (again Stone does not like)
[payment cannot be higher than original bid amount]
o Court decides on benefits received $3.40 instead of Cotnam
benefits rendered $6.85
 How is RR coal (state) case like CD (federal)?
o Both interfere with the voluntary contract
o Is the gov’t a reliable contracting party? Stone says no.
o Creates a disincentive for parties to contract with each other.
o Takes price setting out of the market…stones says this is bad.
We should just rely on market value.

EX: Dentist is at hospital and since no OBGYN is available Dentist

delivers baby. What is the dentist’s fee?
 Benefits rendered or benefits received?
 Benefits rendered…seeking restitution.
 Give market value of these services

How did RR case actually use common sense? They used the hierarchy
of law.
- Private contract terms
- Common law
- State statutes
- Constitution
 The higher on the hierarchy the term is, they will be
superseded by the ones below them. State statues will be
followed over private K terms.

Summary of Remedies for These Cases

1. Restatement § 371—If a sum of money is awarded to protect a
party’s restitution interest, it may as justice requires be
measured by either:

a. reasonable value to the other party of what he rec’d in terms

of what it would have cost him to obtain it form a person in the
claimant’s position (benefits rendered by P) [Cotnam v. Wisdom]

b. extent to which the other party’s property has been increased

in value or his other interests advanced (benefits received by D)
[Michigan R.R.]

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 SPECIFIC
PERFORMANCE
When will a court grant specific performance?
1. When monetary damages are inadequate
2. When it deals with real property (land) b/c each parcel of land is
unique
3. Specially manufactured goods
4. Sometimes for personal performance (contract with Architect A
and he breaches, court might still demand specific performance
as long there is not a close personal relationship needed to
complete the task)
5. Difficult and uncertain to value the monetary damages
6. Impossible to get substitute goods
a. If there is a monopoly
7. When marginal benefits exceed the marginal costs

Problems with specific performance?

 Might keep people from mitigating. No incentive if they know
specific performance will be delivered. Avoid litigation by self help
and contracting around the problem (Coase).

Incentives created by specific performance

1. Forcing two parties who may have animosity towards each
other to perform creates incentive for disharmony.
2. High monitoring costs and continued court management
3. Externalized behavior costs of forcing parties together

Remedy in equity is favored when

1. Uniqueness (i.e. land)
a. When could a car be specific performance? When
it is unique, rare,
classic or if like after the war, cars are hard to get
without considerable expense.
2. One shot personal K (i.e. portrait painting)
3. When money damages are difficult or uncertain to set
as a value, or impossible
to get substitute goods

29
Boone v. Coe
Loss alone is not enough to allow a person to recover. Must also have
benefits bestowed (in this case there was no benefit, the Boone’s
did not work for Coe, just moved there).
371A, 371B if there was benefit (i.e., if Boone had moved, worked for
30 days, and then Coe kicked them off farm) would get some
damages, benefits received and possibly reliance
What if they only worked for 2 days, why only benefits rendered
(reliance)…it would be hard to determine benefits received b/c
they would be minimal and there would be a huge cost for
moving for such a small time
What if we did give specific performance?
- What kind of incentives would we create?
o Incentive for disharmony (bad personal relationship in
an ongoing joint venture)
o This will lead to higher monitoring costs
o Might lead to more lawsuits
- Analogy to family law:
o Telling people to live together instead of getting
divorced will just lead to more hassle

Laclede Gas v. Amoco Oil

FACTS: Contract in which Amoco promised to supply Laclede with
propane for sale to its customers.

PROCEDURE: Trial court awards Laclede specific performance.

ISSUE: Amoco contends that 4 of the requirements for specific

performance have not been met:
1. There is no mutuality of remedy in the contract
a. HOLDING: no requirement in the law that both parties
be mutually entitled to the remedy of specific
performance

2. The remedy of specific performance would be difficult for the

court to administer without constant and long-continued
supervision
a. HOLDING: This constant supervision decree is merely a
discretionary rule which is frequently ignored when the
public interest is involved

3. The contract is indefinite and uncertain

a. HOLDING: there is reasonable certainty as to the duty
of each party and the conditions under which
performance is due

30
 4. The remedy at law available to Laclede is adequate
a. ANALYSIS: For remedy at law to defeat specific
performance:
 Money must be as certain, prompt,
complete and efficient to attain the ends of
justice as a decree of specific performance
Amoco says that Laclede has other propane immediately
available to it under other
contracts and it is readily available on the open market,
HOWEVER:
 This contract is for long term propane which
will make it hard for Laclede to find another
long term supplier
 Other contracts are only in force for a
limited period and there is no assurance
that Laclede will be able to receive any
propane under them after that time
 Laclede would have to undergo considerable
expense to find and secure new contracts
and these costs cannot be estimated in
advance
b. HOLDING: Specific performance is the proper remedy in
this situation.

A. Three part test for using remedy in equity (from Amoco v. Laclede)
1) Part (service) is not readily obtainable
elsewhere
2) Except at considerable expense, trouble or
loss (No real legal
test here)
3) Cannot be estimated in advance

Van Wagner v. S & M

ANALYSIS: VW argues that specific performance should be awarded
because the space in question “is unique.” Uniqueness is not,
however, a magic door to specific performance. At some level all
property may be interchangeable with money, but this view
would mean that there would never be specific performance.
Rule:
 Specific performance does not lie in the physical uniqueness
of the property but instead in the uncertainty of valuing it.
o What matters in measuring money damages is the
volume, refinement, and reliability of the available
information about substitutes for the subject matter of
the breached contract.

31
  High information costs sometimes preclude us
from determining comparable substitutes so
specific performance is awarded in those cases
o In saying that the subject matter is unique, they are
saying that they cannot obtain, at reasonable cost,
enough information about substitutes to permit them to
calculate an award of money damages without imposing
an unacceptably high risk of over or under
compensation.

UCC view on specific performance § 2-716

No money if it is disproportionate to the cost of specific
performance and vice versa

What can courts do to help move people through the system?

 Do nothing…delay the case which gives people the incentive to
settle or obtain cover
o This is a low transaction cost alternative to the normal court
system
 Arbitrate Stone does not like this at all
 Dismiss case  hurt (P) might not get any help

EMPLOYMENT AND SPECIFIC

PERFORMANCE

ABC v. Wolf
General rule: No specific performance in employment contracts.
Problems with specific performance in employment contracts:
1. Cooperation is not likely (people don’t like each other).
2. 13th amendment forced slavery issue.
3. Monitoring costs.

Although sometimes have negative injunctions in some cases.

 If the service is unique, they will usually impose negative
enforcement by issuing an injunction to prevent the person from
furnishing those services to another person for the duration of
the contract.

Why have negative injunctions?

1. keeps out unfair competition by keeping the person for
working for someone else
2. Restatement § 187, 188, don’t compete for a limited time
(restraints on competition that are reasonable restraints of
trade)

32
 a. Is the restraint ancillary (designed to further the
legitimate interests)?
b. Reasonable as to time?
c. Is the restraint reasonable as to space?

STIPULATED DAMAGES
I. Liquidated damages
1. Agreed to damages found in the K as a way to limit damages b/w
parties.
a. Good for avoiding foreseeability issues that would come
up for breach
b. The point is to plan to avoid damages or place limits on
them (Coasian K).
c. Good lawyers always stipulated damage B-4 K.
d. Stipulating damages removes from the subjectivity of
the court the decision of remedies.
e. UCC 2-718—Liquidation or Limitation of Damages &
Rest. §356—Liquidated Damages and Penalties
2. Shotgun clauses
a. Courts will not enforce clauses covering major and
minor breaches
b. These types of clauses award a single damage amount
regardless of severity of breach and will be ruled as
penalties.
3. Limits to stipulated damages
a. Courts will generally not enforce a penalty clause.

II. Penalty Clauses

1. Definition--clauses included in a K that will reward the breached
upon party more than they would have earned by full
performance in the event of a breach.
a. K law is not about penalties or punishing parties
b. Don’t want to overcompensate anyone.

2. Arguments For PC
a. Preserves freedom of parties to enter into voluntary K—low
risk of provoking breach
b. Parties already assessed the risk that was involved (parties
are in a better position to assess the risk than are the
courts). Let them take the chance.
c. Penalty clauses expand the pie
d. Maintains credibility of parties
i. Makes you more likely to contract with them
e. Provides insurance of good faith and compensation for high
risk of fault

33
 f. Allows promisor to always insist on price sufficient to cover
the risks
g. Other damages will under-compensate
h. Clauses save both time and money
i. Creates incentive to produce
j. Disincentive to breach cause then you’ll pay

3. Ballpark Rule—Two-part Test for Determining Valid LQD or

Determining if PC 
1. Are the damages difficult to predict or assess at the moment
of entering the contract?
a. Yes: reasonable and not a penalty
2. Is the liquidated damages amount a reasonable estimate of
the actual damages?
a. Yes: not a penalty

4. Arguments Against PC
a. Deters efficient/inefficient breaches
b. Incentive for P to provoke a breach by D
c. Makes contracting too risky
d. Economic waste/ damage to societal welfare

5. Restatement §356—Liquidated Damages Provision

1. Damages must be reasonable in light of anticipated loss
OR actual harm (must be harm from breach).

What would you do to redraft the contract and liquidated damages

clause? TEST Q
Narrow the liquidated damages clause (don’t make it too broad)
Divide the damages into steps of performance (find price for
each step and set liquidated
damages for each)

Cal. Sugar Co. Case:

FACTS: K1 on barge to be delivered 6-30-81 but wasn’t delivered until
3-16-82. K2 on tug to be delivered 6-30-81 but wasn’t delivered
until 7-15-82. Liquidated damages provided for $17,000 per day
late. Court holds that two sophisticated parties with equal
bargaining parity cannot be said to not know what they are
getting into so the damages are upheld. (Stone loves b/c “whose
K is it anyway.”)

I. K1=sun and California

a. Claim liq. damages are a penalty
b. Damages should only start when the tug and the barge are
together

34
 i. Otherwise Sun would be paying damages on a
useless barge
c. Court does not agree!! No Penalty
i. Says both companies are at fault
ii. Each could breach and say the other is at fault if Sun
was not held liable
iii. Even if tug had been ready, the barge and Sun would
still be late and in breach
d. Damages?
i. Would they be difficult to prove at the beginning of
the contract?
1. Yes: wouldn’t know how much sugar would be
produced, or how much the stores would buy,
wouldn’t know what it would cost to cover
ii. Was the liq. damages a reasonable estimate of the
actual damages?
1. No: the actual damages are only $368,000
while liq. damages are approx. 4.4 Million
2. They are definitely disproportionate, BUT
3. This is ex ante (pre breach) analysis, so of
course the damages ex post aren’t going to
match up to what they predicted
iii. UCC 2-718(1): got to live with whatever information
you have at the time of the contract
e. What is the purpose of private contracting?
i. Let the parties and the contract allocate the risk and
do what they are comfortable with at the time of
contracting (not ex ante by the courts)
1. Gives Parties FREEDOM
2. Allow penalty clause!!! Makes people try to be
accurate in their contract construction
3. You are adults, take responsibility for what you
agree upon

Southwest Engineering Co. pg. 141

FACTS: Gov’t withheld agreed upon damages for P being late in
building airfields.
Southwest does not get the refund
 The clause is valid
o Reasonable
o Anticipated
 Notes: Although there were no actual damages, both parties
took a calculated risk (Law—look at the time entered into the K).
Reasonable forecast of just compensation based on the
information you have up front.

35
Example: Blockbuster Video is labeled as a penalty charge for late fees
—This can be seen as a penalty, but it can also be seen as okay
b/c there is no way ex ante to predict a single person’s actual
cost to the company. It’s the best they can do with the
information they had.
 What if BB charged $20? Unreliable contracting parties

**** Parties trade off the possibility that the actual damages
will be higher or lower than the stipulated liquidated damages
with the certainty of knowing what the maximum damages will
be. ****

Restatement § 205: Duty of Good Faith and Fair Dealing

If we have good faith in contracting then this is a reason why
penalty
clauses can be upheld as OK and valid. [Cal. Sugar Co. case]

Mahoney v. Tingley
FACTS: Seller of house had buyers put earnest money ($200) down on
house. Buyers backed out and seller had to sell for subst. less
than original price (actual damages $3000). Seller sues for lost
profits of house sell, court holds that if seller incorporates an
earnest money agreement in K as a liq. damages clause then
they cannot avoid that agreement and the $200 in earnest
money is what they get. It is not a penalty to the Seller.
 Earnest money: deposit (also seen as liquidated
damages)
 Liq. damages are disproportionate to the seller ($200 v.
$3000)
 Uphold liq. damages as valid

Kearney v. Master
FACTS: Kearney (P) contracted w/ Masters (D) to sell P some equip. to
make some parts. P claims that equip is bad and caused P to
lose profits and sales. P sues to recover all losses (Conseq.
damages of 2-714 and 2-715). D had a Return, Repair,
Replacement clause (2-719 limitation of damages clause) in their
K w/ P. P contends that R clause rendered K to fail its essential
purpose, court disagreed and held for D. D had repaired machine
on numerous occasions and P had never attempted to take
advantage of replacement clause.
2 Pulls in this Case 
 Under UCC 2-719, the Code endorses the principle of freedom of
contract, and makes an express provision for the limitation or
exclusion of such damages.

36
  Under UCC 2-719(2), the Code also endorses the principle that an
aggrieved party must have at least minimum adequate remedies
available and accomplishes this by saying, “where circumstances
cause an exclusive or limited remedy to fail of its essential
purpose, remedy may be has as provided in this Act.”

1. Demonstrates that risks of inestimable damages inherent

in lost profits are burdensome risks to seller and court will
not uphold.
2. Argue for buyer: Having full service of machine denies
profits which were heart of contract
a. to take away consequential damages would take
away their only adequate remedy
b. Purpose of the contract was to business (to make
money!!) Profits were at the heart of the contract
3. Argue for seller: The trade off of a low price reflects seller
not having to jack his costs to compensate for insuring lost
profits to everyone.
c. parties contracted in black and white, hold them
to their contract

 § 2-719(2): failure of essential purpose

 Freedom of contract v. need for minimum adequate remedy
 Court says you can exclude consequential damages when
contractual remedies fail of their essential purpose
 Loss profits are a risk to the buyer, but also to the seller for not
knowing how much they might have to pay out if there is a failure
(loss profits are a risk to BOTH parties)

Free rider effect: if you strike down the clause limiting the damages,
the future price of these machines will go up b/c they’ll have to pass
the cost on to the consumers for having to anticipate lost profits since
they can’t write liquidated damages into the contract anymore. Buyer
will get the benefit of damages without having paid the higher price for
it…this is a free ride for the buyer.
 If you uphold the clause: the risk is lower, so the price
of the machines will go down and buyer will get the
benefit of the lower prices (Coasian theory)

 If B were allowed profits, price of the machines would increase

 If court upholds clauses, price will lower b/c risk to S will be lower.
o K terms are in there b/c trying to allocate risks, don’t want
penalty against S—negating clause for B while allowing B
to have the benefit of the lower cost of the product

37
 o B got a remedy, i.e., the lower price; in most cases courts
will uphold boiler plate language for the reasons
stated
o If lower price is in K it is there for a reason—no free lunch—
can’t collect for lost profits
o If court upholds, it’s an incentive for parties to negotiate in
the future (be careful instead of be sloppy)
o B still has 2-714 and 2-715 damages available to him
under negotiation
o Can Buyer cover as a remedy (2-712)—not if it’s a
reasonable delay; once B accepts goods, it’s too late to
cover ON EXAM HANDLE CASE AS A BUYER

Lefemine v. Baron
FACTS: stipulated damages was a penalty clause b/c liquidated
damages would be useless 2-718(3)—offset; buyer can’t have it
both ways, that’s not risk taking; almost always the predicted
amount will be different from actual amount
 People want a trade-off—want the certainty of the liquidated
damages amount over transactions costs of a trial (too risky)

QUANTUM MERUIT
 If services are involved, the term “quantum meruit” (“as much
as deserved”) is used to express market value.
 Market value is most easily determined by expert
testimony on customary pricing guidelines.
Britton v. Turner
FACTS: Plaintiff agreed to perform labor for the defendant for one year
at the sum of $120. (P) performed a portion of the work but
voluntarily failed to complete the entire contract. (P) is not
entitled to recover upon the express contract because the
service, which was to entitle him to the sum agreed upon, has
never been performed.
ISSUE: Can the (P), under these circumstances, recover a reasonable
sum for the service he has actually performed, under the count
in quantum meruit (reasonable value of services)?

HOLDING: The amount for which the employer ought to be charged,

where the laborer abandons the contract, is only the “reasonable
worth,” or the amount of advantage he receives upon the whole
transaction, and in estimating the value of the labor, the contract
price for the service cannot be exceeded. The direction to the
jury was therefore correct, that the (P) was entitled to recover as

38
 much as the labor performed was reasonably worth (quantum
meruit).

ANALYSIS: Old Rule: In labor contracts, the party who voluntarily fails
to fulfill the contract by not performing the whole labor
contracted for, is NOT entitled to recover anything for the labor
actually performed, however much he may have done towards
the performance. – This is unequal and unjust.
Also, if the (P) failed to do any work on the contract, all he can be
made to pay is the reliance interest of the (D) which would
usually not be a lot.
These rules would mean that the party who attempts performance may
be placed in a much worse situation than he who wholly
disregards his contract, and the non-breaching party may receive
much more by the breach of a partially worked upon contract.
Court likens the new rule of giving quantum meruit to other cases. For
instance, where a party contracts to perform certain work, and
the work is done, but with some variations from the mode
prescribed by the contract, yet the non-breaching party has the
benefit of the labor and materials, so he should be bound to pay
so much as they are reasonably worth.
Where the party receives value, takes and uses the materials, or has
advantage from the labor, he is liable to pay the reasonable
worth of what he has received.
It would have been easy for the parties, if they chose, to provide an
express agreement that nothing shall be earned, if the laborer
leaves his employer without having performed the whole service
contemplated.

 Recovery by the breaching party

 Allowed to recover IF the value is received and accepted by the
other party

RESTATEMENT § 374: Restitution in favor of party in breach

(1)If a party justifiably refuses to perform b/c the other party has
breached, 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 he has caused by his own breach

 Defendant received the value of his work, so if he didn’t have to

pay then it would be a windfall
o Encourages completion, b/c the more you perform, the
more your damages will be if you breach
o Giving restitution for work performed (no expectancy
damages)

39
 o Not a penalty b/c the defendant got the benefit of the work
performed
o 374 offset remaining cost to be paid must be more than
transaction costs
1. Rules apply: D must pay if:
a. He receives an actual benefit from services
b. above the damages caused by the breach
c. worth of services are reasonable to D
2. If D may reject entirely the whole of P’s performance, then D may
restore to P what P has given or done for D and it will be settled, in the
case of services rendered only remedy at law ($$) will suffice
(restitution)
 Restatement § 374 follows this reasoning: “Restitution in
Favor of Party in Breach”

Unenforced Clauses

Lake River Corp. v. Carborundum Co.

FACTS: D breached a K with P to provide a minimum amount of Ferro

Carbo for P to bag over a three-year period. A liquidated damages
clause can be a penalty.

HOLDING: This clause is a Penalty Clause and not liquidation of

damages because it is always designed to assure Lake River
more than its actual damages.

ANALYSIS:
 Liquidated Damages: An amount contractually stipulated as a
reasonable estimation of actual damages to be recovered by
one party if the other party breaches.
o To be valid under IL law, a liquidation of damages must
be a reasonable estimate at the time of contracting of
the likely damages from breach and the need for
estimation at that time must be shown by reference to
the likely difficulty of measuring the actual damages
from a breach of contract after the breach occurs.
o If damages would be easy to determine then, or if the
estimate greatly exceeds a reasonable upper estimate
of what the damages are likely to be, it is a penalty
 Penalty: 1. If the sum payable is so large as to be far in
excess of the probable
damage, it is a penalty.

40
 2. If the same sum is expressed to be payable on
any one of a number of different breaches of
varying importance, it is probably a penalty

REVIEW

A. UCC § 2-718—Liquidated Damages Provision (see Cal. Sugar Co.

Case)
1. Asks “when are liquidated damages reasonable?”
a. A damages amount is reasonable in light of the anticipated
OR actual harm caused by breach.
b. Loss is difficult to prove
c. Obtaining alternate remedy is not feasible.
B. Important because UCC provides for reasonableness of
measurement before OR after time of
Performance

C. UCC § 2-719 (Contractual Modification or Limitation of Remedy) (see

Kearney v. Master)
a. 2-719(2) – says that if a liq. damages clause is in a K and
causes K to fail its essential purpose then remedy may be
had as otherwise provided for in UCC.
b. 2-719(3) – says that consequential damages may be
limited unless limitation is “unconscionable” (drives Stone
nuts).

________________________________________________________________________

CONTRACT
ELEMENTS

CONSIDERATION
Bargain Theory of Consideration

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  The parties must have bargained for (that is, agreed to) an
exchange of the promise for the detriment, so that each induces
the other.
 Legal detriment= any relinquishment of a legal right
o It could take the form of an immediate act (that is, doing
or giving something) or a forbearance (refraining from
something)

EX: Al says to Buster, “If you walk over to my car, I will give you the
skis that I have on my rack.”
 Under the broad concept of legal detriment, Buster’s
act of walking to the car is a detriment: He gave up
his legal right to remain where he was.
 However, this detriment seems incidental to Al’s
promise. Common experience suggest that the
parties did NOT see it as the price for the skis, but
simply as the act needed to take delivery of the GIFT.
[it is nothing more than a CONDITION OF THE
GIFT]

We normally find consideration, but the courts limit it in this fashion:

Adequacy of consideration
↓
False recital
↓
Reliance

Why don’t we enforce all promises?

 Must have bargained for exchanges (not present in gift
cases)
 Society is more orderly if we use each section of law for its
purpose (use property law for gifts, not contracts)

Bargained for contracts allow:

 Facilitates smooth flow of commerce
 Maximizes societal wealth
 Bargains encourage trust in the marketplace
i. How does self interest hinder trust in contracts?
1. People may be greedy
2. Take advantage of others
ii. How does self interest help facilitate trust in
contracts? ***

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 1. One has an incentive to perform if he wants to
get the other side to perform in return (trying
to get performance)
2. Keeps transaction costs low and only police it
when there is fraud or duress
3. Just internalize the cost

3 Devices for encouraging trust and self interest in contracts (by Adam
Smith)
1. Golden rule: voluntariness for return performance prevails
2. Competition: If X does not perform then Y will go to Z for buying
and selling in the future
(markets are fluid and dynamic) (Incentives matter- X has
the incentive to perform otherwise Y will go elsewhere)
3. Rule of Law: most contracts are voluntarily performed, high
transaction cost of using the rule
of law so that’s why this is 3rd (don’t want to use gov’t law
to enforce trust)

Pareto Superior: everyone is better off (otherwise they would never

have made the contract in the first place)

Example of how to structure exam questions:

CASE: Federal Trade Commission Report
FACTS: Landlords adding $600 security deposit to $200 rent for first
month. Gov’t wants to step in and fix prices so this won’t
happen.

ISSUE: Should there be Public Ordering (administrative agency) or

Private Marketing?

ARGUE FOR GOV’T INTERVENTION:

 Emotional--tenants are the weaker parties
 Coercion
 unequal bargaining
 security deposit is too high compared with the actual rent—
inadequacy of consideration (PENALTY)

ARGUE AGAINST GOV’T INTERVENTION:

 There is a cost to being poor
 tenant has a choice thru competition (go rent somewhere else)
 might be high premium amount b/c it’s reflective of high risk (i.e.
damages due to drunken college brawls)
 market will regulate thru competition
 if not allowed the prices of rent will increase

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Key to consideration is not money, but that both sides suffer a
legal detriment or give up a legal right

Why don’t we enforce family/friendship promises?

 marginal benefit is small
 transaction and legal costs are high
 could lead to familial/friendship disharmony
 cost/benefit analysis
 family/friends will find other ways to rectify the situation
(refuse to do something for them in the future)

Don’t enforce social and gratuitous promises

CASE: Balfour v. Balfour
 The common law does not regulate the form of agreements
between spouses. The consideration that really obtains for them
is that natural love and affection which counts for so little in
these cold Courts; have to have status quo, not elevated to level
of business K
1. These contracts are unenforceable because there was
no intent for the parties to contract
2. No legal intent to exchange consideration
3. Try to enforce this type promise under family law or gift
law

CASE: Marvin v. Marvin

 Common law marriage; D asked P to move out, and he stopped
making support payments; P says she gave up career (legal
detriment §71) and agreement to combine all earnings; P sues
under K law (palimony case)
1. Tacit understanding b/t parties—gift
environment under property law, reliance b/c
she gave up career for his promise; No
justifiable reliance-I will love you in the
morning theory
2. Quantum meruit—value of household services
rendered less the reasonable value of support
received if he can show that he rendered
services with the expectation of monetary
reward

ARGUE CONTRACT:
 legal detriment of giving up her career and promise of future
services
 meeting of the minds to bargain exchange

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ARGUE NO CONTRACT: (Court’s view)
 even though she had legal vehicle, no remedy b/c she received
benefits from the services rendered
 may have promised mutual gifts but no intent to K;

RESTATEMENT § 71: Requirement of Exchange

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.

Consideration: want to see each side of the contract suffer some new
legal detriment
 Want to see the “Price Paid” by both parties
 Not all promises are contracts
o Not just about receiving value, but of giving up something
of value
o Property law of gift can be used for cases that are promises
but not contracts

Bilateral contract: promise for a promise

Unilateral contract: promise for an act (I promise to pay you $5000 to

paint my house instead of going to spring break)

Forbearance: giving up a legal right

EXAMPLES:
 Ace receives a gift from Bob of a book worth $10. Subsequently
Ace promises to pay Bob the value of the book. There is NO
CONSIDERATION for Ace’s promise.
 Adam desires to make a binding promise to give $1000 to his son
Brett. Being advised that a gratuitous promise is not binding,
Adam writes out and signs a false recital that Brett had sold him

45
 a car for $1000 and a promise to pay that amount. There is NO
CONSIDERATION for Adam’s promise.
 Alex offers to buy a book owned by Bob and to pay Bob $10 in
exchange therefore. Bob’s transfer and delivery of the book ARE
CONSIDERATION for Alex’s promise even though such books
regularly sell for $5 and that part of Alex’s motive in making the
offer is to make a gift to Bob.

CASE: Hamer v. Sidway

FACTS: Story Sr. promised his nephew that if he would refrain from
drinking, smoking, swearing, and gambling until he became 21
then he would pay him $5000. The nephew agreed and fully
performed the conditions in the promise. Sr. sent Jr. a letter
saying that he shall have the $5000 bucks and interest. The
nephew decided that the money should remain with Sr. in
accordance with the terms of the letter. Sr. died without having
paid any portion of the $5000 and interest to the nephew.

ISSUE: Was there consideration making the contract valid?

ARGUE YES: In this case the nephew gave up legal freedom upon the
faith of the uncle’s agreement, and now having fully performed
the conditions imposed, it is of no matter whether such
performance actually benefited the uncle. (uncle’s benefit could
be seen as psychic gain of knowing nephew was being good
moral, would grow up right). (Court agreed)

ARGUE NO: Estate of Sr. claims that the promise of refraining from
liquor and smoking only benefited the nephew and unless Sr. was
benefited, the contract was without consideration.

CASE: Kirksey v. Kirksey

FACTS: Brother sent sister in law a letter when she was going through
hard times. It said, “If you will come down and see me, I will let
you have a place to raise your family, and I have more open land
than I can tend.” She abandoned her possessions and moved to
the residence of her brother in law. He put her in a comfortable
house and gave her land to cultivate for 2 years. After 2 years,
he told her to leave and put her in an uncomfortable house in the
woods, and then later madder her leave that too.

ISSUE: Was this a contract or a gratuitous promise?

ARGUE PROMISE: She suffered some legal detriment by moving from

her house.

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ARGUE GIFT: There is no “bargained for” element. (Court said gift)

CASE: Duncan v. Black

FACTS: Black (D) sold some land to Duncan (P). In the contract, it said,
“Duncan is to receive a 65 acre cotton allotment with the land his
is purchasing from Black.” However, the land sold did not carry a
65 acre cotton allotment, only 49.6 acres. The first crop year,
Black made up that difference out of his own cotton allotment.
The next year, Duncan asked that they do it again. Black at first
agreed and then backed out.
 K1= land with incorrect allotment  invalid contract, therefore
no consideration for K2
 K2= correction of allotment

ISSUE: Was there consideration? And if so, was it legal consideration?

2 things essential to the validity of consideration:

1. The claim upon which the settlement is based must be one
made in good faith
2. The claim must have some foundation and must have
“tenable ground” or be based no a “colorable right” or on some
“legal foundation.”

ARGUE NO:
 A party who tries to give up something he does not own does not
constitute proper consideration and forbearance.
 To give up, forebear some legal right, it must be something the
party had a legal right to in the beginning.

RESTATEMENT § 74
(1)Forbearance to assert or the surrender of a claim or defense
which proves to be invalid is not consideration unless;
a. The claim is in fact doubtful because of uncertainty as to
the facts or the law, or
b. The forbearing party believes that the claim may be fairly
determined to be valid
(in other words, if you contract thinking the original claim is
valid)

CASE: Batsakis v. Demotsis

FACTS: Demo sent a letter to Bat saying she had received the $2000
and that, “I accept it with the expressed promise that I will return
to you in American dollars the principal amount and 8% interest.”

47
 Like price gouging. Lady gets a loan for $25, agrees to pay back
$2000 American + interest.

ISSUE: Was there consideration?

ARGUE YES: Lady got enough money to keep her family alive…isn’t this
worth $2000? Stone says yes! Stone says, “there are costs to
being poor.”
 We want Private contracts NOT Public regulation!!!!!

ARGUE NO: not fair b/c she was in time of crisis, not adequate
consideration

MERE INADEQUACY OF CONSIDERAION WILL NOT VOID A

CONTRACT
a.k.a. The court will not determine the value of things given up
as consideration for a contract  see below

RESTATEMENT § 79(b)
1. If the requirement of consideration is met, there is NO additional
requirement of:
b. equivalence in the values exchanged

Atiyah’s Model of Contract Theory:

(1)Each person relies on his own skill and judgment, and neither
owes any fiduciary obligation to the other
(2)The parties bargain or negotiate. Prior to acceptance, offers can
be revoked, even if relied upon.
(3)Each party must study the situation, examine the contract,
assess the future probabilities, and rely on his own sources of
information
(4)Only limitation to market bargaining is that there must be no
fraud or gross misrepresentation.
(5)The content of the contract, the terms and the price, are entirely
for the parties to settle.
It is not the Court’s business to ensure that the bargain is fair, or to see
that one party does not take undue advantage of another…that’s
the world of business!!! Live with it.

DURESS AND COERCION

RESTATEMENT § 175: When duress by threat makes

contract voidable

48
 (1) If a party’s manifestation of assent is induced by an
improper threat by the other party that leaves the
victim with no reasonable alternative, the contract is
voidable by the victim

Restatement § 176:
 A threat is improper if:
(a) what is threatened is a crime or a tort
(b)what is threatened is criminal prosecution
(c) what is threatened is the use of civil process
(d)the threat is a breach of the duty of good faith and fair dealing

CASE: Post v. Jones (Stone does not like!!)

FACTS: A ship ran aground and three other ships came. The ship had
oil the others needed, so they decided to do an auction for the
oil. Price ended up as $1 per barrel. Owners of the
grounded ship brought suit against the others later for salvage
(saved property). Auction was held to be invalid because the
ship was in a helpless situation where there was no market,
money, or competition.

ISSUE: Was there a market?

ARGUE MARKET:
 Captain could have contracted to have the other ships just
transport his oil
 He could have negotiated further
 He could have gotten insurance (Coasian contract at the outset)

ARGUE NO MARKET: It’s a monopoly and he has no choices. Ship’s

captain was not able to bargain for oil prices.

Another example: Price in the ghetto is $30 and price is $25 in Vestavia
Why higher in ghetto?
 security costs
 higher default rate
What can you do?
 if is too high you could regulate, but sellers would move out
 if let market regulate others will enter and offer lower prices.
(Stone likes!!)

CASE: Mitchell v. C.C. Sanitation Co.

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FACTS: Mitchell was driving his Herrin Transp. Co. work truck when he
was hit by Crane who was driving for C.C. Sanitation. Mitchell
was injured (said injuries were $40,000). Hall handled Herrin’s
claim and submitted to C.C. a summary of damages ($281 for
truck, $107 Herrin paid for Mitchell’s Dr. bill, and $62 Mitchell
paid out of pocket). C.C.’s insurance Maryland Casualty sent 2
releases, $388 to Herrin & Mitchell, and $62 to Mitchell. Once
the releases were signed, the checks would be sent. Mitchell
said that Hall threatened that if he didn’t sign the releases he
would lose his job. They needed him to sign so that Herrin could
get their money for the truck. Mitchell testified that he would not
have signed the releases if his job hadn’t been placed in
jeopardy.

ISSUE: Contracts obtained through duress or coercion are voidable.

Was the contract valid when Herrin, who had a legal right to fire
employees, threatened to do so if Mitchell would not sign the
release?

ARGUE DURESS:
o Losing job is economic pressure
o Under-compensation for his injuries

ARGUE NO DURESS:
o Employer has a right to fire employee whenever he wants
 Employment at will: employee can quit at will and
employer can fire at will
o Had no right to the job so, the threat to fire him is not
taking away a right that he intrinsically had a right to (no
rights to begin with) see. Cotnam case
 Stone says:
o He could have quit and gambled in tort
o He could have tried to negotiate further

Weakness in Bargaining
A bargain is not unconscionable merely b/c the parties to it are unequal
in bargaining position, nor even b/c the inequality results in an
allocation of risks to the weaker party. But gross inequality of
bargaining power, together with terms unreasonably favorable to
the stronger party, may confirm indications that the transaction
involved elements of deception.

Gross Inadequacy

50
Although the requirement of consideration may be met despite a great
difference in the values exchanged, inadequacy that “shocks the
conscience” is often said to be indicative of fraud.

Federal Deposit Insurance Co. v. Linn

FACTS: Linns were into exploration for oil and had to borrow heavily
from banks to do so. When oil prices collapsed they had to
negotiate with the banks for financial restructuring. In
negotiations, Linns agreed to waive any potential defenses to the
renegotiated debt. Linns now claim the agreement is
unenforceable b/c it was done under economic duress.

ANALYSIS: The agreement is valid b/c although it was negotiated

under threat of bankruptcy, the Linns got themselves into that
position. Defendants cannot blame the banks for their own
economic difficulties. Threatened bankruptcy is not enough to
create economic duress.

Berger v. Berger
FACTS: Husband threatened that if wife did not sign a settlement
agreement giving him the house, truck, furnishings, and kids that
he would turn her into the IRS for failing to report earnings.

ANALYSIS: Husband committed extortion and that is coercion and

duress so agreement is void. The husband had the legal right to
turn wife in to IRS and a claim of coercion cannot be predicated
on a threat to do an act which a person has a lawful right to do.
However, the husband DOES NOT have the right to threaten to
do it for his own pecuniary (monetary) advantage.
In the ordinary commercial negotiations individuals are allowed, and
encouraged, to make explicit threats to their trading partners.
This is the basis of commerce.
Restatement §176(1)(b)

Selmer v. Blakeslee-Midwest Co.

FACTS: General failed to fulfill obligations. Instead of terminating the
contract, Subcontractor agreed to complete the work provided
that General compensate them for the extra costs. After
completion General did not give them all of the extra costs they
said they incurred. Subcontractor, because of financial stress
accepted lower offer.

ANALYSIS: Posner held that “the mere stress of business conditions will
not constitute duress where the defendant was not responsible
for the conditions.” Financial difficulty by itself cannot justify
setting aside a settlement on the grounds of duress.

51
 Subcontractor was not forced by the contract to remain on the
job, they chose to do that for more money.
Restatement §176(c)

PEPPERCORN THEORY: NOMINAL

CONSIDERATION
 If Trump offers you the Trump towers for a peppercorn, this is still
valid consideration!!!! (No reason a person should not be a fool)
 If you offer to give someone $25 if they give you $25, there is no
consideration, b/c no one is giving up anything!!!

Nominal consideration is normally adequate, but not where false recital

or past moral consideration or intended gift.

CASE: Schnell v. Nell

FACTS: Zach Schnell in his will left $200 to each of the above named
persons b/c his wife wanted to do that in her will, but couldn’t b/c
she had no property of her own. Zach said that in consideration
of his wife being dutiful and loving and materially aiding him in
acquiring his property and in consideration of one cent, received
by the parties that he would give the $200. He would give them
this if they give him 1 cent and abstain from collecting any real
or supposed claims upon him or his estate.

ISSUE: Whether the instrument sued on does express a consideration

sufficient to give it legal obligation against Zach Schnell?

ARGUE CONTRACT: Schnell alleges 3 distinct considerations:

1. Promise by plaintiffs to pay him 1 cent.
2. The love and affection of his deceased wife, and her help in
acquiring property.
3. The fact that she had expressed her desire, in the form of an
inoperative will, to give the people $200.

ARGUE NO CONTRACT:
 False recital: there was no true intent for 1 cent to be
consideration (§371)
o As a general proposition, the inadequacy of consideration
will not vitiate an agreement. BUT this doctrine does not
apply to a mere exchange of sums of money, a coin, whose
value is fixed, but instead applies to the exchange of
something with indeterminate value. The consideration of
1 cent is merely nominal.

52
  §71 forbearance: guy refraining from suing on estate
Why isn’t that forbearance: must have legal right to something
to forbear against (no legal valid claim, to nothing to refrain
from)
 Just a gift, does not rise to the level of a promise
o Just a mere moral gift given on behalf of his dead wife
§ 84, 86
 No bargained for legal detriment

RESTATEMENT § 86 (2)(a)
(1)A promise is NOT binding if:
a. The promise conferred the benefit as a gift (gratuitous
promise)

CASE: Newman and Snell’s State Bank v. Hunter

FACTS: (D) Hunter is the widow of Lee Hunter who died without a valid
will. His estate was insufficient to pay for his funeral expenses
and widow’s allowance. At the time of his death, (P) Bank held
his note for $3,700 with 50 shares of stock in Hunter Company as
collateral = K1. Company was insolvent, but was still doing
business when the note was given. (D) gave the (P) the note and
the (P) surrendered to her in consideration of the note of Lee
Hunter = K2. (D) pleaded want of consideration.

ISSUE: Whether the surrender of the note of her deceased husband

who left no estate was a sufficient consideration for the note
sued upon? Whether the manner of handling the stock of the
Hunter Co. furnished a consideration?

ARGUE CONTRACT:
 (P) claim that the interest the bank had in the stock passed to
the (D) when her husband’s note was surrendered, thus a
benefit???

ARGUE NO CONTRACT: (court agreed)

 Nonexistent consideration
 No new legal detriment in K2: attempt at bilateral contract
(promises on each side)
Woman suffers legal detriment, but bank does not necessarily
suffer
 K1 stock had no value, his estate went bankrupt, therefore old
note has no value either

53
CASE: Seyferth v. Groves R.R.
FACTS: (P) signed an agreement granting RR an option to purchase
some of his land for a right of way for the train tracks.
Agreement stated:
 “If said railroad shall, within 4 months from the date hereof,
pay to the (P) the further sum (following “in consideration of
$1.00) of $45 per acre, then the (P) agrees that he will deliver
the deed to the railroad.”
When an agent of the RR came to (P)’s house to get (P) and his
wife to take the acknowledgement, (P) brought up the fact that
the $1 had not been paid. Agent took $1 from his pocket and
tried to give it to (P). (P) said “If I want anything, I will take it all
at once.” (P) now says the contract is void b/c (D) did not pay
$1.

ISSUE: Whether or not the written option set out in the opinion was
binding upon (P)?

HOLDING: Court holds that consideration was recited in K so that is

enough to hold the K valid.

Option K.
1. Courts are split as to whether nominal must be paid or unpaid.
RESTATEMENT § 87 (1)(a)
(1)An offer is binding as an option contract if it:
a. Says that if contract recites a purported consideration then
that is sufficient.(minority view).

CASE: Lewis v. Fletcher

FACTS: P’s Kd to buy a 40-acre tract of land in an option K. D backed
out before performance and P’s sued. Clause called for $20
consideration to be paid. $20 was not paid.

ISSUE: Is this option contract enforceable even thought the $20 was
not paid?

ARGUE ENFORCEABLE: see Restatement §87…minority view

ARGUE NOT ENFORCEABLE:

 Since $20 not paid then no K.
 This is majority view that nominal C must be paid to make a valid
K.
How do you avoid the problem of the court deciding the $1 thing and
whether it is a false recital? JUST PAY IT!!!

54
Reliance Basis For Recovery (Promissory
Estoppel)

I. The Reliance of Consideration Theory

A. Used if can’t prove bargain theory
1. Also called promissory estoppel: Says it is contract if one
relied on promise made (basically) and D can’t raise
objection.

ESTOPPEL= a party who through some misrepresentation had induced

another to change his position, should be precluded (estopped)
in a later action from claiming that the truth is different from
what he had represented it to be.

§ 75 1st

§ 90 1st

§ 90 2nd

RESTATEMENT § 90 2d: 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 promisee 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

Stone says that Restatement §90 1st v. Restatement § 90 2nd (requires

substantial detrimental reliance v. reasonable detrimental
reliance) is too hard to determine!!

4 elements under old common law:

1. Induced
2. Justifiable
3. Detriment
4. Reliance

 If the promisor knew or reasonably should have realized that the

promisee would likely understand that a promise had been made
and would thereby be induced to take or refrain from action of
the kind that occurred then they promisee can recover on the
grounds of promissory estoppel.
o First, we must ask if the promise did in fact induce the
promisee’s action or forbearance.

55
 o Second, even if the promise did induce the promisee’s
conduct, he should not be given relief unless his particular
response was a justifiable reaction to the promise.
o The promisee must also have suffered some detriment or
harm by relying on the promise as shown by a specific
and measurable loss.

§ 90 is rarely used b/c too many people would come forth saying they
relied on a non-contract and everyone would want recovery
 We have little sympathy for people who don’t have a contract but
say they relied, b/c it shows they have no individual
responsibility (no individual economic self interest)

Examples:
 Allie, knowing that Brad is going to college, promises Brad that
Allie will give him $5000 on completion of his first college course.
Brad goes to college and borrows and spends more than $5000
for college expenses. When he has nearly completed his course,
Allie tells him she’s revoking her promise. Allie’s promise is
binding and Brad is entitled to receive $5000 on completion of
the course without regard to whether his performance was
“bargained for” under §71.

CASE: Devecom v. Shaw

FACTS: Uncle says that he will pay for nephew’s trip and then dies.
Nephew has already taken trip and wants money from the estate,
estate says no, it was a gift.

ISSUE: Should nephew get the money?

ARGUE NO CONTRACT/CONSIDERATION:
 It’s a gift under the bargain theory so it’s not enforceable
 It’s nephew’s social response to a gift offer from the uncle
 No bargained for legal detriment b/c he benefited from the trip
(look at illustration 2 p. 222)
o Boy did not give up anything

ARGUE CONTRACT/CONSIDERATION: (court agrees, Stone doesn’t really

like)
 nephew relied on promise by spending money and going through
the expense of travel
o uncle induced nephew to rely and change position to incur
expenses of the trip
 Uncle got benefit as well

56
 o pleasure of seeing nephew going to Europe (psychic
income), but court shoots it down (Kirksey v. Kirksey), but
don’t need to find it in this cases, instead looking for
detriment on the other side

Application of Devecmon case:

This case is an aberration and throws out the whole concept of
consideration
Court is protecting people from their own gullibility (don’t have self
interest to make a real contract)

CASE: Feinberg v. Pfeiffer Co. Uses CORBIN approach

FACTS: Feinberg had worked for (D) company for 40 years. The Board
of Directors met and adopted the following resolution. “Feinberg
has given the corporation many years of long and faithful
service. Feinberg shall be afforded the privilege of retiring from
active duty in the corporation at any time she may elect to see
fit so to do upon retirement pay of $200 per month for the
remainder of her life.
Feinberg continued to work for (D) for another year and a half then
retired. (D) began paying her $200 a month until his death and
then the son in law decided to stop payment. He said the $200
was a mere gratuity and not a contractual obligation.

ISSUE: Was there such an act on the part of Feinberg in reliance upon
the promise contained in the resolution as will estop the (D) and
therefore create an enforceable contract under the doctrine of
promissory estoppel?

Argue YES: (Court agrees)

 Feinberg would not have quit the job had she not known and
relied on the promise of $200 (detrimental reliance)= retired on
the promise of future benefits
 There was a reliance substitution for consideration
o Change of position by leaving job

Argue NO:
 She took a voluntary risk and lost…too bad
 No reliance b/c she didn’t give up any rights to a future job
o Employment at will contract
o Feinberg had no contractual right to her position and could
be fired at any time
 It was a mere promise to make a gift
o No mutuality of obligation
 There was no consideration

57
 o Only apparent consideration was “many years of service”
and past services are not a valid consideration for a
promise
o Can’t base present consideration for a current contract on
a past contract b/c the consideration is already used that
consideration on the first contract (that would be double
recovery)

How to make a valid contract for retirement benefits?

Once they make the offer for a gift, make a contract that turns the
contract at will into a real contract by formalizing the date at
which you will retire (for future consideration of work) and put
terms of how much money they will pay you as a pension

ON TEST: What if there is an express clause that states “you cannot

rely”? Does this mean no reliance, or will court rewrite contract
by using the Reliance Doctrine? Could be used in outsourcing
cases.
 You took the risk, so you cannot rely, so no recovery
 But some stupid judge will say they were induced and apply the
reliance doctrine

Gilmore: The Death of Contract

 Willison  Says use § 75 strictly
o People have free will therefore there is no way to induce a
person short of fraud or duress
 Corbin  don’t be stony-eyed to poor plaintiff victims
 Gilmore  the court made up the law instead of leaving it to the
parties
o § 75 and § 90 will lead to ambiguity and conflict

CASE: Katz v. Danny Dare, Inc.

FACTS: Katz insisted that he did not want to retire, but shop maker
persisted by saying that Katz was more of a liability than an
asset.
HOLDING: Court said shop maker did not discharge Katz but actually
made every effort to induce him to retire voluntarily on the
promise of a pension of $13,000 a year.
 This is a gift, but the court says it isn’t a pure gift so not enough
to take it out of contract realm
 Court says there might be inducement and legal detriment
 Court said Katz had reasonable expectations of retirement
money
o This is unclear and ambiguous language
 Stone says employment at will

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CASE: Hayes v. Plantation Steel Co.
FACTS: (P) announced his intention to retire in July. One week before
his retirement he spoke with an officer of the company who told
him the company would take care of him.
HOLDING: No right to money b/c he acted on his own initiative.
 No inducement b/c he had already decided to retire
 Uses WILLISTON approach
 Employment at will
 No new legal detriment like §75, or maybe just §90 b/c no
justified reliance

FOR TEST:
1. show common law view (Gilmore, Cardozo, Corbin)
2. show §75 1st from CB view (maybe contrast with
§71 from supp)
3. show §90 1st view (substantial)
4. show § 90 2nd (reasonable)
5. argue yes and argue no

MUTUALITY OF CONSIDERATION

Restatement § 77: Illusory and Alternative Promises

A promise is not consideration if by its terms the promisor reserves a
choice of alternative unless:
(a) each of the alternative performances would have been
consideration alone had it been bargained for

EX: A offers B Blackacre for 50,000 if I don’t change my mind. This is

lacking mutuality
 Both parties must be bound to perform at least something, not
one bound and the other perform at his will, wish or desire

EX: Al and Buster agree that Buster will buy Al’s skis for $100 C.O.D.
next Monday on the condition that Buster can obtain a loan of
$100 by then.
 Al’s promise to sell the skis is firm, but Buster’s promise to buy is
subject to a condition.
 It could be argued that Buster has made no real commitment
o However, the court will often IMPLY into Buster’s
undertaking a PROMISE TO USE BEST EFFORTS to
secure a loan, thereby imposing a detriment on Buster and
curing the lack of commitment.

59
 o Under this, Buster has no obligation to buy the skis if he
tires conscientiously but unsuccessfully to secure the loan.
But if he makes no effort at all, he is liable for breach of
contract [see Lucy Lady Duff case]

NEEDS AND REQUIREMENTS CASES

 It may suit the parties to leave the quantity of goods open-ended
on the understanding that the quantity to be supplied under the
contract will be determined by the buyer’s requirements.
 Under this, the Buyer makes a requirements contract with the
seller under which the buyer promises to buy and the seller to
supply the buyer’s total demand for a product during a specific
period.

Great Northern Railway v. Witham

This is a needs and requirements case= contract for what you need or
require at the time

FACTS: Witham agreed to “undertake to supply the G.N.R. for 12

months with such quantities of iron as the company may order at
the set price.” G.N.R. said they accepted his tender to supply
any quantity they might order. Several orders for iron were given
by G.N.R. which were from time to time executed, but ultimately
Witham refused to supply any more.

PROCEDURE: Witham contends that, as G.N.R. did not bind themselves

to take any iron from Witham, his promise to supply them with
iron was a promise without consideration.

ISSUE: Was this contract void for mutuality?

HOLDING: There is ample consideration.

ANALYSIS: G.N.R. had given the order for iron, and had consequently
done something which amounted to a consideration for Witham’s
promise. Witham made a tender offering to supply them for that
period and G.N.R. accepted his tender.
If one says to another, “If you will give me an order for iron, I will
supply it at a given price,” then if the order is in fact given, there
is a complete contract which the seller is bound to perform.

ARGUE CONSIDERATION: There was a meeting of the minds because

the Buyer ordered one set of goods and the Seller was willing to
supply despite the risk.

60
 The risk is that the Seller will have a high v. low amount to make
profits on
The buyer is promising to pay so that is their consideration.

De Los Santos v. Great Western Sugar

FACTS: (P) shall transport in the Contractor’s trucks such tonnage of

beets as may be loaded by the (D) and (P) shall unload such
beets at a factory. (P) was paid solely on the basis of the amount
of beets that he transported. After transporting beets for 2
months, (D) told (P) his services were no longer needed.

ISSUE: (P) contends that he was entitled to continue to haul until all of
the beets had been transported to the factory and that and that
the (D)’s termination caused him to lose profits.

HOLDING: Judgment for (D)

ANALYSIS: An agreement which depends upon the wish, will, or

pleasure of one of the parties is unenforceable. It is apparent
that the right of the (D) to control the amount of beets loaded
onto the (P)’s trucks was in effect a right to terminate the
contract at any time, and this rendered the contract void for
want of mutuality.

No mutuality b/c the (D) can buy if the want or not.

(D) could have gone with one of the other companies, so the contract
was illusory

Scott v. Moragues Lumber Co.

FACTS: K was made under the condition that if Scott were to buy a
ship then Scott would contract w/ D to carry D’s lumber to South
America. Scott bought the ship but K’d w/ another party and not
w/ D.

PROCEDURE: D sues for performance and Scott claims no mutuality of

C b/c his promise was based on his purchase of the ship.

ISSUE: Since the alleged contract was supposedly conditioned upon

the will of (D), was it therefore void for want of consideration or
mutuality of obligation?

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HOLDING: Scott breached his promise by not meeting conditions of his
promise, fact that purchase was a condition precedent to the
promise is not matter b/c cond. triggers the heart of the K.

ANALYSIS: A valid contract may be conditioned upon the happening of

an event, even though the event may be conditioned upon the
will of the party who afterward seeks to avoid it’s obligation.
Appellant was not bound to purchase the vessel, but once he did, the
contract requires obligation to perform.

Mutuality: Court uses a 2 step analysis;

(1) if we remove the condition [When I have a boat], I will charter.
(2) If the parties had bargained for the second thing by itself, it would
be consideration, therefore mutuality

CASE: Loudenback Fertilizer v. Tennessee Phosphate

FACTS: Buyer, a manufacturer of fertilizer, informed Seller that it
planned to increase its production of fertilizer. Buyer then
agreed to buy, and Seller to sell, Buyer’s entire consumption of
fertilizer for 5 years (could buy as much 3000 tons, but
estimated just 1500). For 1/5 years, Buyer ordered no fertilizer
at all. Later Buyer then ordered 3000 tons, and Seller refused.
HOLDING: Buyer committed the first breach by having bad faith and
not ordering the estimate.
 Have mutuality b/c the Buyer’s promised to buy some fertilizer.

CASE: Oscar v. Glue Factory

FACTS: Glue agreed with Oscar to supply your requirements of glue for
the year of 1916, price to be 9 cents per pound. For the first
nine months Oscar ordered 43,000 pounds of glue, but in Oct.,
Nov., & Dec., they ordered 126,000. Glue refused to deliver.
HOLDING: No consideration b/ the only obligation assumed by Oscar
as to pay nine cents for such glue as it might order. Whether it
should order any at all rested entirely with them. No mutuality
b/c quantity and price are so uncertain. This is good faith reason
for Buyer not buying unlike previous Fertilizer case.
Exact Mutuality Not Needed
CASE: Lindner v. Mid Continent Petroleum Corp.
FACTS: Mrs. Lindner leased a filling station to Mid Continent. MC had
the right to terminate the lease at any time upon 10 days notice.
After 2 years, Mr. Lindner began buying gas from another
company, so MC terminated its sublease with Mrs. Lindner. In
retaliation Mrs. Lindner cancelled her lease with MC.

62
ISSUE: Lindner claims no mutuality b/c MC could terminate at any time
and she could not.
HOLDING: The requirement of mutuality does not mean that the
promisor’s obligation must be exactly co-extensive with that of
the promisee.

ARGUE MUTUALITY:
 MC was obligated to pay the lease amount of rent initially
 MC had to pay lease for at least 10 more days after termination

COASE: there might be higher rent in exchange for the ability to get
out of the lease easier

RESTATEMENT § 76(2)
A promise conditional on a performance by the promisor is a promise of
alternative performance within § 77 unless occurrence of the
condition is also promised.

EX: Al promises to sell his skis to Buster in exchange for Buster’s

promise, in his discretion, to pay $100 or to mow Al’s lawn for
two months.
* Provided that each of the promises, ON ITS OWN, would be
consideration, there is nothing objectionable in permitting a
party to select between alternative promises

Empire Gas Corp. v. American Bakeries Co.

FACTS: Empire is a retail distributor of propane. Bakeries was

interested in converting its fleet of vehicles to propane. They
contracted for approx. 3000 conversion units, more or less
depending on the requirements of Bakeries. Bakeries agreed to
purchase propane fuel solely from Empire as long as Empire
remains in a reasonably competitive price market. Bakeries
never ordered any equipment or propane from Empire. This is a
needs and requirements contract. If we have the need for
propane we will buy from you.

PROCEDURE: Empire brought suit against Bakeries for breach of

contract and won a jury verdict.

ISSUE: Is such a contract essentially a buyer’s option, entitling him to

purchase all he needs of the good in question on the terms set
forth in the contract, but leaving him free to purchase none if he
wishes provided that he does not purchase the good from
anyone else and is not acting out of ill will toward the seller?

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Illusory promise is NOT a contract.
May a buyer say he has no needs and therefore not buy anything?

HOLDING: The IL courts would allow a buyer to reduce his

requirements to zero if he was acting in good faith, even though
the contract contained an estimate of those requirements.
Once it is decided (as we have) that a buyer cannot arbitrarily declare
his requirements to be zero, this becomes an easy case, because
Bakeries has never given any reason for its change of heart.
Empire put in evidence, uncontested showing that Bakeries had not got
rid of its fleet of trucks and did have the financial wherewithal to
go through with the conversion process.
The court held that there was not error in the assessment of the
Empire’s damages.

ANALYSIS: This case deals with the problem of “quantities

unreasonably disproportionate to any stated estimate.” Look at
the likely intent of the parties. Also could look to the words
“good faith” in § 2-306(1). The proviso does not distinguish b/w
the buyer who demands more than the stated estimate and the
buyer who demands less, and therefore if read literally it would
forbid a buyer to take much less than the stated estimate. The
stated estimate was for 3000 units; Bakeries took none.
The aspect of “good faith” in S 2-306(1) had only to do with
disproportionately LARGE demands. There is no indication that
the draftsman were equally, if at all, concerned about the case
where the buyer takes less than the estimated requirements.
Courts conclude the IL courts would allow a buyer to reduce his
requirements to zero if he was acting in good faith, even though
the contract contained an estimate of those requirements.
This conclusion would be greatly strengthened if the only purpose of a
requirements contract were to give the seller a reasonably
assured market for his product by forbidding the buyer to satisfy
any of his needs by buying from other suppliers. The buyer’s
undertaking to deal exclusively with a particular seller gives the
seller some, but not complete, assurance of having a market for
his goods.
If the obligation were not just to refrain from buying a competitor’s
goods, but to buy approx. the stated estimate, the contract
would be altogether more burdensome to the buyer.
Both extreme interpretations (that the buyer need only refrain from
dealing with a competitor of the seller, and that the buyer cannot
go significantly below the estimated quantity except in dire
circumstances) must be rejected.
The “unreasonably disproportionate” proviso does not apply, though
the requirement of “good faith” does!

64
The “good faith” proviso requires a new trial on liability unless it is
clear either that Bakeries acted in good faith or that it acted in
bad faith, since the statute requires the buyer to take his “good
faith” requirements from the seller, irrespective of
proportionality.
Clearly, Bakeries was acting in bad faith if they bought propane from
anyone else than Empire during the contract period. Equally
clear, Bakeries was not acting in bad faith if they decided not to
convert to propane for business reasons.
If no reason at all need be given for scaling back one’s requirements
even to zero, then a requirements contract is from the buyer’s
standpoint just an option to purchase up to the stated estimate.
The statement of an estimate invites the seller to begin making
preparations to satisfy the contract.
The IL courts interpret a requirements contract as a sharing of risk b/w
the buyer and seller.

CLASS NOTES

3 things show bad faith:

1. they bought 0
2. they had the finances to complete the contract
3. propane was cheaper than gas

Some things that might show good faith

1. they might have been looking to the future and making good
long term business judgments
2. it’s their contract, not Posner’s

Genius of Posner:
Bakeries did not make a bad business decision. They just didn’t
have the evidence to prove that their decision was made in good
faith. THIS CASE IS ALL ABOUT EVIDENCE.

Can we contract around this case?

Put the terms of allocation of risk into the contract
Put economic reasons of why you might be excused into the
contract
Give examples of situations where you might be excused

Best Efforts and Consideration

Wood v. Lucy, Lady Duff-Gordon

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FACTS: Lucy employed Wood to help her turn her fashions into money.
Wood was to have the exclusive right to place her endorsements
on the designs of others. He was also to have the exclusive right
to market her name. In return, she was to get ½ of all profits and
revenues.

PROCEDURE: Wood says Lucy broke the contract by placing her

endorsement on dresses without his knowledge.

ANALYSIS: Lucy says there is no contract b/c Wood does not bind
himself to anything. She says that he does not explicitly promise
to use reasonable efforts to place her endorsements and market
her designs, therefore no mutuality.
Court thinks that such a promise is to be implied.
Why should this promise be implied?
 Lucy gave an exclusive privilege
o She was to have no right for at least a year to place her
endorsements or market her own designs except through
Wood
 Her sole compensation is to be ½ of the profits resulting from
Wood’s efforts
o Unless he gave effort, she would not get anything
 Wood’s promise to pay Lucy ½ of profits and to render accounts
monthly was a promise to use reasonable efforts to bring profits
into existence

Lucy Claims:
 K is illusory
 Wood not bound to do anything (will, wish, desire)

Wood did not promise anything, K just says he will receive exclusive
rights.
This is not an express promise
Court says promise may be implied, therefore giving consideration and
mutuality
 This is Cardozo’s gap filler (substitute judgment)
 No UCC to rely on like in the Posner case
 Cardozo opens a can of worms with his decision her, gives
you no road map of the law (creates uncertainty)

What are reasonable best efforts? This is like asking what is good/bad
faith. You can’t determine when there is enough effort and when
there needs to be more.

Bloor v. Falstaff

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FACTS: Bloor was trustee of Ballantine, a once successful brewing
company. Falstaff bought the Ballantine brewing labels,
accounts, distribution systems and other property except the
brewery. They made a contract which said:
A. Falstaff will use its best efforts to promote and maintain a high
volume of sales.
B. Falstaff will pay a royalty of .50 cents a barrel for 6 years
unless Falstaff substantially discontinues the distribution of
Ballantine beer in which it will then pay Bloor a cash sum
equal to the years and fraction thereof remaining in the
royalty period times 1.1 mil

PROCEDURE: Bloor claimed that Falstaff breached the best efforts

clause and that its default amounted to the substantial
discontinuance that would trigger the liquidated damages clause.
Judge upheld the first claim and awarded damages, but dismissed the
second. Both appeal.

ANALYSIS: Falstaff contended that the judge read the best efforts
clause as requiring Falstaff to maintain Ballantine’s volume by
any sales method having a good prospect of increasing or
maintaining sales. Appellate court found that judge did not say
that the best efforts clause required Falstaff to bankrupt itself in
promoting Ballantine products.
Once the peril of insolvency had been averted, the drastic percentage
reductions in Ballantine sales as related to any possible basis of
comparison, required Falstaff at least to explore whether steps
not involving substantial losses could have been taken to stop or
at least lessen the rate of decline. The judge found that instead
of doing this, Falstaff had engaged in a number of misfeasances
which could have accounted in substantial measure for the
catastrophic drop in Ballantine sales shown in the chart. These
acts included Falstaff’s failure to treat Ballantine products
evenhandedly with Falstaff’s.

HOLDING: Falstaff had breached its duty to use best efforts.

What could you contracted for instead?

 Have 6 month contracts and renegotiate after each period based
on sales record

BEST EFFORTS: due diligence

 “best efforts” is an expressed term here, not implied like in Lucy
(but still same problem as to what it means)

NO best efforts

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  Sales decline
 Less money on marketing

YES best efforts

 Less money spent does not necessarily mean less effort to sell
(ballantine beer sucks)
 The market demand was just not receptive to beer in general
(see graph) so it is not Flastaff’s fault that they used less effort

By saying that they didn’t promote Ballantine b/c it would cut on their
profits b/c they had to pay the .50 royalty so they sell less and
try to sell more Falstaff beer instead, they don’t take into account
that people will drink Falstaff if their Ballantine is not being sold

Employment at Will and Consideration

Zilg v. Prentice-Hall

FACTS: Z entered into a contract with Prentice Hall in which PH agreed

to publish z’s book. PH reserved the right to determine the
method and means of advertising and the number of copies to
be printed. PH initially agreed to a first printing of 15,000 books
and advertising budget of $15,000. After protests from the
Dupont family, they reduced the amount of both.

PROCEDURE: Trial ct. held that PH had no sound or valid business

reason for reducing the numbers. PH therefore breached its
obligation to use “best efforts” to promote the book.

HOLDING: Reversed

ANALYSIS: Z did not bargain for or show explicit “best effort” promise.
Contract says the terms would be set forth by PH. Z did not
show that PH’s efforts were so inadequate as not to give the
book a reasonable chance to catch on with the public, nor has he
shown the reasons for cutting the numbers were anything other
than a good faith business judgment.

Corenswet v. Amana

FACTS: Corenswet was the exclusive distributor of Amana in LA.

Agreement b/w Amana and Corenswet allowed termination by
either party at any time for any reason on 10 days notice.
Amana gave such notice.

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PROCEDURE: Dist. Ct. held that Amana had acted arbitrarily and that
personal animosity was the real reason for terminating their
relationship.

HOLDING: Amana had a right to terminate for any reason.

When a contract contains a provision expressly sanctioning termination
w/o cause, there is no room for implying a term that bars such a
termination.
Additionally, Corenswet never pressed the issue of unconscionability.

ANALYSIS: The express contract terms cannot be construed as

Corenswet would like, and the contract terms control over any
allegedly conflicting usage. Corenswet is not governed by § 1-
203 “good faith”. The chief purpose of 1-203 has always been as
a rationale in the process of implying contract terms. This
contract had Express Terms.
The better approach is § 2-302 dealing with unconscionability. Court
seriously doubts that the public policy frowns on any and all
contract clauses permitting termination without cause, so
Corenswet has a tough case.

NO Mutuality
 Both can terminate at will so no mutuality
 Unequal bargaining power

Yes Mutuality
 Mutuality for 10 days
 Some time of risk
 No bad faith
 Contract terms allow for any termination

3 elements that show “no unconscionability” in dealership termination:

1. No lack of opportunity to review contract
2. No inability to understand the provisions of the document
3. They could seek a lawyer’s advice
Would you sign a contract that you didn’t review? NO  Grow up!!

Mabley & Carew v. Borden

FACTS: Borden claims that her dead sister had been promised by
Mabley (her old employer) that he would give her relatives (if she
named them on the back of a certificate) the equivalent of a
year’s wages.
The certificate said, “In appreciation of your duration and services to
the company, there will be paid in the event of your death, IF

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 STILL AN EMPLOYEE OF THIS CO, …” “This is a purely voluntary
gratuity”

PROCEDURE: Mabley claims the certificate, as it said, was a voluntary

and gratuitous gift with no consideration.

ANALYSIS:
Consideration:
 Inducement for employee to keep working
 Company appreciates her faithful service
 Employer is benefited by keeping employees in faithful service

HOLDING: Deceased, by continuing in the service of the company until

her death, created a binding obligation upon the company to pay
her designated beneficiary the sum mentioned in the certificate.

WHO”S CONTRACT IS IT ANYWAY? Courts are rewriting the contract by

finding reliance in the clear express contrast to their contract
Belline v. K-Mart

FACTS: Belline thought his supervisor was giving free stuff to a charity
w/o using the proper procedure or forms. All people involved in
the reporting were either demoted, transferred, or fired.
Supervisor was demoted and transferred as well.

PROCEDURE: Belline brought suit against K-Mart, claiming he was fired

from his job in retaliation for reporting to K-Mart mgmt.
suspicious behavior on the part of his supervisor.

HOLDING: K-mart is not entitled to judgment as a matter of law on

Belline’s retaliatory discharge claim. IL public policy protects
vigilant employees who alert their employers to apparently
criminal activity in the workplace.

ANALYSIS: As a general rule, employment contracts can be cancelled

at will. Only exception is if an employee:
1. Is fired
2. her discharge is in retaliation for her activities
3. the discharge violates a clear mandate of public policy

Public policy= favors the exposure of crime

K-Mart says NO public policy:

 Supervisor’s activities were a matter of private concerns
 Belline reported only to K-mart, not to the cops

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  Crime is of small magnitude
 They were just contributing to charity and the only fault of the
manager was not to use the proper forms (book-keeping
problem)

Courts says YES public policy:

 Amount of $ involved does not matter
 Belline did good by going through internal channels first

DISSENT: Stone likes

 Firms need to prune their work forces of persons who create
more trouble than they are worth
 What Belline reported was just an offense against K-mart’s record
keeping
o Or you could see it as reporting a theft, BUT
 A theft is an unconsented taking and K-mart allowed
managers to donate merchandise to charity
 Whether there is a crime depends entirely on K-mart’s rule of
whether this donation followed the right procedure.
o There is no state public policy here
 Should not override the employment at will contract b/w Belline
and K-mart

EX: You are shopping with mom. She has a big purse at the jewelry
counter. Mom tries to gather up her things and accidentally drops the
jewelry into her coat pocket.
 Even though you are suspicious of mom’s activities, you don’t go
calling the security guard.
 You handle it through the low cost of just telling mom that she
forgot to pay for the jewelry. No harm cause you’re not out of
the store yet.
In K-Mart, the same situation arose, and they took the majority opinion
and moved to the more expensive public ordering approach. Stone
does not like.
 Should have just used private means, like telling mom, like
Easterbrook dissent.
 Falstaff is relevant. Try to correct life’s imperfections, but not
with an atomic bomb.

K-mart would have punished the manager if he had stolen the goods.
Majority trashes the employment at will contract and actually creates
new contract terms (fire only for just cause) Stone hates.

What should K-mart do to fire Belline and not have problem of wrongful
discharge.

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  Fire for just cause.
 Fire him for poor job performance, poor business judgment for
going external rather than internal.
 Are you going to be a team player for profits or a maverick for
public policy? Stone says mavericks won’t last in the
employment world

Pre-existing duty
No consideration for a present K2 if the cited obligation is a pre-
existing K1.
 We use the consideration once, if we use it in k1, we can’t use it
again for k2.
 We need new legal detriment.
o “The virginity of contract formation”
o One does not suffer a detriment by doing or promising to
do something that one has already obliged to do or by
forbearing to do something that is already forbidden

Pre-existing v. past consideration:

 Past consideration is in the gift based realm, gift in the past,
want payment now, only one side is suffering legal detriment.
o Past consideration: if the promisee suffered the detriment
before the promise was made, it cannot be said that the
detriment was exchanged for the promise
o The promise is seen as gratuitous and non-binding, even if
it was seriously and freely made, and even if the prior
detriment conferred a valuable benefit on the promisor.
 Pre-existing: k1 in the past, not gift, and trying to structure the
k2 based on it.
 This is all about the consideration for new legal detriment. Can’t
be based on the old obligation.

2 pulls of these cases:

1. No consideration for k2 if the cited obligation is from a pre-existing
k1.
2. UCC view of consideration is that no new consideration is necessary
(§ 2-209)

Query: What if there is a true mutual discharge of k1, and a new

substituted k2?

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  This is ok, but you will have to present enough evidence to
show that there was a true mutual discharge (both parties
really agreeing to wipe out k1).
 It’s as if k1 never existed.

Often we are talking about modifying a K1, through K2. But only one
party takes on a new duty under the K2. This fails for lack of
consideration. NO NEW LEGAL DETRIMENT.

Ex: K1=pay you $500. K2=pay you $300 instead, with a $200 scaling
down. Only one side is benefiting, so no new legal detriment,
therefore it fails for lack of consideration. The differential is only
a gift and therefore not a contract. See Foakes v. Beer.

Exceptions:
1. May allow k2 consideration if there are unexpected
circumstances which render k1 worthless [impracticability rule]
See Blakeslee
2. Clear mutual discharge of k1 and substitution of k2.
a. If you wipe out the old k1, the k2 is not based on a pre-
existing obligation.
i. Problem: what was the intent of the parties?
1. Were they scaling down the k1 or actually
wiping it out?
2. Must look at the burden of the evidence and try
to convince court that there was enough
evidence of an intent to truly discharge k1.
3. Even so, courts could come to different
conclusions, so this is an ambiguous
environment. Just argue yes and argue no.
3. Finding new obligations on both sides.
a. Look at the facts to see if there is new legal detriment on
both sides.
4. If the state statute says consideration is unnecessary. See pg.
289.
5. Provisions §§82, 83 in the Restatement that make consideration
unnecessary. [i.e., statute of limitations, or bankruptcy]
a. No new consideration by both sides, only taken on by the
debtor (new obligation), creditor is just getting a benefit
(no new obligation) but still is a contact b/c:
i. Public policy of wanting people to pay their debts.
ii. Gives more incentives for people to do business if we
give voluntary incentive to revive debts (no coercion
involved, just an original mutual exchange).  this
enlarges the economic pie

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Liquidated debt:
 Presently due debt with no legitimate dispute as to its terms,
debt is mature.
 Mere scaling down of a liquidated debt will fail for consideration.
 See the $500 example above.

Promises to make charitable contributions?

 Look like gifts, but enforceable as contracts.
 They’ve carved out an exception b/c:
o Giver= legal detriment by giving up money
 Giver is getting psychic value
 You might get cancer and will need their help
o Cancer society= they are creating new obligations to do
more research based on the money they get through
donations

CASE: Grouse v. Group Health Plan

FACTS: Pharmacist was offered a job and quit another job to start, but
before he could start they said he couldn’t work there b/c he did
not have the necessary references.
HOLDING: Court says it would be unjust not to hold the company to
their promise. Stone does not like.

ARGUE MUTUALITY: Pharmacist relied on the job.

ARGUE NO MUTUALITY: neither is committed to perform, illusory
COASIAN: What could pharmacist have done?
 Contract for a trial period rather than long term
employment
 Contract to give references later
 Give it up as a lost cause, the market is big, there will
be other jobs
 Only a fool would rely if he couldn’t get his references
together

CASE: Stilk v. Myrick

FACTS: (P) was to be paid 5 a month but during the course of the sea
voyage, 2 other workers deserted, so the captain told the crew
they would have wages of the 2 deserters.
HOLDING: UCC §2-209 No new consideration

ARGUE NEW CONSIDERATION:

 Emergency
 Both agreed

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ARGUE NO NEW CONSIDERATION:
 K1 was already in place and terms were to work hard
 Employees carry the risk that the job will be more difficult than
anticipated

CASE: Alaska Packers v. Domenico

FACTS: D promised to pay P $50 + 2 cents per red salmon to do any
work on a fishing vessel designated by D’s captain during the
fishing season of 1900. Later they signed shipping articles with a
vessel chartered by D in which they bound themselves to do the
same work for $60 and 2 cents per red salmon. While out to sea,
P demanded $100 or they would stop work. After failing to get P
to do their work, the super gave into their demands. When they
got back to shore, D refused to honor the new agreement.
ARGUE NO CONSIDERATION:
 No consideration for K2 b/c there was a pre-existing obligation
 court plays §175/§176 (duress) game
 life has difficult moments

CASE: Glamorgan Cty. Council v. Glasbrook Bros

FACTS: Striking miners threatened safety men if they worked at the
mine. The company agreed to pay the police for extra protection
at the mine. Gov’t brought suit to enforce the promise, and court
ruled in favor of P. Unless it is shown that the granting of the
request deprives others of reasonable police protection. Dissent
said that this was contrary to the general interest of the public.
HOLDING: Court says not pre-existing duty b/c is new duty beyond
normal duties (§73 allows for that)

ARGUE NO PREEXISTING DUTY:

 This is a new duty beyond normal police duties, therefore there
is new consideration
 Receive extra pay
ARGUE PREEXISTING DUTY:
 Police are there to protect and serve
 This protection duty is broad so they take the risk of labor strikes
and working more

CASE: Foakes v. Beer

FACTS: Dr. Foakes owed Mrs. Beer 2090 pounds. The parties entered
an agreement where the Dr. would pay 500 pounds immediately
and then spread the remaining payments out over five years.
Mrs. Beers later claimed that she was owed the interest. Trial
court said she was entitled b/c D was bound to pay the judgment

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 debt immediately, and it was a debt bearing interest. Although P
agreed to give time, she might at any time have changed her
mind, and was not bound by the agreement b/c there was no
consideration for it.
HOLDING: K2 is a modification of the time allowed to pay debt on K1.
There is no new consideration.
ANALYSIS: Classic case of pre-existing duty: partial payment of sum of
K1 even if agreed to in K2 is not valid without consideration;
could be criticized b/c person’s word is his bond.

CASE: Sugarhouse Finance v. Anderson

FACTS: P got judgment from D for 2423.00 + interest and costs. D
told P he was contemplating bankruptcy, so P settled on
2200.00. P later returned the check and demanded full amount.
HOLDING: Court said there was consideration. D had no legal
obligation to negotiate a loan to enable him to pay off the
substitute obligation. P could not legally require D to incur other
obligations to satisfy judgment. D deliberately incurred
detriment of surrendering his right to limit P’s ability to obtain
satisfaction of the underlying judgment.

Restatement § 73 Illustration: A owes B a matured liquidated debt

bearing interest. Mutual promises to extend the debt for a year
even at a lower rate of interest are binding. By such an
agreement, A gives up the right to terminate the running of
interest by paying the debt.
 B, the creditor is giving up right to collect immediately
o B is also giving up the opportunity to invest the money he
would have gotten
 A, debtor, pays interest on the extension, therefore that is his
detriment
 The consideration= the time element and the interest

Modification of K1 w/out
consideration
a. UCC 2-209 says that modification may be made w/o new
consideration.
1. 2-209 allows scaling down of claims
b. Mutual discharge and substitution of K2 is another area that
allows for modification, if
both parties agree to abandon K1 and go w/ K2 then its
okay. (§74,§89,)

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 1. have to have clear evidence (Stone will give hazy facts
and argue yes and
no),don’t assume just b/c parties agree
c. Parties may make a new agreement and modify terms if they
so wish.

CASE: Blakeslee v. Board of Water Commissioners

FACTS: K1 = $250k to build dam and contractor encountered
unforeseen difficulties. Parties agree to a new K2 for $300k.

HOLDING: Held, affirmed, parties did not know of unforeseen

difficulties at the time of entering K and there was an effort to
renegotiate.

OLD STILK VIEW:

 Did other side provide more consideration, more money but it
was precisely the same work the builder agreed to do before
 Stilk view would apply pre-existing duty rule (you took the risk)

NEW BLAKESLEE RULE:

 special situation here confronted with non-contemplated
circumstances
 court comes up with doctrine of commercial impracticability:
o Burdensome unforeseen unanticipated change of
circumstances (§89 approach)
o How do you know when circumstances are extreme
enough?
 RULE: Modification of k1 may be allowed b/c of a burdensome,
unforeseen change in circumstances restatement §89(a)
o Contractor not relieved of obligation, just allowed to modify
 What does the P have to prove? 3 PART TEST: Commercial
impracticability
1. The contractor had a legitimate reason, pressing need to seek
adjustment (truly unforecastable circumstances)
2. Must find that the other side voluntarily agreed to the K2
o both sides agree that one side is a victim and should be
compensated more
o Consistent with mutual discharge type cases
3. The beneficiary is not attempting to take advantage of the
other side
o No economic duress
o No monopoly situations

Criticisms of 3 part test:

 Conflicts with other tests and cases

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  This should be the risk of the bargain that each side takes
 Honor your contract!! Commercial impracticability is emotional
 Everyone with 20/20 hindsight might whine about bad contracts
and would create problems and try to adjust all their contracts
 Test is not used very often (b/c of the reasons stated above)
 How commercially impracticable must the circumstances be to
qualify? This is hard to determine
 Disincentive to plan carefully up front (Coase) Incentive for
sloppiness when writing the contract!!

How could we have planned up front to avoid commercial

impracticability?
 Contract in the alternative
o Show original K price for building a dam and then give new
terms for various scenarios
 Narrows/minimizes the risk

Contacts where Consideration is NOT

needed:
1. Some statutes that make consideration unnecessary U.C.C. 2-
209 (consideration is unnecessary…)
2. Debt §82/§83—(No consideration needed) debt discharged by
statute of limitations,
old debtors revives debt and says owed the creditor, no
consideration; but debt discharged by SOL, public policy
says attempts to revive debts discharged by SOL won’t die
due to lack of consideration, Rationale—want to encourage
people to pay debts; same works w/ bankruptcy in §83
3. Charitable contributions

CASE: Crane v. Progressive

FACTS: (D) accepted K2 higher price, (P) sues on K2.
HOLDING: UCC §2-209(1) needs no new consideration for GOODS
cases.

CASE: Fisheries v. J-Z Sales Corp.

FACTS: A fish packing company made an agreement to buy excess fish
from a fishery. When the amount went well above the estimated
agreement the packer attempted to decrease price by giving
fishery a check for a lesser amount. When Fishery accepted this
modified amount the debt was cleared. Why?, b/c debt was
unliquidated, i.e. it was not explicitly spelled out in the K. Also
an intro to accord and satisfaction.

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K2 Consideration= giving up more or lesser amounts of fish or money
than they would have under the K1 estimates.
Restatement §73 and §74(1)(a)—where is consideration element?
Can debtor always mark payment in full and have satisfaction? No
only if an unliquidated claim (Rule on 305); 2-306(1)—estimates
were disproportionate

A. Liquidated Debt – debt that is mature, due and no dispute exists as

to its amount.
1. Only unliquidated debts can be modified.
2. The seller may take an offer to settle debt an that
acceptance will be
enforced only in the case of liquidated debt.
3. A check sent for a liquidated claim, even if marked “full
payment”, will
not be enforceable as a settlement for debt.
4. Ex. Paying rent on an apartment.
B. Unliquidated debt – debt that is unsure, i.e. amount is in dispute
1. If all claims are set in concrete and debt is sure then no
modification
may take place.
C. Only way that a payment for a liquidated debt can be enforced is if
B can show that
the old K was mutually discharged and K2 was substituted
1. This is a hard burden to meet
2. Clear and convincing evidence of discharge and new K
required.

Notes: What if debt is not in dispute, and buyer sends payment in full
(rent check) no consideration of K2 b/c was liquidated claim so
not payment in full (violating pre-existing duty rule—a mere
scaling down of a liquidated claim fails for no consideration);
How do you modify liquidated claim for a lesser/greater amount?
§89, §275—clear discharge of K1 and substitution of K2;

RULE: Where the amount of a debt or obligation is unliquidated or in

dispute, then the tender by the debtor of a certain sum in full
payment of the debt, followed by acceptance and retention of
the amount tendered, establishes an accord and satisfaction

Reilly v. Barrett: The “Executory Accord” (a contract that hasn’t been

fully performed yet)
- No accord and satisfaction (no full performance, b/c there was
no payment therefore no satisfaction)

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 - A promise to perform is not enough, they must actually pay or
the accord is ineffective till performance occurs
How do we handle this?
Accord AND Satisfaction= unilateral contract [promise for an act]
(promise for an act is accord, act of payment is the satisfaction)
Accord= bilateral contract[promise for promise to create the contract,
performance is coming later] (accord is enough b/c bilateral
contracts are all about promises)
What is the intent of the parties? Do they want just accord, or accord
AND satisfaction
Are they intending to be bound just by accord? If yes then
bilateral
If they are intending to be bound by satisfaction? If yes, then
unilateral

“Past” Consideration and Moral Obligations

I. “Past” Consideration
A. Past consideration or moral obligation alone w/o legal
consideration is insufficient for new contract.
1. Rest 86(2)(a) – A promise is not binding if a promisor
can show performance given to him was a gift then the
contract is invalid.
2. This is a matter for gift law not contract law.
3. Under past consideration, there was no legal obligation
of contract in the past (just a gift) unlike §73 pre-
existing obligation
B. Arises in cases of past care for someone
1. Mills v. Wyman – Promise for past care not
consideration for present promise
a. Mills did nothing new for promise, so there is no
new legal detriment
b. Mills took care of D’s 25-year old son who had
fallen sick in a foreign country. D wrote a letter to
P promising to pay him boarding and nursing
expenses. D reneged on the promise.
2. The general position, is that moral obligation is not
sufficient consideration for a K
3. Problems if find a moral obligation to enforce K:
a. co-mingling w/ K and property law
b. who’s definition of morality do you use
c. no new legal detriment
4. Why no contract?
a. These people intended to contract, but there was
no bargained for exchange

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 b. This was just a gift of payment for a previous
Good Samaritan act
c. True good Samaritans do not intend to be paid
through contracts
d. If promise had been to pay for future care, then
that would be a contract that is enforceable
C. Material benefits conferred on others
1. McGowin – A saves B’s life but in the process causes great
injury to himself. B agrees to pay A $15/wk for the
remainder of A’s life in return for saving his life. B dies and
A sues estate to continue recovery of $15/wk. Held, for A.
2. Why consideration here but not in Mills? Argue Y and N:
i. Consideration: B obviously intended to pay A, he paid
out for 8 yrs before he died, B received a material
benefit from A’s act. Maybe a Hypothetical K
situation – A did not have time to work out a K w/ B
as did the parties in Mills if they had wanted to
establish some form of payment. Here time did not
allow bargain. See Cotnam v. Wisdom.
ii. No consideration: D may only have intended to make
a gift. Benefit was “past” consideration. B’s
obligation to pay was merely moral obligation. 86(2)
(a)
iii. Express contract:
1. If the court calls it an express contract but
basing it on unjust enrichment, which deals
with implied contract (calling it express but
basing it on implied reasoning)
2. Proper remedy would not be express contract
terms, but bring in expert witnesses on
reasonable amount of care delivered
3. Difference b/w Mills and McGowin is the transaction costs
involved, in Mills they were low (could have K’d for the care
of the son) and in McGowin high (didn’t have time to K, but
high probability that parties would have agreed)

STATUTE OF FRAUDS
A. General Rule: Law allows for oral contracts

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 a. However, certain types of contracts fall outside this general
rule and must be written and signed in order to be
enforceable
1. Legislature deems some contracts extra important
b. Basic Statute of Frauds Rule: A contract within the scope
of the statute of frauds may not be enforced by the court
unless a memorandum of it is written and signed by the
party to be charged.
1. If the parties willingly perform, that is OK

QUESTIONS TO ASK:
2. Does the contract fall within the statute?
1. NO = Oral contract is enforceable
2. YES= Is the contract reflected in a writing that
satisfies the statute?
a. YES = contract is enforceable
b. NO = Does the case fall within one of the
exceptions to the statute that permits
enforcement despite non-compliance?
i. YES = contract is enforceable
ii. NO = contract is unenforceable

I. Importance
A. Oral K is enforceable unless special statute requires that
particular kind of K be in writing and signed by the person
sought to be held liable on the K.
B. Some K’s are unenforceable if they are not in writing.
1. W/in SOF means subject to rules of SOF, so a writing
is required
a. part performance can take a K out of SOF
2. Not Within or W/out SOF means not subject to SOF,
so a writing is not required.
3. Most K are not required to be in writing
C. Imposes additional legal requirement on enforceability of
agreements
1. May make unenforceable an agreement that
otherwise meets requirements of binding K
2. May prevent enforcement of K even though evidence
is overwhelming that it’s an otherwise enforceable
agreement
D. Hypos:
a. A enters K with B on March 17 A to work for 9 months
for B, work to begin the following July 1. Do you need
writing?
i. YES, b/c 12 months from the date of entry (12 ½
months)

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 b. A agrees to work w/ B for life. Do you need writing?
i. NO: if performance is contingent on something
that can take place within a year (life is the term).
c. If terms call for more than one year but terms can be
completed w/in a year. Do you need a writing?
i. YES, b/c terms call for more than one year

II. Purpose of SOF

A. First imposed as a protection against fraud and mistake
B. To assure deliberation before making a promise concerning
important matters
C. To specify a method by which intention may be given legal
effect

III. The Kind of Writing Required

A. UCC 2-201(1) imposes minimal requirements for sale of goods
B. Restatement 131—General Requisites of a Memorandum
1. Memorandum satisfies if it meets all of the following:
1) Reasonably identifies the subject of the K
2) Names parties charged
3) Consideration is cited
4) States w/ reasonably certainty the essential
terms of the K.
5) It is signed by or on behalf of the party to be
charged.
2. Don’t have to give actual signature
3. Initials, stamp, letterhead, authorized person
4. If signed writing is lost can prove by oral evidence
5. If writing inaccurately states the terms of K, courts
permit correction by reformation
6. An item not intended as a memorandum, such as a
letter citing the terms of the oral K may be made
enforceable.
a. Several writings are okay—letters, faxes; just have
to have evidence of agreement
b. Single piece of paper is okay

IV. Oral Rescission or Modification

A. Oral rescission doesn’t usually violate SOF if it doesn’t result
in the re-transfer of property that is the subject of the statute
(e.g. goods or interest in land).
1. Ex. Oral rescission of K for the sale of goods may not be
effective if B has already received the goods. If S still
has the goods, even though title may have passed to B
the oral rescission may be effective on the ground that

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 by agreeing to the rescission S has “received and
accepted” the goods (UCC 2-201(3)(c)).

Statute of Fraud covers 6 types of contracts:

1. Contracts for the sale of land or an interest in land (§ 125-129)
a. Covers any agreement that contains a promise to create or
transfer an interest in land
b. Leases are covered, but the statute commonly excepts
short-term leases
2. Contracts that cannot be performed within one year (§ 130)
a. In measuring the period, the 2 points of reference are the
time of making the contract and the time when
performance is to be completed
i. TIME IS MEASURED FROM MAKING OF CONTRACT, not
the time it takes parties to perform.
ii. Applies only if performance is IMPOSSIBLE not merely
difficult
b. If the contract is indefinite (more than a year), but the
performance is possible within a year, then the contract is
not covered by the statute of frauds, no matter how
unlikely it is that it will actually be performed within a year.
c. A contract that will be performed in the event of the death
of a person is NOT within the one year provision, since
death can occur at any time.
d. Ex. An employment K for 2 years (oral agreement)
commencing immediately is unenforceable b/c it is not
able to be fully performed w/in one year.
e. Certain K’s do not fall w/in the statute:
i. Possibility of completion w/in a year: not w/in SOF
even if actual performance may extend beyond a
year.
ii. Right to terminate w/in a year: Majority – K is w/in
SOF, Minority – K is not w/in SOF (Rest. 2d view)
iii. LIFETIME K: Never included in SOF b/c a person can
die w/in a year even if the greater probability is that
they will live.
3. Contracts for the sale of goods worth $5000 or more (§ 2-201) ON
EXAM!!!
a. The statute applies if the goods combined price exceeds
$5000
b. Goods are defined as all things moveable
c. UCC § 2-201(1) Kind of Writing Required
i. Writing must indicate K made, name parties, be
signed by party to be charged, and state quantity
d. UCC § 2-201(2) Written Confirmation

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 e. UCC § 2-201(3) Enforceability W/out Signed Writing—
Subject to three exceptions:
i. Specially manufactured goods – if goods are tailor
made for one buyer and not suitable for another, oral
K may be enforced.
ii. Admissions in pleadings or in court that a K was
entered into may make an oral agreement
enforceable (statement made by one charged
against)
iii. Payment – If goods have been accepted and paid for
1. Part performance of K would also take it out
(payment).
4. Contracts to answer for the duty (debt or default) of another
(suretyship) (Primary v. second contract)
a. A promises to pay B $100 for goods (Original contract, no
sof)
b. C promises to pay B 100 if A does not pay (collateral
contract, yes SOF)
c. A promises to pay B $100 for B sending goods to C
(Original promise, no SOF)
i. Elements
1. 3 parties
2. 2 promises
3. paying for collateral promise
5. Contracts of an executor or administrator to answer for a duty of
his decedent
a. if an executor agrees to pay an estate’s debt out of his own
funds that agreement must be in writing b/c it’s a trustee
position
6. Contracts made upon consideration of marriage
a. A promise for which the consideration is marriage or a
promise of marriage is w/in the SOF.
i. Ex. prenuptials, ante nuptials
b. Exception: If an oral K consists solely of mutual promises to
marry w/o ancillary promises relating to property transfer.
i.e. ordinary oral engagement.

How do you satisfy a Statute of Frauds requirement?

1. Writing is the usual way to satisfy
a. Usually done on paper, but now moving towards electronic
b. Pencil on bathroom tissue will suffice
c. Even if the actual paper is lost, it can still be satisfied by
oral testimony saying it did once exist
2. Contents of the writing:
a. Identify the parties to the contract
b. Indicate the nature of the contract and its subject matter

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 c. State the essential terms of the promises to be performed
under the contract
d. If the consideration has not already been given, most
courts insist that the consideration be put in the writing
e. Sale of goods under UCC is less stringent
i. Only term that needs to be stated is the quantity of
goods sold
3. Mistakes in the writing
a. Court can rewrite the contract if there is a mistake
4. Requirement of Signature
a. The writing need only be signed by the party against whom
it is to be enforced
b. Signature= any mark or symbol placed on the paper with
the intention of authenticating the writing (no full signature
needed) (“X” is enough)
c. Not necessary that every piece of paper be signed

Exceptions that permit enforcement despite lack of a sufficient

signed writing
1. Part Performance Exception
a. Following an oral contract, if the parties begin
performance, it may provide reliable evidence that a
contract was made
i. Therefore, failure to sign a writing will not terminate
the contract
b. UCC Sale of Goods exceptions
i. Good that are specially made for the buyer and not
otherwise easily saleable
ii. The goods have been made and accepted, or goods
have been delivered and accepted
2. Judicial Admission Exception
a. When a party that admits in pleading, testimony, or
otherwise in court that a contract was made, then the
contract will not be held unenforceable solely b/c of the
statute of frauds

Impact of Non-Compliance with the Statute

1. Precludes enforcement of the agreement against that party
a. Called invalid, void, unenforceable
2. Part of contract within SOF
a. General rule: No part of K is enforceable if one part fails to
satisfy SOF
b. Exception: If all promises that were w/in SOF have been
performed, then promise is enforceable.
3. Remedies

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 a. Parties can recover reasonable value of the services or part
performance rendered
b. May also recover restitution of benefits rendered. (quantum
meruit)
c. Promissory estoppel recovery: if D’s conduct induces P to
change her position in reliance on the oral agreement
which is unenforceable under the SOF, P may recover
under a theory of promissory estoppel.
i. If D has intentionally and falsely told P that the K is
not w/in the Statute or that a writing will be
subsequently executed or that the defense of SOF
will not be used.
ii. Inducement of detrimental reliance also allows
recovery

VI. Solving the SOF Problem

A. Look for an ORAL AGREEMENT
B. Look for MYLEGS
1. Think about elements
2. Look for small abnormalities that require exclusion
C. See if reliance doctrine applies.
D. Stuff not under SOF:
1. Indemnity (Health Insurance)
2. Goods under $500
3. joint debts—considered original promise b/c both
individually responsible
4. specially manufactured goods (operator of purple night
club orders 5000 yards of purple carpet; refuses to pay;
2-201(3)(a) out of SOF so don’t need a writing)
E. Argue Y or N: Do we really have part performance

PAROL EVIDENCE
RULE
I. PAROL EVIDENCE GENERALLY
A. Application: applies where an agreement is recorded in writing
and one of the parties proffers evidence to prove a term is not
contained in the writing or to explain or expand on a term in the
writing

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B. Rationale: court wants to be able to shield the jury from
apparently unreliable or irrelevant matter and thereby exercise
some control over its decision making
a. The court views parol testimony as highly suspicious and
susceptible to fraud and dishonesty…this could confuse a
jury
b. Why be concerned w/ oral testimony being inadmissible
here?
i. Writings are generally more accurate than oral
1. Slower to perform and more easily
remembered
ii. Higher statistical probability that the true terms are
found in the writing.
iii. More incentive to be careful with things you pay
higher costs for (writing)

C. Rule: Evidence of an earlier agreement is irrelevant and

misleading and should be kept from the fact finder (An original
writing prevails over an oral statement or secondary
writing) Parol evidence is not admissible to add to, alter,
or vary the original document § 215
a. In a writing that is and is intended to be a final expression
of their agreement, no parol evidence may be admitted to
supplement, explain, or contradict it.
b. If the writing is not a final and complete expression of their
agreement, consistent, but not contradictory parol
evidence may be admitted to supplement or explain those
parts of the writing that have not been finally expressed.
c. Applies to both oral and written evidence
d. Not a rule of evidence, a rule of substantive matters
e. This is a “best evidence” type of rule
i. Requires court to assess the “best evidence” offered
by parties.
ii. Determined by certain rules
iii. Is not admissible to add to, alter, or vary the original
written document
f. P.E.R. does NOT apply only to those contracts covered
under the statute of frauds. It is broader than that, covers
any written contract.

D. After the execution of the writing: parol evidence rule does

not affect evidence of, either oral or written, agreements claimed
to have been made after the execution of the writing.
a. This would just be a contract modification

E. Restatement § 213

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EX: Seller and Buyer sign written agreement under which Seller sells
her car to Buyer for $5000 cash. When Seller tenders delivery of
the car, Buyer refuses to pay claiming that on the day before the
agreement was signed, Seller had orally agreed to give Buyer 30
days credit. Buyer’s testimony about the prior oral agreement
would be parol evidence.

II. Integrated Agreements (§209, §215)

A. Partial Integration
1. Document is not intended to include all details of the
agreement
i. It is:
1. FINAL, but
2. NOT COMPLETE
ii. Prior evidence may be admitted to
supplement or explain the writing as long as
it does not contradict a term of the writing
2. Corbin view—favored

B. Complete Integration
1. Document is intended by the parties to include all
details of the agreement.
i. It is:
1. FINAL and
2. COMPLETE
2. Prior evidence may NOT be admitted to add to the
terms and especially not to contradict the terms.
3. Williston view.

III. Williston v. Corbin

A. Williston view
1. Williston holds that ORIGINAL WRITING SUPREME
UNLESS…
a. clear mutual discharge of 1st agreement
b. terms in K2 that might mutually be agreed
upon but were left out
c. new consideration for K2
B. Corbin View
1. More liberal: ALLOW PAROL UNLESS…
a. The parties in their writing showed clear
intent to the contrary (not to allow oral)
2. Modern trend favors Corbin’s view
C. Stone asks “Has Corbin ever met a 2d oral promise that he
didn’t like?”

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 D. General rule: The more complete, detailed and complex a
formal writing is, the more likely that it will be final and
complete – unless, it is evident from the K that it was not
the intent to be final.
a. Corbin’s rule: Admit evidence b/c a written
agreement couldn’t possibly cover all bases.
b. Use the statutes, don’t leave out any language.

IV. Exceptions to the General PER (also allow oral

evidence)
A. FRAUD
1. Does not exclude evidence to show there was no
agreement or that the agreement was invalid
2. Attacking the K in Its Entirety (Rest § 214 (d))
i. PER does not bar evidence if it goes to show
illegality, fraud, duress, mistake,
misrepresentation, incapacity, and lack of C or
other voidability. (Show no valid K exists)

B. EXPLAIN OR CLARIFY AMBIGUITIES (Rest 216)

1. Does not exclude evidence offered to help interpret
the language of the writing
i. Courts will allow PER to explain or clarify
ambiguities, vagueness or conflicts in the
writing.
ii. Trying to clear up sloppy drafting
iii. Rest. 2d 216 CANNOT ALTER TERMS
2. Does this negate the “best evidence” by this
exception?
i. Y: Allows agreements not included in the terms.
ii. N: Doesn’t add to, alter, or vary; merely
explains rules of K not changes any terms.
3. Merger/Exculpatory Clauses are okay as long as they
are specific and outside evidence won’t be allowed in
to refute them.
i. Merger clause is a recital that the writing
contains the entire agreement of the parties
1. courts typically accept merger clauses as
showing intention that agreement be
completely integrated. (209/210)
4. Jordan v. Doonan Truck– P buys truck after dealer
says it’ll run okay (ORAL warranty) for a few months.
P signs a contract for purchase of the truck that
states “As is,” (WRITTEN warranty). Truck is junk and

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 P sues for breach of K, relying on sellers oral
guarantees.
i. Held for D, If P would have wanted a 3 or 4
month warranty on the vehicle he could have
bargained for it.
ii. 2-202(b) and §209—Williston view P: § 215
intent of both oral/writing as consistent
iii. how do you argue partial integration—anytime
you have language like in 2-316(1)
(unreasonable) then you can argue that it
would be unreasonable not to allow oral
evidence
1. § 2-316(1): Oral warranty is relevant and
should be followed BUT must be subject
to § 2-202 when you look to
reasonableness
2. § 2-202: Terms set forth in writing are to
be seen as a final expression and
therefore may not be contradicted by
other oral agreements
5. Reformation of a mistake
i. Goode v. Riley – Allow parol evidence in to
clarify a clerical error on the face of an
executed deed that awarded too much land to
D after sale.
1. Court says it doesn’t contradict essential
terms of K. (214(d) mistake)
a. D says final writing (209/210/215)
2. Does S get windfall?
a. Maybe b/c he gets to convey less
land. But if actual meeting of
minds was to convey less land,
then it’s a mutual mistake
b. purpose is to seek the true intent
of the parties
ii. In case of mistake, at the request of a party, a
court may reform the writing to express the
agreement actually reached
iii. For P to obtain reformation, he must show
1. there was an antecedent valid
agreement that is
2. incorrectly reflected in the writing, or
3. if that mistake was induced by the other
party’s fraudulent misrepresentation

C. COLLATERAL AGREEMENT RULE

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1. Even the finding of a completely integrated
agreement doesn’t preclude a showing of a collateral
agreement
2. Can show an entirely separate and distinct
agreement b/w the same parties
3. Is enough if the collateral agreement is one that in
the circumstances might naturally be omitted from
the writing
i. Mitchill v. Lath: P buys a house from D w/
the terms stipulated orally that D is to remove
an ice house from his neighboring property if P
is to buy the house. D agrees but never puts
the terms in writing and never removes the
house and P sues for specific performance.
ii. Held: for D. Court finds that the writing was
the complete agreement and any term such as
the one requested by P would alter the terms
of the K therefore inadmissible.
iii. P says oral agreement should be integrated
(merged) into written agreement (§209) and
should be viewed as one
iv. D says violates PER b/c will add to, alter, or
vary terms of written K (§ 213(1))
v. How do you argue as equity (specific
performance) point to argue for oral argument?
(P relied on the promise/ estoppel)
4. §216(2) is the collateral agreement rule even though
it doesn’t state the term
5. Three requirements that must be present before an
oral agreement will be allowed.
i. 2nd agreement must be a collateral one (closely
relates to 1st contract/grows out of it).
ii. 2nd agreement must not contradict express or
implied provision of the written K.
1. Y: original writing called for conveying
land, not additional acts such as
removing ice house
2. N: oral part on ice house does not stop
any of the performance of conveying
land, it just rounds out or enhances the
value of the sale
iii. Must be one where parties would not
reasonably be expected to put/include the
wanted terms in the original writing
(Hypothetical K analysis).

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 1. If P wanted icehouse removed should
have included in writing; low transactions
costs to include it.
2. What would be the statistical probability
of how normal economically minded
people would function= Stone’s definition
of “reasonable”

D. TO PROVE/SHOW CONDITION PRECEDENT

(Restatement § 217)
1. If parties agree that a K will not come into existence
until a particular event occurs, evidence of that
condition precedent will be admissible to establish
said condition.
i. Ex: Football contracts for employment on
condition of health precedent
ii. Ex: Obtaining financing before sale is final on a
home
2. Courts will sometimes imply condition precedent in
order to show that a certain condition had to occur
before the contract would kick in
3. Luther Williams v. Johnson: P sought to recover
$670 in liquidated damages from D for breach. D
claims that K was void b/c of unfulfilled condition
precedent.
i. Issue was whether the admission of testimony
concerning the oral condition precedent
violated the PER.
ii. Two questions:
1. Can evidence be admitted to show that
the parties did not intend the writing to
be a complete statement of their
transaction?
a. Answer: To determine intent of
parties, look at the written
instrument and the circumstances
surrounding its execution.
2. Can it be said that the testimony
regarding the condition precedent
doesn’t contradict the writing when the K
states there are no agreements other
than those contained in the writing?
a. Answer: The oral agreement is
operative if there’s nothing in the
writing inconsistent therewith. It’s
clear from the illustration that an

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 exclusion only if the parol condition
contradicts some other specific
term of the written agreement. In
the instant case, no provision was
made regarding financing;
therefore, the parol condition would
not contradict the terms of the
writing.

E. SUBSEQUENT MODIFICATIONS (§214(e)/§216)

1. Courts will invariably allow into evidence of a new K
when old one was mutually discharged.
2. Generally talking about a clear 2nd oral
agreement achieved via mutual discharge and
re-K with new consideration.
3. PER only affects agreements made before or
contemporaneous w/ the execution of the K.
4. Could argue that it alters, adds to, or varies K, but is
clear 2d K supported by consideration
5. Ex. Pro football K1 600mill and management tears up
writing at player’s request; new K2 for 800mill; have
a substitution (got to get over pre-existing duty
problem and SOF hurdles)
6. Dennison v. Harden: P’s entered into K with D to
purchase for $12,000 a parcel of land that included
fruit trees, tools, tractors, trucks, fertilizers, etc.
i. P claimed that an oral agreement was given
that there were 276 peach trees and that there
was breach of warranty b/c the trees were
worthless.
ii. Trial: PER applicable b/c it varied and added to
terms of the written K.
iii. P said evidence clarified the subject matter.
iv. Supreme Court: No ambiguity in fruit trees;
only ambiguous word is etc. (214(c)); P only
trying to question the adequacy of the fruit
trees
v. Written term called for fruit trees, so could
argue breach (failure for performance); breach
of warranty; PER is not the only way to get
relief the party wants

UCC 2-202
1. Comment seems to adopt Corbin view
2. But argue that in practice this rarely happens

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V. Solving the Parol Evidence Problem
A. Is there a written contract?
1. Yes – is it a partial or completely integrated writing?
a. Good way to tell is merger clause
b. Look for express statements of intent.
c. Judge makes decision, Argue Y and N.

B. Is the K in litigation?
1. Yes – has to be before parol evidence will arise.
2. No – probably not a parol evidence problem.

C. Is one of the parties trying to enter evidence of an extrinsic

nature?
1. Yes – If a completely integrated writing NO EXTRINSIC
EVIDENCE ALLOWED
i. Exceptions: Fraud, explains/ clarifies ambiguity,
collateral agreement, subsequent mod., or condition
precedent.
2. Yes – if a partial integration, only evidence allowed won’t
contradict terms already there.
3. No – no parol evidence problem

D. What is the nature of the evidence?

1. If contemporaneous of or prior to agreement court will not
allow evidence unless meets exception rules.
2. If subsequent agreement PER doesn’t apply.

E. If PER applies, go on to further considerations.

1. Either evidence is allowable or isn’t.
2. Judge makes determination.
3. Has nothing to do w/ believability of evidence only
admissibility.

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