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1. A contract is a promise or set of promises, for the breach of which the

law gives a remedy, or the performance of which the law
in some way recognizes as a duty.

2. COMMON LAW Generally, the common law governs contracts.

VS. ARTICLE
2 SALE OF However, special rules have been developed for
GOODS contracts involving the sale of goods, and those rules are
contained in Article 2 of the Uniform Commercial Code
("UCC"). Article 2 has adopted much of the common law
of contracts, but where the common law and Article 2
differ, Article 2 prevails in a contract for the sale of goods.

3. "Sale" Defined A sale is a contract in which title to goods passes from the
seller to the buyer for a price.

4. "Goods" Defined Article 2 defines "goods" as all things movable at the

time they are identified as the items to be sold under the
contract.

Thus, Article 2 applies to sales of most tangible things

(e.g., cars, horses, hamburgers), but does not apply to
the sale of real estate, services (e.g., a health club mem-
bership), or intangibles (e.g., a patent), or to construction
contracts.

Goods associated with real estate (e.g., minerals, grow-

ing crops and uncut timber, and fixtures removed from
the land) may fall under Article 2 under certain circum-
stances.

5. Contracts Involv- If a sale involves both goods and services (e.g., a contract
ing Goods and to paint a portrait), a court will determine which aspect is
Nongoods dominant and apply the law governing that aspect to the
whole contract. However, if the contract divides payment
between goods and services, then Article 2 will apply to
the sale portion and the common law will apply to the
services portion.

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6. Merchants vs. A number of the rules in Article 2 depend on whether the
Nonmerchants seller and/or buyer are merchants.

Article 2 generally defines "merchant" as one who reg-

ularly deals in goods of the kind sold or who otherwise
by his occupation holds himself out as having knowledge
or skill peculiar to the practices or goods involved. [UCC
§2-104(1)] For many of the Article 2 provisions dealing
with general business practices (e.g., Statute of Frauds,
confirmatory memos, firm offers, modification), almost
anyone in business can be deemed a merchant because
they have knowledge of the business practices. However,
a few Article 2 provisions (e.g., the implied warranty of
merchantability) are narrower and require a person to be
a merchant
with respect to goods of the kind being sold. To be subject
to any of the merchant rules, the merchant must be acting
in his mercantile capacity; i.e., he must be acting in his
business, rather than personal, capacity.

Example: Martha sells computers for Acme Corp. On

Monday, Martha places Acme Corps annual coffee order
with the coffee service. Later that day, she offers
to sell her car to her neighbor for $5,000. Martha is a
merchant with respect to the coffee order, but she is not
a merchant with respect to the offer to sell her car. In the
first instance, she is acting in her mercantile capacity (i.e.,
as part of her business). In the second, she is engaging
in a transaction in her personal life.

7. Good Faith and Every contract within the UCC imposes an obligation of
Fair Dealing good faith in its performance and enforcement. [UCC
§1-304]

*The UCC's definition of "good faith" is honesty in fact and

the observance of reasonable commercial standards.*
[UCC §1-201(20)]

The common law also imposes a duty of good faith and

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fair dealing on each party to a contract with respect to
performance and enforcement.

A breach of this duty is a question of fact, but it usually

involves exercising discretion in a way that deprives the
other party of the fruits of the contract.

Example: Pursuant to a written contract giving both par-

ties the power terminate the contract without cause, Car-
Co employs Sam to sell cars on commission, with
the commission to be paid when the customers take
delivery of their cars. One month, Sam earned $100,000
in potential commissions, with the bulk of his customers
taking delivery at the end of the month. To avoid paying
the commissions, CarCo terminated Sam's employment
on the 28th of the month. Although CarCo was within its
contractual rights in terminating Sam, it was acting in bad
faith. CarCo terminated the employment to escape paying
money that was rightfully due. Thus, Sam is entitled to
recover the commission.

[See Fortune v. National Cash Register, 373 Mass. 96

(1977)]

8. C. TYPES OF Contracts are frequently described as express, implied, or

CONTRACTS quasi. Only the first two are actually contracts, and they
differ only in the manner in which they are formed.

9. a. Express Con- Express contracts are formed by language, oral or written.

tract

10. b. Implied in Fact Implied contracts are formed by manifestations of assent

Contract other than oral or written language, i.e., by conduct (e.g.,
if a person sits in a barber's chair and the barber cuts his
hair, a contract has been formed by the parties' conduct).

11. c. Quasi-Con- Quasi-contracts are not contracts at all. They are con-
tract or Implied structed by courts to avoid unjust enrichment by permit-
in Law Contract ting the plaintiff to bring an action in restitution to recover

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the amount of the benefit conferred on the defendant.
Their only relationship to genuine contracts is historical.

12. Bilateral The traditional bilateral contract is one consisting of

Contracts—Ex- the exchange of mutual promises, i.e., a promise for a
change of promise, in which each party is both a promisor and a
Mutual Promises promisee.

Example: Sidney promises to sell Blackacre to Bertram

for $6,000, and Bertram promises to purchase Blackacre
at that price.

13. Unilateral The traditional unilateral contract is one in which the

Contracts—Ac- offeror requests performance rather than a promise. Here,
ceptance by the offeror-promisor promises to pay upon the completion
Performance of the requested act by the promisee. Once the act is
completed, a contract is formed. In such contracts, there
is one promisor and one promisee.

Example: Susan promises to pay Charles $5 if he will

deliver a textbook to Rick. Charles is not obligated to
deliver the book, but if he does in fact deliver it, Susan
is obligated to pay him the $5.

14. 1) Acceptance by Under Article 2 and the Restatement (Second) of Con-

Promise or Start tracts, unless clearly indicated otherwise by the language
of Performance or circumstances, all offers are "indifferent"
offers, which means that they may be accepted by promis-
ing or beginning performance.

Example: Acme Co. orders specifically manufactured

goods from Barnes Manufacturing Co. Recognizing the
speed with which the order must be filled, Barnes begins
to manufacture the ordered item shortly after the order is
received. This constitutes an acceptance
of the offer if Barnes gives Acme notice of its beginning
of performance within a reasonable time, and it creates
an implied promise on the part of Barnes to complete
manufacture.

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15. Unilateral Con- (i) where the offeror clearly (unambiguously) indicates
tracts Limited that completion of performance is the only manner of
to Two Circum- acceptance—the offeror is the master of the offer and may
stances create the offer in this fashion; and

Under Article 2 (ii) where there is an offer to the public, such as a reward
and the Second offer, which so clearly contemplates acceptance by per-
Restatement, a formance rather than a promise (not to mention the total
traditional unilat- ineffectiveness of a promise in such a situation) that only
eral contract (i.e., the performance requested in the offer will
a contract that acceptance.
can be formed
only by full
performance) oc-
curs in only two
situations:

16. Void Contract A void contract is one that is totally without any legal
effect from the beginning (e.g., an agreement to commit
a crime). It cannot be enforced by either party.

17. Voidable Con- A voidable contract is one that one or both parties may
tract elect to avoid (e.g., by raising a defense that makes it
voidable, such as infancy or mental illness).

18. Unenforceable An unenforceable contract is an agreement that is oth-

Contract erwise valid but which may not be enforceable due to
various defenses extraneous to contract formation, such
as the statute of limitations or Statute of Frauds.

19. CREATION OF A 1. Was there mutual assent?

CONTRACT 2. Was there consideration or some substitute for consid-
eration?
When a suit 3. Are there any defenses to creation of the contract?
is brought in
which one par-
ty seeks to en-
force a contract
or to obtain dam-
ages for breach
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of contract, a
court must first
decide whether
there was in
fact a contract.
In making this
determination, a
court will ask the
following three
basic questions:

20. MUTUAL "same bargain at the same time"—"a meeting of the

ASSENT—OF- minds." The process by which parties reach this meeting
FER AND of the minds generally is some form of negotiation, during
ACCEPTANCE which, at some point, one party makes a proposal (an
offer) and the other agrees to it (an acceptance). An actual
subjective meeting of the minds is not necessary.
Mutual assent is
often said to be Rather, courts use an objective measure, by which each
an agreement on party is bound to the apparent intention that he manifest-
the ed to the other(s).

21. THE OFFER An offer creates a power of acceptance in the offeree and
a corresponding liability on the part of the offeror.

For a communication to be an offer, it must create a

reasonable expectation in the offeree that the offeror is
willing to enter into a contract on the basis of the offered
terms.

22. In deciding (i) Was there an expression of a promise, undertaking, or

whether a com- commitment to enter into a contract?
munication cre-
ates this rea- (ii) Were there certainty and definiteness in the essential
sonable expecta- terms?
tion of an of-
fer, you should (iii) Was there communication of the above to the offeree?
ask the following
three questions:

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23. 1. Promise, Un- invitation to begin preliminary negotiations; i.e., there
dertaking, or must be an intent to enter into a contract.
Commitment

For a communi-
cation to be an
offer, it must con-
tain a promise,
undertaking, or
commitment to
enter into a con-
tract, rather than
a mere

24. The criteria used language, surrounding circumstances, prior practice and
to determine relationship of the parties, method of communication, and
whether a com- industry custom.
munication is an
offer include the
following: (5)

25. a. Language it is not necessary. Also, certain language is generally

construed as merely contemplating an invitation to deal,
The language preliminary negotiations, or "feelers," rather than being an
used may show offer. This includes phrases such as "I quote," "I am asking
that an offer was $30 for," and "I would consider selling for." No mechanical
or was not in- formula is available. For example, price quotes, which are
tended. generally considered invitations to deal, can be offers if
made in response to an inquiry that contains a quantity
Technical lan- term.
guage such as
"I offer" or "I
promise" is use-
ful to show that
an offer was
made, but

26. b. Surrounding an offer because it is interpreted objectively (i.e., accord-

Circumstances ing to a reasonable person's expectations).

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The circum-
stances sur-
rounding the lan-
guage will be
considered by
courts in deter-
mining whether
an offer exists.

For example,
where the state-
ment is made in
jest, anger, or by
way of bragging,
and the state-
ment is reason-
ably understood
in this context, it
will have no legal
effect.

However, where
the statement is
subjectively in-
tended to be in
jest but reason-
ably understood
by the hearer
to have been
made seriously,
the statement is

27. c. Prior Practice the prior relationship and practice of the parties involved.
and Relationship
of the Parties

In determining
whether certain
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remarks consti-
tute an offer
rather than pre-
liminary negotia-
tions, a court will
look to

28. d. Method of The broader the communicating media (e.g., publica-

Communication tions), the more likely it is that the courts will view the
communication as merely the solicitation of an offer. (Note
1) Use of that there is an exception as to reward offers.)
Broad Communi-
cations Media

29. 2) Advertise- they usually are indefinite as to quantity and other terms,
ments, Etc. and addressed to the general public. If an advertisement
addressed to the general public were considered an offer,
Advertisements, it might be overaccepted; i.e., the number of acceptances
catalogs, may exceed the number of items for sale.
circular letters,
and the like
containing price
quotations are
usually
construed as
mere invitations
for offers. They
are
announcements
of prices at
which the seller
is willing to
receive offers.
Typically, these
are not
considered
offers because

30.

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However, in cer- containing a promise, the terms are certain and definite,
tain situations, and the offeree(s) is clearly identified. Price quotations
courts have also may be considered offers if given in response to an
treated adver- inquiry.
tisements as of-
fers if the lan- Example: Defendant store advertised a particular coat
guage of the ad- worth $140 for $1 on
vertisement can a "first come, first served" basis. Held: Valid offer to first
be construed as person accepting on this basis as nothing was left open
for negotiation.

31. e. Industry Cus- The courts will also look to generally accepted custom in
tom the industry in determining whether the proposal qualifies
as an offer.

32. 2. Definite and (i) the identity of the offeree;

Certain Terms
(ii) the subject matter; and
An offer must be
definite and cer- (iii) the price to be paid.
tain in its terms.
The basic in- However, a promise generally will be enforceable even
quiry is whether if it does not spell out every material term, as long as it
enough of the contains some objective standard for the court to use to
essential terms supply the missing terms.
have been pro-
vided so that a
contract includ-
ing them would
be capable of be-
ing enforced.

The principle is
that the par-
ties make their
own contract; the
courts do not
make it for them.

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What is essential
for the requisite
certainty in an of-
fer depends on
the kind of con-
tract contemplat-
ed. Typically, the
following are im-
portant: (3)

33. a. Identification sufficiently identify the offeree or a class to which she

of the Offeree belongs to justify the inference that the offeror intended
to create a power of acceptance.
To be considered
an offer, a state- Examples: 1) In the example above with the $140 coat
ment must selling for $1, the "first
come, first served" language eliminates any identification
problem.

2) Harvey promises a reward to the person who captures

a wanted
fugitive. Although the offeree is unidentified and indeed
unidentifiable at the time the offer is made, the perfor-
mance of the requested act constitutes both an identifi-
cation of the offeree and an acceptance.

34. b. Definiteness it can tell with reasonable accuracy what the promise is.
of Subject Matter

The subject mat-

ter of the deal
must be certain,
because a court
can enforce a
promise only if

35. 1) Requirements Land and Price Terms Required

for Specific
Types of Con- An offer involving realty must identify the land and the

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tracts price terms. The
land must be identified with some particularity but a deed
a) Real Es- description is not required (e.g., "my house in Erewhon"
tate Transac- is sufficient if the seller has only one house in Erewhon).
tions—offer re- Most courts will NOT supply a missing price term.
quirements?

36. b) Sale Quantity Term Required

of Goods—what
term required in In a contract for the sale of goods, the quantity being
offer? offered must be certain
or capable of being made certain.

37. (1) "Require- buy from a certain seller all of the goods the buyer re-
ments" and "Out- quires, and the seller agrees to sell that amount to the
put" Contracts buyer.

In a require-
ments contract,
a buyer promises
to

38. In an output con- sell to a certain buyer all of the goods the seller produces,
tract, a seller and the buyer agrees to buy that amount from the seller.
promises to

39. Although no spe- the quantity is capable of being made certain by reference
cific quantity is to objective, extrinsic facts (i.e., the buyer's actual require-
mentioned in of- ments or the seller's actual output).
fers to make out-
put or require-
ments contracts,
the offers are
sufficiently defi-
nite because

40. Requirements (i) any stated estimate, or in the absence of a stated

and Output estimate
Contracts
(ii) any normal or otherwise comparable prior output or
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(a) Quantity Can- requirements.
not Be Unrea-
sonably Dispro- (b) Established Business vs. New Business A number
portionate of courts have sometimes refused to enforce output/re-
quirements agreements if the promisor did not have an
It is assumed established business. The courts in these cases reason
that the par- that, due to the lack of any basis for estimating quantity,
ties will act the agreement is illusory or the damages too
in good faith; speculative.
hence, there may
not be a tender of Article 2 avoids this problem by reading a "good faith"
or a demand for agreement into the contract; i.e., the promisor must op-
a quantity unrea- erate his plant or conduct his business in good faith and
sonably dispro- according to commercial standards of fair dealing in the
portionate to trade so that his output or requirements will approximate
a reasonably foreseeable figure.

41. (2) Reasonable An offer allowing a person to specify an item within a

Range of Choic- reasonable range of choices may be sufficiently definite
es to result in a contract if accepted.

Example: Seller states to Buyer: "I will sell you any of

these motorcycles
for $1,000. Pick one." These words will result in a contract
when Buyer's choice is made and manifested.

42. c) Employment creating a contract terminable

and Other Ser- at the will of either party.
vices
For other services, the *nature of the work to be per-
In contracts for formed must be included in the offer.*
employment, if
the duration of
the employment
is not specified,
the offer, if ac-
cepted, is con-
strued as

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43. 2) Missing Terms a reasonably certain basis for giving a remedy. In such a
& Offers case, the majority of jurisdictions and Article 2 hold that
the court can supply reasonable terms for those that are
The fact that one missing.
or more terms
are left open These terms will be supplied, however, only where they
does not prevent are consistent with the parties' intent as otherwise ex-
the formation of pressed.
a contract if it
appears the par- Note that the more terms the parties leave open, the
ties intended to less likely it is that they intended to enter into a binding
make a contract agreement.
and there is

44. a) Price imply the service provider's usual price for the services,
the normal price for such services in the area, etc.
Except in con-
tracts for real
property, the fail-
ure to state the
price does not
prevent the for-
mation of a con-
tract if the par-
ties intended to
form a contract
without the price
being settled.
For example, if
parties enter into
a contract for
services and the
price is not in-
cluded in the of-
fer, a court might

45. (1) Article 2 Gap (i) Nothing is said as to price;

Filler
(ii) The price is left to be agreed to by the parties and they

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Article 2 includes fail to agree;
some very spe- or
cific "gap fillers"
for situations (iii) The price is to be fixed by some external factor or third
where certain party and it
terms are not in- is not so set.
cluded in a con-
tract for the sale
of goods. Un-
der Article 2, the
price will be a
reasonable price
at the time of de-
livery if:

46. (2) Price Fixed by the party to whom the contract gives the right to fix the
Party Under Arti- price must act in good faith. If that party does not fix the
cle 2 price in good faith, the other party may either cancel the
contract or fix a reasonable price herself. [UCC §2-305(3)]
Under Article 2,
a contract will
be formed even
if the parties
agree that one
of the parties
will fix the price
in the future
(e.g., "price to
be set by seller
at time of deliv-
ery"). However,

47. b) Time the law implies that it is to be performed within a reason-

able time.
If an agreement
does not specify
the time in which
an act is to be
performed,

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48. 3) it is not an offer at common law or under the UCC.

Distin-
guish—Vague The presumption that the parties' intent was to include a
Terms reasonable term goes to supplying missing terms. How-
ever, the presumption cannot be made if the
If a material term parties have included a term that makes the contract too
is vague or am- vague to be enforced. The problem then is that the parties
biguous, have manifested an intent that cannot be determined.

Examples: 1) An agreement to divide profits "on a liberal

basis" is too vague to be enforced.

2) An agreement to purchase a parcel of land for "$8,000

or less" is
also too vague.

49. a) Vagueness cure vagueness.

Can Be Cured
by Part Perfor-
mance

Where part per-

formance sup-
plies the need-
ed clarification of
the terms, it can
be used to

50. b) Uncertainty the offeree communicates her choice. (See previous ex-
Can Be Cured by ample about choice of motorcycle for $1,000.)
Acceptance

If uncertainty re-
sults because
the offeree is giv-
en a choice of al-
ternative perfor-
mances, the offer

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becomes definite
when

51. c) Focus on Con- there is some way in which the offer is capable of being
tract made certain, e.g., by part performance or acceptance.

In short, the
contract (as
distinguished
from the offer)
must be definite
and certain in its
terms—hence,
even if the offer
lacks certainty,
the problem can
be cured if

52. 4) Terms to Be too uncertain. The courts will not supply a reasonable
Agreed on Later term, as the parties have provided otherwise. However,
as discussed above, Article 2 permits a reasonable price
Often, an offer term to be supplied by the court under these circum-
will state that stances if the other evidence indicates that the parties
some term is to intended to form a contract.
be agreed on at a
future date. If the
term is a material
term, the offer is

53. 3. Communica- knowledge of the offer. Therefore, the proposal must be

tion to Offeree communicated to her.

To have the pow- Example: Chauncey returned Bowater's lost briefcase un-
er to accept, aware that Bowater had placed an advertisement offering
the offeree must a $20 reward for its return. Because the offer had not been
have communicated to Chauncey, there could not be mutual
assent.

Hence, there is no contract.

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54. C. TERMINATION The power of acceptance created by an offer ends when
OF OFFER the offer is terminated. The mutual assent
requirement obviously cannot be met where the termina-
tion occurs before acceptance is effective.

Thus, you must establish whether the offer has been

terminated, and if so, in what fashion.

55. 1. Termination by A revocation is the retraction of an offer by the offeror. A

Acts of Parties revocation terminates the offeree's power of acceptance
if it is communicated to her before she accepts.
a. Termination
by Offeror—Re-
vocation

56. 1) Methods of Revocation directly communicated to the offeree by the

Communication offeror terminates the offer.

a) Revocation by
Direct Communi-
cation

57. (1) Revocation by publication of revocation through comparable means.

Publication
Example: An offer published in The New York Times may
Offers made by be revoked by publication in The New York Times. It may
publication may not be revoked by publication in Reader's Digest or by a
be terminated by TV spot.

58. b) Revocation by (i) correct information,

Indirect Commu- (ii) from a reliable source,
nication (iii) of acts of the offeror that would indicate to a reason-
able person that the offeror no longer wishes to make the
The offer may be offer.
effectively termi-
nated if the offer- Example: Offeree, before attempting to accept Offeror's
ee indirectly re- offer to sell Greenacre, was informed by a reliable third
ceives: (3) party that Offeror had sold Greenacre to another. Held:
Offeror revoked the offer.

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59. 2) Effective When received by the offeree. Where revocation is by publica-
Received tion, it is effective when published.

A revocation is
generally effec-
tive when

60. a) When a Com- At common law, a written communication is considered to

munication Is have been "received" when it comes into the possession
Received of the person addressed (or of someone authorized by
him to receive it) or when it is deposited in some place
authorized as the place for this or similar communications
to be deposited.

The communication need not be read by the recipient to

be effective.

61. Similarly, under (i) it comes to his attention, or

the UCC, a per-
son receives no- (ii) it is delivered at a place of business through which the
tice when (2) contract was made or another location held out by that
person as the place for receipt of such communications.
An organization receives a communication at the time it
is brought (or should
have been brought) to the attention of the individual con-
ducting the transaction.

Note that these rules do not restrict the communication or

notice to a writing; thus, courts will likely apply the same
rules to phone messages.

62. 3) Limitations on a) Option contracts

Offeror's Power
to Revoke b) Merchant's Firm Offer Under UCC

Offers can be c) detrimental reliance

revoked at will
by the offeror, d) performance by offeree has begun
even if he has

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promised not to
revoke for a cer-
tain period, ex-
cept under cer-
tain situations
where the offer-
or's power to ter-
minate the offer
is limited.

63. a) Options An option is a distinct contract in which the offeree gives

consideration for a promise by the offeror not to revoke an
outstanding offer.

Example: An offeror offers to sell her farm—Black-

acre—to an offeree for $1 million and promises to keep
the offer open for 90 days if the offeree pays the offeror
$1,000 to keep the offer open.

If the offeree pays the offeror the $1,000, an option con-

tract is formed and the offeror must keep the offer open
for 90 days.

Compare: An offeror offers to sell her farm—Black-

acre—to an offeree for $1 million and promises to keep
the offer open for 90 days.

Because there is no consideration (see infra) to make

enforceable the promise to keep the offer open, the offeror
may terminate her offer at any time despite her promise.

64. (1) Timely Accep- An offer must be accepted within the time specified or, if
tance Under Op- no time is specified, within a reasonable time. Often, an
tion Contract option contract specifies that the offer must be accepted
within the option period; i.e., the offer terminates when the
option expires. In the absence of specific language stat-
ing when the offer terminates, the power of acceptance
arguably survives the option period, but courts often treat
the option period as the

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offer period so that at the end of that time, the option
expires and the offer lapses.

Example: As in the above example, a farmer offers to sell

her farm to a buyer for $1 million and promises to keep the
offer open for 90 days if the buyer pays $1,000 to keep the
offer open. The buyer pays the $1,000 but does not buy
the farm during the 90-day period. On the 92nd day, the
farmer sells the farm to someone else. Most courts would
find that the option holder can no longer accept the offer,
even if the farmer has not revoked it. The option period
and offer period are treated as one and the same.

65. b) Merchant's (i) If a merchant;

Firm Offer Under
Article 2 (ii) Offers to buy or sell goods in a signed writing; and

Under Article 2, (iii) The writing gives assurances that it will be held open
there are cir- (e.g., "this offer will be held open for 10 days," "this offer is
cumstances in firm for 10 days," "I shall not revoke this offer for 10 days");
which a promise
to keep an of- (iv) The offer is not revocable for lack of consideration
fer open is en- during the time stated, or if no time is stated, for a reason-
forceable even if able time (but in no event may such period exceed three
no consideration months).
has been paid
to keep the offer Note: As with the Statute of Frauds requirements , the
open. Under Arti- signed writing requirement for a merchant's firm offer may
cle 2: (4) be satisfied by an electronic record (e.g., e-mail, fax) and
an electronic signature.

(1) Form Supplied by Offeree

If the term assuring that the offer will be held open is on a
form supplied by the offeree, it must be separately signed
by the offeror. [UCC §2-205]

66. c) Detrimental Where the offeror could reasonably expect that the offer-
Reliance ee would rely to her detriment on the offer, and the offeree
does so rely, the offer will be held irrevocable as an option

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contract for a reasonable length of time.

The case law indicates that this may be limited to those

situations in which the offeror would reasonably contem-
plate reliance by the offeree in using the offer before it is
accepted.

Example: A general contractor solicited bids from various

subcontractors before making its own irrevocable offer
on a construction project. For the subcontractor to be
held to its offer, the subcontractor must reasonably have
foreseen the possible use of its subcontracting bid in the
making of the general contractor's irrevocable offer.

67. d) Beginning Per- An offer for a true unilateral contract becomes irrevocable
formance in Re- once performance has begun. Note that the unilateral
sponse to True contract will not be formed until the total
Unilateral Con- act is complete. However, once the offeree begins to
tract Offer perform, she is given a reasonable time to complete
performance, during which time the offer is irrevocable.
Note also that the offeree is not bound to complete perfor-
mance—she may withdraw at any time prior to completion
of performance.

Example: Matt offers to pay Lisa $1,000 if she will paint his
house, insisting that the acceptance occur only by the act
of painting the house rather than through Lisa's promise.
Lisa begins to paint the house. Matt attempts to revoke the
offer. Matt's attempt at revocation is ineffective because
Lisa must have a reasonable time in which to complete
the act of painting. If Matt refuses to allow Lisa to continue
to paint, Matt will be in breach of contract and will be liable
for damages.

68. (1) Preparations preparing to perform.

to Perform
*Note, however, that substantial preparations to perform
The rules limit- may constitute detrimental reliance* sufficient to make the
ing the offeror's offeror's promise binding to the

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power to revoke extent of the detrimental reliance.
an offer for a uni-
lateral contract Example: Matt offers to pay Lisa $1,000 if she will paint
apply only if thehis house, insisting that the acceptance occur only by
offeree has em- the act of painting. Lisa immediately drives to the local
barked on perfor-hardware store; expends $100 purchasing paint brushes,
mance. drop cloths, and masking tape to enable her to paint the
house; and returns. On her return, Matt tells Lisa that
They do not ap- he has changed his mind and does not want his house
ply when the of- painted after all. Matt's revocation of his offer is valid
feree is only because Lisa's acts did not constitute the beginning of
performance, but rather were merely done in preparation
to perform. However, Lisa will have an action against Matt
to recover the $100 she spent in detrimental reliance on
his offer.

69. (2) Offeror Refus- If the offeror's cooperation is necessary for performance,
es to Accept Per- his withholding of it upon the tender of performance is the
formance equivalent of commencing performance.

What happens if
performance is
tendered by the
offeree but re-
fused by the of-
feror?

70. e) Begin- the contract is complete and revocation becomes impos-

ning Perfor- sible.
mance—Offer In-
different as to But note: Notification of the start of performance may be
Manner of Ac- necessary.
ceptance

As noted above,
most offers are
indifferent as to
the manner of
acceptance, and,

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thus, a bi-
lateral contract
may be formed
upon the start
of performance
by the offeree.
(See I.C.2.c.1),
supra.) There-
fore, once the of-
feree begins per-
formance,

71. b. Termination by An express rejection is a statement by the offeree that she

Offeree does not intend to accept the offer. Such a rejection will
terminate the offer.
1) Rejection

a) Express Re-
jection

72. b) Counteroffer A counteroffer is an offer made by the offeree to the offeror

as Rejection that contains the same subject matter as the original offer
but differs in its terms. A counteroffer serves as a rejection
of the original offer as well as a new offer.

73. Counteroffer (i) Counteroffer combined with express rejection, e.g.,

usually happens "Not at that price, but I'll take it at $200."
in two situations:
(ii) Acceptance conditional upon additional terms, e.g., "I'll
take it at that price, but only if it is also equipped with air
conditioning."

Note: Article 2 provides for exceptions to the above gen-

eral treatment in the "battle of forms" provision.

74. (1) Distin- An inquiry will not terminate the offer when it is consistent
guish—Mere In- with the idea that the offeree is still keeping the original
quiry proposal under consideration. The test is whether a rea-
sonable person would believe that the original offer had
Distinguish be- been rejected.
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tween a coun-
teroffer (which Examples: 1) The offeree says to the offeror, "Would you
constitutes a re- consider lowering your price by $5,000?" This, without
jection) and a more, is merely an inquiry, not a rejection.
mere inquiry.
2) The offeree says to the offeror, "I couldn't possibly
pay your asking price but could pay $5,000 less." This
is more than a mere inquiry because of the certitude
involved and will be treated as a counteroffer.

75. c) Effective When the offeror.

Received

A rejection is ef-
fective when re-
ceived by

76. d) Revival of Of- new offer, although the same as the original offer, has
fer been made.

If an offer is
rejected, the of-
feror may re-
state the same
offer and create a
new power of ac-
ceptance. Some
courts refer to
this as the revival
of the original of-
fer. It is more pre-
cise to suggest
that a

77. e) Rejection of does not constitute a termination of the offer. The offeree
Option is still free to accept the original offer within the option
period unless the offeror has detrimentally relied on the
Because an op- offeree's rejection.
tion is a contract

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to keep an offer
open, a rejection
of or a counterof-
fer to an option

78. 2) Lapse of Time The offeree must accept the offer within the time period
specified or, if no time period is specified, within a reason-
a) Must Accept able time. If she does not do so, then she will have allowed
Within Specified the offer to terminate. (Note: Where the offer's terms are
or Reasonable unclear as to time, e.g., "by return mail," the time limit is
Time what a reasonable person in the offeree's position would
have assumed.)

79. b) Look to When the offer is received by the offeree.

Offer Is Received
by Offeree

If the offer pro-

vides that it will
expire within a
particular time
period, that pe-
riod commences
when

80. If the offer is de- it would have expired had there been no delay. All relevant
layed in trans- facts must be considered in determining whether this
mission and this knowledge is present. These include, e.g., date of letter,
fact is or should postmark, and any subsequent statements made by the
have been appar- offeror.
ent to the offer-
ee, the offer ter-
minates at the
time...

81. 2. Termination by a) Termination by Death or Insanity

Operation of Law
b) Termination by Destruction of Subject Matter
Three types?
c) Termination by Supervening Legal Prohibition
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82. a. Termination by If either of the parties dies or is adjudicated insane prior

Death or Insanity to acceptance, the offer is terminated. It is not necessary
of Parties that the death or insanity be communicated to the other
party.

(Compare: Supervening mental incapacity of the offeror

without an adjudication of incapacity will terminate an
offer only if the offeree is aware of the incapacity.)

Note, however, that the offer will not terminate in this

fashion if the rules limiting an offeror's power to terminate
are applicable (e.g., an option contract).

83. b. Termination by Destruction of the subject matter terminates the offeree's

Destruction of power of acceptance.
Subject Matter

84. c. Termination by If the subject matter of the proposed contract becomes

Supervening Le- illegal, the offer will terminate.
gal Prohibition of
Proposed Con- Example: Lucky Lou offers Vegas Vernon a share in his
tract casino business. Prior to acceptance, a law is passed
banning casinos. The offer is automatically terminated.

85. THE ACCEP- manifestation of assent to the terms of an offer. Through

TANCE this manifestation of
assent, the offeree exercises the power given her by the
An acceptance is offeror to create a contract.
a

86. 1. Who May Ac- Generally, only the person to whom an offer is addressed
cept has the power of acceptance.

a. Party to Whom This is so even if the offer does not call for personal
Offer Is Ad- performance or special financial responsibility on the part
dressed or Di- of the offeree. One may also have the power of accep-
rected tance if she is a member of a class to which an offer has
been directed. If the offer is made to the general public,
anyone may qualify as an offeree. If the offer requests
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performance from an unlimited number of persons, per-
formance by anyone knowing of the offer will cut off the
power of every other person to accept, provided that the
offeror desires only
one performance and there is no indication that he is
willing to pay more than once.

87. b. Offeree's Pow- An exception exists for the right to accept under an option
er of Acceptance contract, because the power to accept is itself a contract
Cannot Be As- right in these contracts, and contract rights generally are
signed assignable.

Unlike rights un-

der an existing
contract, the of-
feree's power of
acceptance can-
not be assigned.

1)
Exception—Op-
tion Contracts

88. 2. Offeree Must The offeree must know of the offer in order to accept, and
Know of Offer this is true whether the offer is for a bilateral or unilateral
contract.

Examples: 1) Alex sends Becky a letter offering to sell her

Blackacre for $500,000. That same day, without knowl-
edge of Alex's letter, Becky sends Alex a letter offering
to buy Blackacre from him for $500,000. No contract is
formed because neither party knew of the other's letter
when sending his or her own letter.

2) Cindy offers to pay $1,000 to the person who finds her

missing dog. Dee
finds a dog in her yard, reads its tags, and returns the dog
to Cindy without

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knowledge of Cindy's offer. Most courts hold that no con-
tract is formed here.

89. 3. Acceptance of a) completion of performance

Offer for Unilater- b) notice of completion
al Contract
*a. Completion of Performance*
If an offer pro- Most courts hold that an offer to form a unilateral contract
vides that it may is not accepted until performance is completed. The be-
be accepted only ginning of performance may create an option so that the
by performance offer is irrevocable. (See C.1.a.3)d), supra.) However, the
(i.e., an offer for offeree is not obligated to complete performance merely
a unilateral con- because he has begun performance, as only complete
tract), note the performance constitutes an acceptance of the offer.
following partic-
ular rules. *b. Notice*
Generally, the offeree is not required to give the offeror
notice that he has begun the requested performance,
but is required to notify the offeror within a reasonable
time after performance has been completed. If a required
notice is not given, a contract is formed, but the offeror's
duties are discharged for failure of an implied condition
subsequent.

However, no notice is required if:

(i) The offeror waived notice; or
(ii) The offeree's performance would normally come to the
offeror's attention within a reasonable time.
Example: Joe tells Susan he will pay her $1,000 if she
paints the house that he
is living in. Susan need not formally notify Joe that she has
painted his house, as her performance would be obvious
to him.

Compare: In writing, Joe tells Susan that if she lends Tina

$1,000 for one year, he
will repay the loan if Tina fails to pay. Joe becomes con-
tractually bound
on his promise the instant Susan loans Tina the money,
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but Joe will be
discharged from this contractual obligation unless Susan
notifies him
of her acceptance (i.e., her making the loan to Tina) within
a reasonable time.

1) Compare—Article 2
Article 2 has a slightly different rule regarding notice,
although the end result is basically the same. It provides
that when a contract is accepted by the beginning of
performance, if the offeree fails to notify the offeror of
the acceptance (i.e., the beginning of performance rather
than the completion of performance) within a
reasonable time, the offeror may treat the offer as having
lapsed before acceptance

(i.e., no contract was ever formed, as opposed to the

Restatement view that a
contract was formed but performance is excused by fail-
ure of a condition).

90. 4. Acceptance of an offer to enter into a bilateral contract and may be ac-
Offer for Bilateral cepted either by a promise to perform or by the beginning
Contract of performance (compare offers for true unilateral con-
tracts, which may be accepted only by full performance).
Recall that un-
less an offer
specifically pro-
vides that it may
be accepted only
through perfor-
mance,
it will be con-
strued as

91. a. Generally, Ac- communicated to the offeror.

ceptance Must
Be Communicat-
ed

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Generally, accep-
tance of an of-
fer to enter into a
bilateral contract
must be

92. Generally, accep- If an offer provides that acceptance need not be com-
tance of a bilater- municated, then no communication of the acceptance is
al contract must required.
be communicat-
ed to the offeror. Example: Alex applies for life insurance on a form that
provides that the
1) Excep- policy will become effective immediately upon approval by
tion—Waiver in the
Offer insurance company's home office. The insurance contract
is formed when the home office approves Alex's applica-
tion.

93. Generally, accep- Although the offeree cannot be forced to speak under
tance of a bilater-
penalty of having her silence treated as an acceptance, if
al contract must the offeree silently takes offered benefits, the courts will
be communicat- often find an acceptance. This is especially true if prior
ed to the offeror.dealings between the parties, or trade practices known
to both, create a commercially reasonable expectation by
Exception: 2) Si- the offeror that silence represents an acceptance. In such
lence as Accep- a case, the offeree is under a duty to notify the offeror if
tance she does not intend to accept.

94. a) Offered Ser- he fails to speak.

vices
Example: At Homeowner's request, Landscaper prepared
When the recip- a proposal for planting trees in Homeowner's yard. Home-
ient of services owner stated that of the trees proposed she preferred
knows or has beech trees. As beech trees were in short supply, Land-
reason to know scaper said he would check
that the ser- the availability and get back to her. Landscaper e-mailed
vices are being Homeowner that he had secured the beech trees and
rendered with would need to plant them within the week as a hard freeze

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the expectation was coming. Landscaper stated that if he did not hear
of compensation back, he was going ahead with the planting. Homeowner
and by a word read the e-mail
could prevent but did not respond. Just in advance of the freeze, Land-
the mistake, he scaper planted the trees. Homeowner watched the work
may be held from her window. When it was done, Homeowner refused
to have accepted to pay, arguing there was no contract. Because Home-
the offer if owner knew that Landscaper was rendering services with
the expectation of payment and Homeowner, by a word,
could have prevented the
mistake, she will be held to have accepted the offer.

95. b. Method of Ac- in any reasonable manner and by any medium reason-
ceptance able under the circumstances. Any objective
manifestation of the offeree's counterpromise is usually
Unless other- sufficient.
wise provided,
an offer is con- Example: Nikki telephones an offer to Skip that is to
strued as inviting remain open for five days.
acceptance ... Two days later, Skip e-mails an acceptance, or two days
later Skip mails
an acceptance. Whether there has been a proper accep-
tance depends on
whether the use of e-mail or mail was reasonable under
the circumstances.

96. 1) Act as an Ac- act to signify acceptance.

ceptance
Example: Jennifer offers to purchase Steve's car for
The offeror is the $1,000, specifying that
master of her of- Steve accept the offer by wearing a yellow shirt to lunch
fer and may re- next Tuesday. Steve can accept the offer only by acting
quire an as requested. If Steve simply tenders the automobile,
most courts would construe the tender as a rejection and
counteroffer. Also, recall that Steve must know of the offer
to accept. If he simply wears a yellow shirt
without knowing of Jennifer's offer, there is no acceptance
and no
bilateral contract.

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97. 2) Offers to Buy Under Article 2, an offer to buy goods for current or prompt
Goods for Cur- shipment is construed as inviting acceptance either by
rent or Prompt a promise to ship or by current or prompt shipment of
Shipment conforming or nonconforming goods.

98. c. Acceptance absolute and unequivocal acceptance of each and every

Must Be Un- term of the offer (the "mirror image rule").
equivocal
At common law, any different or additional terms in the ac-
Traditional con- ceptance make the response a rejection and counteroffer.
tract law insisted
on an Example: Adam offers to lease a warehouse to Jamie
by handing Jamie a signed copy of his standard lease
agreement. Jamie reads over the lease, adds a clause
providing that disputes will be settled by arbitration, signs
the
lease, and hands it back to Adam. Adam hands the keys
over to Jamie.
By adding the arbitration clause to the lease, Jamie re-
jected Adam's offer
and made a counteroffer. By handing Jamie the keys to
the warehouse,
Adam accepted Jamie's counteroffer.

99. 1) Statements by the offeree that make implicit terms explicit

Distin- do not prevent acceptance.
guish—State-
ments that Make Example: The statement by an offeree, "I accept provided
Implicit Terms you convey marketable title," is a valid acceptance be-
Explicit cause the obligation to convey
marketable title is implicit in the offer to sell.

100. 2) it stops short of actual dissent.

Distin-
guish—"Grum- Example: "I think it's highway robbery at that price, but I
bling guess I'll have to accept" is a valid acceptance.
Acceptance"
A "grumbling ac-
ceptance" (i.e.,
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an acceptance
accompanied by
an expression
of dissatisfac-
tion) is an effec-
tive acceptance
as long as

101. 3) rejection and counteroffer.

Distinguish—Re-
quest for Example: "The $1,000 price—that includes shipping,
Clarification doesn't it?" is not a
counteroffer.
A request
for clarification
does not neces-
sarily amount to
a

102. 5. Acceptance conforming or nonconforming goods.

Under Article 2

a. Offers to Buy
Goods for Cur-
rent or Prompt
Shipment

As noted above,
an offer to buy
goods for cur-
rent or prompt
shipment may be
accepted by ei-
ther a promise to
ship or by a ship-
ment of

103. 1) Acceptance a breach of the contract unless the seller seasonably no-
by Shipment tifies the buyer that a shipment of nonconforming goods

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of Nonconform- is offered only as an *accommodation*.
ing Goods
The buyer is not required to accept accommodation
The shipment goods and may reject
of nonconform- them. If he does, the shipper is not in breach and may
ing goods is an reclaim the accommodation goods, because her tender
acceptance cre- does not constitute an acceptance of the buyer's original
ating a bilateral offer.
contract as well
as Examples: 1) Craig orders 1,500 blue widgets from Susy.
Susy ships 1,500
black widgets but does not notify Craig that the goods
are offered only as an accommodation. Susy's shipment
is both an acceptance of Craig's offer and a breach of
the resulting contract. Craig may sue for any appropriate
damages.

2) In the example above, Susy, before the goods arrive,

notifies Craig that black widgets have been sent as an
accommodation. The shipment is a counteroffer and, if
Craig accepts delivery, there will be a contract for the
purchase of black widgets.

3) Craig orders 1,500 blue widgets from Susy. Susy sends

Craig an email promising to ship the widgets within two
days. Upon checking her stock, Susy discovers that she
has only 1,000 blue widgets. She ships the 1,000 blue
widgets along with 500 black widgets and a letter explain-
ing that the black widgets are offered only as an accom-
modation. Craig may sue for damages. Susy accepted
Craig's order via email, promising to ship 1,500 blue
widgets. *This is not a case of acceptance by shipment.*

104. b. Battle of the the proposal of additional or different terms by the offeree
Forms in a definite and timely acceptance does not constitute
a rejection and counteroffer, but rather is effective as an
1) Mirror Image acceptance, unless the acceptance is expressly made
Not Required conditional on assent to the additional or different terms.
(See 3), infra.)
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Article 2 has
abandoned the Example: Harry sends Sally an e-mail offering to sell her
mirror image his car for $1,000.
rule, providing Sally e-mails back, "I accept; deliver it to my house by
instead that noon tomorrow." At common law, no contract would be
formed here because Sally's acceptance added a de-
livery term. Under Article 2, a contract is formed and
whether or not Harry is required to deliver the car to
Sally's house by noon of the next day is determined by
the rules discussed below.

Compare: Same facts as above, but Sally's e-mail says,

"I accept, but only if
you agree to deliver the car to my house by noon tomor-
row." No contract is formed here because Sally's accep-
tance was expressly conditioned on assent to the new
terms.

105. Battle of the Terms of Offer Govern

Forms
If any party to the contract is not a merchant, the addition-
2) Terms Includ- al or different
ed terms are considered to be mere proposals to modify the
contract that do not become part of the contract unless
a) Contracts In- the offeror expressly agrees.
volving a *Non-
merchant*— Example: Paul sends a letter offering to sell his car to
Stephanie for $1,200. Stephanie sends Paul a letter stat-
ing: "I accept and want you to put new tires on it." This is
a contract, but Paul is
not bound to put new tires on the car.

106. Battle of the (i) They materially alter the original terms of the offer (e.g.,
Forms they change a
party's risk or the remedies available);
2) Terms Includ-
ed (ii) The offer expressly limits acceptance to the terms of
the offer; or
b) Contracts

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Between (iii) The offeror has already objected to the particular
Merchants—Ad- terms, or objects within a reasonable time after notice of
ditional Terms them is received.
Usually Included
Note: Whether an alteration is material is a fact question.
If both parties to
the contract are Example: Sellco emails an offer to sell to Buyco 1,500
merchants, addi- widgets at $10 each. Buyco replies, "We accept, 5% dis-
tional terms in count for paying within 30 days." The parties have formed
the acceptance a contract and it probably includes a 5% discount for
will be included payment within 30 days (assuming that the discount is not
in the contract material).
unless: (3)
Compare: Buyco emails Sellco an order for 1,500 widgets
at $10 each. Sellco replies, "We accept. Warranties are
limited to the express warranties in these attached docu-
ments. These warranties are in lieu of the implied warranty
of merchantability."

The parties have formed a contract.

However, the warranty disclaimer is a material alteration

that will not be included in the terms of the contract.

107. Battle of the There is a split of authority over whether terms in the ac-
Forms ceptance that are different from (as opposed to in addition
to) the terms in the offer will become part of the contract.
2) Terms Includ-
ed Some courts treat different terms like additional terms and
follow the test set out above in determining whether the
b) Contracts terms should be part of the contract.
Between
Merchants—*Dif- Many courts follow the "*knockout rule*," under which
ferent Terms conflicting terms in the offer and acceptance are knocked
May or May Not out of the contract because each party is assumed to
Be Included* object to the inclusion of such terms in the contract. Under
the knockout rule, gaps left by knocked-out terms are
filled by the UCC (e.g., when the date of delivery differs
in the offer and the acceptance, the UCC
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provides that delivery must be made within a reasonable
time). Even though it is possible for a contract to be
formed despite the fact that the acceptance has different
terms, there must still be a meeting of the minds. Dif-
ferences between the offer and acceptance as to price,
quantity, or quality indicate there is no meeting of the
minds, and thus there is no contract.

108. Knockout Rule

(UCC)

109. Knockout Rule when a buyer and seller (both merchants) engage in a
battle of the forms and different terms are exchanged,
both the seller's and buyer's differing terms drop out and
substitute UCC gap fillers complete the contract.

110. Knockout Rule Under the approach treating different terms like additional
Example: Sellco terms, the buyer's acceptance will control (i.e., the buyer
offers to sell to is obligated to pay $15,150 for the widgets and no addi-
Buyco 1,500 wid- tional freight charges) unless the seller objects. If
gets at $10 each the seller does object, there is a contract on the seller's
plus freight. Buy- original terms.
co replies, "I ac-
cept. The price is However, under the knockout rule, the
$10.10 each in- different freight terms will be knocked out. The price will
cluding freight." be $10 plus the reasonable cost of freight at the time of
There is a con- delivery according to the UCC.
tract, assuming
that the actual
cost of freight
is not material-
ly different from
$150, as the of-
fer was to sell
the widgets for
$10 plus (actual)
freight costs and
the acceptance
was to purchase

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the widgets at
$10.10 each in-
cluding freight
costs (the ex-
tra 10¢ apparent-
ly being to cover
freight costs).

111. c) Mer- A merchant's memo confirming an oral agreement that

chant's Confir- contains different or additional terms is also subject to the
matory Memo battle of the forms provisions. [UCC
§2-207(1)]

112. 3) Effect of Con- rejection of the offer. The conditional acceptance is es-
ditional Accep- sentially a new offer, and the original offeror may form a
tance contract by expressly assenting to the
new terms.
When an accep-
tance is made However, the offer that results from a conditional ac-
expressly condi- ceptance *cannot* be accepted by performance (by the
tional on the ac- original offeror). If the parties ship or accept goods after
ceptance of new a conditional acceptance, *a contract is formed by their
terms, it is a conduct*, and the new terms are not included. The con-
tract consists of all terms on which their writings agree,
plus supplementary terms supplied by the UCC.

Example: Same facts as the example in b.1), supra, ex-

cept that after Sally's
e-mail making her acceptance conditional on Harry's con-
sent to the
delivery term, Harry does not reply but delivers the car to
Sally's house two days later. Sally accepts the delivery.
Harry is not in breach because Sally's conditional accep-
tance was not a counteroffer that could be accepted by
performance. When Sally conditioned
her acceptance on consent to the delivery term, there
was no contract. The contract was not formed until Harry
delivered the car and Sally accepted it. The contract was
formed by performance and its terms are those to which

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the parties agreed (i.e., $1,000 for
the car) plus the terms supplied by their course of perfor-
mance (delivery two days later at Sally's house) and the
UCC.

113. c. Moment of Mu- a binding contract even though the moment of its making
tual Assent Un- is uncertain.
certain

In situations in
which it can-
not be deter-
mined with cer-
tainty which spe-
cific communica-
tion was the of-
fer and which the
acceptance but
the parties act
as though there
is a contract, the
UCC considers
this

114. 6. Bilateral Con- a contract is formed.

tracts Formed by
Performance Rationale: At common law, the last communication sent
to the party who performed is considered a counteroffer
Sometimes in and the performance is considered acceptance of the
business, a con- counteroffer. In contracts for the sale of goods, Article
tract is not 2 specifically provides that conduct by both parties that
formed by the recognizes the existence of a contract is sufficient to
parties' commu- establish the contract. [UCC §2-207(3)]
nications, either
because: (i) the
mirror image rule
has not been sat-
isfied; or (ii) in a
contract for the

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sale of goods,
the original of-
feror's form con-
tains a clause
objecting in ad-
vance to any new
or inconsistent
term and the of-
feree sends a re-
sponse with new
or different terms
that states it is
not an accep-
tance unless the
original offeror
agrees to these
terms. Clearly,
no contract is
formed
at this point.

But, as is some-
times the case,
if the parties be-
gin to perform as
if they formed a
contract,

115. 7. When Ac- (i) The offer stipulates that acceptance is not effective until
ceptance Effec- received; or
tive—The Mail-
box Rule (ii) An option contract is involved (an acceptance under
an option contract is effective only upon receipt
Acceptance by
mail or simi- Note: Because in most states a revocation is effective
lar means cre- only upon receipt (see C.1.a.2), supra), under the mailbox
ates a contract rule if the offeree dispatches an acceptance before he
at the *moment receives a revocation sent by the offeror, a contract is
of dispatch*, pro- formed. This is true even though the acceptance is dis-
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vided that the patched after the revocation is dispatched and received
mail is proper- after the revocation is received.
ly addressed and
stamped, unless:
(2)

116. a. Effect of Offer- Because a rejection is effective only when received, an

ee Sending Both offeree sending both an acceptance and rejection could
Acceptance and create problems for the offeror if the mailbox rule were
Rejection applicable; e.g., a contract would be created when the ac-
ceptance was dispatched even if the offeror received the
rejection and relied on it before receiving the acceptance.

117. 1) Offeree Sends Mailbox Rule Does Not Apply

Rejection, Then
Acceptance— If the offeree sends a rejection and then sends an accep-
tance, the mailbox rule
does not apply. Whichever one is received first is effective.

118. 2) Offeree Mailbox Rule Generally Applies

Sends Accep-
tance, Then Re- If the offeree sends the acceptance first, the mailbox rule
jection— applies; i.e., a contract is created upon dispatch of the
acceptance. However, if the offeror received the rejection
first and changed his position in reliance on it, the offeree
will be estopped from enforcing the contract.

119. b. Acceptance *it is actually received by the offeror while the offer is still
by Unauthorized in existence.*
Means
Examples: 1) Bailey makes an offer to Janet specifying
An accep- that acceptance should be by email. Janet mails Bailey
tance transmit- her acceptance. The acceptance will not be effective upon
ted by unautho- dispatch of the letter but only upon receipt by Bailey, if
rized means or the offer is still open.
improperly trans-
mitted by autho- 2) Janet, in a situation where the mailbox rule otherwise
rized means may applies, incorrectly addressed the envelope in mailing
still be effective back the acceptance. It will be
if effective upon receipt if the offer is still open.
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120. CONSIDERA- consideration.

TION
While substitute doctrines may permit enforcement of an
The majority of agreement, only the presence of valuable consideration
agreements that on both sides of the bargain will make an executory
qualify as legally bilateral contract fully enforceable from the
enforceable con- moment of formation.
tracts contain
a bargained-for
change in legal
position between
the parties, i.e.,
valuable

121. Simply stated, enforceability in the courts.

consideration is
the price for
_________.

122. B. ELEMENTS (i) there must be a bargained-for exchange between the

OF CONSIDERA- parties; and
TION
(ii) that which is bargained for must be considered of legal
Basically, two el- value or, as it is traditionally stated, it must constitute a
ements are nec- benefit to the promisor or a detriment to
essary to con- the promisee.
stitute consider-
ation: At the present time, the detriment element is emphasized
in determining whether an exchange contains legal value.

Example: Jeff promises to sell his used television to Kris-

ten for $100 in exchange for Kristen's promise to pay
$100.

Both elements of consideration are found in this example.

First, Jeff's promise was bargained for. Jeff's promise
induced a detriment in the promisee, Kristen. Kristen's
detriment induced Jeff to make the promise. Second, both

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parties suffered detriments. The detriment to Jeff was the
transfer of ownership of the television, and the detriment
to Kristen was the payment of $100 to Jeff.

123. 1. Bargained-For This element of consideration requires that the promise

Exchange induce the detriment and the detriment induce the
promise (see preceding example). Unless both of these
elements are present, the "bargained-for exchange" ele-
ment of consideration is not present.

If either of the parties intended to make a gift, he was not

bargaining for consideration, and this requirement will not
be met.

124. a. Act or whether the act or forbearance by the promisee would

Forbearance by be of any benefit to the promisor. In other words, if the
Promisee Must promisor's motive was to induce the detriment, it will
Be of Benefit to be treated as consideration; if the motive was no more
Promisor than to state a condition of a promise to make a gift, there
is no consideration.
It is not
enough that the Example: "Come to my house and I will give you my old
promisee incurs television." The promisee suffers a detriment by going to
detriment; the the promisor's house, as she did not have to go there
*detriment must at all. However, the promise of the television was prob-
be the price of ably not made to induce the promisee to come to the
the exchange*, promisor's house.
and not merely
fulfillment of cer- Hence, there is no consideration.
tain conditions
for making the
gift.

The test is

125. b. Economic The benefit to the promisor need not have economic
Benefit Not Re- value. Peace of mind or the gratification of influencing
quired the mind of another may be sufficient to establish bar-
gained-for consideration, provided that the promisee is

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not already legally obligated to perform the requested act.

Example: Father tells Daughter, "I'll give you $1,000 if you

stop smoking." Father's emotional gratification from influ-
encing his daughter's health suffices as consideration.

126. c. "Past" or If something was already given or performed before the

"Moral" Consid- promise was made, it will not satisfy the "bargain" require-
eration ment. The courts reason that it was not given in exchange
for the promise when made.
1) General
Rule—Not Suffi- Example: A loose piece of molding fell from a building
cient Considera- and was about to hit Sam. Sherry, seeing this, pushed
tion Sam out of the molding's path and was herself struck by
it and seriously injured. Sam later promised Sherry that
he would pay her $100 per month for life. There is no
consideration because Sherry did not bargain for Sam's
promise.

127. 2) Exceptions If a past obligation would be enforceable except for the

to the General fact that a technical defense to enforcement stands in the
Rules that Past" way (e.g., statute of limitations), the courts will enforce
or "Moral" Con- a new promise if it is in writing or has been partially
sideration is NOT performed. However, the court will enforce the contract
Consideration only to the extent of the new promise.

There is sub- Example: Debtor owed Creditor $2,000, but the statute of
stantial disagree- limitations had run on the debt. Debtor won some money
ment with the in her state lottery and wrote to Creditor, explaining that
general rule. she had just won some money and promising to pay
Thus, the courts Creditor $1,000. The promise to pay is enforceable—at
have sought to least to the extent of the $1,000—
avoid its applica- despite the lack of new consideration.
tion by creating
exceptions.

a) Debt Barred by
a Technical De-
fense

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128. b) Promise to Under a modern trend, some courts will enforce a promise
Pay Arising Out if it is based on a material benefit that was previously
of Past Materi- conferred by the promisee on the promisor and if the
al Benefit—Mate- promisee did not intend to confer the benefit as a gift.
rial Benefit Rule
This includes situations in which the promisee performed
an act at the promisor's request or performed an unre-
quested act during an emergency

The Second Restatement follows this rule but

adds that the promise is unenforceable to the extent it is
disproportionate to the benefit conferred.

129. 2. Legal Value they find a contract to be unconscionable.

a. Adequacy of
Consideration

Courts of law
normally will not
inquire into the
adequacy of con-
sideration (i.e.,
the relative val-
ues exchanged).
If a party wish-
es to contract to
sell an item of
high market val-
ue for a rela-
tively low price,
so be it. Howev-
er, courts of eq-
uity may inquire
into the relative
values and deny
an equitable rem-
edy (such as an

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order for specific
performance) if

130. 1) Token Consid- If the consideration is only token (i.e., something entirely
eration devoid of value), it will usually not be legally sufficient.

The courts reason that this indicates a gift rather than

bargained-for consideration.

131. 2) Sham Consid- Parties to a written agreement often recite that it was
eration made in consideration of $1 or some other insignificant
sum. Frequently, this recited sum was not in fact paid
and, indeed, it was never intended to be paid. Most courts
hold that evidence may be introduced to show that the
consideration was not paid and no other consideration
was given in its stead.

132. 3) Possibility of Where there is a possibility of value in the bargained-for

Value act, adequacy of consideration will be found even though
the value never comes into existence.

Example: Alex and Becky are siblings. They agree that

whatever their grandmother leaves them in her will they
will pool it together and divide it evenly. There is consid-
eration even though the grandmother may
leave everything to one of the siblings or nothing at all.

133. b. Legal Detri- Legal detriment will result if the promisee does something
ment and Benefit he is under no legal obligation to do or refrains from doing
something that he has a legal right to do. It is important
1) Legal to remember that the detriment to the promisee need not
Detriment to involve any actual loss to the promisee or benefit to the
Promisee promisor.

Example: Uncle promises Nephew $5,000 if he will refrain

from drinking, smoking, swearing, and gambling until he
reaches age 21. Nephew's refraining is a legal detriment,
and because it was bargained for,
Uncle must pay the $5,000 if Nephew so refrains.

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Note: Remember that the promisor must have sought to
induce the detrimental act by his promise.

134. 2) Legal Benefit A legal benefit to the promisor is simply the reverse side
to Promisor of legal detriment. In other words, it is a forbearance or
performance of an act by the promisee which the promisor
was not legally entitled to expect or demand, but which
confers a benefit on the promisor.

135. c. Preexisting Le- Traditionally the promise to perform, or the performance

gal Duty Not of, an existing legal duty is not consideration.
Consideration
Examples: 1) Mike contracts to build a garage for Richard
for $15,000. Mike discovers that he cannot make a profit
at that price and tells Richard that he will not build the
garage unless Richard promises to pay him $16,000.

Because Richard does not have time to find a new con-

tractor before winter and he does not want his new car
exposed to snow, he agrees to pay Mike the $16,000.
When Mike finishes the garage, Richard pays
Mike $15,000. Mike cannot enforce the promise for the
additional $1,000 because he was under a preexisting
duty to build the garage.

2) Smith offers a $10,000 reward for recovery of his

kidnapped daughter. Jones, a police officer assigned to
this case, recovers the daughter. Jones's performance of
her official duty is not sufficient consideration.

136. 1) Exception If the promisee has given something in addition to what

to Pre-Ex- she already owes in return for the promise she now seeks
isiting Duty to enforce, or has in some way agreed to vary her
Rule—New or preexisting duty, such as by accelerating performance,
Different Consid- there is consideration.
eration Promised
It is important to note that it is usually immaterial how
slight the change is, because courts are anxious to avoid
the preexisting duty rule.

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137. 2) Exception A promise to perform a voidable obligation (i.e., ratifica-
to Pre-Existing tion) is enforceable despite the absence of new consid-
Duty Rule—Void- eration. Thus, an infant's (i.e., minor's) ratification of a
able Obligation contract upon reaching the age of majority is enforceable
without new consideration, as is a defrauded person's
promise to go through with the tainted contract after learn-
ing of the fraud.

138. 3) Traditionally, when a preexisting duty was owed to a third

Exception—Pre- party, courts held that the new promise did not consti-
existing Duty tute consideration. However, the modern view adopted by
Owed to Third the Second Restatement and the majority of jurisdictions
Party states that the new promise constitutes consideration.

Example: Saul Pimon contracts with Pam Promotor to

sing at a concert in New York for $25,000. Later, when
Pimon threatens to cancel, Dud Dooright, a Pimon fan,
offers to pay Pimon an additional $5,000 if he sings at the
concert. Pimon appears and sings as agreed. Under
the traditional view, Pimon cannot enforce Dooright's
promise to pay the additional $5,000, but under the major-
ity view Pimon can enforce the promise because Pimon
did not owe a duty to Dooright under the original contract.

139. 4) Exception If the scope of the legal duty owed is the subject of honest
to Pre-Existing dispute, then a modifying agreement relating to it will
Duty Rule—Hon- ordinarily be given effect. The compromise
est Dispute as to by each party is a detriment.
Duty

140. 5) Exception Under the modern view, which appears to be the view
to Pre-Existing adopted by the National Conference of Bar Examiners for
Duty Rule—Un- MBE purposes, a promise modifying a contract
foreseen Circum- that has not been fully performed on either side is binding
stances without consideration if the modification is fair and equi-
table in view of circumstances not anticipated
when the contract was made (e.g., contractor unexpect-
edly hits bedrock).

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Under the majority view, however, mere unforeseen diffi-
culty in performing is not a substitute for consideration.
But if the unforeseen difficulty rises to the level of im-
practicability, such that the duty of performance would
be discharged, most states will hold that the unforeseen
difficulty is an exception to the preexisting legal duty rule.

141. 6) Exception At common law, a contract modification generally is un-

to Pre-Existing enforceable unless it is supported by new consideration.
Duty Rule—Mod- Article 2 does not follow this rule. Under Article 2, contract
ification of Con- modifications sought in good faith are binding without
tract for the Sale consideration.
of Goods
A good faith modification is based on a legitimate com-
mercial reason outside the control of the party seeking the
modification. Modifications extorted from the other party
are in bad faith and are unenforceable.

Example: Paintco has agreed to sell to Retailco 15,000

gallons of paint at a price of $5 per gallon, to be delivered
in 500-gallon installments each month for 30 months. Af-
ter 15 months, the price of materials rises so that Paintco
is losing 50¢ per gallon. Paintco had at the
inception of the contract made a profit of 25¢ per gallon.
Paintco tells Retailco the circumstances and asks if Re-
tailco will agree to pay $5.75 per gallon for the remaining
deliveries. Retailco agrees and the proper writing is exe-
cuted. The modification was no doubt sought in good faith
and is binding even though Paintco
gave Retailco no new consideration. If Paintco had asked
for an increased price because she believed that it was
too late for Retailco to purchase elsewhere and Retailco
would pay the higher price to get the paint, the modifica-
tion would be in bad faith and would be
unenforceable.

142. 7) Existing Debts But again, bear in mind that courts will attempt to avoid
this result by application of the above exceptions. Thus,
One of the re- for example, if the consideration is in any way new or

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curring problems different (e.g., payment before maturity or to one other
in the preexisting than the creditor; payment in a different medium, e.g.,
duty area con- stock instead of cash; or payment of a debt that is subject
cerns promises to an honest dispute), then sufficient consideration may
regarding exist- be found.
ing debts. When
the amount due
is undisputed,
payment of a
smaller sum than
due will not be
sufficient con-
sideration for a
promise by the
creditor to dis-
charge the debt.
Neither a legal
detriment nor a
benefit would be
present.

143. d. Forbearance If the claim is valid, the forbearance to sue is, of course,
to Sue sufficient consideration. If the claim is invalid and the
claimant is aware of this fact, he has no such right; his
The promise to suit is no more than the wrongful exercise of a power.
refrain from su-
ing on a claim But even if the claim is invalid, in law or in fact, if the
may constitute claimant reasonably and in good faith believes his claim
consideration. to be valid, forbearance of the legal right to have his claim
adjudicated constitutes detriment and consideration.

144. C. MUTUAL There are many agreements in which one party has be-
AND ILLUSO- come bound but the other has not. Such agreements lack
RY PROMIS- mutuality, i.e., at least one of the promises is "illusory." If
ES—THE RE- so, consideration fails.
QUIREMENT OF
MUTUALITY Example: Acme Co. promises to buy from Batcher, Inc.
"such ice cream as I may wish to order from Batcher, Inc."
Consideration

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must exist on Acme's promise is illusory, because it is still free to buy
both sides of the from anyone else it chooses, or not to buy at all.
contract; that is,
promises must
be mutually
obligatory.

145. However, the req- 1. Requirements and Output Contracts

uisite mutuality 2. Conditional Promises
will be found 3. Right to Cancel or Withdraw
to exist in cer- 4. Exclusivity Agreements—Best Efforts Implied
tain situations 5. Voidable Promises
even though the 6. Unilateral/Option Contracts
promisor has 7. Suretyship Promises
some choice 8. Right to Choose Among Alternative Courses
or discretion.
Notable among
these are the fol-
lowing:

146. 1. Requirements "Requirements" contracts (promises to buy "all that I will

and Output Con- require") and "output" contracts (promises to sell "all that
tracts I manufacture") are enforceable.

Consideration exists, as the promisor is suffering a legal

detriment; he has parted with the legal right to buy (or
sell) the goods he may need (or manufacture) from (or to)
another
source.

147. 2. Conditional Conditional promises are enforceable, no matter how re-

Promises mote the contingency, unless the "condition" is entirely
within the promisor's control.

Example: Alice promises to deliver goods to Charles "only

if her son comes into the business." Valid consideration
exists. If the promise were "only if I decide to take my son
into the business," a court might find no consideration.

148.
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a. Promise Con- the promisor is constrained by good faith (for contracts in-
ditioned on Sat- volving personal taste) and a reasonable person standard
isfaction (for contracts involving mechanical fitness, utility, or
marketability).
A promise con-
ditioned on the
promisor's satis-
faction is not illu-
sory because

149. 3. Right to Can- Although reservation of an unqualified right to cancel or

cel or Withdraw withdraw at any time may be an illusory promise, the
consideration is valid if this right is in any way restricted,
e.g., the right to cancel upon 60 days' notice.

Note that Article 2 implies a requirement of reasonable

notice even if it is not specified in the contract. [UCC
§2-309(3)]

150. 4. Exclusiv- A court may find an implied promise furnishing mutuality

ity Agree- in appropriate circumstances (such as exclusive market-
ments—Best Ef- ing agreements). The courts generally will find an implied
forts Implied promise to use best efforts and sustain agreements that
might otherwise appear illusory.

Example: Y Corp. was granted exclusive rights to sell

Dominick's dresses in return for one-half the profit. The
agreement was silent as to any obligation on the part
of Y Corp. Held: Y Corp. impliedly promised to use its best
efforts to sell Dominick's dresses. [See UCC §2-306(2)]

151. 5. Voidable Voidable promises are not held objectionable on "mutual-

Promises ity" grounds.

Example: Victor entered into a contract with Baby Jane,

an infant. Baby Jane's power to disaffirm her contractual
obligation will not prevent her promise from serving
as consideration.

152.
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6. Unilateral/Op- Unilateral contracts, enforceable because one has begun
tion Contracts performance, or option contracts, enforceable because
one has purchased time to decide (e.g., whether to pur-
chase land), are
not held objectionable on "mutuality" grounds.

153. 7. Suretyship A suretyship contract involves a promise to pay the debt of

Promises another. A suretyship contract is not enforceable unless it
is supported by consideration. If a surety is compensated,
the requirement of consideration is not much of an issue,
because the compensation will serve
as consideration for the surety's promise. If, however,
the surety is gratuitous (i.e., the surety is not paid for
his services), the consideration requirement may cause
problems. The timing becomes important in determining
whether adequate consideration is present in a gratuitous
surety situation.

154. a. Surety Makes Consideration Present

Promise Before
(or at the Same If the gratuitous surety makes his promise to pay before
Time as) Credi- (or at the same time as) the creditor performs or promises
tor Performs or to perform, the creditor's performance or promise will
Promises to Per- serve as consideration for the surety's promise, because
form— the creditor has incurred a
detriment in exchange for the surety's promise.

Example: Beth sees a car on Sam's used car lot that she
wants, but she does not have enough money to pay for
the car. Sam tells Beth that he will sell her the car for
$500 and a two-year promissory note for the remainder
if Beth can get her father to co-sign the note with her.
Beth's father agrees. The three parties meet, Beth and
her father sign the note, and Sam signs over title of the
car to Beth. Beth's father is bound as a surety because the
consideration passed from Sam at the same time Beth's
father made his promise.

155.

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b. Surety Makes Generally No Consideration to Support Surety's Promise
Promise After
Creditor Per- If a gratuitous surety does not make his promise until
forms or Promis- after the creditor has performed or made an absolute
es to Perform— promise to perform, there is no consideration to support
the surety's promise because of the preexisting legal duty
rule—the creditor has not incurred any new detriment
in exchange for the surety's promise. Thus, the surety's
promise is unenforceable.

Example: Beth sees a car on Sam's used car lot that

she wants, but she does not have enough money to pay
for the car. Sam tells Beth that she can have the car for
$500 and a two-year promissory note for the remainder.
Beth agrees. Sam signs the title of the car over to Beth,
and Beth gives Sam $500 and a promissory note for the
remainder. A few days later, Sam discovers that Beth
works only part-time and will likely have trouble
making payments on her current income. He calls Beth
and asks her to get a surety on the note. Beth's father
sends Sam a letter promising to pay whatever Beth owes
if she defaults. Beth's father is not bound as
surety because there is no consideration to support his
promise.

*1) Exception—Obtaining Surety Is Condition Precedent*

If the contract between the debtor and the creditor makes
obtaining a surety a condition precedent to the creditor's
performance, so that the creditor would be
justified in refusing to perform the contract until a surety
is obtained, the surety's promise is binding if the creditor
performs in reliance on the surety's promise.

*2) Exception—Additional Consideration*

As with other contracts, if the creditor gives additional
consideration in exchange for the surety's promise, the
surety will be bound.

156.
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8. Right every alternative involves some legal detriment to the
to Choose promisor.
Among Alterna-
tive Courses However, if the power to choose rests with the promisee or
some third party not under the control of the promisor, the
A promise to promise is enforceable as long as at least one alternative
choose one of involves some legal detriment.
several alterna-
tive means of Example: Smith, an English professor, tells Jack that in
performance is return for Jack's promise to pay $250, Smith will either (i)
illusory unless give Jack swimming lessons, (ii) paint Jack's portrait, or
(iii) teach his English class (of which Jack is a member)
on a regular basis during the next term, the choice to
be entirely Smith's. Because alternative (iii) represents a
preexisting duty owed by Smith to the university
under his contract of employment, it involves no legal
detriment, and Smith's promise does not constitute valu-
able consideration for Jack's promise to pay
$250.

Compare: Had Smith allowed Jack's mother (or Jack) to

select the performance, there would be a legal detriment
and valuable consideration—even if alternative (iii) were
selected.

*a. Selection of Valuable Alternative Cures Illusory

Promise*

Even if a promisor retains the power to select an al-

ternative without legal detriment, his actual selection of
an alternative involving legal detriment would cure the
illusory promise.

Example: In the above example (in which Smith was

allowed to select a means of performance), if Smith had
actually chosen alternative (i) or (ii), his illusory promise
would have been cured.

157.
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IV. REQUIRE- there is a defense to formation of the contract, because
MENT THAT NO there is a defect in capacity (making the obligations void-
DEFENSES EX- able by one of the parties), or because a defense to
IST enforcement of certain terms exists.

Even if an agree-
ment is sup-
ported by valu-
able considera-
tion or a recog-
nized substitute,
contract rights
may still be un-
enforceable be-
cause

158. B. ABSENCE OF (i) The mistake concerns a basic assumption on which

MUTUAL AS- the contract is made (e.g., the parties think they are
SENT contracting for the sale of a diamond but in reality the
stone is a cubic zirconia);
1. Mutual Mis-
take as to Exist- (ii) The mistake has a material effect on the agreed-upon
ing Facts exchange (e.g., the cubic zirconia is worth only a hun-
dredth of what a diamond is worth); and
A mutual mis-
take is general- (iii) The party seeking avoidance did not assume the risk
ly a mistaken as- of the mistake.
sumption shared
by both par-
ties. Thus, when
both parties en-
tering into a con-
tract are mistak-
en about exist-
ing facts (not fu-
ture happenings)
relating to the
agreement, *the
contract may be
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voidable by the
adversely affect-
ed party if: (3)*

159. a. Not a Defense one party is in a position to better know the risks than the
If Party Bore the other party (e.g., contractor vs. homeowner)
Risk or where the parties knew that their assumption was
doubtful (i.e., when the parties were consciously aware of
Mutual mistake their ignorance). In other words, to be a defense it must
is not a defense if be a mistake, not a mere uncertainty.
the party assert-
ing mistake as Examples: 1) Homeowner contacts Builder regarding the
a defense bore cost of installing an inground pool. Builder bids $15,000
the risk that the and Homeowner accepts. While digging the hole for the
assumption was pool, Builder encounters an unexpected slab of granite.
mistaken. Blasting away the granite will add 20% to Builder's costs,
making the contract unprofitable. Builder will be held to
This commonly have assumed the risk.
occurs when
2) Roger finds a stone that appears to be valuable and
shows it to his friend Betsy. The two do not know what the
stone is but think it is a topaz. Roger agrees to sell the
stone to Betsy for $100. The parties subsequently discov-
er that the stone is a diamond worth $1,000. Roger cannot
void the contract on mutual mistake grounds because the
parties knew that their assumption about the stone was
doubtful.

Compare: Roger finds a stone that appears to be valu-

able. Because Roger is not an expert as to gems, he
takes it to Jeweler. Jeweler, in good faith, tells Roger that
the stone is a topaz worth very little and offers to buy it
for $100. Roger accepts, but subsequently discovers that
the stone actually is a diamond worth $1,000. Roger can
rescind the contract on mutual mistake grounds. Roger's
reliance on an expert's opinion shows that
Roger did not intend to assume the risk of not knowing
about the stone.

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160. 1) Mistake in Val- Example: Roger finds a stone that appears to be valuable
ue Generally Not and shows it to his friend Betsy. The two properly deter-
a Defense mine that the stone is a topaz.
Roger believes the topaz is worth $500, and Betsy be-
If the parties to a lieves the topaz is worth $50, but Roger agrees to sell it
contract make to Betsy for $200. The parties subsequently discover that
assumptions as the topaz is worth $600.
to the value of
the subject Roger cannot void the contract because he knew that the
matter, mistakes parties did not know the true value of the stone, and so
in those assumed the risk that their valuation was incorrect.
assumptions
will generally Compare: Same facts as above, but because Roger and
not be Betsy did not know the value of a topaz, they took it
remedied—even to Jeweler, who told them the stone was worth $200.
though the value Subsequently, Roger discovers that Jeweler knows noth-
of the subject ing about topaz stones and determines that the stone
matter is was worth $600. Roger can void the contract for mutual
generally a basic mistake and force Betsy to return the stone because here
assumption and the facts show that the parties did not intend to assume
the mistake the risk of determining value (because they sought out an
creates a expert to determine the true value).
material
imbalance—be-
cause both
parties usually
assume the risk
that their
assumption as
to value is
wrong. However,
it is possible for
the facts to show
that the
adversely
affected party
did not assume
the risk in

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determining
value.

161. 2. Unilateral Mis- voidable by the mistaken party.

take

Unilateral mis-
takes arise most
commonly when

one party makes

a mechanical er-
ror in computa-
tion.

If only one of
the parties is
mistaken about
facts relating to
the agreement,
the mistake will
not prevent for-
mation of a con-
tract.

However, if
the nonmistaken
party knew or
had reason to
know of the mis-
take made by the
other party, the
contract is

162. As is the case have a material effect on the agreed upon exchange and
with mutual mis- the mistaken party must not have borne the risk of the
take, for the con- mistake.
tract to be void-

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able, the unilater-
al mistake must

163. Materiality in uni- the overall impact on both parties.

lateral mistake is
determined by Ordinarily this is proven by showing the exchange is much
less desirable to the mistaken party and more advanta-
geous to the nonmistaken party.

Example: Seller agrees to sell Buyer a number of different

items of hardware. Seller computes the total price at
$15,000, and Buyer agrees to pay this amount.
Subsequently, Seller discovers that he made an error in
computation and the price should be $17,000. In this sit-
uation, the preferred analysis is that there is a contract at
$15,000, assuming that Buyer was reasonably unaware
of the unilateral computation error. Note also that the error
was not an error in the offer; the mistake was antecedent
to the offer by Seller. When Seller stated
the offer at $15,000, he meant $15,000.

Compare: Homeowner asks four contractors to submit

bids to build a two-car garage on Homeowner's property.
When Homeowner receives the bids they are:
$17,000, $19,000, $19,500, and $9,000. The last bid was
due to a typographical error. Homeowner will not be able
to snap up the $9,000 offer because he should have
known, based on the other bids, that the $9,000 bid
probably contained an error.

164. a. Unilateral Mis- that the nonmistaken party has not relied on the contract.
take May Be Can-
celed in Equity There is also modern authority indicating that a unilateral
mistake that is so extreme that it outweighs the other
There is authori- party's expectations under the agreement will be a ground
ty in a number of for cancellation of the contract.
cases that con-
tracts with er-
rors, such as

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mistakes in com-
putation, may be
canceled in equi-
ty, assuming

165. b. Error in Judg- not result in a voidable contract, even if the nonmistaken
ment party knows or has reason to know of the mistake made
by the other party.
An error in judg-
ment by one of Examples: 1) Seller offers to sell her car to Buyer for $500,
the parties as and Buyer accepts. Buyer knows that Seller's car has a
to the value or market value of $1,500 and that this fact is unknown to
quality of the Seller. The contract is enforceable.
work done or
goods contract- 2) Seller advertises a particular dredge for sale. After
ed for will an employee of Buyer inspects the dredge, Buyer offers
$35,000 for it, which Seller accepts. Prior to the delivery
of the dredge, Buyer discovers that the dredge will not
perform certain operations in shallow water, which was
the central purpose Buyer intended for the dredge. The
contract is not voidable by Buyer because Buyer's uni-
lateral mistake was a mistake in judgment about goods
contracted for.

166. 3. Mistake by the message as transmitted is operative unless the other

the Intermediary party knew or should have known of the mistake.
(Transmission)
Example: Harry put his home up for sale at the price
When there is a of $340,000. After viewing the home, Sally called her
mistake in the attorney and asked him to prepare an offer to purchase
transmission of the home for $313,000. The attorney misunderstood Sally
an offer or ac- and prepared an offer for $330,000 and transmitted the
ceptance by an offer to Harry. Harry accepted.
intermediary, the
prevailing view is Assuming that the attorney had the power to bind Sally,
that a contract was formed to buy the house for $330,000,
despite the attorney's mistake in transmitting the price.

Compare: Same facts as above, but Sally asked her at-

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torney to prepare an offer for $318,000 and the attorney
misunderstood and submitted an offer for
$380,000. Here, Sally probably would not be bound be-
cause Harry probably should have known of the error as
the offer substantially exceeded his asking
price.

167. 4. there is no meeting of the minds.

Misunderstand-
ing—Ambigu-
ous Contract
Language

Contract lan-
guage with at
least two pos-
sible meanings
leads to different
results depend-
ing on the aware-
ness of the par-
ties. Most often
there is no con-
tract because

168. a. Neither Par- both parties happened to intend the same meaning.
ty Aware of Am-
biguity—No Con- Example: Buyer agrees to purchase cotton from Seller
tract when the cotton is delivered by a ship named Peerless.
This is the total expression of the agreement. It is sub-
If neither party sequently determined that Buyer contemplated a ship
was aware of the named Peerless that was to dock in September while
ambiguity at the Seller contemplated a ship named Peerless that was to
time of contract- dock in December. Neither party was aware
ing, there is no that there were two ships named Peerless. Their subse-
contract unless quent expression of the ship each intended indicates that
they did not intend the same ship
at the time of contracting. Therefore, there is no contract.
[See Raffles v. Wichelhaus, 159 Eng. Rep. 375 (1864)]

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169. b. Both Parties both parties in fact intended the same meaning.
Aware of Ambi-
guity—No Con-
tract

If both parties
were aware of the
ambiguity at the
time of contract-
ing, there is no
contract unless

170. c. One Party was unaware of the ambiguity.

Aware of Ambi-
guity—Contract Example: Collector agrees to purchase a Picasso sketch
from Gallery. It is subsequently determined that Gallery
If one party was has two sketches and that Gallery intended to sell one of
aware of the am- these to Collector while Collector intended to buy
biguity and the the other one. Collector did not know that Gallery owned
other party was two sketches; Gallery, of course, knew that it did. Here,
not at the time there is a contract for the sketch that Collector had in
of contracting, a mind because this is a situation in which one party knew
contract will be of the ambiguity (Gallery) while the other party did not
enforced accord- (Collector).
ing to the inten-
tion of the party
who

171. d. Subjective In- This is because the objective test simply does not work in
tention of Parties this situation. The objective manifestations of the parties
Controls appear to be perfectly clear but subsequent facts indicate
the latent ambiguity. It is then necessary to receive evi-
While the ob- dence of what each party subjectively
jective test is thought at the time of contracting.
used in contract
law generally, the
latent ambigui-
ty situation is
unique in that
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the courts look
to the subjective
intention of the
parties.

172. 5. Misrepresenta- A misrepresentation is a false assertion of fact. It is fraud-

tion ulent if it is intended to induce a party to enter into a
contract and the maker knows or believes the assertion
a. Fraudu- is false or knows that he does not have a basis for what
lent Misrepre- he states or implies with the assertion.
sentation (Fraud
in the Induce-
ment)

173. A fraudulent as- conduct; i.e., concealment or sometimes even nondisclo-

sertion can be in- sure may be considered a misrepresentation.
ferred from

174. If a party induces voidable by the innocent party if she justifiably relied on
another to enter the fraudulent misrepresentation. This is a type of fraud in
into a contract the inducement.
by using fraud-
ulent misrepre- Example: Buyer agreed to buy a painting from Seller
sentation (e.g., because Seller told her that the painting previously had
by asserting in- been owned by Bubbles Springfield, a famous rock star.
formation she In fact, Seller knew that Springfield had never owned
knows is untrue), the painting. Buyer's promise is voidable if she justifiably
the contract is relied on Seller's misrepresentation.

175. 1) Distin- If one of the parties was tricked into giving assent to the
guish—Fraud in agreement under circumstances that prevented her from
the Factum appreciating the significance of her action, the agreement
cannot be enforced; it is void.

Example: Joe Rocket, a famous football player, signs au-

tographs after each game. After one game, a fan handed
him a paper to sign that was in reality the last page of a
contract. The contract is void due to fraud
in the factum because Rocket was tricked into signing it.

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176. b. Material Mis- the innocent party justifiably relied on the misrepresenta-
representation tion and the misrepresentation was material.

Whether or not
a misrepresenta-
tion is fraudu-
lent, the contract
is voidable by the
innocent party if

177. A misrepresenta- (i) it would induce a reasonable person to agree, or

tion is material if:
(2) (ii) the maker knows that for some special reason it is
likely to induce the particular person to agree, even if a
reasonable person would not.

Example: Same facts as in the painting example in a.,

above, except that Seller truly believed that the painting
had once belonged to Springfield. Because a famous prior
owner would likely make a reasonable person
agree to buy a painting, the misrepresentation is material.
Therefore, Buyer's promise is voidable if she justifiably
relied on Seller's misrepresentation.

178. c. Concealment An action intended to prevent another from learning a

and Nondisclo- fact is the equivalent of asserting that a fact does not
sure exist. Similarly, if a party frustrates an investigation by the
other party or falsely denies knowledge of a fact, it can be
considered a misrepresentation.

Note, however, that nondisclosure without concealment

usually is not a misrepresentation.

179. A party is not material or fraudulent, the contract is voidable for misrep-
required to tell resentation.
everything he
knows to the oth-
er party, but if the

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nondisclosure is
either

180. d. Justified Re- voidable; i.e., he is not entitled to relief if the reliance
liance was unreasonable under the circumstances. However,
the mere fact that the misrepresentation could have been
A party's re- revealed by the exercise of reasonable care does not
liance on mean reliance was unjustified.
a misrepresenta-
tion must be jus- For example, a party's failure to read a contract or use
tified for the con- care in reading it will not necessarily preclude him from
tract to be avoiding the contract.

Example: Able and Baker agree that Able will mow Bak-
er's lawn weekly for $50. Able draws up a contract, hands
it to Baker, and states that it is the written version of their
agreement. In fact, the writing states that Baker
will pay Able $60 per week for the mowing. Baker signs the
contract without reading it, despite having an opportunity
to do so. Baker can void the contract.

181. e. Innocent Par- The right to rescind the agreement exists even if the terms
ty May Rescind are fair or beneficial to the misled party. The right to void
Agreement or rescind such a contract may be lost, however, if the
party so induced affirms the contract in question.
The innocent
party need not
wait until she is
sued on the con-
tract, but may
take affirmative
action in equi-
ty to rescind the
agreement.

182. f. Remedies for all remedies available for breach (see VI., infra). In a
Fraud contract for the sale of goods, neither rescission nor the
return of the goods is inconsistent with a claim for dam-
In addition to ages.

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rescission, reme-
dies for mater- Note that the time period to bring an action for fraud does
ial misrepresen- not run until the party knows or should have known of the
tation or fraud in- fraud.
clude

183. C. ABSENCE If the promises exchanged at the formation stage lack the
OF CONSIDERA- elements of bargain or legal detriment, no contract exists.
TION In this situation, one of the promises is always illusory.

184. D. PUBLIC If either the consideration or the subject matter of a con-

POLICY tract is illegal, this will serve as a defense to enforcement.
DEFENSES—IL-
LEGALITY

185. Contracts may inconsistent with the Constitution, violate a statute, or are
be illegal be- against public policy as declared by the courts.
cause they are

186. 1. Some Typical a. Agreements in restraint of trade;

Cases of Illegali- b. Gambling contracts;
ty c. Usurious contracts;
d. Agreements obstructing administration of justice;
Some of the e. Agreements inducing breach of public fiduciary duties;
most common and
areas in which f. Agreements relating to torts or crimes.
problems of il-
legality have
arisen are:

187. 2. Effect of Ille-Illegal consideration or subject matter renders a contract

gality void and unenforceable. In a close case, a court may sev-
er an illegal clause from the contract rather than striking
a. Generally Con- down the entire contract.
tract Is Void

188. If the subject there was no valid offer.

matter or consid-
eration was ille-

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gal at the time of
the offer,

189. If it became ille- revoke the offer.

gal after the offer
but before accep-
tance, the super-
vening illegality
operates to

190. If it became il- discharge the contract because performance has be-
legal after a come impossible.
valid contract
was formed, the
supervening ille-
gality operates to

191. c. Compare—Ille- (i) did not know of the purpose; or

gal Purpose
(ii) knew but did not facilitate the purpose and the purpose
If the contract does not involve "serious moral turpitude." If both parties
was formed for knew of the illegal purpose and facilitated it, or knew and
an illegal pur- the purpose involves serious moral turpitude, the contract
pose but nei- is void and unenforceable.
ther the consid-
eration nor the
subject matter is
illegal (e.g., a
contract to rent
a plane when
the renter's pur-
pose is to smug-
gle drugs out
of Colombia), the
contract is only
voidable (rather
than void) by the
party who

192.
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3. Limitations on *a. Plaintiff Unaware of Illegality*
Illegality Defense If the plaintiff contracted without knowledge that the
agreement was illegal and the defendant acted with
knowledge of the illegality, the innocent plaintiff may re-
cover on the contract.

*b. Parties Not in Pari Delicto*

A person may successfully seek relief if he was not as
culpable as the other.
Example: Punter, a casual bettor, may recover against
Booker, a professional bookie. (Some courts reach this
result on the theory that the criminal proscription was
designed to protect a class to which Punter belongs.)

*c. Licensing—Revenue Raising vs. Protection*

If a contract is illegal solely because a party does not have
a required license, whether the contract will be enforce-
able depends on the reason for the license:
*1) Revenue Raising—Contract Enforceable*
If the license is required merely to raise revenue (e.g., a
city requires all vendors at a fair to pay a $25 license fee),
the contract generally is enforceable.
*2) Protection of Public—Contract Not Enforceable*
If the license is required to ensure that the licensee meets
minimum requirements to protect the public welfare (e.g.,
a license to practice law, medicine, accounting, etc.), the
contract is void. This means that even if the unlicensed
party performs perfectly under the contract, the party
cannot collect any damages.

193. E. DEFENSES Individuals in certain protected classes are legally inca-

BASED ON LACK pable of incurring binding contractual obligations. Timely
OF CAPACITY assertion of this defense by a promisor makes the con-
tract voidable at his election.
1. Legal Incapac-
ity to Contract

194. a. Contracts of The age of majority in most jurisdictions is 18. However,

Infants (Minors) in many states, married persons under age 18 are con-

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sidered adults.
1) Who Is an In-
fant? *2) Effect of Infant's Contract*
Infants generally lack capacity to enter into a contract
binding on themselves. However, contractual promises of
an adult made to an infant are binding on the adult. In
other words, a contract entered into between an infant
and an adult is
voidable by the infant but binding on the adult.

195. *3) Disaffir- b) Contracts for Necessaries

mance* "Necessaries" generally includes food, shelter, clothing,
medical care, medicines, and other items necessary for
An infant may the minor's subsistence, health, or education. A minor
choose to disaf- may disaffirm a contract for necessaries but in most states
firm a contract will be liable in restitution for the value of benefits re-
any time before ceived.
(or shortly af-
ter) reaching the
age of majority. If
a minor chooses
to disaffirm, she
must return any-
thing that she re-
ceived under the
contract that still
remains at the
time of disaffir-
mance. However,
there is no oblig-
ation to return
any part of the
consideration
that has
been squan-
dered, wasted, or
negligently de-
stroyed.

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*a) Exceptions*
Most states have
created a small
number of statu-
tory exceptions
to the rule that
minors can dis-
affirm their con-
tracts (e.g., stu-
dent loan agree-
ments, insurance
contracts, agree-
ments not to
reveal an em-
ployer's propri-
etary informa-
tion, etc.).

196. 4) Affirmance An infant may affirm, i.e., choose to be bound by his con-
upon Majority tract, upon reaching majority. He affirms either expressly
or by conduct, e.g., failing to disaffirm the contract within
a reasonable time after reaching majority.

197. b. Mental Inca- One whose mental capacity is so deficient that he is

pacity incapable of understanding the nature and significance of
a contract may disaffirm when lucid or by a later appointed
legal representative. He may likewise affirm during a lucid
interval or upon complete recovery, even without formal
restoration by judicial action.

In other words, a contract made by a mentally incom-

petent person is *voidable*. As in the case of infants,
mentally incompetent persons are liable in quasi-contract
for necessaries furnished to them.

Note: Once a mentally incompetent person has been ad-

judicated and placed under a *guardianship*, that person
no longer has any ability to contract as the guardian has
complete control of the incompetent person's property.

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Thus any attempted contracts by
an incapacitated person who is under a guardianship
would be void.

198. c. Intoxicated One who is so intoxicated that he does not understand

Persons the nature and significance of his promise may be held to
have made only a voidable promise if the other party had
reason to know of the intoxication. The intoxicated per-
son may affirm the contract upon recovery. Once again,
there may be quasi-contractual recovery for necessaries
furnished during the period of incapacity.

199. 2. Duress and Contracts induced by duress (e.g., "sign the contract or
Undue Influence I'll break your legs") or undue influence are voidable and
may be rescinded as long as not affirmed.

200. a. Duress There are two types of duress.

1) In the first, a party is physically forced to sign against

her will; e.g., a stronger person grabs her hand and signs
the contract with the victim's hand or the victim signs the
contract at gunpoint. With this type of physical-compul-
sion duress, the contract is void.

2) The much more common type of duress arises when

a party's assent to a contract is induced by an improper
threat by the other party that leaves the victim no reason-
able alternative. In these cases, the contract is voidable
by the victim.

Examples of this type of duress include threats of bodily

harm to the victim or her family and threats to bring
unfounded criminal or civil charges.

Example: Able tells Baker that Baker must sign a business

contract with Able in which all provisions greatly favor
Able. Able states that if Baker fails to sign, Able will hire
someone to hurt Baker's teenage daughter. Baker signs
the agreement. The contract is voidable at Baker's option.

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201. 1) Economic (i) The party threatens to commit a wrongful act that would
Duress General- seriously threaten the other contracting party's property
ly Not a Defense or finances; and

Generally, taking (ii) There are no adequate means available to prevent the
advantage of an- threatened loss.
other person's
economic needs Example: Barry buys his dream home for $700,000. A few
is not a defense. years later, Barry loses his job, stops making mortgage
payments, and is threatened with foreclosure. Because of
However, with- the economy, houses are not selling in Barry's neighbor-
holding some- hood, so his friend Freida offers to buy Barry's house for
thing some- the $500,000 that he owes on it. Before the closing, Barry
one wants or finds a job and does not want to sell the house. Barry is
needs will con- bound; his economic duress is not a defense.
stitute economic
duress if: Compare: Barry buys his dream home for $700,000. A few
years later, Barry's boss, Freida, tells Barry that if he will
not sell her his house for $500,000, she will fire him from
his job. Barry agrees to the sale, but before closing finds
a new job. The economic duress here would
probably be a defense.

202. b. Undue Influ- Undue influence is unfair persuasion of a party who is

ence under the domination of the person exercising the per-
suasion or who by virtue of the relationship between
them is justified in assuming that that person will not act
in a manner inconsistent with his welfare. [Restatement
(Second) of Contracts §177]

203. The elements of often described as undue susceptibility to pressure by

undue influence one party and excessive pressure by the other. Other
are factors considered are the unfairness of the resulting
bargain and the availability of independent advice.

204. F. STATUTE OF In most instances, an oral contract is valid. However,

FRAUDS certain agreements, by statute, must be evidenced by a
writing signed by the party sought to be bound.

205.
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1. Writing Re- The Statute of Frauds does not require a formal written
quirement contract. Among other things, the writing could be a re-
ceipt, a letter, a check with details in the memo line, or a
written offer that was accepted orally.

206. The Statute re- (i) reasonably identify the subject matter of the contract,
quires only one (ii) indicate that a contract has been made between the
or more writings, parties, and
signed by the (iii) state with reasonable certainty the essential terms
party of the unperformed promises. [Restatement (Second) of
to be charged, Contracts §131]
that: (3)

207. a. Electronic Whenever a law, such as the Statute of Frauds, requires

Record Satisfies a record to be in writing, an electronic record satisfies that
Writing Require- law. [Uniform Electronic Transactions Act ("UETA")
ment §7(c)] Thus, the writing requirement may be satisfied by
an e-mail.

208. b. Essential or If a writing does not contain the essential terms of the
Material Terms agreement, it does not satisfy the Statute and the contract
cannot be enforced. There is no definitive list of essential
terms. They vary depending on the situation. What is
essential depends on the agreement, its context, and the
subsequent conduct of the parties, including the dispute
that has arisen. There must be enough in the writing to
enable a court to enforce the
contract.

If an element is contained in the writing, evidence is

admissible to explain the particulars.

If, however, a term is missing and cannot be supplied by

implication or rule of law, evidence will not be admitted to
add it. The essential terms normally include the identity
of the parties, description of the subject matter, and the
terms necessary to make the contract definite (see II.B.2.,
supra).

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For example, writings evidencing land sale contracts must
contain a description of the land and the price, and those
for employment contracts must state the length of employ-
ment. For the sale of goods, the
UCC requires only some signed writing indicating that a
contract has been made and specifying the quantity term.

209. 2. Signature Re- The signature requirement is liberally construed by most

quirement courts. A signature is any mark or symbol made with the
intention to authenticate the writing as that of the signer.
It need not be handwritten; it can be printed or typed.
Under the UCC, even a party's initials or letterhead may
be sufficient.

210. a. Electronic Sig- The signature requirement may be satisfied by an elec-

nature tronic signature. [UETA §7(d)]

As with paper signatures, whether a record is "signed" is

a question of fact. No specific technology is necessary to
create a valid signature. If the requisite intent is present,
one's name as part of an e-mail may suffice as a signa-
ture, as may the firm name on a facsimile (fax).

211. 3. Agreements a. Executor or Administrator Promises Personally to Pay

Covered by the Estate Debts
SOF
b. Promises to Pay Debt of Another (Suretyship Promises)

c. Promises in Consideration of Marriage

d. Interest in Land

e. Performance Not Within One Year from Date of Contract

f. Goods Priced at $500 or More

212. b. Promises to *1) Must Be a Collateral Promise*

Pay Debt of
Another (Surety- A promise to answer for the debt or default of another
ship Promises) must be evidenced by a writing. The promise may arise
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as a result of a tort or contract, but it must be collateral
to another person's promise to pay, and not a primary
promise to pay.

Example: "Give him the goods, and if he does not pay,

I will." This promise is a collateral promise and must be
evidenced by a writing. But if the promise is, "Give him the
goods, and I will pay for them," the promise is a primary
promise and need not be evidenced by a
writing.

*2) Main Purpose Must Not Be Pecuniary Interest of

Promisor*

If the main purpose or leading object of the promisor is to

serve a pecuniary interest of his own, the contract is not
within the Statute of Frauds even though the effect is still
to pay the debt of another.

Example: Ernie contracted with ABC Co. to have some

machines custom made for his factory. He promised ABC
Co.'s supplier that if it would continue to deliver materials
to ABC, Ernie would guarantee ABC Co.'s payment to the
supplier. This promise need not be in
writing because Ernie's main purpose in guaranteeing
payment was to assure that ABC Co. had adequate sup-
plies to build his machines.

213. c. Promises in A promise the consideration for which is marriage must

Consideration of be evidenced by a writing. This applies to promises that
Marriage induce marriage by offering something of value (other
than a return promise to marry—e.g., "if you marry my
son, I will give the two of you a house").

214. d. Interest in A promise creating an interest in land must be evidenced

Land by a writing. This includes not only agreements for the
sale of real property, but also other agreements pertaining
to land.

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215. 1) What Is an In- a) Leases for more than one year;
terest in Land? b) Easements of more than one year;
c) Mortgages and most other security liens;
In addition to d) Fixtures; and
agreements for e) Minerals (or the like) or structures if they are to be
the sale of real severed by the buyer.
property, the fol-
lowing items are If they are to be severed by the seller, they are not an
among the more interest in land but rather are goods. If the subject matter
important inter- is growing crops, timber to be cut, or other
ests in land gen- things attached to realty capable of severance without
erally covered by material harm to the realty, it is a contract for the sale of
the Statute: goods (see f., infra). [UCC §2-107]

216. 2) Items That Do a contract to build a building or a contract to buy and sell
Not Create an In- real estate and divide the profits does not create an
terest in Land interest in land.

Even though the

end result of
some contracts
may involve land,
they still do not
come within this
portion of the
Statute. For ex-
ample,

217. 3) Effect of Full performance by the seller will take the contract out of
Performance on the Statute of Frauds.
Contracts
Part performance by the buyer may also remove the con-
tract from the Statute. (See 5.a.1), infra.)

218. e. Performance A promise that by its terms cannot be performed within

Not Within One one year is subject to the Statute of Frauds. Part perfor-
Year from Date of mance does not satisfy the Statute of Frauds in this case.
Contract
1) Effective Date

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The date runs from the date of the agreement and not
from the date of performance.

Example: Maria entered into an employment agreement

whereby she was to perform services from April 1, 2014,
until March 31, 2015. The agreement was entered into on
March 15, 2014. It must be evidenced by a writing.

219. 2) Contracts *a) Possibility of Completion Within One Year*

Not Within the If the contract is possible to complete within one year, it
Statute is not within the one-year prong of the Statute of Frauds,
even though actual performance may extend beyond the
The following one-year period.
contracts do not ---Example: Carlo makes the following oral statement to
fall within this Nellie: "Be my nurse until I recover and I will pay you a
provision of the small salary now, but leave you a large estate in my will."
Statute: The contract need not be evidenced by a writing because
Carlo could recover within one year.

*b) Right to Terminate Within Year*

If a contract that cannot be performed within one year
allows both parties the right to terminate within a year,
there is a split as to whether the right to terminate takes
the contract out of the one-year prong of the Statute of
Frauds. The majority view is that nonperformance is not
performance within one year, and so the contract is still
within the Statute of Frauds. The minority Second Re-
statement view suggests that because the contract is
terminable by either party within a year, it is outside the
Statute.

Example: Susan contracts to employ Linda for two years.

Part of their agreement allows either party to terminate
on 30 days' notice. Under one view, this contract would be
within the Statute of Frauds (excusable nonperformance
is still not performance
within a year). The Second Restatement view makes this
contract enforceable because giving the 30 days' notice is
an alternative form of performance that can occur within
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one year.

*c) Lifetime Contracts*

A contract measured by a lifetime (e.g., a promise to
"employ until I die" or "work until I die") is not within the
Statute because it is capable of performance within a
year, since a person can die at any time.

*d) Performance by One Party*

Even if a contract cannot be performed within one year, if
it has been fully performed on one side, most courts will
find that it is enforceable even though it is oral. Even if a
court were to find that it was not enforceable, the
performing party can sue for restitution for the reasonable
value of the benefit conferred.

220. f. Goods Priced A contract for the sale of goods for a price of $500 or
at $500 or More more is within the Statute of Frauds and generally must
be evidenced by a signed writing to be enforceable.

Note that a writing is sufficient even though it omits or in-

correctly states a term, but the contract is not enforceable
beyond the quantity of goods shown in the writing.

Examples: 1) To meet the Statute of Frauds requirement,

Constructo offers a notation made on Widgetco's office
pad and signed by Widgetco's president reading: "Sold to
Constructo, widgets." The writing is probably not
sufficient because no quantity term is given.

2) Facts the same as above, but the memorandum reads:

"Sold to Constructo, 1,500 widgets." The memorandum is
sufficient to support a contract for up to 1,500 widgets. If
the actual agreement was for 15,000 widgets, the agree-
ment would be enforceable only to the extent of 1,500
widgets. However, if the actual agreement was for only
150 widgets, the actual agreement may be shown.

221.

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1) When Writing *a) Specially Manufactured Goods*
Not Required If goods are to be specially manufactured for the buy-
er and are not suitable for sale to others by the seller
There are three in the ordinary course of his business, the contract is
situations de- enforceable if the seller has, under circumstances that
scribed in UCC reasonably indicate that the goods are for the buyer, made
section 2-201(3) a substantial beginning in their manufacture or commit-
in which con- ments for their purchase before notice of repudiation is
tracts are en- received. [UCC §2-201(3)(a)]
forceable with-
out the writ- *b) Admissions in Pleadings or Court*
ing described If the party against whom enforcement is sought admits
above: in pleadings, testimony, or otherwise in court that the
contract for sale was made, the contract is enforceable
without a writing (but in such a case the contract is not
enforced beyond the quantity of goods admitted). [UCC
§2-201(3)(b)]

*c) Payment or Delivery of Goods*

If goods are either received and accepted or paid for,
the contract is enforceable. However, the contract is not
enforceable beyond the quantity of goods accepted or
paid for. Thus, if only some of the goods called for in the
oral contract are accepted or paid for, the contract is only
partially enforceable. If an indivisible item is partially paid
for, most courts hold that the Statute of
Frauds is satisfied for the whole item.

Examples: 1) Ketty and Lydia orally agree that Lydia

will purchase 150 widgets from Ketty at a price of $10
each. Lydia gives Ketty a check for $70. The contract is
enforceable for seven widgets only.

2) Joe orally contracts to buy a car from Suzette for

$15,000. Joe gives her a $1,000 down payment. Although
Joe has only partially paid for the car, most courts would
hold that the contract is enforceable.

222.
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2) (i) he has reason to know of the confirmation's
Merchants—Con- contents; and
firmatory Memo
Rule (ii) he does not object to it in writing within 10 days of
receipt.
In contracts
between mer-
chants, if one
party, within
a reasonable
time after an
oral agreement
has been made,
sends to the oth-
er party a writ-
ten confirmation
of the under-
standing that is
sufficient under
the Statute of
Frauds to bind
the sender, it will
also bind the re-
cipient if:

223. 4. Effect of Non- unenforceable at the option of the party to be charged

compliance with (i.e., the party being charged may raise the lack of a
the Statute of sufficient writing as an affirmative defense). If the Statute
Frauds is not raised as a defense, it is waived.

Under the major-

ity rule, noncom-
pliance with the
Statute of Frauds
renders the con-
tract

224. 5. Situations in a. Performance

Which the Con-

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tract Is Removed b. Equitable and Promissory Estoppel
from the Statute
of Frauds c. Judicial Admission

225. a. Performance If a seller conveys to the buyer (i.e., fully performs), he

can enforce the buyer's oral promise to pay. Likewise,
1) Land Sale the buyer may seek to specifically enforce an oral land
Contracts sale contract under the doctrine of part performance. Part
performance that unequivocally indicates that the parties
have contracted for the sale of land takes
the contract out of the Statute of Frauds.

226. What constitutes (i) payment (in whole or in part),

sufficient part (ii) possession, and/or
performance in (iii) valuable improvements.
land sales con-
tracts varies
among jurisdic-
tions. Most re-
quire at least two
of the following:

227. a) Specific Per- A purchaser of an interest in land may enforce an oral

formance Only contract in this manner only in equity (i.e., he may sue
only for specific performance, not damages).

228. 2) Sale of Goods (i) the goods have been specially manufactured, or
Contracts
(ii) the goods have been either paid for or accepted.
Part perfor-
mance is suffi- If a sales contract is only partially paid for or accepted,
cient to take a the contract is enforceable only to the extent of the partial
sale of goods payment or acceptance.
contract out of
the Statute of
Frauds when:

229. 3) Services Con- As noted above, an oral contract that cannot be complet-
tracts—Full Per- ed within one year but has been fully performed by one
party is enforceable.
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formance Re-
quired

230. b. Equitable Estoppel is sometimes applied in cases where it would be

and Promissory inequitable to allow the Statute of Frauds to defeat a mer-
Estoppel itorious claim. When a defendant falsely and intentionally
tells a plaintiff that the contract is not within the Statute or
that he will reduce their agreement to a writing, or when
his conduct foreseeably induces a plaintiff to change his
position in reliance on an oral agreement, courts may use
the doctrine to remove the contract completely from the
Statute of Frauds.

231. c. Judicial Ad- If the party asserting the Statute of Frauds defense admits
mission in pleadings or testimony that there was an agreement, it
is treated as though the Statute is satisfied. The contract
will be enforced without a writing.

232. 6. Remedies If If a contract is within the Statute of Frauds and there is

Contract Is With- noncompliance with the Statute with no applicable excep-
in Statute tion, in almost all cases a party can sue for the reasonable
value of the services or part performance rendered, or the
restitution of any other benefit that has been conferred.

This recovery would be in quantum meruit rather than a

suit on the contract. The rationale is that it would be unjust
to permit a party to retain benefits received under the
failed contract without paying for them.

233. 7. Contract Made Most states would answer no, except for contracts involv-
by Agent ing interests in real property. A few states would answer
yes as to all such contracts pursuant to
The problem: A the states' *equal dignities* statutes. However, even
given contract is where written authority would otherwise be required, writ-
required under ten authority may be dispensed with if the agent contract-
state law to be ed in the presence and under the direction of the principal
evidenced by a or if the principal later ratified the contract in writing.
writing. An agent
now purports to
enter into such a
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contract on be-
half of her prin-
cipal. Must the
agent's authority
also be in writ-
ing?

234. G. UNCON- The concept of unconscionability allows a court to refuse

SCIONABILITY to enforce a provision or an entire contract (or to modify
the contract) to avoid "unfair" terms.

235. It is some- 1) substantive unconscionability (i.e., unconscionability

times said that based on price alone) and
there are two
types of uncon- 2) procedural unconscionability (i.e., unconscionability
scionability: based on unfair surprise or
unequal bargaining power).

However, few cases recognize substantive uncon-

scionability based on unfair price alone. Instead, the cas-
es have dealt mostly with procedural unconscionability.

236. 1. Common In- (i) Confession of judgment clauses, which are illegal in
stances of Pro- most states;
cedural Uncon-
scionability (ii) Disclaimer of warranty provisions; and

a. Inconspicu- (iii) "Add-on" clauses that subject all of the property pur-
ous Risk-Shift- chased from a seller to repossession if a newly purchased
ing Provisions item is not paid for.

Standardized Typically, such clauses are found in the fine print ("boiler-
printed form plate") in printed form contracts. Courts have invalidated
contracts often these provisions because they are inconspicuous or in-
contain a comprehensible to the average person, even if brought to
material his actual attention.
provision that
seeks to shift a
risk normally

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borne by one
party to the
other. Examples
of such
provisions are:

237. b. Contracts Courts will deem a clause unconscionable and unen-

of Adhe- forceable if the signer is unable to procure necessary
sion—"Take It or goods, such as an automobile, from any seller without
Leave It" agreeing to a similar provision. The buyer has no choice.

238. c. Exculpatory An exculpatory clause releasing a contracting party from

Clauses liability for his own intentional wrongful acts is usually
found to be unconscionable because such a clause is
against public policy in most states.

Exculpatory clauses for negligent acts may be found to be

unconscionable if they are inconspicuous (as discussed
above), but commonly are upheld if they are in contracts
for activities that are known to be hazardous (e.g., a con-
tract releasing a ski hill operator for liability for negligence
often will be upheld).

239. d. Limitations on inconspicuous. However, if a contract limits a party to

Remedies a certain remedy and that remedy fails of its essential
purpose, a court may find the limitation unconscionable
A contractual and ignore it. Note that under the UCC any limitation
clause limiting li- on consequential damages for personal injury caused
ability for dam- by consumer goods is prima facie unconscionable. [See
ages to proper- UCC §2-719]
ty generally will
not be found Example: An automobile dealership sells a car and the
to be uncon- contract provides that the dealer's liability for defects in
scionable unless the car is limited to repair or replacement.
it is Generally, such a clause is not unconscionable. However,
if a particular customer brings his car back numerous
times for the same problem and the dealer is unable to
effectively fix the car, the remedy fails of its

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essential purpose, and a court may ignore the limiting
clause and allow the normal remedies for breach.

240. 2. Timing formed.

Unconscionabili-
ty is determined
by the
circumstances
as they existed
at the time the
contract was

241. 3. Effect If Court (i) refuse to enforce the contract;

Finds Uncon-
scionable Clause (ii) enforce the remainder of the contract without the un-
conscionable clause; or
If a court finds as
a matter of law (iii) limit the application of any clause so as to avoid an
that a contract unconscionable result.
or any clause
of the con-
tract was uncon-
scionable when
made, the court
may:

242. V. BREACH (i) the promisor is under an absolute duty to perform, and

A. WHEN DOES (ii) this absolute duty of performance has not been dis-
A BREACH OC- charged, then this failure to perform in accordance with
CUR? contractual terms will amount to a breach of the contract.
The nonbreaching party who sues for breach of contract
If it is found that must show that she is willing and able to perform but for
the breaching party's failure to perform.

243. B. MATERIAL OR A breach of contract is minor if the obligee gains the

MINOR substantial benefit of her bargain despite the obligor's
BREACH—COM- defective performance.
MON LAW
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CONTRACTS Examples would be insignificant delays in completing per-
formance or small deficiencies in the quality or quantity of
Once you have performance when precision is not critical.
determined that
there is a breach
of contract, the
next determina-
tion to be made
in
a common law
contract situa-
tion is whether
that breach is
material or mi-
nor.

1. Effect of
Breaches

a. Minor Breach

244. The effect of a provide a remedy for the immaterial breach to the aggriev-
minor (immateri- ed party. The aggrieved party is not relieved of her duty of
al) breach is to performance under the contract.

245. b. Material If the obligee does not receive the substantial benefit of
Breach her bargain as a result of failure to perform or defective
performance, the breach is considered material.

246. If the breach is (i) may treat the contract as at an end, i.e., any duty of
material, the con- counterperformance owed by her will be discharged, and
sequences are
more severe. (ii) will have an immediate right to all remedies for breach
The nonbreach- of the entire contract, including total damages.
ing party

247. c. Minor Breach If a minor breach is coupled with an anticipatory repudi-

Coupled with An- ation, the nonbreaching party may treat it as a material
ticipatory Repu- breach; i.e., she may sue immediately for total damages
diation and is
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permanently discharged from any duty of further perfor-
mance. Indeed, the courts hold that the aggrieved party
must not continue on, because to do so would be a failure
to mitigate damages.

The UCC modifies this to permit a party to complete the

manufacture of goods to avoid having to sell unfinished
goods at the lower salvage value.

248. d. Material In a divisible contract, recovery is available for substantial

Breach of Divisi- performance of a divisible part even though there has
ble Contract been a material breach of the entire contract.

249. 2. Determining *1) Amount of Benefit Received*

Materiality of Look to the extent to which the nonbreaching party will
Breach receive substantially the benefit she could have anticipat-
ed from full performance. The greater the extent, the less
a. General Rule material the breach.

Whether a *2) Adequacy of Damages*

breach is mate- Look to the extent to which the injured party may be
rial or minor is adequately compensated in damages. The greater the
a fact question. extent, the less material the breach.
To make this de-
termination, the *3) Extent of Part Performance*
courts generally Look to the extent the party failing to perform completely
apply the follow- has already performed or made preparations to perform.
ing six criteria The greater the extent, the less material the breach.

*4) Hardship to Breaching Party*

Look to the extent of hardship on the breaching party
should the contract be terminated. If a finding of mate-
riality and termination of the contract would cause great
hardship to the breaching party, the breach is less likely
to be found to be material.

*5) Negligent or Willful Behavior*

Look to the extent of negligent or willful behavior of the
party failing to perform. The greater the extent, the more

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material the breach.

*6) Likelihood of Full Performance*

Look to the extent of likelihood the party who has failed
to perform will perform the remainder of his contract. The
greater the extent, the less material the breach.

250. b. Failure of always be a breach of contract. There are, however, ad-

Timely Perfor- ditional specific rules for determining the materiality of
mance breach by failure of timely performance.

The basic ques-

tion here is
whether the par-
ties to the con-
tract must per-
form on time.

Assuming that
the defaulting
party had a
duty of immedi-
ate performance
when his failure
to perform oc-
curred, then his
failure to perform
on time will

251. 1) Nature of Con- Traditionally, courts have held that if the contract contains
tract or Time of a "time is of the essence" provision, any delay is a material
the Essence Pro- breach of contract. The modern trend, however, is for
vision the court to consider all of the circumstances, including
the time of the essence clause, in determining whether
Unless the na- performance at the time specified is important.
ture of the con-
tract is such as For example, if the parties sign a preprinted form contract
to make perfor- that contains a "time is of the essence" clause and there
mance on the ex- are no surrounding circumstances indicating that perfor-

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act day agreed mance on that date is of vital importance, a court could
upon of vital find that delayed performance is only a minor breach.
importance (e.g., [See Restatement (Second) of Contracts §242(c)]
contract for use
of a wedding
chapel), or the
contract by its
terms provides
that time is of the
essence, failure
by a promisor to
perform at the
stated time will
not be material.
Merely providing
a date for perfor-
mance does not
make time of the
essence.

a) Time of the
Essence

252. 2) When Delay there has been part performance.

Occurs

Delay at the
onset of per-
formance before
the delaying par-
ty has ren-
dered any part
of his agreed-on
performance is
more likely to be
considered ma-
terial than delay
where

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253. 3) Mercantile material.
Contracts

In mercantile
contracts, timely
performance as
agreed is impor-
tant, and unjusti-
fied delay is

254. 4) Land Con- More delay in land contracts is required for materiality
tracts than in mercantile contracts.

255. 5) Availability of Hence, they will tend to find the breach immaterial and
Equitable Reme- award compensation for the delay where possible.
dy

In equity, the
courts generally
are much more
lenient in tolerat-
ing considerable
delay.

256. c. Material the quantity and quality of the performance.

Breach and Sub-
stantial Perfor- If the performance is "substantial," the breach is not ma-
mance terial.

Whether perfor-
mance is "sub-
stantial" de-
pends on

257. C. PER- if goods or their delivery fail to conform to the contract in

FECT TENDER any way, the buyer generally may reject all, accept all, or
RULE—SALE OF accept any commercial units and reject the rest.
GOODS

Article 2 gen-
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erally does not
follow the com-
mon law sub-
stantial perfor-
mance doctrine.
Instead, it fol-
lows the perfect
tender rule—

258. 1. Commercial one that by commercial usage is treated as a single whole

Unit Defined for the
purpose of sale, and division of which materially impairs
A "commercial its value (e.g., place setting of dishes). A commercial unit
unit" is may be a single article (e.g., a machine) or a set of articles
(e.g., a suite of furniture), a quantity (e.g., a bale, a gross),
or any other unit treated in use or in the relevant market
as a single whole. [UCC §2-105(6)]

The test for "commercial unit" is "not only what unit has
been the basis of contract, but also whether the partial ac-
ceptance produces so materially an adverse effect upon
the remainder as to constitute bad faith."
[UCC §2-601, comment 1]

Example: Widgets are always sold in units of 100. Buyer

orders 500 widgets. They arrive but are found to be defec-
tive. Buyer keeps 25 and rejects 475. Buyer is probably
required to reject in units of 100 and the rejection of the
75 above 400 is probably wrongful.

259. 2. Right to Reject A buyer's right to reject under the perfect tender doctrine
Cut Off by Ac- generally is cut off by acceptance.
ceptance

260. Under Article 2, (i) After a reasonable opportunity to inspect the goods,
a buyer accepts she indicates to the seller that they conform to require-
when: (3) ments or that she will keep them even though they fail to
conform;

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(ii) She fails to reject within a reasonable time after tender
or delivery of the goods or fails to seasonably notify the
seller of her rejection; or

(iii) She does any act inconsistent with the seller's owner-
ship.

261. a. Notice (i) The seller could have cured the defect if he had been
told about it; or
If in connection
with rejection the (ii) Between merchants when the seller has, after rejec-
buyer fails to tion, made a request in writing for a full and final written
state that the statement of all defects upon which the buyer proposes
goods have a to rely.
particular defect [UCC §2-605]
that is ascertain-
able by reason- Example: Buyer has ordered blue widgets. Buyer rejects
able inspection, because the shipment did not contain the widget wrench
she cannot rely that, under the contract, went with each widget. Buyer
on that defect to does not give the reason for rejection. If Seller had known
justify rejection the reason, he could have had the necessary number of
or to show sell- widget wrenches at Buyer's business within hours. That
er's breach if: probably would have constituted an adequate cure. If so,
Buyer's rejection is unjustified; she will not be able to rely
on the absence of the wrenches as a reason for rejection
or as the basis for a claim for damages.

262. 3. Buyer's Re- After rejecting goods in her physical possession, the buy-
sponsibility for
er has an obligation to hold them with reasonable care
Goods After Re-at the seller's disposition for a time sufficient to permit
jection the seller to remove them. If the seller has no agent or
place of business within the market area where the goods
a. Buyer Must are rejected, a merchant buyer has an obligation to obey
Hold Goods with any reasonable instructions as to the rejected goods (i.e.,
Reasonable Care she must arrange to reship the goods to a destination
designated by the seller or resell on request of the seller,
if
reasonable). [UCC §2-602]

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263. 3. Buyer's Re- If a seller gives no instructions within a reasonable time
sponsibility for after notification of rejection, the buyer may reship the
Goods After Re- goods to the seller, store them for the seller's account,
jection or resell them for the seller's account. The buyer has a
security interest in rejected goods in her possession for
b. When Seller any part of the price already paid and for expenses rea-
Gives No Instruc- sonably incurred in connection with handling them after
tions on Dispos- rejection. [UCC §2-604]
al of Goods

264. 3. Buyer's Re- If the buyer does resell rejected goods, she is entitled to
sponsibility for have her expenses of selling and any commission ordi-
Goods After Re- narily paid in the trade or, if there is none, a reasonable
jection commission not exceeding 10%. [UCC §2-603(2)]

c. When Buyer
Resells Goods

265. 4. Buyer's Right (i) She accepted them on the reasonable belief that the
to Revoke Ac- defect would be cured and it has not been; OR
ceptance
(ii) She accepted them because of the difficulty of discov-
Once goods are ering defects or because of the seller's assurance that the
accepted, the goods conformed to the contract.
buyer's power to [UCC §2-608]
reject the goods
generally is ter-
minated and the
buyer is obligat-
ed to pay the
price less any
damages result-
ing from the sell-
er's breach.

However, under
limited situa-
tions, a buyer
may revoke an

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acceptance al-
ready made. A
proper
revocation of ac-
ceptance has the
effect of a rejec-
tion.

*a. When Accep-

tance May Be Re-
voked*
*The buyer may
revoke her ac-
ceptance of
goods if the
goods have a
defect that sub-
stantially impairs
their value to her
and*: (2)

266. b. Other Require- 1) Within a reasonable time after the buyer discovers or
ments for Revo- should have discovered the defects; and
cation of Accep-
tance 2) Before any substantial change in the goods occurs that
is not caused by a defect present at the time the seller
Revocation of ac- relinquished possession. [UCC §2-608(2)]
ceptance must
occur: Example: If the buyer receives defective goods and due to
her own fault damages the goods in some other way, she
can no longer revoke acceptance, because the damage
is a substantial change in the goods not caused by the
seller. Similarly, if the buyer receives damaged goods and
then resells the goods, she cannot
revoke acceptance and her only remedy is to recover
damages for the defect

If the buyer sells some but not all of the defective units,

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she can revoke acceptance (within a reasonable time) of
any unsold unit.

267. 5. Exceptions to a. Installment Contracts

the Perfect Ten-
der Rule b. Seller's Right to Cure

268. 5. Exceptions to The right to reject when a contract is an installment con-

the Perfect Ten- tract (i.e., when there is to be more than one delivery)
der Rule is much more limited than in a single delivery contract
situation.
a. Installment
Contracts Installment contracts follow a rule akin to the common
law substantial performance doctrine. In an installment
contract situation, an installment can be rejected only if
the nonconformity substantially impairs the value of that
installment and cannot be cured (see below). In addition,
the whole contract is breached only if the nonconformity
substantially impairs the value of the entire contract.

Example: Steve and Becky enter into a contract under

which Steve is to deliver
to Becky 100 blue widgets on the first day of each month,
and Becky
is to pay Steve $275 by the 10th of each month. Steve
makes a perfect delivery the first two months and Becky
makes the required payments.
On the first day of the third month, Steve sends only 90
widgets. The
10-widget shortfall would be a basis for rejection under
the perfect tender rule, but because this is an installment
contract, Becky cannot reject the installment unless she
can show that the 10-widget shortfall substantially impairs
the value of that installment, and she cannot cancel the
entire contract unless she can show that the shortfall
substantially impairs the value of the entire contract.

269. b. Seller's Right If the buyer has rejected goods because of defects, the
to Cure seller may within the time originally provided for perfor-

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mance "cure" by giving reasonable notice of her intention
1) Single Deliv- to do so and making a new tender of conforming goods
ery Contracts which the buyer must then accept. [UCC §2-508]

a) Seller Can Example: Buyer ordered blue widgets for delivery during
Cure by Notice the first 15 days of June. The widgets are delivered on
and New Tender June 9, but the widget wrenches required by the contract
Within Time for are missing. Seller can cure this defect by giving reason-
Performance able notice of his intention to provide and subsequently
providing wrenches for the widgets by June 15. If he does,
Buyer must accept, or Buyer will breach the contract.

270. b. Seller's Right (i) trade practices or prior dealings with the buyer led the
to Cure seller to believe that the goods would be acceptable, OR

1) Single Deliv- (ii) the seller could not have known of the defect de-
ery Contracts spite proper business conduct (e.g., packaged goods pur-
chased from a supplier).
b) Seller's Right
to Cure Beyond Examples: 1) In the last example above, widgets are
Original Contract delivered without wrenches on June 15. Seller and Buyer
Time have had a number of contracts over the years for the sale
of widgets in which the wrench was a part of the contract.
Ordinarily, the On several occasions, Seller has not been able to deliver
seller has no the wrenches, and on each occasion, Buyer has accepted
right to cure be- the widgets with a reduction in price and purchased the
yond the original wrenches from another source. This time Buyer rejects
contract time. the widgets. Seller will have a reasonable
time after June 15 within which to cure by furnishing the
However, in wrenches.
cases where
the buyer re- 2) Barry ordered 100 barrels of grade A oil from Sonya to
jects a tender be delivered on or before January 1. On January 1, Sonya
of nonconform- delivered to Barry 100 barrels of oil that she had pur-
ing goods that chased from her supplier, Refineco. Upon delivery, Barry
the seller rea- opened a barrel and found that the oil was grade B oil.
sonably believed Barry immediately rejected the delivery. Sonya checked
would be accept- with Refineco and discovered that Refineco had made a
able "with or packaging error and
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without money could replace the oil within two days. Assuming two days
allowance," the is a reasonable time under the circumstances (e.g., if
seller, upon a Barry does not need the oil immediately), Sonya will have
reasonable noti- a right to cure even though the time for performance has
fication to the passed.
buyer, has a
further reason-
able time beyond
the original con-
tract time within
which to make a
conforming ten-
der.

A seller will prob-

ably be found to
have had reason-
able cause to be-
lieve that the ten-
der would be ac-
ceptable if the
seller can show
that (2)

271. 2) Installment Article 2 provides that a defective shipment in an install-

Contracts ment contract cannot be rejected if the defect can be
cured. Ordinarily, defects in the particular goods them-
selves cannot be cured, so the buyer can reject them, but
then might be required to accept substitute goods under
the provisions discussed above. Note that a deficiency in
quantity may be cured by an additional delivery, and a
delivery of
too much may be cured by acceptance or return of a part.
[UCC §2-612]

272. D. ANTICIPATO- Anticipatory repudiation or anticipatory breach is a term

RY REPUDIA- in the law of contracts that describes a declaration by
TION the promising party to a contract that he or she does not
intend to live up to his or her obligations under the contract

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Recall that an anticipatory repudiation can be treated as

an immediate breach of contract.

273. BREACH OF the failure to uphold an express or implied promise to

WARRANTY abide by certain terms and conditions relevant to the sale
or lease of goods

At common law, the rule was caveat emptor—let the

buyer beware. Once goods were accepted, the seller's
obligations were discharged. However, as we have seen,
today sellers give warranties as to the condition of the
goods that apply even after acceptance. Failure to live up
to these warranties constitutes a breach of warranty, for
which a remedy is available.

274. NONMONETARY nonmonetary and monetary.

REMEDIES

There are two

broad branch-
es of reme-
dies available in
breach of con-
tract situations:

275. The primary non- specific performance, but Article 2 has a number of other
monetary reme- specific nonmonetary remedies for certain situations in-
dy for exam pur- volving contracts for the sale of goods.
poses is

276. 1. Specific Per- If the legal remedy is inadequate, the nonbreaching party
formance may seek specific performance, which is essentially an
order from the court to the breaching party to perform or
face contempt of court charges. The legal remedy (dam-
ages) generally is inadequate when the subject matter of
the contract is rare or unique. The rationale is that if the
subject matter is
rare or unique, damages will not put the nonbreaching
party in as good a position as performance would have,
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because even with the damages the nonbreaching party
would not be able to purchase substitute performance.

277. a. Available for goods that are rare or unique at the time performance is
Land and Rare or due (e.g., rare paintings, gasoline in short supply because
Unique Goods of oil embargoes,
etc.).
Specific perfor-
mance is al-
ways available
for land sale con-
tracts because
all land is con-
sidered to be
unique. It is also
available for

278. b. Not Available Specific performance is not available for breach of a con-
for Service Con- tract to provide services, even if the services are rare or
tracts unique. This is because of problems of enforcement (it
would be difficult for the court to supervise the perfor-
mance) and because the courts feel it is tantamount to
involuntary servitude, which is prohibited by the Constitu-
tion.

279. 1) Injunction as In contrast, a court may enjoin a breaching employee from

Alternate Reme- working for a competitor throughout the duration of the
dy contract if the services contracted for are rare
or unique. This is allowed because less court supervision
is required for a negative injunction than for a specific
performance decree, and the prohibition against working
(as opposed to the requirement of working) does not run
afoul of the Constitution. The rationale for this approach
is that an employee providing rare or unique services
expressly or impliedly covenants that she will not work for
a competitor during the contract term.

280. c. Covenant Not (i) the services to be performed are unique (thus render-
to Compete ing money damages inadequate); and

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Most courts will (ii) the covenant is reasonable.
grant an order
of specific per- To be reasonable:
formance to en- (i) The covenant must be reasonably necessary to pro-
force a contract tect a legitimate interest of the person benefited by
not to compete the covenant (i.e., an employer or the purchaser of the
if: covenantor's business);

(ii) The covenant must be reasonable as to its geographic

scope and duration (i.e., it cannot be broader than the
benefited person's customer base and typically cannot be
longer than one or two years); and

(iii) The covenant must not harm the public.

Example: A locksmith agrees to sell his shop to a competi-

tor and agrees not to open a new locksmith shop within
75 miles of his old shop within the next year. The covenant
not to compete probably will be upheld.

281. d. Equitable De- laches, unclean hands, and sale to a bona fide purchaser.
fenses Available

Because specif-
ic performance is
an equitable rem-
edy, it is subject
to equitable de-
fenses.

The most fre-

quently claimed
equitable defens-
es are

282. 1) Laches de- The equitable defense of laches arises when a party
fense to specific delays in bringing an equitable action and the delay prej-
performance udices the defendant (e.g., the delay has substantially
increased the cost or difficulty of performance). Note that

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mere delay itself is not a
ground for this defense.

283. 2) Unclean The unclean hands defense arises when the party seek-
Hands defense ing specific performance is guilty of some wrongdoing in
to specific per- the transaction being sued upon (e.g., the defendant en-
formance tered into the contract because of the plaintiff's lies). Note
that the wrongdoing must be related to the transaction
being sued upon; it is not sufficient that the plaintiff has
defrauded other persons in similar transactions.

284. 3) Sale to a If the subject matter of a goods or land contract has

Bona Fide Pur- already been sold to another who purchased for value
chaser defense and in good faith (i.e., a bona fide purchaser), the right
to specific per- to specific performance is cut off.
formance
Example: Store contracts to sell a specific Van Gogh
painting to Ben. Before Store delivers the painting to Ben,
Carla, who is unaware of Ben's contract with Store, offers
to buy the same Van Gogh from Store. Store accepts
Carla's offer and gives the painting to Carla. Ben may not
obtain specific performance.

285. 2. Nonmonetary If a buyer rightfully rejects goods because they do not

Remedies Under conform to the contract, one of her options is simply to
Article 2 cancel the contract.

a. Buyer's Non-
monetary Reme-
dies

1) Cancellation

286. 2. Nonmonetary (i) The seller becomes insolvent within 10 days after re-
Remedies Under ceiving the buyer's first payment; or
Article 2
(ii) The goods were purchased for personal, family, or
a. Buyer's Non- household purposes.
monetary Reme-
dies
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In either case, the buyer must tender any unpaid portion
2) Buyer's Right of the purchase price to the seller. [UCC §2-502]
to Replevy Iden-
tified Goods - Re-
plevy is to recov-
er or take back
goods that are
being unlawfully
withheld or with-
held from their
rightful owner.

*a) On Buyer's
Prepayment*
If a buyer has
made at least
part payment
of the purchase
price of goods
that have been
identified under
a contract and
the seller has
not delivered the
goods, the buyer
may replevy the
goods from the
seller in two cir-
cumstances:

287. 2. Nonmonetary In addition, the buyer may replevy undelivered, identified

Remedies Under goods from the seller if the buyer, after reasonable effort,
Article 2 is unable to secure adequate
substitute goods (i.e., cover). [UCC §2-716(3)]
a. Buyer's Non-
monetary Reme- Example: Buyer and Seller enter into a contract for the
dies delivery of 10,000 widgets on December 31. Seller, who
has identified goods to the contract (e.g., seller has set
2) Buyer's Right aside 10,000 widgets on his loading dock), refuses to
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to Replevy Iden- deliver. Buyer makes reasonable efforts to find widgets
tified Goods - Re- from another source, but the earliest delivery date he can
plevy is to recov- arrange is March 15. The widgets are needed for Buyer's
er or take back manufacturing operations in February and March. Buyer
goods that are can replevy the goods from Seller.
being unlawfully
withheld or with- However, if the widgets were not to be used by Buyer until
held from their June, widgets for March 15 delivery would probably be
rightful owner. reasonable substitute goods and Buyer could not recover
the widgets from Seller.
*b) On Buyer's In-
ability to Cover*

288. 2. Nonmonetary A right closely related to the buyer's right to replevy is her
Remedies Under right to specific performance "where the goods are unique
Article 2 or in other proper circumstances."

a. Buyer's Non- The court may order specific performance even where the
monetary Reme- goods have not yet been identified to the contract by the
dies seller. The comments to section 2-716 say that inability to
cover is "strong evidence of other circumstances." Thus,
*3) Buyer's Right buyers in inability-to-cover situations have their choice of
to Specific Per- replevin or specific performance remedies.
formance*
Of course, a specific performance remedy is always dis-
cretionary with the court, and unclean hands, laches, etc.,
might bar an equity action but would not affect a replevin
recovery.

289. In any case, keep may be decreed even though the goods have not previ-
in mind that re- ously been identified.
plevin will lie
only for identi-
fied goods, while
specific perfor-
mance

- UCC

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290. b. Seller's Non- If the buyer fails to make a payment due on or before
monetary Reme- delivery, the seller may withhold delivery of the goods. The
dies - UCC seller may also withhold goods when the goods are sold
on credit and, before the goods are delivered, the seller
1) Seller's discovers that the buyer is insolvent. However, in such a
Right to Withhold case, the seller must deliver the goods if the buyer tenders
Goods cash for their payment. [UCC §2-702]

291. b. Seller's Non- If a seller learns that a buyer has received delivery of
monetary Reme- goods on credit while insolvent, the seller may reclaim
dies - UCC the goods upon demand made within 10 days after the
buyer's receipt of the goods. However, the 10-day limi-
2) Seller's Right tation does not apply if a misrepresentation of solvency
to Recover has been made in writing to the particular seller within
Goods three months before delivery. Note that the seller's right to
reclaim the goods is subject to the rights of a buyer in the
a) Right to Re- ordinary course or any other good faith purchaser. [UCC
cover from Buyer §2-702]
on Buyer's Insol-
vency

292. b. Seller's Non- *(1) On Buyer's Insolvency*

monetary Reme-
dies - UCC The seller may stop delivery of goods in the possession
of a carrier or other bailee when he discovers the buyer to
2) Seller's Right be insolvent. Of course, the seller must deliver the goods
to Recover if the buyer tenders cash for their payment.
Goods [UCC §2-705(1)]

*b) Right to Re- *(2) On Buyer's Breach*

cover Shipped The seller may stop delivery of carload, truckload, plane-
or Stored Goods load, or larger shipments of goods when the buyer
from Bailee* breaches the contract or when the seller has a right to
withhold performance pending receipt of assurances.

293. b. Seller's Non- (i) the goods or a negotiable document of title covering
monetary Reme- the goods; or
dies - UCC
(ii) an acknowledgment from a bailee other than the

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*(3) When Goods carrier that it is holding the goods for the buyer. [UCC
May Not Be §2-705(2)]
Stopped*

The seller may

stop delivery of
the goods to the
buyer until the
buyer
receives:

294. (4) Obligation of The seller's notification must come in time to give the
Carrier or Bailee person in possession a reasonable time to stop delivery.
If a negotiable document covers the goods, the carrier
or bailee is not obligated to obey a stop order until the
document is surrendered.

295. 3) Seller's Ability The seller's ability to force goods on a buyer is limited
to Force Goods to an action for price when the seller is unable to resell
on Buyer Limited the goods to others at a reasonable price. (See B.2.b.2),
infra.)
`

296. c. Right to demand assurances that the performance will be forth-

Demand Assur- coming at the proper time. The demand for assurances
ances must be made in writing. Until the party receives adequate
assurances, he may suspend his own performance. [UCC
Under Article 2, §2-609] If the proper assurances are not given within
actions or cir- a reasonable time (i.e., within 30 days after a justified
cumstances that demand for assurances), he may then treat the contract
increase the risk as repudiated.
of nonperfor-
mance by a par- What constitutes an adequate assurance depends on the
ty to the contract facts of the case.
but do not clear-
ly indicate that Examples: 1) Seller hears a rumor, in fact false, that Buyer
performance will is in financial trouble. Seller reasonably believes that the
not be forthcom- rumor may have foundation in fact. He is justified in mak-
ing, may NOT be ing a demand for assurances and withholding any goods

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treated immedi- for which he has not been paid. Buyer, within a reasonable
ately as an an- time, sends a financial report from her banker showing
ticipatory repudi- good financial condition. This is adequate assurance and
ation. Instead, if Seller must resume performance.
there
are reasonable 2) Same facts as above except that Buyer is in bad
grounds for in- financial condition.
security with re- Adequate assurance may require a third party of good
spect to the oth- credit to back up Buyer.
er party's perfor-
mance, a party 3) Same facts as above. Buyer does not give any assur-
may ances. Seller may treat the failure to give assurances as
a repudiation of the contract.

297. B. MONE- they can be proved with reasonable certainty and

TARY REME- could not be avoided with reasonable effort. In cases
DY—DAMAGES of willful breach, courts are more likely to be flexible in
determining the plaintiff's damages alternatives.
The most fre-
quently sought
remedy for
breach of con-
tract is an action
at law for dam-
ages.

Damages can be
recovered only
to the extent ....

298. Compensatory The purpose of contract damages is to give compensation

Damages for the breach—i.e., to put the nonbreaching party in the
position she would have been in had the promise been
performed so far as money can do this. The most common
measure of this is
the value of the breaching party's performance that was
lost (expectation damages), plus incidental and conse-
quential damages, less any loss or cost saved by not

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having to perform. [Restatement (Second) of Contracts
§347]

299. 1) "Standard In most cases, the plaintiff's standard measure of dam-

Measure" of ages will be based on an "expectation" measure, i.e., suf-
Damages—Ex- ficient damages for her to buy a substitute performance.
pectation This is also known as "benefit of the bargain" damages.
Damages

300. 2) Reliance Dam- If the plaintiff's expectation damages will be too spec-
age Measure ulative to measure (e.g., the plaintiff cannot show with
sufficient certainty the profits she would have made if the
defendant had performed the contract), the plaintiff may
elect to recover those damages she has suffered based
on her reasonable reliance on the contract.

Reliance damages award the plaintiff the cost of her

performance; i.e., they are designed to put the plaintiff
in the position she would have been in had the contract
never been formed.

Example: J-Mart gives Sam a "dealer franchise" to sell

J-Mart's products in a stated area for one year. In prepara-
tion for performance, Sam spends money on advertising,
hiring sales personnel, and acquiring premises that can-
not be used for other purposes. J-Mart then repudiates
before performance begins. If it cannot be established
with reasonable certainty what profit Sam would have
made if the contract had been performed (i.e., Sam's
expectation damages), Sam can recover as reliance dam-
ages his expenditures in preparation for performance.

301. 3) Consequential Consequential damages are special damages and reflect

Damages losses over and above standard expectation damages.
These damages result from the nonbreaching
party's particular circumstances. Usually, consequential
damages are lost profits resulting from the breach.

These damages may be recovered only if at the time

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the contract was made, a reasonable person would have
foreseen the damages as a probable result of a breach.

Foreseeability is the key issue for consequential

damages. To recover consequential damages, the plaintiff
must show that the breaching party knew or had reason
to know of the special circumstances giving
rise to the damages.

Example: Alex and Becky make a written contract under

which Alex is to recondition by a stated date a used
machine owned by Becky so that it will be suitable for
sale by Becky to Cindy. Alex knows when they make the
contract that Becky has contracted to sell the machine to
Cindy but knows nothing of the terms of Becky's
contract with Cindy. Because Alex delays in returning the
machine to Becky, Becky is unable to sell it to Cindy and
loses the profit that she would have made on that sale.
Becky's loss of reasonable profit was foreseeable by Alex
as a probable result of the breach at the time the contract
was made.

Compare: Suppose in the above example that the profit

that Becky would have made was extraordinarily large
because Cindy promised to pay an exceptionally high
price as a result of a special need for the machine. Again
Alex is aware of the contract with Cindy but
unaware of its terms. Alex is not liable for Becky's loss
of profit beyond what would ordinarily result from such a
contract. The exceptionally high price paid by Cindy was
not foreseeable by Alex as a probable result of the breach
at the time the contract was made.

302. Note that in con- buyer

tracts for the sale
of goods, only a
_____ may recov-
er consequential
damages.
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303. 4) Incidental Incidental damages are most commonly associated with

Damages contracts for the sale of goods and typically include ex-
penses reasonably incurred by a buyer in inspection, re-
Compensatory ceipt, transportation, care, and custody of goods rightfully
damages may rejected and other expenses reasonably
also include incident to the seller's breach, and by the seller in storing,
incidental shipping, returning, and reselling the goods as a result of
damages. the buyer's breach.

304. 5) Certainty Rule may allow lost profits as damages if they can be made
more certain by observing similar businesses in the area
The plaintiff or other businesses previously owned by the same party.
must prove that
the losses suf-
fered were cer-
tain in their na-
ture and not
speculative. Tra-
ditionally, if the
breaching par-
ty prevented
the nonbreach-
ing party from
setting up a new
business, courts
would not award
lost profits from
the prospec-
tive business as
damages, be-
cause they were
too speculative.

However, mod-
ern courts

305. b. Punitive Dam- Punitive damages, awarded to punish a defendant for

ages wrongful conduct, are generally not awarded in contract
cases.
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306. c. Nominal Dam- Nominal (token) damages (e.g., $1) may be awarded
ages where a breach is shown but no actual loss is proven.

307. d. Liquidated The parties to a contract may stipulate what damages

Damages are to be paid in the event of a breach. These liquidated
damages must be in an amount that is reasonable in view
of the actual or anticipated harm caused by the breach.

308. 1) Requirements (i) Damages for contractual breach must have been diffi-
for Enforcement cult to estimate or ascertain at the time the contract was
of Liquidated formed.
Damages
(ii) The amount agreed on must have been a reasonable
Liquidated dam- forecast of compensatory damages in the case of breach.
age clauses will The test for reasonableness is a comparison
be enforceable if between the amount of damages prospectively probable
the following two at the time of contract formation and the liquidated dam-
requirements are ages figure. If the liquidated damages amount is unrea-
met: sonable, the courts will construe this as a penalty and will
not enforce the provision.

309. a) UCC Rule actual damages

The UCC allows a Even if the clause was not a reasonable forecast of
court to consider damages at the time of the contract formation, it will be
____ to validate valid if it was reasonable in light of the subsequent actual
a liquidated dam- damages. [UCC §2-718(1)]
ages clause.

310. 2) Liquidated If the above requirements are met, the plaintiff will receive
Damages Recov- the liquidated damages amount. Most courts hold this is
erable Even If No so even if no actual money or pecuniary damages have
Actual Damages been suffered. Should one or both of the above require-
ments not be met, the provision fails and the plaintiff will
recover only those damages that she can prove.

311. 3) Effect of Elect- Should a contract stipulate that the plaintiff may elect
ing Liquidated or to recover liquidated damages set by a clause or actual
Actual Damages
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damages, the liquidated damages clause may be unen-
forceable.

312. 2. Contracts for

The buyer's basic damages where the seller does not
Sale of Goods deliver or the buyer properly rejects or revokes her accep-
tance of tendered goods consist of the difference
a. Buyer's Dam- between the contract price and either the market price or
ages the cost of buying replacement goods (i.e., cover), plus
incidental and consequential damages (see
1) Seller Does above), if any, less expenses saved as a result of the
Not Deliver or seller's breach.
Buyer Rejects
Goods or Re- In the case of a seller's anticipatory repudiation, the buy-
vokes Accep- er's damages are measured as of the time she learns of
tance the breach.

313. 2. Contracts for

If the buyer measures damages by the difference be-
Sale of Goods tween contract price and market price, market price usu-
ally is determined as of the time the buyer learns of the
a. Buyer's Dam- breach and at the place of tender. [UCC §2-713]
ages

1) Seller Does
Not Deliver or
Buyer Rejects
Goods or Re-
vokes Accep-
tance

*a) Difference
Between Con-
tract Price and
Market Price*

314. Note that the delivery.

buyer's damages
are measured as
of the time she
learns of the

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breach, while the
seller's damages
are measured as
of the time for

315. 2. Contracts for Cover is the usual measure of damages for a buyer.
Sale of Goods
Typically, if a buyer is not sent the goods contracted for, he
a. Buyer's Dam- will go out into the marketplace to buy replacement goods.
ages If the buyer chooses the cover measure (i.e., difference
between contract price and cost of buying replacement
*b) Difference goods), the buyer must make a reasonable contract for
Between substitute goods in good faith and without
Contract Price unreasonable delay. [UCC §2-712]
and Cost of
Replacement Example: Seller and Buyer have a contract for the sale of
Goods—"Cov- 10,000 widgets at $1 per widget. Seller does not deliver.
er"* At the time and place for determining market price, the
average price of widgets is $1.05. However, Buyer made
a replacement contract within a reasonable time and in
good faith at a price of $1.07. Buyer can recover $700
based on her replacement costs. If, on the
other hand, Buyer could have bought substitute widgets
for $1.03 while the general market price was $1.05, but
she chose not to cover, she could recover $500 based on
the difference between contract and market prices, rather
than being limited to her cover costs.

316. 2) Seller Deliv- *a) Warranty Damages*

ers Nonconform- If the buyer accepts goods that breach one of the seller's
ing Goods that warranties, the buyer may recover as damages "loss re-
Buyer Accepts sulting in the normal course of events from
the breach." The basic measure of damages in such a
case is the difference between the value of the goods
as delivered and the value they would have had if they
had been according to contract, plus incidental and con-
sequential damages. [UCC §2-714]

*b) Notice Requirement*

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To recover damages for any defect as to accepted goods,
the buyer must, within a reasonable time after she dis-
covers or should have discovered the defect, notify the
seller of the defect. If she does not notify the seller within a
reasonable time, she loses her right to sue. "Reasonable
time" is, of course, a flexible standard.

317. 3) Seller Antici- the difference between the market price at the time the
patorily Breach- buyer learned of the breach and the contract price.
es Contract

Under section
2-713, the mea-
sure of dam-
ages when the
seller anticipato-
rily breaches the
contract is

318. 4) Consequential (i) he had reason to know of the buyer's general or partic-
Damages ular requirements, and

As noted above, (ii) the subsequent loss resulting from those needs could
a seller is liable not reasonably be prevented by cover. Particular needs
for consequen- must be made known to the seller, but general
tial damages requirements usually need not be. [UCC §2-715(2)]
arising from his
breach if: a) Goods for Resale
If the buyer is in the business of reselling the goods, the
seller is deemed to have knowledge of the resale.

b) Goods Necessary for Manufacturing

If a seller knows that the goods he provides are to be
used in the manufacturing process, he should know that
his breach would cause a disruption in production leading
to a loss of profits.

319. b. Seller's Dam- The seller's basic damages when the buyer refuses to
ages accept goods or repudiates are either the *difference

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between the contract price and the market price* OR
1) Buyer Refuses
to Accept Goods the *difference between the contract price and the resale
or Anticipatori- price of the particular goods, plus incidental (but not con-
ly Breaches Con- sequential) damages, if any, less expenses saved as a
tract result of the breach.*

320. If damages lost profits plus incidental damages.

based on the
difference be-
tween the con-
tract price and
market or resale
price do not put
the seller in as
good a position
as performance
would have, then
the seller may re-
cover

321. In the case of a the suit comes to trial before the time for performance, in
buyer's anticipa- which case damages are measured as the time the seller
tory breach, the learned of the breach.
seller's damages
are measured as
of the actual time
for performance,
unless

322. *a) Difference delivery.

Between Con-
tract Price and
Market Price*
The market price
is measured as
of the time and at
the place for

323.
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*b) Difference This is the usual measure of a seller's damages. If the
Between Con- seller chooses to resell, he must do so under the provi-
tract Price and sions of section 2-706, which requires a good
Resale Price* faith, commercially reasonable sale that may be either
private or public (auction).

In the case of a private sale, the breaching buyer must be

given reasonable notice of intention to resell. In the case
of an auction sale, the sale must be at a usual market for
such goods if such a market is reasonably available.

Notice of the sale must be given to the breaching buyer

unless the goods are perishable or threaten to decline
rapidly in value. Only existing and identified goods may be
sold, unless there is a market in futures for the particular
goods. The seller may buy the goods at an auction sale.

324. *c) Damages *lost volume seller*, because although he is able to resell
Based on Lost the goods for the same or similar price as in the initial
Profits* contract, he loses volume of business: But for the buyer's
breach, the seller would have made two sales instead of
The previous one.
two measures of
damages might
not give ade-
quate compen-
sation for the
buyer's breach in
situations where
the seller can
obtain or manu-
facture as many
goods as he
can sell (e.g.,
a car dealer-
ship). In such a
case, the seller is
known as a

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325. Generally, lost the contract price with the breaching buyer minus cost to
profit is mea- the seller.
sured by
"Lost Volume Sale" Example: Seller, a distributor of wid-
gets, can get all of the widgets he needs for sale. He
makes a contract to sell 10,000 widgets to Buyer at a price
of $1 per widget. Buyer repudiates the contract. Seller
resells the widgets he had identified to Buyer's contract
to Z for $1 per widget. If damages are measured by the
difference between the contract price and resale price,
Seller will be denied recovery. However, assuming Seller
paid 85¢ per widget for these widgets, his lost profit on
the Buyer deal is $1,500 ($10,000 less $8,500), because
even if Buyer had not breached, Seller would have been
able to supply Z with widgets. Because Buyer's breach did
not enable Seller to make the sale to Z, and because the
sale to Z would have been made in any event, the only
way to make Seller whole is to allow him to recover his
lost profits, i.e., $1,500. If Seller would have incurred sales
commissions of $500 and delivery expenses of $100 if
Buyer had taken the goods, but does not now incur those
expenses, the saved expenses reduce the
recovery. Therefore, the recovery would be $900 ($1,500
less saved expenses of $600).

Compare: Seller and Buyer enter into a contract for the

sale of a particular painting by van Gogh at a price of
$25,000. Seller paid $15,000 for the painting two years
earlier. Buyer repudiates. Seller resells to Z at $24,000.
Seller's measure of damages is $1,000 plus incidental
damages. Seller cannot get the $10,000 lost profit mea-
sure (i.e., the difference between the contract
price and what Seller paid for the painting) because there
is only one painting, and Seller could not have made the
sale to Z but for Buyer's repudiation.

326. 2) Action for 1) the buyer has accepted the goods and has not paid, or
Price
2) has not accepted the goods, and the seller is unable to
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the seller may resell them at any reasonable price, or
maintain an ac-
tion against the 3) if the goods have been lost or damaged at a time the
buyer for the full risk of loss was on the buyer
contract price if
(3)

327. 3. Contracts for the difference between the contract price and the fair
Sale of Land market value of the land.

The standard
measure of dam-
ages for breach
of land sale con-
tracts is

328. 4. Employment Irrespective of when the breach occurs—i.e., before per-

Contracts formance, after part performance, or after full perfor-
mance, the standard measure of the employee's dam-
In employment ages is the full contract price.
contracts, check
to see whether
the breach was
by the employer
or the employee.

a. Breach by Em-
ployer

329. 4. Employment If an employee materially breaches an employment con-

Contracts tract, the employer is entitled to recover the cost of replac-
ing the employee (i.e., the wages the employer must pay
In employment to a replacement employee minus the breaching employ-
contracts, check ee's wages). The breaching employee
to see whether may offset money owed for work done to date.
the breach was
by the employer
or the employee.

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b. Breach by Em-
ployee

330. c. Employment at Many employment relationships can be characterized as

Will employment at will, which means employment may be
terminated at any time for any reason. Thus termination
of at-will employment by either party does not result in
breach. A position characterized as
"permanent" creates an employment-at-will relationship.

331. 5. Construction *1) Breach Before Construction Started*

Contracts If the breach occurred before construction started, the
builder is entitled to the profits he would have derived from
If construction the contract.
contracts are in-
volved, check to *2) Breach During Construction*
see whether the If the breach occurs during construction, the builder is
owner or the entitled to any profit he would have derived from the
builder is breach- contract plus any costs he has incurred to date. The
ing. formula is also stated as the contract price minus the cost
of completion. Either formula will give the same result.
*a. Breach by
Owner* *3) Breach After Construction Completed*
If the breach occurs after construction has been complet-
If the owner has ed, the builder is entitled to the full contract price plus
breached, check interest thereon.
to see when the
breach occurred.

332. 5. Construction *1) Breach Before Construction Started*

Contracts If the builder breaches before construction, the owner's
measure of damages is the cost of completion, i.e., the
*b. Breach by amount above the contract price that it will cost to
Builder* get the building completed plus reasonable compensation
If the breach is for any delay in performance.
by the builder,
check to see *2) Breach During Construction*
when it occurred. If the builder breaches after partially performing, the own-
er is entitled to the cost of completion plus reasonable

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compensation for any delay in performance.
If, however, completion would involve undue economic
waste, the measure of damages will be the difference
between the value of what the owner would have received
if the builder had properly performed the contract and the
value of what the owner actually received.

Example: Homeowner and Builder enter into a contract to

build a house. The contract provides, among other things,
that all of the plumbing pipes will be copper. After the
plumbing is installed throughout the house, but before
construction of the house is completed, Homeowner dis-
covers that the pipes installed were made of polyvinyl
chloride ("PVC"), and not copper. Homeowner insists that
Builder remove the entire plumbing system and replace
the PVC pipes with copper pipes. The house with PVC
pipes would be valued at $500 less than it would have
been had copper pipes been installed. However, it would
cost Builder $10,000 in labor and materials to rip out the
PVC pipes and replace them with copper pipes. Result:
Builder would not be compelled to replace the pipes,
and Homeowner's damages would be $500, which may
be offset against the amount owed to Builder.

*3) Breach by Late Performance*

If the builder completes performance, but it is late, the
owner has a right to damages for any loss incurred by not
being able to use the property when performance
was due, e.g., loss of reasonable rental value when prop-
erty could have been leased. However, if damages for this
"lost use" are not easily determined or were
not foreseeable at the time the contract was entered into,
the owner can recover only the interest on the value of
the building as a capital investment.

333. c. Restoration Moreover, courts are split on the result when a party
and Economic contracts to restore property and willfully refuses to do
Waste so because it is much more costly than any diminution in
value of the property.
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Usually, when a
building contract Example: Farmer and GasCo enter into a two-year con-
is not proper- tract that permits GasCo to explore Farmer's property and
ly performed, the extract any natural gas it finds in exchange for a fixed sum
owner is entitled and a promise to restore the land to its
to the cost of pre-exploration status upon completion of the two-year
fixing the defect. term. At the end of the term, GasCo determines that it will
However, as not- cost $200,000 to restore the property. Although it cannot
ed in the pipes be used for farming, the land has lost
example above, only $5,000 in value. Courts are split on whether GasCo
unless there is must pay the $200,000 to restore the property or only
special signifi- the $5,000 loss in value. GasCo will argue that to pay
cance attached the $200,000 is economic waste. Farmer will argue that it
to use of a par- bargained for the restoration and GasCo will be unjustly
ticular item (e.g., enriched if it does not have to follow through—giving
the owner is the GasCo a $195,000 windfall at Farmer's expense.
CEO of
the particular
brand of cop-
per pipe speci-
fied) and that sig-
nificance is com-
municated to the
builder, a court
will not order a
remedy that re-
sults in undue
economic waste.

334. 6. Contracts Call- only a partial breach. The aggrieved party is limited to re-
ing for Install- covering only the missed payment, not the entire contract
ment Payments price. However, the contract may include an acceleration
clause making the entire amount due on any late pay-
If a contract calls ment, in which case the aggrieved party may recover the
for payments in entire amount.
installments and
a payment is not
made, there is

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335. 7. Avoidable could have been avoided with reasonable effort. Thus,
Damages (Miti- she must refrain from piling up losses after she receives
gation) notice of the breach; she must not incur further expen-
ditures or costs, and she must make reasonable efforts
Under the to cut down her losses by procuring a substitute perfor-
common law, mance at a fair price. Should she not do so, she will not be
the nonbreach- allowed to recover those damages that might have been
ing party can- avoided by such mitigation after the breach. Generally, a
not recover dam- party may recover the expenses of mitigation.
ages that

336. a. Employment If the breaching employer can prove that a comparable job
Contracts - Duty in the same locale was available, then contract damages
to Mitigate against that breaching employer for lost wages will be re-
duced by the wages that the plaintiff would have received
from that comparable job.

337. b. Manufacturing Generally, in a contract to manufacture goods, if the per-

Contracts - Duty son for whom the goods are being manufactured breach-
to Mitigate es, the manufacturer is under a duty to mitigate by not
continuing work after the breach. However, if the facts are
such that completion of the manufacturing project will de-
crease rather than increase damages, the manufacturer
has a right to continue.

Example: Partly manufactured goods may be without

value because they cannot be sold. The nonbreaching
manufacturer may complete production and recover for
his expenses in doing so, because finished goods usually
can be resold, and the damages will be decreased as a
result.

338. c. Construction A builder does not owe a duty to avoid the consequences
Contracts - Duty of an owner's breach, e.g., by securing other work, but
to Mitigate does have a duty to mitigate by not continuing work after
the breach. Again, however, if completion will decrease
damages, it will be allowed.

339. Under Article 2, the rule of mitigation generally does not

apply.
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d. Contracts for
Sale of Goods - An injured buyer is not required to cover, and an injured
Duty to Mitigate seller is not required to resell. Market damages are always
available if the buyer does not cover or the seller does not
resell. Recall, however, that the seller generally cannot
bring an action against the buyer for the full contract price
(rather than market or resale damages) unless the goods
cannot be resold
at a reasonable price or were damaged or lost when the
risk of loss was on the buyer.

340. C. RESTITUTION As an alternative to the contract damages discussed

above, restitution may be available in a contract-type
situation. Restitution is not really part of contract law,
but rather is a distinct concept. Restitution is based on
preventing unjust enrichment when one has conferred a
benefit on another without gratuitous intent. Restitution
can provide a remedy not only when a contract exists
and has been breached, but also when a contract is
unenforceable, and in some cases when no contractual
relationship exists at all between the parties.

341. When a contract 1) an action for an implied in law contract,

is unenforceable 2) an action in quasi-contract, or
or no contract 3) an action for quantum meruit.
between the par-
ties exists, an
action to recov-
er restitutionary
damages often is
referred to as (3)

342. 2. Measure of the value of the benefit conferred. Although this is usually
Damages based on the benefit received by the defendant (e.g.,
the increase in value of the defendant's property or the
Generally, the value of the goods received), recovery may also be mea-
measure of resti- sured by the "detriment" suffered by the plaintiff (e.g., the
tution is reasonable value of the work performed or the services
rendered) if the benefits are difficult to measure or the

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"benefit" measure would achieve an unfair result.

Example: Homeowner hires Painter to paint Homeown-

er's house in exchange for $5,000. When the job is 70%
complete, Homeowner orders Painter to stop
because Homeowner does not like the new color. The
value of the work performed thus far is $4,000. Although
the value of Homeowner's house might not have been
increased by the partially finished paint job, Painter may
recover in a restitutionary action the $4,000 value of the
services rendered.

343. 3. Specific Appli- sue for restitution to prevent unjust enrichment.

cations of Resti-
tution Damages Note that if the plaintiff has fully performed, he is limited
to his damages under the contract. This may be less than
a. When Contract he would have received in a restitutionary action because
Breached a restitutionary remedy is not limited to the contract price
(see example below).
When a con-
tract has been
breached and
the nonbreach-
ing party has not
fully performed,
he may choose
to cancel the
contract and

344. 1) "Losing" Con- (i.e., a contract in which the actual value of the services
tracts or goods to be provided under the contract is higher than
the contract price), because normal contract expectation
A restitutionary damages or reliance damages would be for a lesser
remedy often is amount.
desirable in the
case of a "los- Example: Owner and Contractor enter into a contract
ing" contract under which Contractor is to remodel Owner's kitchen for
$30,000, to be paid on completion. It turns out Contractor
underestimated the cost of the remodel

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by failing to take into account increasing supply costs.
Contractor estimated that the job would end up costing
him $33,000. When the remodel was nearly complete,
Owner told Contractor that he was out of funds for home
improvements and could not pay him.
Contractor ceased work on the job. At that point, Con-
tractor had spent $32,000 on the remodel. Contractor
may recover the $32,000 in restitution, even though his
contract damages would have been only $30,000.

345. 2) Breach by If the breach was intentional, some courts will not grant
Plaintiff the breaching party restitution; modern courts, however,
will permit restitutionary recovery but limit it to the contract
Typically, the price less damages incurred as a result of the breach.
plaintiff will be
seeking resti- Example: Client hires Attorney to represent Client in a
tution because contract dispute. Attorney prepares the case, but with-
the defendant draws without good cause. The case is settled favorably
breached the for Client. Modern courts will allow Attorney to recover for
contract. Howev- the value of the services he rendered to
er, under some Client, up to the contract price, reduced by the reasonable
circumstances, a amount Client had to expend to hire another attorney.
plaintiff may
seek restitution
even though
the plaintiff is
the party who
breached.

346. a) Restitution of When the buyer breaches, the seller may keep advance
Advance Pay- payments totaling 20% of the purchase price or $500,
ments or Deposit whichever is less. The balance must be returned to the
If Buyer of Goods buyer. [UCC §2-718(2)(b)]
in Breach

Article 2 has
very specific
rules concerning
whether and how

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much a
breaching buy-
er can recover
of advance pay-
ments. If the buy-
er has paid part
of the purchase
price in advance
and then breach-
es the contract,
he can usually
recover some of
the payments.

(1) General Off-

set Provision

347. Restitution of the excess of the buyer's payments over the amount of
Advance Pay- liquidated damages. [UCC §2-718(2)(a)]
ments or Deposit
If Buyer of Goods
in Breach

(2) Effect of
Liquidated Dam-
ages Provision

If there is a valid
liquidated dam-
ages clause, the
seller is required
to
refund only

348. Restitution of the seller cannot prove greater actual damages. If the
Advance Pay- seller can prove damages in excess of 20% of the price
ments or Deposit or $500, he may recover them. Even if he cannot prove
If Buyer of Goods actual damages beyond the offset, he is additionally enti-
in Breach

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tled to incidental damages and the value of any benefits
(3) Seller's Right received by the buyer.
to Greater Dam-
ages

The general off-

set rule above
applies only if

349. b. When Restitution may be available in a quasi-contract action

Contract when a contract was made but is unenforceable and
Unenforce- unjust enrichment otherwise would result.
able—QuasiCon-
tract Remedy Examples: 1) Aristotle hires Derek to sign autographs
in Aristotle's sporting goods store one day next month
and gives Derek half of his $1,000 fee upon making the
contract. Derek then dies and so is discharged from his
obligation to perform. Aristotle can recover the $500 from
Derek's estate as restitution in quasi-contract.

2) Owner hires Contractor to repair Owner's house. After

Contractor has completed half of the repair work, the
house is destroyed by a tornado. Although the parties will
be discharged for impossibility, Contractor will be able to
recover in restitution for the valuable improvements made
to the house before it was destroyed.

3) Landlord promises to sell Tenant five acres of a

1,000-acre tract that Tenant is leasing, but the contract
fails to state which five acres. Tenant plants fruit trees on
the five acres that he thinks were intended. Tenant cannot
enforce the promise because it does not specify which
five acres were intended, but he can recover restitution in
a quasi-contract action for the value of the fruit trees.

350. c. When No (i) The plaintiff has conferred a benefit on the defendant
Contract by rendering services or expending properties;
Involved—Quasi-
Contract (ii) The plaintiff conferred the benefit with the reasonable

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Remedy expectation of being compensated for its value;

Restitution may (iii) The defendant knew or had reason to know of the
also be available plaintiff's expectation; and
in a quasi-con-
tract action when (iv) The defendant would be unjustly enriched if he were
there is no con- allowed to retain the benefit without compensating the
tractual relation- plaintiff.
ship between the
parties if: Example: Doctor witnesses an automobile accident and
rushes to aid an unconscious victim. Doctor can recover
the reasonable value of his services.

Note: Where the parties are in a close relationship to

one another, it is usually presumed that the benefits were
given gratuitously and the party claiming relief bears the
burden of showing that they were conferred with an ex-
pectation of being paid therefor.

351. D. RESCISSION Rescission is a remedy whereby the original contract is

considered voidable and rescinded. The parties are left
as though a contract had never been made.

352. The grounds for a. Mutual mistake of a material fact;

rescission must
have occurred ei- b. Unilateral mistake if the other party knew or should have
ther before or known of the mistake;
at the time the
contract was en- c. Unilateral mistake if hardship to the mistaken party is so
tered into. The extreme it outweighs the other party's expectations under
grounds are: (5) the contract;

d. Misrepresentation of fact or law by either party as to a

material factor in the negotiations that was relied upon;
and

e. Other grounds, such as duress, undue influence, ille-

gality, lack of capacity, and failure of consideration.

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2. Defenses - Generally all equitable defenses (e.g., lach-

es, unclean hands) are available in a rescission action.
Note that the plaintiff's negligence is not a defense.

3. Additional Relief
If the plaintiff has paid money to the defendant, she is
entitled to restitution in addition to rescission.

353. E. REFORMA- Reformation is the remedy whereby the writing setting

TION forth the agreement between the parties is changed so
that it conforms to the original intent of the parties.

354. 1. Grounds for (i) an agreement between the parties,

Reformation
(ii) an agreement to put the agreement in writing, and
a. Mistake
(iii) a variance between the original agreement and the
To reform a con- writing.
tract because of
mistake, there
must be:

355. 1. Grounds for If a writing is inaccurate because of a misrepresentation,

Reformation the plaintiff can choose between reformation and avoid-
ance.
b. Misrepresen-
tation To qualify for reformation, the misrepresentation must
relate to the content or the legal effect of the record.

The court will reform the writing to reflect the expressed

intent of the parties. Misrepresentations as to the subject
matter of the agreement are not grounds for reformation
because the court will not remake the parties' bargain.
Rescission and damages are the proper remedy for that.

Example: Seller owns Blackacre, which is encumbered

by a mortgage. Seller and Buyer agree that Buyer will
purchase Blackacre subject to the mortgage. Buyer does

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not agree to assume the mortgage. If Seller inserts
a clause under which Buyer agrees to assume the mort-
gage and Buyer signs without knowledge of this, Buyer is
entitled to reformation. [See
Bradshaw v. Provident Trust Co., 158 P. 274 (Or. 1916)]

356. 2. Negligence Failure to read the record of the agreement does not
Does Not Bar Re- preclude a party from obtaining reformation.
formation In nearly every case in which the record does not reflect
the agreement, either one or both parties have failed to
read it.

357. 3. Clear and Con- The variance between the antecedent agreement and
vincing Evidence the writing must be established by clear and convincing
Standard & Re- evidence.
formation

358. 4. Parol Evidence The parol evidence rule is not applied in reformation
Rule and Statute actions. Likewise, the majority rule is that the Statute
of Frauds Do Not of Frauds does not apply—but many courts will deny
Apply in Refor- reformation if it would add land to the contract without
mation complying with the Statute of Frauds.

359. 5. Defenses to In addition to the general equitable defenses, the exis-

Reformation tence of a bona fide purchaser for value is also a defense
to reformation. If the subject matter of the contract is sold
to a bona fide purchaser, reformation will not be allowed.
Similarly, reformation is not permitted if the rights of third
parties will be unfairly affected.

360. F. STATUTE four-year statute of limitations.

OF LIMITATIONS
UNDER UCC

States have en-

acted differing
statutes of lim-
itation for con-
tracts actions
in general, and
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some have spe-
cific limitations
periods for spe-
cific types of
contracts.

For sales con-

tracts, however,
the UCC pro-
vides for a

361. 1. Parties May The parties to a sales contract may shorten the limitations
Agree to Shorter period by agreement to no lessthan one year, but they
Period instead of may not lengthen the period.
SOL

362. 2. Accrual of Ac- a party can bring suit, i.e., when the breach occurs. The
tion for SOL statutory period begins to run regardless of whether the
aggrieved party knows about the breach.
The statutory pe-
riod begins to
run when the
cause of ac-
tion accrues. The
cause of action
accrues when

363. 3. Breach of War- *a. Warranty Extends to Future Performance*

ranty Actions If there is an express warranty that explicitly extends to fu-
ture performance of the goods, the four-year period does
For a breach not begin to run until the buyer should have discovered
of warranty ac- the breach.
tion, the breach
occurs and the Example: Buyer purchases a lawnmower from Seller. In
limitations peri- the contract, Seller specifically warrants that all parts will
od begins to be free from defect for five years. Two years after the
run upon deliv- sale, one of the blades breaks in two. The four-year period
ery of the goods. begins to run on the day the blade broke.
This is true even

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if the buyer *b. Implied Warranties Breached on Delivery*
does not discov- Because implied warranties cannot "explicitly" extend to
er the breach un- future performance, they are breached, if at all, upon
til much later. delivery.

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