Contracts

Professor Luke Scheuer

Fall 2024
 What is a Contract?
A promise?
Is every promise a contract?
I promise to walk your dog?
I promise to give someone a free meal for nothing
in return?
I promise to buy your car for $1,000 and you
promise to sell it to me for that price?

Class #1
 What is a Contract (cont’d)?
Rest. 2d Contracts
§1. CONTRACT DEFINED
A contract is a promise or a 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.
 What is a Contract (cont’d)
Rest. 2d Contracts § 17 - Requirement of a Bargain
(1) Except as stated in Subsection (2), the
formation of a contract requires a bargain in
which there is a manifestation of mutual
assent to the exchange and a
consideration.
(2) Whether or not there is a
bargain a contract may be formed
under special rules applicable to
formal contracts or under the rules
stated in §§ 82-94 (e.g., a promise to
perform notwithstanding (1) statute of limitations,
(2) discharge in bankruptcy, (3) contract voidable
because entered into by a minor, etc.)
Overview – What We Will Cover
(1) contract formation (do the parties even have deal
that the law will enforce?)
(2) contract defenses (can either party get out of the
deal?)
(3) contract remedies (what does one party get if the
other party breaches?)
(4) contract meaning (what have the parties agreed
to do?)
(5) contract performance and breach (in what order
must the parties perform, and what happens if one
party does not properly perform?)
Why Do We Have the Contract Law That
We Have?
CONTRACT LAW POLICY
A. Predictability – promotes the commercial exchange
of goods and services
B. Freedom of Contract – encourages that exchange in
a free market economy
C. Fairness – furthers contract-making under rules that
are fair and just
D. Efficiency – encourages “efficient” contracting and
“efficient” breaches (e.g., law generally favors damages
to non-breaching party over specific performance;
court thus does not need to supervise ongoing
performance; non-breaching party generally required
to mitigate, i.e., take action to reduce its damages)
 An Example
Ana and Betty negotiated the purchase by Ana
from Betty of Betty’s house and land for Ana to use
as her home
Ana was the religious leader of Betty’s church
Ana, her lawyer, and Betty attended the
negotiations, at which Betty agreed to sell at a
price that was 15% less than the value
If Betty sued, seeking to rescind the contract, how
would a court consider the policies discussed
above?
What are the Sources of Contract Law?
Common law (judge-made), found by reading
cases and generally summarized in
Restatement 2d Contracts
Uniform Commercial Code (uniform statute
enacted by each of the States, with some
variations)
Other state and federal statutes
 What is the Restatement 2d of
Contracts?
Each Restatement of Law is essentially is a
summary of the judge-made, common law (i.e.,
case law) precedent and doctrines that
developed gradually over time because of the
principle of stare decisis, prevailing in the state
of the U.S. (not a statute)
Prepared by the American Law Institute (judges,
academics and practitioners) since 1923
Effect is 2-way --- courts subsequently may “adopt”
the various majority or minority rules set forth in
the restatement
What is the UCC (and, in particular, Art.
2 of the UCC)?
The Uniform Commercial Code (UCC) is a uniform
state law, drafted by the National Conference of
Commissioners on Uniform State Laws and the
American Law Institute and adopted on a state-by-
state basis
UCC Article 2 (aka “Sales”) applies to “transactions
in goods,” which includes most contracts for the
sales of goods
If UCC applies, the common law also applies unless
displaced by a specific provision of the UCC
Common Law (Rest. 2d) and UCC Article
2 – Scope Further Considered
UCC – Transactions in Goods
§ 2-102. Scope; Certain Security and
Other Transactions Excluded From This
Article.
Unless the context otherwise requires, this Article
applies to transactions in goods; it does
not apply to any transaction which although in the
form of an unconditional contract to sell or present sale is
intended to operate only as a security
transaction nor does this Article impair or repeal
any statute regulating sales to consumers, farmers or
other specified classes of buyers.
 UCC Article 2 – Scope (cont’d)
§ 2-105. Definitions: Transferability;
"Goods"; "Future" Goods; "Lot";
"Commercial Unit".
(1) "Goods" means all things (including specially
manufactured goods) which are movable at the time of
identification to the contract for sale other than the money
in which the price is to be paid, investment securities
(Article 8) and things in action. "Goods" also includes
the unborn young of animals and growing crops and
other identified things attached to realty as described
in the section on goods to be severed from realty
(Section 2-107).
 Why the UCC for “Transactions in
Goods?”
Goods transactions are a core part of a
commercial economy
UCC § 1-103. Construction of Uniform
Commercial Code to Promote its Purposes
and Policies: Applicability of
Supplemental Principles of Law.
(a) The Uniform Commercial Code must be liberally
construed and applied to promote its
underlying purposes and policies, which are:
(1) to simplify, clarify, and modernize the
law governing commercial transactions; (2) to permit
the continued expansion of commercial
practices through custom, usage, and
agreement of the parties; and (3) to make uniform
the law among the various jurisdictions.
Why Do Both UCC + Common Law apply
to “Transactions in Goods?”
UCC § 1-103. Construction of Uniform
Commercial Code to Promote its
Purposes and Policies: Applicability of
Supplemental Principles of Law.
(b) Unless displaced by the particular
provisions of the Uniform Commercial Code, the
principles of law and equity, including
the law merchant and the law relative
to capacity to contract, principal and agent,
estoppel, fraud, misrepresentation, duress, coercion,
mistake, bankruptcy, and other validating or
invalidating cause supplement its provisions.
 UCC Article 2 – Scope - Contracts
Involving Both Goods and Services
If the transaction involves both (1) goods and (2)
services and/or real estate, then:
Vast majority of jurisdictions “apply Article 2 if the
‘predominant purpose’ of the whole transaction
was a sale of goods, and in that event, the majority
usually applies Article 2 to the whole.”
White & Summers, §2:3
“In such ‘hybrid’ cases, a minority of courts apply
Article 2 to the sale of goods aspects of the
transaction only.”
Id.
Contracts Involving Both Goods and
Services
Most courts have held that software is a
“good” under UCC - see Wachter Mgmt.
Co. v. Dexter Chaney, Inc. (Kan. 2006)
(p. 11)
“Computer software is considered to be
goods subject to the UCC even though
incidental services are provided along with
the sale of the software.”
Systems Design v. Kansas City P.O. Employees Credit Union,
14 [Link].2d 266, 272, 788 P.2d 878 (1990) .
 Other, Non-UCC State Statutory
Contract Law Provisions May Also Apply
See e.g. 6 Del. Code.
Ҥ 2701 Joint and several contracts.
An obligation or written contract of several persons
shall be joint and several, unless otherwise expressed.”
Ҥ 2705 Age of majority; capacity to contract.
Any person who has attained 18 years of age shall
have full capacity to contract; provided such person
has not been declared legally incompetent to contract
for reasons other than age. Any person who has
attained the age of 18 years shall become fully
responsible for that person's own contracts.”
 Mutual Assent (cont’d)
Rest. 2d Contracts § 17 - Requirement of a Bargain
(1) Except as stated in Subsection (2), the
formation of a contract requires a bargain in
which there is a manifestation of mutual
assent to the exchange and a
consideration.
(2) Whether or not there is a bargain a contract
may be formed under special rules applicable to
formal contracts or under the rules stated in §§ 82-
94.
 Mutual Assent (cont’d)
Rest. 2d Contracts § 18 - Manifestation of
Mutual Assent
Manifestation of mutual assent to an
exchange requires that each party either make
a promise or begin or render a performance.
 Mutual Assent (cont’d)
Rest. 2d Contracts § 22 - Mode of Assent: Offer and
Acceptance
(1) The manifestation of mutual assent to an
exchange ordinarily takes the form of an offer
or proposal by one party followed by an
acceptance by the other party or parties.
(2) A manifestation of mutual assent may be
made even though neither offer nor acceptance
can be identified and even though the moment of
formation cannot be determined.
 Exercise 2-1 pg. 21
Amy, who desperately needed a job to pay for
her next meal, noticed that the floor of Betty’s
store was quite dirty. She approached Betty and
said, “I will sweep and mop your floor for $20.”
Betty responded, “The floor is a mess. I really
ought to let you do it.” Then Betty walked away.
Do you think that Amy and Betty communicated
a present commitment to form a contract? Why
or why not?
 Mutual Assent (cont’d)

1. What’s an offer?
2. What’s an acceptance?
3. What do the definitions of offer and
acceptance have in common?
 Mutual Assent (cont’d)
Rest. 2d Contracts § 24 - Offer Defined
An offer is the manifestation of
willingness to enter into a
bargain, so made as to justify another
person in understanding that his assent to that
bargain is invited and will conclude it.
 Mutual Assent (cont’d)
Rest. 2d Contracts § 50 - Acceptance of Offer Defined;
Acceptance by Performance; Acceptance by Promise
(1) Acceptance of an offer is a
manifestation of assent to the terms
thereof made by the offeree in a
manner invited or required by the
offer.
(2) Acceptance by performance requires that
at least part of what the offer requests be performed
or tendered and includes acceptance by a performance
which operates as a return promise.
(3) Acceptance by a promise requires that the
offeree complete every act essential to the making of
the promise.
 Lucy v. Zehmer (Va. 1954) pg. 26
1. Facts
2. Subjective or objective?
3. Why are the words of offer and acceptance
important in evaluating whether an offer or
acceptance has been made?
4. Is this the same thing as a “meeting of the minds?”
5. What is the relationship between the rule stated
by the court and the definitions of offer and
acceptance?
 Lucy v. Zehmer (cont’d)
6. What words showed the Zs’ commitment?
7. Was the context significant?
8. What is the policy is behind the objective
intent rule?
 Exercise 2-4(3)
Dana walks into a café obviously upset and angry. For the next
half hour, she sips her soda and complains about her laptop to
the other customers. To each person, she says, “If you fix this
thing and find my report so I can e-mail the report to my boss, I
will sell you the laptop for $50.” Because Dana is well known to
most of the customers as a blowhard and a pathological liar, and
because the laptop is an expensive laptop worth $2,000, no one,
apart from Pedro takers her seriously. Pedro has never met Dana
and he has no idea what the laptop is worth, but he is good at
fixing computers. Pedro says to Dana, “Let me have a look at it
for you.” He works on it for ten minutes, retrieves the document
Dana needs, and e-mails the document to Dana’s boss at an e-
mail address Dana provides. He then hands Dana $50 in cash and
insists that Dana give him the laptop. Do Dana and Pedro have a
contract?
Harvey v. Facey (U.K. Privy Counsel
1893) pg. 32
If a party “intends” an acceptance of a perceived
offer, can the court call that “acceptance” an offer?
Why?
Is “what is your best price” a manifestation that
you are going to commit to buy at the quoted
price?
What are the policy arguments in favor of the
court’s holding here?
TRY TO ANSWER PROBLEM 2-6 ON PAGE 29
CERTAINTY OF TERMS AND OFFER RULES
Contract Formation (cont’d) - Certainty
of Terms
Certainty of Terms
“I will sell you my computer.”
Offer? Binding on offeror? Why not?

Class #2
 Formation – Certainty of Terms
Rest. 2d Contracts § 33. CERTAINTY
(1) Even though a manifestation of intention is
intended to be understood as an offer, it cannot be
accepted so as to form a contract unless the terms of
the contract are reasonably certain.
(2) The terms of a contract are reasonably certain if
they provide a basis for determining the existence of a
breach and for giving an appropriate remedy.
(3) The fact that one or more terms of a proposed
bargain are left open or uncertain may show that a
manifestation of intention is not intended to be
understood as an offer or as an acceptance.
Formation – Certainty of Terms (cont’d)
TERMS ESSENTIAL FOR FORMATION OF A
CONTRACT (general summary applicable to
most but not all contracts)
Q–T–P–P–P-S
Quantity
Time for performance
Parties
Price
Place for performance
Subject matter
Formation – Certainty of Terms (cont’d)

Why will courts in some instances find that

“reasonable price” is sufficient?
Why will courts in some instances construe a
contract that is silent about the time and
place of performance to mean a reasonable
time or place?
What is the policy behind a court sometimes
implying a “reasonable” term?
Formation – Certainty of TermsUCC Art.
2
§ 2-204. Formation in General.
*******
(3) Even though one or more terms are left
open a contract for sale does not fail for
indefiniteness if the parties have intended to
make a contract and there is a reasonably certain
basis for giving an appropriate remedy.
Formation – Certainty of TermsUCC Art.
2 - Price
§ 2-305. Open Price Term.
(1) The parties if they so intend can conclude a
contract for sale even though the price is not settled. In such a
case the price is a reasonable price at the time
for delivery if
(a) nothing is said as to price; or
(b) the price is left to be agreed by the parties and they fail to
agree; or
(c) the price is to be fixed in terms of some agreed market or
other standard as set or recorded by a third person or agency
and it is not so set or recorded.
(2) A price to be fixed by the seller or by the buyer means a
price for him to fix in good faith.
*******
Formation – Certainty of TermsUCC Art.
2 – Place for Delivery
§ 2-308. Absence of Specified Place
for Delivery.
Unless otherwise agreed
(a) the place for delivery of goods is the seller's place of
business or if he has none his residence; but
(b) in a contract for sale of identified goods which to the
knowledge of the parties at the time of contracting
are in some other place, that place is the place for
their delivery; and
(c) documents of title may be delivered through
customary banking channels.
Formation – Certainty of TermsUCC Art.
2 – Time for Performance
Time for Performance - Delivery
§ 2-309. Absence of Specific Time
Provisions; Notice of
Termination.
(1) The time for shipment or delivery or any
other action under a contract if not provided in
this Article or agreed upon shall be a
reasonable time.
*******
 Formation – Certainty of TermsUCC Art.
2 – Time for Performance
Time for Performance - Payment
§ 2-310. Open Time for Payment or
Running of Credit; Authority to Ship
Under Reservation.
Unless otherwise agreed
(a) payment is due at the time and place at which the buyer
is to receive the goods even though the place of
shipment is the place of delivery; and
*******
(d) where the seller is required or authorized to ship
the goods on credit the credit period runs from the
time of shipment but post-dating the invoice or
delaying its dispatch will correspondingly delay the
starting of the credit period.
Formation – Certainty of Terms (cont’d)

What happened to QTPPPS (Quantity, Time for

Performance, Parties, Price, Place for
Performance, Subject matter)?
Is some looseness of contract terms only permitted
for contracts governed by the UCC Art. 2?
No, though probably less leeway given for
contracts governed only by the common law --- see
comments to Rest. 2d § 33
Will court be less flexible in finding assent than it
will be in construing terms (QTPPPS)?
 Formation – Certainty of Terms–
Comments to Rest.2d § 33
a. Certainty of terms. It is sometimes said that the
agreement must be capable of being given an exact
meaning and that all the performances to be rendered
must be certain. Such statements may be appropriate
in determining whether a manifestation of intention is
intended to be understood as an offer. But the
actions of the parties may show
conclusively that they have intended to
conclude a binding agreement, even
though one or more terms are missing
or are left to be agreed upon. In such cases
courts endeavor, if possible, to attach a sufficiently
definite meaning to the bargain.
 Formation – Certainty of Terms
Comments to Rest.2d § 33 (cont’d)
An offer which appears to be indefinite may
be given precision by usage of trade or by
course of dealing between the parties. Terms
may be supplied by factual implication, and in recurring
situations the law often supplies a term in the absence of
agreement to the contrary. See § 5, defining “term.”
Where the parties have intended to
conclude a bargain, uncertainty as to
incidental or collateral matters is seldom
fatal to the existence of the contract. If the
essential terms are so uncertain that there is no basis for
deciding whether the agreement has been kept or broken,
there is no contract. But even in such cases partial
performance or other action in reliance on the agreement
may reinforce it under § 34.
 Formation – Certainty of Terms
Comments to Rest.2d § 33 (cont’d)
b. Certainty in basis for remedy. The rule
stated in Subsection (2) reflects the
fundamental policy that contracts should
be made by the parties, not by the courts,
and hence that remedies for breach of
contract must have a basis in the
agreement of the parties. Where the
parties have intended to make a contract
and there is a reasonably certain basis for
granting a remedy, the same policy
supports the granting of the remedy. The
test is not certainty as to what the parties were to do nor as
to the exact amount of damages due to the plaintiff;
uncertainty may preclude one remedy without affecting
another. See Uniform Commercial Code § 2-204(3) and Comment.
 Formation – Certainty of Terms
Comments to Rest.2d § 33 (cont’d)
Thus the degree of certainty required may be
affected by the dispute which arises and by
the remedy sought. Courts decide the
disputes before them, not other hypothetical
disputes which might have arisen. It is less likely
that a reasonably certain term will be supplied by construction
as to a matter which has been the subject of controversy
between the parties than as to one which is raised only as an
afterthought. In some cases greater definiteness may be
required for specific performance than for an award of damages;
in others the impossibility of accurate assessment of damages
may furnish a reason for specific relief. Partial relief may
sometimes be granted when uncertainty prevents full-scale
enforcement through normal remedies. See §§ 357-62.
 Formation – Certainty of Terms
Comments to Rest.2d § 33 (cont’d)
e. Indefinite price. Where the parties manifest an
intention not to be bound unless the amount of money to be
paid by one of them is fixed or agreed and it is not fixed or
agreed there is no contract. Uniform Commercial Code § 2-305(4).
Where they intend to conclude a contract for the
sale of goods, however, and the price is not settled,
the price is a reasonable price at the time of delivery if (a)
nothing is said as to price, or (b) the price is left to be
agreed by the parties and they fail to agree, or (c) the price
is to be fixed in terms of some agreed market or other
standard as set or recorded by a third person or agency and it
is not so set or recorded. Uniform Commercial Code § 2-305(1). Or
one party may be given power to fix the price
within limits set by agreement or custom or good faith.
Similar principles apply to contracts for the
rendition of service.
 Formation – Certainty of Terms
Comments to Rest.2d § 33 (cont’d)
Examples to comment e.
7. A promises to sell and B to buy goods “at cost plus a nice
profit.” The quoted words strongly indicate that the parties
have not yet concluded a bargain.
8. A promises to do a specified piece of work and B promises
to pay a price to be thereafter mutually agreed. The
provision for future agreement as to price strongly indicates
that the parties do not intend to be bound. If they manifest
an intent to be bound, the price is a reasonable price at
the time for doing the work.
Farnsworth, Contracts, §3:28 – Agreement to pay “reasonable
price” may be sufficiently definite, even for a sale of stock or
land, where reasonableness can be determined by reference
to a market.
Formation – Special Offer Rules
For advertisements, price quotes, requests for
bids and similar situations
Are these offers?
7,000,000 Pepsi Points?
Formation – Special Offer Rules (cont’d)

Leonard v. Pepsico (S.D.N.Y. 1999)

What are court’s formulations of general rule
How might you state the rule?
Distinguish Lefkowitz
How might you state the Lefkowitz exception to
the rule?
Distinguish Carbolic Smoke and reward
cases
When is a quote an offer +When is it
just a quote
Fairmount Glass Works v. Crunden-
Martin Wooden Ware Co. (Ky. 1899) pg.
56
In response to a request for a price quote a
seller wrote “We quote you [included
quantities and prices] for immediate
acceptance”
Are price quotes normally offers?
Was the price quote an offer here?
 Letters of Intent
Often preliminary to lengthy, extensive and
more-specific and time-consuming
documentation
Some binding, some not
Where’s the dividing line?
 Letters of Intent (cont’d)
Rest. 2d §26. PRELIMINARY NEGOTIATIONS
A manifestation of willingness to enter into a
bargain is not an offer if the person to whom it is
addressed knows or has reason to know that
the person making it does not intend to conclude
a bargain until he has made a further
manifestation of assent.

Rest. 2d § 27. EXISTENCE OF CONTRACT WHERE

WRITTEN MEMORIAL IS CONTEMPLATED
Manifestations of assent that are in
themselves sufficient to conclude a contract
will not be prevented from so operating by the
fact that the parties also manifest an intention
to prepare and adopt a written memorial
thereof; but the circumstances may show that
the agreements are preliminary negotiations.
 Letters of Intent (cont’d)
Store Properties v. Neal ([Link].2d
1945) pg. 60
Does the letter of intent leave anything left to
negotiate or does it seem like a finalized deal?
-paragraph 8 says additional terms must be approved by both parties
-paragraph 9 says that after the LOI the plaintiff will have to deposit
$5,000 as a down payment which “if accepted” will be applied to the
first payment due
-paragraph 10 says that the agreement is null and void unless
accepted in writing by a certain date
 Letters of Intent (cont’d)
Diesel Power Equipment, Inc. v. ADDCO,
Inc. (8th Cir. 2004) pg. 64
-This case illustrates how contracts are negotiated
in the real world. They go through many drafts and
one party may believe the deal is essentially done
before the other party does.
-Here was there anything left to negotiate?
-How should parties address this if unhappy with a
deal not being completed?
 Requests for Bids
Typical situation: general contractor is
bidding on large construction contract, and
needs prices from subcontractors prior to its
making its bid
GC might not be awarded the general
contract
What is GC looking for, legally?
 CLASS 3

ACCEPTANCES
 Manner of Acceptance
Offeror is the “master of its offer,” and can
insist on a particular form of acceptance
What if offeror instead merely suggests or
invites a manner of acceptance?

Class #3
Manner of Acceptance (cont’d)
Rest. 2d Contracts §30. FORM OF
ACCEPTANCE INVITED
(1) An offer may invite or require
acceptance to be made by an
affirmative answer in words, or by
performing or refraining from
performing a specified act, or may
empower the offeree to make a
selection of terms in his acceptance.
(2) Unless otherwise indicated by the
language or the circumstances, an offer
invites acceptance in any manner and
by any medium reasonable in the
circumstances.
Manner of Acceptance (cont’d)
§60. ACCEPTANCE OF OFFER
WHICH STATES PLACE, TIME OR
MANNER OF ACCEPTANCE
If an offer prescribes the place, time or
manner of acceptance its terms in this respect
must be complied with in order to create a
contract. If an offer merely suggests a
permitted place, time or manner of
acceptance, another method of acceptance is
not precluded.
 Manner of Acceptance (cont’d)
Kuzmeskus v. Philip Motor Co. (Mass.
1953)
Who made the offer here?
On whose form was the offer made?
What was the time/place/manner restriction on
the offer?
Was that restriction complied with?
 Manner of Acceptance - UCC Art. 2
§ 2-206. Offer and Acceptance in
Formation of Contract.
(1) Unless otherwise unambiguously indicated
by the language or circumstances
(a) an offer to make a contract shall be construed as
inviting acceptance in any manner and by any
medium reasonable in the circumstances;
(b) *******
 Manner of Acceptance - UCC Art. 2
§ 2-206. Offer and Acceptance in
Formation of Contract.
(1) Unless otherwise unambiguously indicated by the
language or circumstances
(a) *******
(b) an order or other offer to buy goods for prompt or
current shipment shall be construed as inviting
acceptance either by a prompt promise to ship or by
the prompt or current shipment of conforming or non-
conforming goods, but such a shipment of non-
conforming goods does not constitute an acceptance
if the seller seasonably notifies the buyer that the
shipment is offered only as an accommodation to the
buyer.
Manner of Acceptance - UCC Art. 2
§ 2-206. Offer and Acceptance in
Formation of Contract.
*******
(2) Where the beginning of a requested
performance is a reasonable mode of
acceptance an offeror who is not notified of
acceptance within a reasonable time may
treat the offer as having lapsed before
acceptance.
 Bilateral Contracts
Most contracts involve an exchange of promises
Example:
Day 1
A to B – I offer to buy your laptop for $200, in cash,
tomorrow after class. Will you sell it to me then?
B to A – I accept your offer. I will sell it to you then.
Day 2 – A performs by paying B; B performs by
transferring and delivery the laptop to A
THIS IS A BILATERAL CONTRACT – offeror requires
acceptance by a promise from the offeree – when was
the contract formed?
 Unilateral Contracts
Some offers require or permit acceptance
by performance itself
Example:
Day 1: A to B – If you give me your laptop prior to class
tomorrow I’ll pay you $200.
Day 2: B gives A the laptop prior to class.
THIS IS A UNILATERAL CONTRACT – offeror requires
acceptance by performance of the very act that the
offeror is seeking from the offeree
When was the contract formed? Must A pay B?
Why ask for performance vs. a promise?
 Unilateral Contracts
Davis v. Jacoby (Cal. 1934) pp. 79
Was the promise to leave the estate in
exchange for care until death a bilateral or
unilateral offer?
What signs do we have?
What is the modern presumption about
unclear bilateral vs unilateral offers?
What is the benefit and consequence of this
presumption?
 Unilateral and Bilateral Contracts
(cont’d)
Rest. 2d §32. INVITATION OF
PROMISE OR PERFORMANCE
In case of doubt an offer is
interpreted as inviting the
offeree to accept either by
promising to perform what the
offer requests or by rendering
the performance, as the offeree
chooses.
 Exercise 2-21 (unilateral or bilateral)
1. “I will pay you $100 if you find my lost dog, Fido.”
2. “I will pay you $50 to search for my lost dog, Fido.”
3. “I will pay you $30 to baby-sit my two children next
Friday night.”
4. An uncle writes to his favorite nephew, who is
sixteen years old, “If you refrain from drinking,
smoking, swearing, and playing cards until age
twenty-one, I will pay you $5,000.”
 Exercise 2-22:
Read section 51 of the Second Restatement of
Contracts and answer the following hypothetical
question: D offers a reward for the capture of
Connie Criminal. P sees Connie robbing a bank
and chases Connie into a dead end alley. P then
notices a poster at the entrance to the alley
offering $50,000 for the capture of Connie. P
then captures Connie and turns her over to the
police and sues D for the $50,000. Result?
 Unilateral and Bilateral Contracts
(cont’d)
What if offeree does not know of offer?
Rest. 2d § 51. Effect of Part
Performance without Knowledge of
Offer
Unless the offeror manifests a
contrary intention, an offeree who
learns of an offer after he has
rendered part of the performance
requested by the offer may accept
by completing the requested
performance.
Rest. 2d § 69. Acceptance by Silence or
Exercise of Dominion
(1) Where an offeree fails to reply to an offer, his silence and inaction operate as
an acceptance in the following cases only:
(a) Where an offeree takes the benefit of offered services
with reasonable opportunity to reject them and reason to
know that they were offered with the expectation of
compensation.
(b) Where the offeror has stated or given the offeree reason
to understand that assent may be manifested by silence
or inaction, and the offeree in remaining silent and
inactive intends to accept the offer.
(c) Where because of previous dealings or otherwise, it is
reasonable that the offeree should notify the offeror if he
does not intend to accept.
(2) An offeree who does any act inconsistent with the offeror’s ownership of
offered property is bound in accordance with the offered terms unless they are
manifestly unreasonable. But if the act is wrongful as against the offeror it is an
acceptance only if ratified by him.
Exercise 2-23 silence as acceptance
1. I say, “I offer to buy your car for $500. If I haven’t heard from you by
this time tomorrow, I will assume that you accept.” If there is no
further contact between us by this time tomorrow, do we have a K?
2. Same result if you intended by your silence to accept my offer?
3. Same result if you did not intend to accept by your silence but you
took my car keys and drove the car home and parked it in your
garage?
4. Inna Insurance Co. insured Peggy Policyholder’s business under a
one-year policy. After the policy expired, Inna sent Peggy a renewal
form offering to insure Peggy. Peggy never replied but, when Inna
billed Peggy for one year of insurance at the end of the year, Peggy
paid the bill without objection. The next year, Inna again sent Peggy
a renewal form and, two months later, a bill for two months’ worth
of insurance. Peggy refused to pay, saying she had purchased
insurance from another insurer. Must Peggy pay for the two
months?
 Hypothetical
Paula gives three piano lessons to Dad’s daughter, intending to
give the child a course of 20 lessons and to charge Dad her
normal (and reasonable) fee of $25 per lesson. Dad, who knows
Paula is a piano teacher by profession, never asked Paula to
provide these lessons, but Dad watches each lesson silently and
allows Paula to finish the course of lessons and then refuses to
pay. Have Paula and Dad formed a contract?
a. No, because Paula did not express her intent to charge.
b. Yes, because Dad must have known Paula intended to charge.
c. No, because offer did not request a silent acceptance.
d. Yes, because Dad acted inconsistently with Paula’s ownership.
Offers Don’t Last Forever:
Termination of Power to Accept
Rest. 2d §§ 36-43, 48
Rest. 2d § 36. Methods of Termination of
the Power of Acceptance
(1) An offeree’s power of acceptance may
be terminated by
(a) rejection or counter‐offer by the
offeree, or
(b) lapse of time, or
(c) revocation by the offeror, or
(d) death or incapacity of the offeror or
offeree.
(2) In addition, an offeree’s power of
acceptance is terminated by the non‐
occurrence of any condition of acceptance
under the terms of theClass #4 offer.
Termination of Power to Accept
What does the phrase “the power to accept”
mean?
What does it mean to say that the power to
accept has been terminated?
Can an offeror terminate the power to accept
an offer after an offeree has already accepted
the offer?
 Contract or No Contract?
A offers to paint B’s house for $10k, and B says “I agree” –
contract?
A offers to paint B’s house for $10k, and B says, “I agree – but for
$9k” – contract?
A offers to paint B’s house for $10K, and B says, “I agree – but for
$9k.” After A does not reply, B says “Fine I agree to pay you
$10K.” – contract?
A offers to paint B’s house for $10k, and B says, “Maybe. I’ll get
back to you.” A year later, B emails A: “I agree. $10k to paint my
house.” – contract?
A offers to paint B’s house for $10k , and B says, “Maybe. I’ll get
back to you.” A says: “I needed to know now. Deal’s off. I’m
going to paint C’s house instead.” B says: “Ok. $10k.” - contract?
A offers to paint B’s house for $10k , and B says, “Maybe. I’ll get
back to you.” A dies. B emails A: “Ok. $10k.” - contract?
 Termination of Power to Accept –
Revocation by Offeror
General Rule – The person who made the offer
(“Offeror”) can revoke her offer at any
time prior to acceptance – R2d 36(1)(c)
Example:
On Monday:
A to B – I offer to sell you my laptop for $200 cash.
B to A – Let me think about it.
A to B – Ok. Let me know tomorrow if you agree.
Later on Monday, A calls B – I’ve changed my mind –
the deal’s off the table. B responds: I accept your offer.
Is there a contract?
 Termination of Power to Accept –
Revocation by Offeror – Exceptions
Are there exceptions to the rule set forth in
R2d 36(1)(c), i.e., in some instances are there
limitations on the offeror’s power to revoke?
 Termination of Power to Accept –
Revocation by Offeror – Exceptions
Are there exceptions to the rule set forth in
R2d 36(1)(c), i.e., in some instances are there
limitations on the offeror’s power to revoke?
Exceptions to offeror’s power to
revoke/terminate power:
1. Offer for unilateral K under which offeree has
begun to perform
2. Option contracts and firm offers
 Brooklyn Bridge
A makes an offer of a unilateral contract to B by
stating, “I will pay you $50 if you walk across the
Brooklyn Bridge.” When B gets halfway across
the bridge, A says, “I revoke my offer.” If B walks
the rest of the way across the bridge, must A pay
B the $50?
 Termination of Power to Accept –
Revocation by Offeror – Exceptions
Exceptions to offeror’s power to revoke/terminate power:
1. Offer for unilateral K under which offeree has begun to
perform §45. OPTION CONTRACT CREATED
BY PART PERFORMANCE OR TENDER
(1) Where an offer invites an offeree to
accept by rendering a performance and
does not invite a promissory acceptance,
an option contract is created when the
offeree tenders or begins the invited
performance or tenders a beginning of it.
(2) The offeror's duty of performance
under any option contract so created is
conditional on completion or tender of
the invited performance in accordance
with the terms of the offer.
 Option Contract Example
A offers to sell her house to B for $500,000. B is
interested but wants to think it over. B is
concerned however that A will revoke the offer
and sell it to someone else while B is thinking
about it. B offers to pay A $10 to not revoke the
offer for seven days while B thinks the offer over.
 Termination of Power to Accept –
Revocation by Offeror – Exceptions
Exceptions to offeror’s power to
revoke/terminate power – also an option
contract:
1. Consideration paid by offeree in exchange for
the offeror’s agreement to make the offer
irrevocable for a period of time (i.e., an
option contract) – R2d 37
Is more than one contract involved in this
transaction?
 Termination of Power to Accept –
Revocation by Offeror– Exceptions
Exceptions to offeror’s power to
revoke/terminate power :
1. A “firm offer.” UCC Art. 2 only –
merchant/gives assurance/in signed
writing/goods/3 months max./ - UCC 2-205
Did the other party give consideration in this
transaction for the merchant’s enforceable
promise to keep his offer open?
 Termination of Power to Accept –
Revocation by Offeror
Peterson v. Pattberg (N.Y. 1928) pp. 89
Promise to discount a loan if it is paid off early
Does Rest. 2d § 45 resolve? (option contract
limitation on unilateral contracts)
Was this rule applied?
Rest. 2d §§ 36(c), 42 and 43? (indirectly
learning of contrary intent)
 Termination of Power to Accept –
Revocation by Offeror
Rest. 2d §42. REVOCATION BY
COMMUNICATION FROM OFFEROR RECEIVED
BY OFFEREE
An offeree's power of acceptance is
terminated when the offeree receives from
the offeror a manifestation of an intention
not to enter into the proposed contract.
Rest. 2d §43. INDIRECT COMMUNICATION OF
REVOCATION
An offeree's power of acceptance is
terminated when the offeror takes definite
action inconsistent with an intention to enter
into the proposed contract and the offeree
acquires reliable information to that effect.
 Termination of Power to Accept –
Revocation by Offeror
Dickinson v. Dodds (1876) pp. 94
Was this a unilateral or a bilateral offer?
Rest. 2d § 43 (indirectly learning of contrary intent)
Dodds wrote to Dickinson offering to sell his house for 800 pounds
the offer said it would stay open for two days and the parties testified that it
was their intent for the offer to stay open for those days
Dickinson intended to accept the following day (within the open offer
window) but did not communicate his acceptance because he believed he
had an extra day
Dickinson learned, prior to accepting the offer, that Dodds had agreed to sell
the property to a third party (Allan), after hearing this Dickinson went to
Dodds house and left a formal acceptance there (Dodds claimed never to
have received it)
the next day Dickinson handed another copy of his formal acceptance to
Dickinson himself but Dickinson said it was too late, the property was
already sold
Dickinson sued to get specific performance
Termination of Power to Accept – Lapse
and Rejection or Counter-offer
Termination of Power of Acceptance by lapse -
R2d 36(1)(b)
Lapse of time (how long?)
Rejection or counter-offer by offeree
Akers v. J.B. Sedberry (Tenn. 1955)
pp. 97
What was the offer?
Had the offeree’s power to accept it
terminated before it was accepted?
How?
Termination of Power of Acceptance
(cont’d)
Lapse
§41. LAPSE OF TIME
(1) An offeree's power of acceptance is
terminated at the time specified in the offer, or,
if no time is specified, at the end of a reasonable
time.
(2) What is a reasonable time is a question of
fact, depending on all the circumstances existing
when the offer and attempted acceptance are
made.
(3) Unless otherwise indicated by the language
or the circumstances, and subject to the rule
stated in §49, an offer sent by mail is seasonably
accepted if an acceptance is mailed at any time
before midnight on the day on which the offer is
received. [but reasonable time may be longer]
 Lapse of Time (cont’d)
See also comments to Rest. 2d § 41
Comment:
b. Reasonable time. In the absence of a contrary indication,
just as acceptance may be made in any manner and by any medium
which is reasonable in the circumstances (§30), so it may be made
at any time which is reasonable in the circumstances. The
circumstances to be considered have a wide range: they include the
nature of the proposed contract, the purposes of the parties, the
course of dealing between them, and any relevant usages of
trade....
d. Direct negotiations. Where the parties bargain face to
face or over the telephone, the time for acceptance does not
ordinarily extend beyond the end of the conversation unless a
contrary intention is indicated.....
 Lapse of Time (cont’d)
Comments to Rest. 2d § 41 (cont’d)
Comment:
e. Offers made by mail or telegram.
Where the parties are at a distance from each
other, the normal understanding is that the time
for acceptance is extended at least by the normal
time for transmission of the offer and for the
sending of the offeree's reply....But in the absence
of a significant speculative element in the situation,
a considerably longer time may be reasonable....
 Lapse of Time (cont’d)
Comments to Rest. 2d § 41 (cont’d)
Comment:
f. Speculative transactions. The rule that an
offer becomes irrevocable when an acceptance is
mailed (§§42, 63) in effect imposes a risk of
commitment on the offeror during the period required
for communication of the acceptance, although during
that period the offeror has no assurance that the
bargain has been concluded. The rule that the power
of acceptance is terminated by the lapse of a
reasonable time serves to limit this risk. The more
significant the risk, the greater is the need for
limitation, and hence the shorter is the time which is
reasonable.
Termination of Power of Acceptance -
Rejection
Rejection of offer by offeree - R2d 36(1)
(a)
§ 38. Rejection
(1) An offeree’s power of acceptance is
terminated by his rejection of the offer,
unless the offeror has manifested a
contrary intention.
(2) A manifestation of intention not to
accept an offer is a rejection unless the
offeree manifests an intention to take it
under further advisement.
Termination of Power of Acceptance –
Counter-offers
Counter-Offers - R2d 36(1)(a)
Livingstone v. Evans (Alberta [Link]. 1925)
Evans wrote to Livingstone offering to sell him some land for
$1,800 with a set of terms
the day Livingstone received the offer he wired back stating “Send
lowest cash price. Will give $1,600 cash.”
Evans replied “Cannot reduce price.”
Livingstone immediately wrote back accepting this offer.
Evans does not want to go through with the sale and argues that
there was nothing for Livingstone to accept
Termination of Power of Acceptance -
Counter-offers
§ 39. Counter‐offers
(1) A counter‐offer is an offer made by an offeree
to his offeror relating to the same matter as the
original offer and proposing a substituted bargain
differing from that proposed by the original offer.
(2) An offeree’s power of acceptance is terminated
by his making of a counter‐offer, unless the offeror
has manifested a contrary intention or unless the
counter‐offer manifests a contrary intention of the
offeree.
Termination of Power of Acceptance –
Option Contracts
§ 37. Termination Of Power Of Acceptance Under
Option Contracts.
Notwithstanding §§ 38-49, the power of acceptance
under an option contract is not terminated by
rejection or counter-offer, by revocation, or by
death or incapacity of the offeror, unless the
requirements are met for the discharge of a
contractual duty.

Potentially 2 Ks here – what are they?

Acceptance and Termination of Power
of Acceptance – Mailbox Rule
The Mailbox Rule
Rest. 2d §§ 63, 66, 40 and 42
§ 63(a) – acceptance is effective upon
dispatch (“as soon as it is put out of the
offeree’s possession”) by offeree, without regard to
whether it is received by offeror (must be properly
dispatched - § 66)
§ 42 – offeree’s power to accept is terminated
when offeree receives from offeror the offeror’s
manifestation not to enter into the proposed
contract

Class #5
Termination of Power of Acceptance –
Mailbox Rule (cont’d)
§ 63. Time When Acceptance Takes Effect
Unless the offer provides otherwise,
(a) an acceptance made in a manner and by a
medium invited by an offer is operative and
completes the manifestation of mutual assent
as soon as put out of the offeree's possession,
without regard to whether it ever reaches the
offeror; but
(b) an acceptance under an option contract is
not operative until received by the offeror.
Manner of acceptance matters
Acceptance effective on dispatch, and does not need to reach
offeror
BUT, acceptance under option contract is not operative until receipt
by offeror – Rest. 2d § 63
Acceptance and Termination of Power
of Acceptance – Mailbox Rule
§ 66 Acceptance Must Be
Properly Dispatched
An acceptance sent by mail or otherwise from
a distance is not operative when dispatched,
unless it is properly addressed and such other
precautions taken as are ordinarily observed
to insure safe transmission of similar
messages.
Acceptance and Termination of Power
of Acceptance – Mailbox Rule
§67. EFFECT OF RECEIPT OF
ACCEPTANCE IMPROPERLY DISPATCHED
Where an acceptance is seasonably
dispatched but the offeree uses means
of transmission not invited by the offer
or fails to exercise reasonable
diligence to insure safe transmission, it
is treated as operative upon dispatch if
received within the time in which a
properly dispatched acceptance would
normally have arrived.
Termination of Power of Acceptance –
Mailbox Rule (cont’d)
§ 40. Time when Rejection or
Counter‐offer Terminates the Power
of Acceptance
Rejection or counter‐offer by mail or telegram does
not terminate the power of acceptance until
received by the offeror, but limits the power so
that a letter or telegram of acceptance started after
the sending of an otherwise effective rejection or
counter‐offer is only a counter‐offer unless the
acceptance is received by the offeror before he
receives the rejection or counter‐offer.
 Modern World Less Complicated?
Telephone and Email
§64. ACCEPTANCE BY TELEPHONE OR
TELETYPE
Acceptance given by telephone or other
medium of substantially
instantaneously two-way
communication is governed by the
principles applicable to acceptances
where the parties are in the presence of
each other.
Text message?
Email?
 Modern World Less Complicated?
Telephone and Email
§64. ACCEPTANCE BY TELEPHONE OR TELETYPE
Comment a. Rationale. Where the parties are in each other's
presence, the offeree can accept without being in doubt as to
whether the offeror has attempted to revoke his offer or whether
the offeror has received the acceptance. His need of a dependable
basis for decision whether to accept is therefore met without the
rules stated in § 63. The situation prevents the question
from arising whether a revocation of the offer or
acceptance can be effective during the period
required for communication of the acceptance, and all
that remains is the risk of misunderstanding. Where
the parties are not in each other's presence, but are
able to communicate with each other without any
substantial lapse of time, the situation is similar and
the governing principles are the same.
 Exercise 2-34 pg. 107
1. A sent B a letter: “I will sell you 5 books for $2
each.” The letter was mailed on Sept 2 and
received on Sept 4. B sent a reply letter to A: “I
accept your offer.” B’s letter was mailed on Sept 5
and received on Sept 7. A faxed B on Sept 6 stating
“Offer is rescinded.” This was received by B on Sept
6. Result?
2. Assume above except A’s revocation was sent by
mail on Sept 4 and received on Sept 6. Result?
3. Assume above except A never received B’s
acceptance. Result?
4. Assume above except that A’s offer was governed
by an option contract. Result?
 Exercise 2-34 cont
5. A sent B the following email: “I will sell you 5
books for $2 each. Reply a.s.a.p.” A’s email was
sent and received on Sept 2. B replied by letter
(mailed on Sept 5): “I accept.” The letter is
received by A on Sept 7. A then emails B on Sept
6 stating: “Offer is rescinded.” Result?
6. Assume above except that A’s email stated
“We would prefer you email your acceptance.”
Result?
 Exercise 2-34 cont
7. A sent B a letter: “I will sell you 5 books for $2
each.” The letter was put in the mail on Sept 2 and
received on Sept 4. B sent A the following letter: “I
reject your offer.” B’s letter was put in the mail on
Sept 5 and received on Sept 7. B then sent the
following fax to A: “On second thought, I accept your
offer.” This fax was sent and received on Sept 6.
Result?
8. Assume above except A received B’s letter before
receiving B’s fax. Result?
 Exercise 2-34 cont
9. A sent B the following letter: “I will sell you 5
books for $2 each.” The letter was deposited in
the mail on Sept 2 and received on Sept 4. B
then sent A the following letter: “I accept your
offer.” B’s letter was deposited on Sept 5 and
received on Sept 7. B then sent A the following
fax: “I reject your offer.” The fax was sent and
received on Sept 6. Result?
 Exercise 2-34 cont
10. How could we redraft A’s letter of Sept 2 to
avoid the application of the mailbox rule?
 Exercise 2-34 cont
10. How could we redraft A’s letter of Sept 2
to avoid the application of the mailbox rule?
“I will sell you 5 books for $2 each. Please
phone me at …. With your response.”
“I will see you 5 books for $2 each. I need
your reply by Sept 4.”
“Are you interested in 5 books at $2 each. If
so let me know a.s.a.p. as I am trying to find a
buyer.”
Firm Offers/Options Granted in Writing
by Merchant Under UCC
Does UCC Art. 2 (UCC 2-205) change
the rules for:
1. The requirement of consideration
for an option contract?
§ 2-205. Firm Offers.
An offer by a merchant to buy or sell goods in a signed writing
which by its terms gives assurance that it will be held
open is not revocable, for lack of consideration, during
the time stated or if no time is stated for a reasonable
time, but in no event may such period of irrevocability
exceed three months; but any such term of assurance on
a form supplied by the offeree must be separately signed
by the offeror.
Firm Offers/Options Granted in Writing
by Merchant Under UCC (cont’d)
Parse 2-205 (S&R pp. 97-98)
§ 2-205. Firm Offers.
(I)(A) An offer (B) by a merchant (C) to buy or
sell goods(D) in a signed writing (E) which by
its terms gives assurance that it will be
held open (II) is not revocable, for lack
of consideration, during the time stated
or if no time is stated for a reasonable
time, but in no event may such period
of irrevocability exceed three months;
but (III) any such term of assurance on a form supplied
by the offeree must be separately signed by the offeror.
Who is a “Merchant” Under the UCC?
§ 2-104. Definitions: "Merchant";
"Between Merchants"; "Financing
Agency".
(1) "Merchant" means a person who deals in
goods of the kind or otherwise by his
occupation holds himself out as
having knowledge or skill peculiar to
the practices or goods involved in
the transaction or to whom such knowledge
or skill may be attributed by his employment of an
agent or broker or other intermediary who by his
occupation holds himself out as having such
knowledge or skill.
Is There a Mirror Image Rule Under
UCC Art. 2?
Does UCC Art. 2 (UCC 2-207) change
the rules for:
2. The effect of a counteroffer on the
offeree/counterofferor’s power to
accept?

§ 39. Counter‐offers
*******
(2) An offeree’s power of acceptance is
terminated by his making of a counter‐
offer, unless the offeror has manifested
a contrary intention or unless the
counter‐offer manifests a contrary
intention of the offeree.
Counter-offers, etc. under the UCC
§ 2-207. Additional Terms in Acceptance or
Confirmation.
(1) A definite and seasonable expression of acceptance or a written
confirmation which is sent within a reasonable time operates as an
acceptance even though it states terms additional to or
different from those offered or agreed upon, unless acceptance is
expressly made conditional on assent to the additional or different
terms.
(2) The additional terms are to be construed as
proposals for addition to the contract. Between merchants such
terms become part of the contract unless:
(a) the offer expressly limits acceptance to the terms of the offer;
(b) they materially alter it; or
(c) notification of objection to them has already been given or is
given within a reasonable time after notice of them is received.
IS THIS THE MIRROR IMAGE RULE OF THE COMMON LAW?
Compare R2d Contracts § 39 [S95]
 Counter-offers, etc. under the UCC
(cont’d)
§ 2-207. Additional Terms in
Acceptance or Confirmation.
(3) Conduct by both parties which recognizes the
existence of a contract is sufficient to establish a
contract for sale although the writings of the parties do
not otherwise establish a contract. In such case
the terms of the particular contract consist of
those terms on which the writings of the parties
agree, together with any supplementary terms
incorporated under any other provisions of this
Act.
Shrinkwrap License
 Counter-offers, etc. under the UCC
(cont’d)
Wachter Mgmt. Co. v. Dexter Chaney,
Inc. (Kan. 2006) PG. 115
Does UCC Art. 2 apply? Why?
What contract term was at issue before the dist.
court?
How was that term at issue?
Was the shrink-wrap agreement a counter-offer?
If so, were the terms accepted by Wachter Mgmt.?
What did the dist. court determine?
 Another UCC and R2d Comparison:
Mode of Acceptance
§ 2-206. Offer and Rest. 2d Contracts
Acceptance in §30. FORM OF
ACCEPTANCE INVITED
Formation of
(1) An offer may invite or
Contract. require acceptance to be made
(1) Unless otherwise by an affirmative answer in
words, or by performing or
unambiguously refraining from performing a
indicated by the language specified act, or may empower
the offeree to make a selection
or circumstances of terms in his acceptance.
(a) an offer to make a contract (2) Unless otherwise
shall be construed as inviting indicated by the language
acceptance in any manner or the circumstances, an offer
and by any medium invites acceptance in any
reasonable in the manner and by any medium
reasonable in the
circumstances; circumstances.
Another UCC and R2d Comparison:Acceptance
of Offer to Enter into Unilateral Contract

§ 2-206. Offer and Rest. 2d Contracts

Acceptance in §§ 45 and 62.
Formation of If the offeree has
Contract. commenced performance
(2) Where the beginning of under proposed unilateral
a requested performance contract, then the
is a reasonable mode of offeree’s failure to give
acceptance an offeror who
is not notified of notice to the offeror
acceptance within a DOES NOT give the
reasonable time may treat offeror the power to treat
the offer as having lapsed the offer as having lapsed
before acceptance.
 Consideration
1. How do parties form a contract?
2. What is the effect of finding that an
agreement lacks consideration?
 Mutual Assent to Exchange of
Consideration = Contract
Rest. 2d Contracts § 17 - Requirement of a
Bargain
(1) Except as stated in Subsection (2), the
formation of a contract requires a bargain
in which there is a manifestation of
mutual assent to the exchange
and a consideration.
 Consideration
1. Mutual assent + consideration = contract
2. Mutual assent w/o consideration ≠ contract
Consideration – In general, bargained for exchange of
something for something
Recurring issues:
Forbearance
Adequacy
Sufficiency
Pre-existing duty rule
Moral and past consideration
Settlement of invalid claims
Illusory promises
 Consideration
Rest. 2d §71. REQUIREMENT OF EXCHANGE;
TYPES OF EXCHANGE
(1) To constitute consideration, a performance or a return
promise must be bargained for.
(2) A performance or return promise is bargained
for if it is sought by the promisor in exchange for
his promise and is given by the promisee in
exchange for that promise.
(3) The performance may consist of
(a) an act other than a promise, or
(b) a forbearance, or
(c) the creation, modification, or destruction of a
legal relation.
(4) The performance or return promise may be
given to the promisor or to some other person. It
may be given by the promisee or by some other
person.
 Consideration Illustration
1. Anna agrees to pay Bill $500, and Bill agrees to tutor
Anna in contract law for 5 hours.
Consideration?
2. Anna misses class due to a death in the family. Bill, out
of sympathy for Anna, agrees to tutor Anna in contract
law for five hours.
Consideration?
3. Anna misses class due to a death in the family. Bill, out
of sympathy for Anna, agrees to tutor Anna in contract
law for five hours. Anna, in appreciation then promises to
pay Bill $500 for his services.
Consideration?
 Consideration
Hamer v. Sidway (N.Y. 1898) pg. 133
What did the uncle promise his nephew?
What did his nephew promise (or perform) to
his uncle?
What “value” did the uncle and nephew
receive?
Who receive the most “benefit” of this
agreement?
Was this consideration?

Class #6
 Consideration
Lucht’s Concrete Pumping, Inc. v. Horner
(Colo. 2011) pp. 136
What is at-will employment?
What was Horner’s status before he entered into
the non-competition agreement?
Why did Colo. [Link]. find that consideration was
given?
What was the consideration?
Do courts judge the adequacy of consideration?
Blackacre for a peppercorn?
 Adequacy and Sufficiency of
Consideration, etc.
Schnell v. Nell (Ind. 1861) pg. 142
Who sued whom on the contract?
Who were the parties to the contract, and
what was their bargained for exchange?
What was the question (the issue) before the
court?
 Adequacy and Sufficiency of
Consideration, etc. (cont’d)
Schnell v. Nell (cont’d)
What rule(s) apply to the alleged consideration in
this case (refer to R2d Contracts § 71)?
The 1¢ paid by Nell et al. (even if it was tendered)?
Theresa Schnell’s love, industry and aid, and ZS’s
love of TS?
TS’ will?
Nell et al.’s waiver of claims against the estate?
 Past and Moral Consideration
Mills v. Wyman (Mass. 1825) pg. 146
Facts:
Π, Mills, was a stranger to the son of Δ, Wyman
Π, Mills, took care of the son in his illness
Δ, upon hearing of Π’s kindness, and “influenced by a
transient feeling of gratitude,” promised in writing to
pay the Π’s expenses
Δ then changed his mind, and Π sued on the promise
Contract?
Why not?
Past and Moral Consideration (cont’d)
Mills v. Wyman (cont’d)
“if nothing paid or promised” for the Δ’s promise,
then “the law, perhaps wisely, leaves the execution
of it to the conscience of him who makes it”
Fair?
Same result for (1) promise of adult to pay debt of
minor, (2) promise of party to pay claim barred by
the statute of limitations, (3) promise to pay debt
discharged in bankruptcy?
Why would the court treat (1)-(3) differently?
Past and Moral Consideration (cont’d)
Rest. 2d § 86. Promise For Benefit Received
(1) A promise made in recognition of a
benefit previously received by the
promisor from the promisee is binding to
the extent necessary to prevent
injustice.
(2) A promise is not binding under
Subsection (1)
(a) if the promisee conferred the benefit
as a gift or for other reasons the
promisor has not been unjustly enriched;
or
(b) to the extent that its value is
disproportionate to the benefit.
Past and Moral Consideration (cont’d)
§ 86. Promise For Benefit Received
Comment:
a. "Past consideration"; "moral obligation." Enforcement of
promises to pay for benefit received has sometimes been said to rest on
"past consideration" or on the "moral obligation" of the promisor, and
there are statutes in such terms in a few states. Those terms are not used
here: "past consideration" is inconsistent with the meaning of
consideration stated in § 71, and there seems to be no
consensus as to what constitutes a "moral obligation." The
mere fact of promise has been thought to create a moral
obligation, but it is clear that not all promises are enforced.
Nor are moral obligations based solely on gratitude or
sentiment sufficient of themselves to support a subsequent
promise.
Illustrations:
1. A gives emergency care to B's adult son while the son is sick and
without funds far from home. B subsequently promises to reimburse A for
his expenses. The promise is not binding under this Section.
 Settlement of Invalid Claims as
Consideration?
A files or asserts or suggests that he has a
claim against B
B agrees to pay A in exchange for A’s not
asserting or prosecuting the claim against B
B later comes to believe that A had no claim
against B, and tries to get out of the deal
Conflicting policy: discouraging filing of
frivolous claims v. encouraging consensual
settlement of disputes
Settlement of Invalid Claims (cont’d)
Possible rules that address conflicting policies:
(1) If B genuinely believed that A had a valid
claim at time of settlement (subjective) and a
reasonable person would think, at worst, that
there was a doubtful (as opposed to invalid
claim) or
(2) B genuinely believed that A had a valid
claim… (subjective only)
(3) Rest. 2d § 74
Settlement of Invalid Claims (cont’d)
Rest. 2d § 74. Settlement of Claims
(1) Forbearance to assert or the surrender of a claim or
defense which proves to be invalid is not consideration unless
(a) the claim or defense is in fact doubtful because of
uncertainty as to the facts or the law, or
(b) the forbearing or surrendering party believes that the
claim or defense may be fairly determined to be valid.
(2) The execution of a written instrument surrendering a claim
or defense by one who is under no duty to execute it is
consideration if the execution of the written instrument is
bargained for even though he is not asserting the claim or
defense and believes that no valid claim or defense exists.
Settlement of Invalid Claims (cont’d)
Fiege v. Boehm (Md. 1956) pp. 153
What rule did the court follow in reaching its
decision? –
Are there objective components in the rule?
Are there subjective components in the rule?
What component of contract formation is at issue
in these cases?
Should the rule in this area ever include an
objective component?
Pre-Existing Duty as Consideration?
Rule: A promise to do what one already is
obligated to do is not consideration
Exercise 3-13 – Two friends (Albert and
Betty) are trading baseball cards. They agree to
trade the card of one famous player for the card of
another famous player. After Albert has handed
over his card, Betty says, “I’ll give you the card I
promised give you only if you agree to give me a
second card.” Betty then asks for a specific card.
Albert, although upset, agrees to hand over the
second card because of his passionate desire for
the card for which he original had bargained.

Class #7
 3-13 cont.
1. What if Betty’s reason for demanding a second card
was that, after she looked at the first card from Albert,
she discovered the card was in much worse condition
than she had been led to believe?
2. What if Betty agreed to throw in a second card to get
Albert’s second card?
3. Would it matter in problem 2 if Albert’s second card
was considerably more valuable than Betty’s second
card?
4. What if Betty agreed to pay $1 to get Albert’s second
card? (So imagine now that Betty had said, “I’ll give
you the card I promised to give you only if you agree
to sell me a second card of my choice of $1.”)
 3-13 cont.
5. Imagine that Betty, instead of agreeing to the trade,
had agreed to buy Albert’s first card for $10 and, after
getting the card, handed Albert a check for $8 with the
notation “paid in full” on it. If Albert cashed the check,
could he then assert the pre-existing duty rule and
successfully sue for the remaining $2?
6. Imagine that Betty agreed to wash Albert’s convertible
car in exchange for Albert’s first baseball card. After
getting the card, a truckload of manure is dumped onto
and into Albert’s car. If Betty then demands, and Albert
agrees to give her, a second baseball card, will the pre-
existing duty rule prevent Betty from collecting the
second card? (See Rest. 2d. 89 next slide)
 Pre-Existing Duty as Consideration
(cont’d)
Rest. 2d § 89. MODIFICATION OF
EXECUTORY CONTRACT
A promise modifying a duty under a contract not
fully performed on either side is binding
(a) if the modification is fair and equitable in view
of circumstances not anticipated by the parties
when the contract was made; or
(b) to the extent provided by statute; or
(c) to the extent that justice requires enforcement
in view of material change of position in reliance
on the promise.
 Pre-Existing Duty as Consideration
(cont’d) pg 158
Alaska Packers Association v. Domenico (9th
Cir. 1902)
Libelants (plaintiffs) agreed in March/April to work as
seamen/fishermen on a salmon boat bound from San
Francisco to Alaska, for $50 or $60 each for the season,
+ 2¢ per fish
Arriving in Alaska, in the salmon season, the libelants
as a body refused to work unless promised a new
contract for $100 each
Superintendant, stating that he was without authority,
nonetheless signed new, $100 each contracts
Libelants on return to S.F., sue for $100 each
 Pre-Existing Duty as Consideration
(cont’d)
Alaska Packers Association v.
Domenico (cont’d)
$100 contracts were for the same services
that libelants had agreed to furnish under the
$50 and $60 contracts
Consideration?
Why did libelants argue defective nets, and
did court’s ruling on that issue change
outcome?
 Exercise 3-15 (2)
For two years, Kendra was in default on a $100
debt she owed her sister, Samantha. One day,
Samantha said to Kendra, “That $100 you owe
me is way overdue, but I don’t want to sue you.
You don’t use your old DVR very much. I can use
it to make sure I never miss any of my favorite
television shows. If you give me the DVR, I will
agree you have paid me in full.” Kendra agreed
to the proposal. Assume the DVR is worth $50.
Did the parties form a contract?
 Exercise 3-15 (3)
Mike is a police officer. Elizabeth is a business
owner whose business is robbed at gunpoint by
Robert. Elizabeth offers Mike $10,000 to capture
Robert. If Mike captures Robert while on Duty,
Elizabeth will not have to pay Mike the $10,000.
Why not? If Mike captures Robert while on
vacation in another state, Elizabeth will have to
pay. Why?
 Pre-Existing Duty as Consideration
(cont’d)
Rest. 2d §73. PERFORMANCE OF
LEGAL DUTY
Performance of a legal duty owed to a
promisor which is neither doubtful nor the
subject of honest dispute is not
consideration; but a similar performance is
consideration if it differs from what was
required by the duty in a way which reflects
more than a pretense of bargain.
 Pre-Existing Duty as Consideration
(cont’d)
Rest. 2d § 89. MODIFICATION OF
EXECUTORY CONTRACT
A promise modifying a duty under a contract not
fully performed on either side is binding
(a) if the modification is fair and equitable in view
of circumstances not anticipated by the parties
when the contract was made; or
(b) to the extent provided by statute; or
(c) to the extent that justice requires enforcement
in view of material change of position in reliance
on the promise.
 Pre-Existing Duty as Consideration
(cont’d)
§ 2-209. Modification, Rescission
and Waiver.
(1) An agreement modifying a contract within this
Article needs no consideration to be binding.
Pre-Existing Duty as Consideration –
Statute of Frauds
§ 2-209. Modification, Rescission and Waiver.
(cont’d)
(2) A signed agreement which excludes modification or rescission
except by a signed writing cannot be otherwise modified or
rescinded, but except as between merchants such a requirement on a
form supplied by the merchant must be separately signed by the
other party.
(3) The requirements of the statute of frauds section of this Article
(Section 2-201) must be satisfied if the contract as modified is within
its provisions.
(4) Although an attempt at modification or rescission does not
satisfy the requirements of subsection (2) or (3) it can operate as a
waiver.
(5) A party who has made a waiver affecting an executory portion of
the contract may retract the waiver by reasonable notification
received by the other party that strict performance will be required
of any term waived, unless the retraction would be unjust in view of
a material change of position in reliance on the waiver.
Accord and Satisfaction (cont’d)
What is an “accord?”
A “satisfaction?”
An “accord and satisfaction?”
A “liquidated” claim?
An “unliquidated” claim?
 Accord and Satisfaction
UCC 1-308, formerly UCC 1-207
§ 1-308. Performance or Acceptance
Under Reservation of Rights.
(a) A party that with explicit reservation of rights
performs or promises performance or assents to
performance in a manner demanded or offered by the
other party does not thereby prejudice the rights
reserved. Such words as "without prejudice," "under
protest," or the like are sufficient.
(b) Subsection (a) does not apply to an accord and
satisfaction.
Accord and Satisfaction (cont’d)
AFC Interiors v. DiCello (Ohio 1989) pp. 163
DiCello paid less than the amount owing, by check
with notation “payment in full”
AFC crossed out DiCello’s notation and inserted
“payment on account,” and deposited check
Did an accord and satisfaction take place with
respect to the debt owed by DiCello to AFC under
the common law?
Does UCC 1-207 (now 1-308) supersede the
common law doctrine of accord and satisfaction?
Accord and Satisfaction (cont’d)
AFC Interiors v. DiCello (Ohio 1989)
Majority holding
Dissent
Illusory Promises – Consideration?
Is an illusory promise a promise at all?
What makes a promise illusory?
Has the language of a promise, but contains no
restriction on the promisor’s discretion to
perform or not to perform
No promisor liability if promisor chooses not to
perform
 Illusory Promises (cont’d)
What makes a promise illusory (cont’d)?
A promise is illusory if:
1. it does not restrict the promisor’s future
right of action,
2. if it gives the promisor unfettered
discretion to perform or not perform the
promise, or
3. if it does not restrict the promisor’s
autonomy
 Illusory Promises (cont’d)
Why do courts/the law care about this?
Fairness --- one party isn’t getting anything
And Court can’t enforce the “promise” because
the promising party didn’t really promise anything
BUT --- good faith and reasonableness
Parties acted as if, and thought, they had a deal
 Good Faith
Rest. 2d §205. DUTY OF GOOD FAITH
AND FAIR DEALING
Every contract imposes upon each
party a duty of good faith and fair
dealing in its performance and its
enforcement.
Comment:
c. Good faith in negotiation. This Section,
like Uniform Commercial Code §1- 203, does not deal
with good faith in the formation of a contract. Bad faith
in negotiation, although not within the scope of this
Section, may be subject to sanctions....
 Exercise 3-18
1. “I will buy your car for $5,000 cash if I feel
like it.”
2. “I will buy your car for $5,000.”
3. “If I wake up in a good mood tomorrow, I will
clean your house in exchange for $100.”
4. “Unless I win the lottery tonight, I will clean
your house in exchange for $100.”
5. From a baseball league to a baseball
manufacturer: “We will buy, at $1 per ball, all
the balls we require.”
6. From a baseball league to a baseball
manufacturer: “We will buy, at $1 per ball, as
many baseballs as we choose to buy.”
7. “I covenant to pay you $4,000 for this
washing machine if I am satisfied with it.”
8. “I covenant to pay you $4,000 for this
washing machine if I desire to do so.”
 Illusory Promises (cont’d)
Harris v. Blockbuster ([Link]. 2009) pg.
177

Class #8
 Illusory Promises (cont’d)
Omni Group, Inc. v. Seattle-First National
Bank ([Link]. 1982)
Omni agreed to buy real estate from the Clarks,
subject to Omni’s engineer’s and architect’s
feasibility report
Omni required to give notice to seller if “said
report is satisfactory to purchaser” within 15 days
of seller’s acceptance of Omni’s offer; if notice not
given, agreement null and void
Omni then gave notice to Clarks that it had decided
to forego the feasibility report
 Illusory Promises (cont’d)
Omni Group, Inc. v. Seattle-First National
Bank (cont’d)
Does a condition to a party’s performance always
make that party’s consideration illusory?
Why is feasibility report condition, based on the
report’s being satisfactory to Omni, not illusory?
Good faith?
Express or implied?
 Illusory Promises (cont’d)
Wood v. Lucy, Lady Duff-Gordon (N.Y. 1917)
Δ Lucy, Lady Duff-Gordon, agreed with Π, Wood,
that Wood had the exclusive right to brand his
fashions with her endorsement and to sell her
designs (one-year term, renewed unless
terminated by either party)
Π filed suit against Δ, alleging that she sold her
designs in breach of the agreement
Δ answered no contract, because Π did not
promise to do anything
 Illusory Promises (cont’d)
Wood v. Lucy, Lady Duff-Gordon
(cont’d)
What did the Π, Wood, expressly agree to do?
What did court find that the Π, Wood, had
implicitly agreed to do?
Contract?
 Promissory Estoppel
1. Promise
2. Promisor should reasonably expect to induce
action or forbearance
3. Promise does induce such action or forbearance
4. Injustice can be avoided only by enforcing the
promise
Is this a contract with consideration?
Is this a contract?

Class ##9 and 10

 Promissory Estoppel (cont’d)
§90. PROMISE REASONABLY INDUCING
ACTION OR FORBEARANCE
(1) A [A]promise [B] which the promisor

should reasonably expect to induce

action or forbearance on the part of
the promisee or a third person and
[C] which does induce such action or
forbearance [D] is binding if injustice
can be avoided only by enforcement
of the promise. The remedy granted
for breach may be limited as justice
requires.
 Promissory Estoppel (cont’d)
b. Character of reliance protected. The
principle of this Section is flexible. The promisor is
affected only by reliance which he does or
should foresee, and enforcement must be
necessary to avoid injustice. Satisfaction of the
latter requirement may depend on the reasonableness of the
promisee's reliance, on its definite and substantial character
in relation to the remedy sought, on the formality with which
the promise is made, on the extent to which the evidentiary,
cautionary, deterrent and channeling functions of form are
met by the commercial setting or otherwise, and on the
extent to which such other policies as the enforcement of
bargains and the prevention of unjust enrichment are
relevant.... The force of particular factors varies in different
types of cases....
 Promissory Estoppel (cont’d)
Illustrations:
2. A promises B not to foreclose, for a
specified time, a mortgage which A holds on
B's land. B thereafter makes improvements on
the land. A's promise is binding and may be
enforced by denial of foreclosure before the
time has elapsed.
 Promissory Estoppel (cont’d)
4. A has been employed by B for 40 years. B
promises to pay A a pension of $200 per
month when A retires. A retires and forbears
to work elsewhere for several years while B
pays the pension. B's promise is binding.
 Promissory Estoppel (cont’d)
What is the significance of the last sentence of
R2d § 90(1)?
 Promissory Estoppel (cont’d)
R2d § 90
Comment d. Partial enforcement. A promise
binding under this section is a contract, and full-
scale enforcement by normal remedies is often
appropriate. But the same factors which bear on
whether any relief should be granted also bear on
the character and extent of the remedy. In
particular, relief may sometimes be limited to
restitution or to damages or specific relief
measured by the extent of the promisee's reliance
rather than by the terms of the promise.
 Promissory Estoppel (cont’d)
R2d § 90
Comment d.
Illustrations:
8. A applies to B, a distributor of radios manufactured by C,
for a “dealer franchise” to sell C's products. Such franchises
are revocable at will. B erroneously informs A that C has
accepted the application and will soon award the franchise,
that A can proceed to employ salesmen and solicit orders,
and that A will receive an initial delivery of at least 30 radios.
A expends $1,150 in preparing to do business, but does not
receive the franchise or any radios. B is liable to A for the
$1,150 but not for the lost profit on 30 radios.
 Promissory Estoppel (cont’d)
Note!
Charitable subscription does not require
reliance:
§ 90. Promise Reasonably
Inducing Action or Forbearance
(2) A charitable subscription or a marriage
settlement is binding under Subsection (1)
without proof that the promise induced action
or forbearance.
 Promissory Estoppel (cont’d)
Ricketts v. Scothorn (Neb. 1898) pp. 198
Π, Scothorn alleged that her grandfather, Ricketts,
made to her a $2,000 demand note, @ 6%/year, in
“consideration” that “she should surrender her
employment as bookkeeper for Mayer Bros., and
cease to work for a living.”
Grandfather died, and executor of his estate
refused to pay on the note
Was consideration given?
 Promissory Estoppel (cont’d)
East Providence Credit Union v.
Geremia (R.I. 1968) pp. 202
Δs, H + W, borrowed $2,350 and made note to
Π, secured by a chattel mortgage on the Δs’
1962 ranch wagon
What is a chattel?
 What is a “Chattel?”
An article of personal property; any species of property not
amounting to a freehold or fee in land. People v.
Holbrook, 13 Johns. (N. Y.) 94; Hornblower v Proud, 2
Barn. & Aid. 335; State v. Bartlett, 55 Me. 211; State v.
Brown, 9 Baxt. (Teun.) 54, 40 Am. Rep. 81. The name
given to things which in law are deemed personal property.
Black’s Law Dictionary, available at
[Link]
What is a ranch wagon?
1952 Ford Ranch Wagon
1962 Ford Ranch Wagon
 Promissory Estoppel (cont’d)
East Providence Credit Union v.
Geremia (cont’d)
Δs were obligated under the loan agreement
to insure the car
Π lender received notice that insurance was
about to lapse for Δs’ failure to pay premium
Π lender notified Δs: “If we are not notified of
a renewal Policy within 10 days, we shall be
forced to renew the policy for you and apply
this amount to your loan.”
 Promissory Estoppel (cont’d)
East Providence Credit Union v. Geremia
(cont’d)
Π did not pay the premium, the insurance lapsed,
the ranch wagon was totaled, and the Π lender
sought to recover from the Δs on the note
What happened on Π’s complaint below?
Did the lender promise to pay the premium?
If so, was there any consideration given by the Δs
to support formation of a contract regarding the
payment of the premium?
 Promissory Estoppel (cont’d)
East Providence Credit Union v.
Geremia (cont’d)
Did the court think that it needed to find
mutual assent and consideration for it to rule
for the Δs
Why?
Did the court rule that a promise was
enforceable without consideration?
If so, is that a contract?
 Promissory Estoppel (cont’d)
Valley Bank v. Dowdy (S.D. 1983) pg. 205
What was the deal among Dowdy, Weeks
Bros. and the Bank?
What did Dowdy assert that he did in
reliance?
On what promise?
Promissory Estoppel and Irrevocable
Offers
Drennan v. Star Paving Co. (Cal. 1958) pp. 209
Π Drennan, a licensed general contractor, made a
request for bids from subcontractors in connection
with his bidding on the Monte Vista School Job
Δ, Star Paving Co., submitted the low bid for paving
Next day, Star told Drennan that it had made a mistake
(wanted $15k instead)
Drennan told Star that he had relied on the paving
subcontract bid in making his GC bid, and expected
Star to perform
Promissory Estoppel and Irrevocable
Offers (cont’d)
Drennan v. Star Paving Co. (cont’d)
Star refused
Drennan covered, using another paving
subcontractor, to whom he had to pay
$10,949
What did trial court rule?
What did Star contend in its defense?
What did Drennan contend to the contrary?
Promissory Estoppel and Irrevocable
Offers (cont’d)
Drennan v. Star Paving Co. (cont’d)
Did Star’s bid expressly state that it was
irrevocable? That it was revocable?
“The absence of consideration is not fatal to
the enforcement of… a promise.” ???????
When not?
For whom, and on what basis (rule + facts),
did the appellate court rule?
 Two Promissory Estoppels
The First Restatement and Second Restatment take
different approaches to Promissory Estoppel
both require
1) a promise was made
2) promisor should have reasonably expected the
other party to rely on the promise
3) there was in fact reliance
4) it would be unjust to not enforce the
promise
 Two Promissory Estoppels
differences are that
-first restatement requires promise to be of a
definite and substantial character
-second allows reliance by third parties
-second adds protection for charitable
donations or marriage settlements by saying
there does not need to be reliance
 Promissory Estoppel and Unfair
Bargaining
Hoffman v. Red Owl Stores, Inc. (Wis.
1965) pp. 213
Did the jury find facts for each of the
elements of a “contract without
consideration” based on the doctrine of
promissory estoppel?
What were those facts?
 Promissory Estoppel and Unfair
Bargaining (cont’d)
Hoffman v. Red Owl Stores, Inc. (cont’d)
Court adopts promissory estoppel rule of Rest. 2d
Contracts § 90 --- “supplies a needed tool which
courts may employ in a proper case to prevent
injustice”
Court applies the facts to the rule in considering
the jury’s verdict: “a number of promises and
assurances given to Hoffman by Lukowitz in behalf
of Red Owl upon which plaintiffs relied and acted
upon to their detriment”
 Promissory Estoppel and Unfair
Bargaining (cont’d)
Hoffman v. Red Owl Stores, Inc.
(cont’d)
But Δ alleges that an “agreement was never
reached on essential factors necessary to
establish a contract”
Does the agreement under Rest. 2d § 90(1)
(promissory estoppel) need to be as definite
as an agreement under Rest. 2d § 17(1)
(bargained for exchange and consideration)
for the former to be enforceable?
 Promissory Estoppel and Unfair
Bargaining (cont’d)
Hoffman v. Red Owl Stores, Inc. (cont’d)
Court: promise giving rise to the cause of action
need not be so comprehensive in scope as to meet
the requirements of an offer that would ripen into
a contract if accepted by the offeree
Does the court hold that all of the factual findings
required to establish an enforceable promise on
the basis of promissory estoppel are the jury’s
determination, or are some for the court?
 Promissory Estoppel and Unfair
Bargaining (cont’d)
Hoffman v. Red Owl Stores, Inc.
(cont’d)
Would be a mistake to regard an action
grounded on promissory estoppel as the
equivalent of a breach of contract action ---
jury may find most facts, but court, not jury,
must decide if injustice can be avoided only
by enforcement of the promise
 Introduction to the Statute of Frauds
Rest. 2d § 110. Classes Of Contracts Covered
(1) The following classes of contracts are subject to a
statute, commonly called the Statute of Frauds, forbidding
enforcement unless there is a written memorandum or an
applicable exception:
(a) a contract of an executor or administrator to answer for
a duty of his decedent (the executor-administrator
provision);
(b) a contract to answer for the duty of another (the
suretyship provision);
(c) a contract made upon consideration of marriage (the
marriage provision);
(d) a contract for the sale of an interest in land (the land
contract provision);
(e) a contract that is not to be performed within one year
from the making thereof (the one-year provision).
(2) The following classes of contracts, which were
traditionally subject to the Statute of Frauds, are now
governed by Statute of Frauds provisions of the Uniform
Commercial Code:
(a) a contract for the sale of goods for the price of $500 or more
(Uniform Commercial Code § 2-201);
*******
Promissory Estoppel and the Statute of
Frauds
Rest. 2d § 139. Enforcement By Virtue Of Action In Reliance
(1) A promise which the promisor should reasonably expect to
induce action or forbearance on the part of the promisee or a
third person and which does induce the action or forbearance is
enforceable notwithstanding the Statute of Frauds if injustice can
be avoided only by enforcement of the promise. The remedy
granted for breach is to be limited as justice requires.
(2) In determining whether injustice can be avoided only by
enforcement of the promise, the following circumstances are
significant:
(a) the availability and adequacy of other remedies, particularly
cancellation and restitution;
(b) the definite and substantial character of the action or
forbearance in relation to the remedy sought;
(c) the extent to which the action or forbearance corroborates
evidence of the making and terms of the promise, or the making
and terms are otherwise established by clear and convincing
evidence;
(d) the reasonableness of the action or forbearance;
(e) the extent to which the action or forbearance was foreseeable
by the promisor.
Comment: Compliments § 90
 Contract Defenses
Contract Defenses
1. Deception/Misrepresentation
2. Mistake
3. Duress
1. Undue influence
2. Illegality
3. Incapacity
4. Unconscionability
5. Statute of frauds

Class #11
 Contract Defenses – Deception
Misrepresentation
The 5 elements of misrepresentation:
1. A false statement of a fact or an intention (to act in a
certain way in the future) or an opinion (expressing
the party’s belief or viewpoint but which implies false
facts)
2. That addresses a fact, intention, or opinion that is
material to the contract (i.e., a reasonable
person would regard it as important in making the
contract)
3. That is made with the requisite state of mind
4. That is justifiably and actually relied on by the other
party
5. That caused damages to the other party
 Contract Defenses – Deception
Misrepresentation
Rest. 2d § 159 Misrepresentation Defined. A
misrepresentation is an assertion that is not in
accord with the facts.

Rest. 2d § 162 When a Misrepresentation Is Fraudulent or Material

(1) A misrepresentation is fraudulent if the maker
intends his assertion to induce a party to
manifest his assent and the maker
(a) knows or believes that the assertion is not in
accord with the facts, or
(b) does not have the confidence that he states or
implies in the truth of the assertion, or
(c) knows that he does not have the basis that he
states or implies for the assertion.
(2) A misrepresentation is material if it would be
likely to induce a reasonable person to manifest
his assent, or if the maker knows that it would be
likely to induce the recipient to do so.
 Contract Defenses – Deception
Misrepresentation
An alleged misrepresentation is a defense
The effect of the misrepresentation may be
either that:
1. No contract was formed (R2d 163), or
2. The contract is voidable (R2d 164)
 State of Mind
If the misrepresentation is intentional or
fraudulent, it does not need to be material
If the misrepresentation is negligent or
innocent, it needs to be material
 Contract Defenses – Deception
Misrepresentation
Rest. 2d § 163 When a Misrepresentation Prevents
Formation of a Contract. If a
misrepresentation as to the
character or essential terms of a
proposed contract induces conduct
that appears to be a manifestation
of assent by one who neither knows
nor has reasonable opportunity to
know of the character or essential
terms of the proposed contract, his
conduct is not effective as a
manifestation of assent.
 Contract Defenses – Deception
Misrepresentation
Rest. 2d § 164 When a Misrepresentation
Makes a Contract Voidable
(1) If a party's manifestation of

assent is induced by either a

fraudulent or a material
misrepresentation by the other
party upon which the recipient is
justified in relying, the contract is
voidable by the recipient.
*******
 Contract Defenses – Deception
Misrepresentation
Misrepresentation (cont’d)
Elements 1 + 2. Materially false statement –
usually objectively analyzed, i.e., a reasonable
person in the same circumstance would
regard the fact as important in deciding
whether to enter into the contract (minority –
analyzes materiality from the subjective view
of the recipient)
 Contract Defenses – Deception
Misrepresentation
Misrepresentation Elements 1 + 2
(cont’d)
Misrepresentation of fact and intention? -
actionable
Misrepresentation of opinion? - actionable if
the opinion implies underlying facts
 Exercise 5-4 (Fact, Intention or Opinion)
1. The seller of a used car lies about the car’s maintenance
record?
2. The seller of a used car lies about the age of the car’s tires.
3. The seller of a used car lies and says “in my opinion this car is
a good buy.”
4. The seller of a used car lies and says she thinks the car is
“gorgeous.”
5. The seller of a used car lies and says she intends to buy a new
version of the same make/model car. She actually intends to
buy an entirely different kind of car.
6. The seller of an office building lies and says that a major
manufacturer is planning to move its business nearby.
7. An art expert who is selling a painting lies and says “in my
opinion this painting is a masterpiece.”)
 Contract Defenses – Deception
Misrepresentation
Misrepresentation Element 3 - Made with the
requisite state of mind --- i.e., the Speaker either:
knew that the statement was not true
(intentional), or
unreasonably believed that the statement was not
true (negligent), or
reasonably believed that the statement was true
(innocent)
Contract is voidable in each case, though measure
of damages may differ
 Contract Defenses – Deception
Misrepresentation
Misrepresentation Element 4 - Justifiably
relied on by the recipient
Reliance is “justifiable” if it is not completely
irrational, preposterous, or absurd (fairly low
standard)
 Contract Defenses – Deception
Misrepresentation
Cousineau v. Walker (Alaska 1980) pg. 239
Can purchasers rescind land contract because of false
statements of sellers?
“rescind” – to end
Statements made in the multiple listing were false:
gravel and frontage
Innocent misrepresentation may be basis to rescind
Questions before the court:
1. Did Cousineau rely on the statements?
2. Were statements material?
3. If yes + yes, was Cousineau’s reliance justified?
 Contract Defenses – Deception
Misrepresentation
Cousineau v. Walker (cont’d)
1. Did Cousineau rely (gravel + frontage)?
2. Were statements material?
3. Was reliance justified?
 Contract Defenses – Deception
Misrepresentation
Cousineau v. Walker (cont’d)
1. Cousineau relied (ruling that the trial
court’s contrary finding was clearly erroneous)
2. Walker’s statements re: gravel and frontage
were material “as a matter of law” --- what
does this mean?
3. Cousineau justifiably relied --- “the
prevailing trend is toward placing a minimal
duty on a buyer”
 Exercise 5-9 (3A) pg. 246
Larry Landowner was negotiating with Betty Buyer for Betty to
buy, for $50,000, PurpleAcre, a tract of farmland on which a corn
crop is growing. Betty, who owns a chain of ice skating rinks, was
planning to use the land to open an ice skating rink. During
negotiations, Larry told Betty that, within the next two years, his
brother, Ken was planning to build a shopping mall on a nearby
tract of land that Ken owned. Betty thereafter agreed to buy the
land from Larry. At the time he made this statement, Larry was
unaware that Ken had been forced to abandon his plan to build
the shopping mall. He was also unaware that Ken had promised
the city council that he would not develop his land for at least
the next fifteen years. Three weeks before the sale was due to
close, Betty discovered the truth. She refused to close. Larry
sued Betty for breach of contract. Is the fact that Larry
misrepresented material so that Betty would not be liable for
beaching the contract?
The first issue is whether Betty can void her contract to buy Purpleacre from Larry on the
grounds of the misrepresentation defense.
The applicable rule in this case is misrepresentation. Misrepresentation requires you to
show a false statement of fact, intention or opinion. The statement must be material.
Materiality means that the statement would influence a reasonably buyer in their decision
as to whether or not to enter the contract. …. Damages.
The facts in this case show that Larry did make a false statement of fact. He stated that
there was going to be a shopping mall next door, and in reality there was no planned
shopping mall for next door. This statement was verifiably false at the time it was made.
The statement is most likely material. A reasonable business person would consider the use
of a neighboring parcel of land …
In conclusion, Betty can likely void her contract with Larry based upon a misrepresentation
defense.
The next issue is whether Betty
 Exercise 5-9 (3B) pg. 246
Larry Landowner was negotiating with Betty Buyer for Betty to buy, for
$50,000, PurpleAcre, a tract of farmland on which a corn crop is
growing. Betty, who owns a chain of ice skating rinks, was planning to
use the land to open an ice skating rink. During negotiations, Larry told
Betty that the land had only ever been used for farming. Betty
thereafter agreed to buy the land from Larry. Three weeks before the
sale was due to close, Betty discovered that, without Larry knowing,
his brother Ken had buried several hundred large metal containers
twenty feet underground on a portion of the property Betty did not
intend to use. The containers were not harming the property and an
expert with whom Betty consulted told Betty that he did not expect
the containers to cause any harm to the property. However, the expert
also noted that no one could say with certainty the containers would
not deteriorate and then begin to harm the land because the particular
metal used for the containers had only been in existence for a few
years. Betty refused to close the deal. Larry sued Betty for breach of
contract.
 Exercise 5-9 (4) pg. 246
Two weeks ago, Bob purchased a used car from Sally
Seller. Sally was asking what Bob determined to be a fair
price for the car, $6,000. The car was very popular and, as
Bob knew, there were tens of thousands of identical
versions of the car in existence. During negotiations, Sally
told Bob the deal was a great one because Fred
Filmmaker was planning to use this particular car in one
of Filmmaker’s next films. After Bob took delivery of the
car, Bob asked Filmmaker when he wanted to borrow the
car. Filmmaker told Bob he never intended to use the car
in a film and had never even met Sally. Bob returned the
car to Sally and told her he unwilling to buy it. Sally sued
Bob for breach of contract. Was Bob’s reliance on Sally
misrepresentation justifiable?
 Contract Defenses – Deception
Misrepresentation v. Warranty
CBS Inc. v. Ziff-Davis Publishing Co. (N.Y. 1990)
Pg. 249
CBS agreed to purchase from Ziff-Davis, which agreed
to sell to CBS, certain of its business assets
Ziff-Davis warranted (promised) that financial
information was true and correct
CBS did its due diligence, and concluded that the
financial information was not true
CBS closed anyway, without waiving rights
Did CBS purchase property in reliance on Ziff-Davis’
misrepresentation or warranty?
 Contract Defenses – DeceptionNon-
Disclosure
Another type of deception – Non-
disclosure
1. Failure to disclose a fact
1. That the party had a duty to
disclose
2. That was material
3. Upon which the counterparty justifiably and
actually relied
4. And was damaged
Contract Defenses – Deception Non-
Disclosure
Non-disclosure – when does duty to disclose arise?
The fact is basic to the transaction (e.g.,
bankruptcy not disclosed in the middle of
negotiations to borrow money), or
Party who made a prior representation that now is
not true, or
Party who has made a partial disclosure, or
Party who has a confidential or fiduciary
relationship with the counterparty
 Exercise 5-13 pg. 257
Andy Applicant applied for a position as a bank
teller with Careful Bank. In his application, Andy
did not disclose his criminal record. Twenty
years ago, Andy was convicted and jailed for
burglarizing his stepfather’s house. Did Andy
have a duty to disclose his criminal record?
 Contract Defenses – Deception
Concealment
Concealment
1. Active efforts to prevent another
party from learning a fact
2. Fact was material
3. Other party justifiably and actually relied
on the misrepresentation
4. Damages
 Contract Defenses – Deception (cont’d)
Review – 3 kinds of deception:
1. Misrepresentation
2. Non-Disclosure
1. Concealment
 Contract Defenses – Deception
Misrepresentation
The 5 elements of misrepresentation:
1. A false statement of a fact or an intention (to act in a
certain way in the future) or an opinion (expressing
the party’s belief or viewpoint but which implies false
facts)
2. That addresses a fact, intention, or opinion that is
material to the contract (i.e., a reasonable
person would regard it as important in making the
contract)
3. That is made with the requisite state of mind
4. That is justifiably and actually relied on by the other
party
5. That caused damages to the other party
 Contract Defenses – DeceptionNon-
Disclosure
Another type of deception – Non-disclosure
1. Failure to disclose a fact
1. That the party had a duty to disclose
The fact is basic to the transaction (e.g., bankruptcy not disclosed in
the middle of negotiations to borrow money), or
Party who made a prior representation that now is not true, or
Party who has made a partial disclosure, or
Party who has a confidential or fiduciary relationship with the
counterparty
1. That was material
2. Upon which the counterparty justifiably and actually relied
3. And was damaged
 Contract Defenses – Deception
Concealment
Concealment
1. Active efforts to prevent another
party from learning a fact
2. Fact was material
3. Other party justifiably and actually relied
on the misrepresentation
4. Damages
 Contract Defenses - Mistake
Rest. 2d § 151 Mistake Defined.
A mistake is a belief that is not in accord with
the facts.

Two types of mistake:

Mutual Mistake
Unilateral Mistake
Contract Defenses – Mutual Mistake
(cont’d)
Mutual mistake – S&W p. 221
Rest. 2d § 152. When Mistake of Both
Parties Makes a Contract Voidable
(1) Where a [1]mistake of both parties at the time a contract
was made [2] as to a basic assumption on which the contract
was made [3] has a material effect on the agreed exchange of
performances, the contract is voidable by the adversely
affected party unless he bears the risk of the mistake under
the rule stated in § 154.
(2) In determining whether the mistake has a material effect
on the agreed exchange of performances, account is taken of
any relief by way of reformation, restitution, or otherwise.
Contract Defenses – Mutual Mistake
(cont’d)
Sherwood v. Walker (Mich. 1887) pg. 261
Rose 2d of Aberlone
What was the mistake?
Was it mutual or unilateral?
Contract Defenses – Mutual Mistake
(cont’d)
3 situations in which a party may be found to
have assumed the risk, notwithstanding
mutual mistake:
1. Contract allocates risk to that party
2. Party Δ knows she has limited
knowledge, but nonetheless treats that
limited knowledge as sufficient
3. Court believes it is just to allocate the
risk to one party
Contract Defenses – Mutual Mistake
(cont’d)
Rest. 2d § 154. When a Party Bears the
Risk of a Mistake
A party bears the risk of a mistake when
(a) The risk is allocated to him by agreement of the
parties, or
(b) he is aware, at the time the contract is
made, that he has only limited knowledge
with respect to the facts to which the
mistake relates but treats his limited
knowledge as sufficient, or
(c) the risk is allocated to him by the court
on the ground that it is reasonable in the
circumstances to do so.
Contract Defenses – Mutual Mistake
(cont’d)
Lenawee County Board of Health v.
Messerly (Mich. 1982)
Facts?
Trial; Intermediate Appellate Court
How does Rest. 2d § 154 apply?
What is an “as is” clause?
Why is it relevant to mutual mistake case?
“17. Purchaser has examined this property and
agrees to accept same in its present condition. There
are no other or additional written or oral
understandings.”
 “As is” and “Where is”
AS IS AND WHERE IS. The Purchaser has been given the
opportunity to inspect the property and has agreed to
purchase the land, buildings and other improvements,
and all fixtures and personal property (the “PROPERTY”)
from the Seller in an “AS IS” and “WHERE IS” condition,
without any warranty or representation, express or
implied, whatsoever, and subject to any and all defects,
whether visible or latent, and will accept the Property at
closing in such condition. Purchaser acknowledges and
agrees that the Seller hereby expressly disclaims any and
all warranties, whether express or implied, with respect to
the Property, including without limitation, any warranty of
habitability, warranty of merchantability, or warranty of
fitness for a particular use. The Purchaser waives and
relinquishes all rights to assert any claim, demand, or
lawsuit of any kind with respect to the condition of the
Property. The Seller will not be required to make any
repairs or pay any expenses concerning the Property.
 Exercise 5-20 (2)
Pierre offered to sell Dominic an old violin for
$500,000. The parties agreed Dominic would
pay this amount because they both believed the
violin might be a Stradivarius (i.e. rare and
expensive). The violin turned out not to be a
Stradivarius and therefore was only worth
$5,000. Does the parties’ mistake about the
brand of violin affect a basic assumption on
which the contract was made?
Eagle Diamond
Contract Defenses – Mistake (cont’d)

Wood v. Boynton (Wis. 1885) pg. 273

Wood sold stone to Boynton, a jeweler, for $1
Neither knew what kind of stone it was
The stone was a diamond, worth $700
 Yard Sales?
If you find an amazing deal at a yard sale (e.g. an
original declaration of independence for $10, or
a Picasso for $20), do you get to keep it? Does it
matter if you knew what you were buying?
Contract Defenses – Unilateral Mistake
The 3 elements of mutual mistake + 1 = unilateral mistake
Compare S217 – R2d 152 – Mutual Mistake
§ 153. When Mistake of One Party Makes a
Contract Voidable
Where a [1] mistake of one party at the time a contract was
made [2] as to a basic assumption on which he made the
contract [3] has a material effect on the agreed exchange of
performances that is adverse to him, [4] the contract is
voidable by him [A] if he does not bear the risk of the mistake
under the rule stated in § 154, and [B]
(a) the effect of the mistake is such that enforcement of the
contract would be unconscionable, or
(b) the other party had reason to know of the
mistake or his fault caused the mistake.
Contract Defenses – Unilateral Mistake
(cont’d)
Drennan v. Star Paving Co. (Cal. 1958)
(EXCERPT ON PAGE 279)
Did Star Paving’s unilateral mistake make the
subcontract avoidable?
Why not?
 Contract Defenses - Duress
Easy case: gun to head --- “Sign or I’ll shoot”
--- traditional duress (“I’ll make him an offer
he can’t refuse.” Don Vito Corleone)
Harder case: “I won’t perform under contract
unless you pay me more” --- economic duress
In either case, agreeing party’s assent may
not have been shown because the purported
assent not given on the exercise of the party’s
free will

Class #12
Traditional Duress v. Economic Duress
Economic Duress
Traditional Duress
Contract Defenses – Duress (cont’d)

Austin Instrument, Inc. v. Loral

Corporation (N.Y. 1971) pg. 282
Facts What is the difference between “a mere
threat by one party to breach the contract” and
economic duress?
Rest. 2d Contracts §§ 174-176
 Duress
Rest. 2d § 174 When Duress by Physical Compulsion Prevents
Formation of a Contract
If conduct that appears to be a
manifestation of assent by a party who does
not intend to engage in that conduct is
physically compelled by duress, the conduct
is not effective as a manifestation of assent.
Rest. 2d § 175 When Duress by Threat Makes a Contract
Voidable
(1) If a party's manifestation of assent is
induced by an improper threat by the other
party that leaves the victim no reasonable
alternative, the contract is voidable by the
victim.
*******
 Duress
Rest. 2d § 176 When a Threat Is Improper
(1) A threat is improper if
(a) what is threatened is a crime or a tort, or the threat
itself would be a crime or a tort if it resulted in obtaining
property,
(b) what is threatened is a criminal prosecution,
(c) what is threatened is the use of civil process and the
threat is made in bad faith, or
(d) the threat is a breach of the duty of good faith and fair
dealing under a contract with the recipient.
(2) A threat is improper if the resulting exchange is
not on fair terms, and
(a) the threatened act would harm the recipient and would
not significantly benefit the party making the threat,
(b) the effectiveness of the threat in inducing the
manifestation of assent is significantly increased by prior
unfair dealing by the party making the threat, or
(c) what is threatened is otherwise a use of power for
illegitimate ends.
 Duress
Rest. 2d § 176
Comment:
a. Rationale. An ordinary offer to make a contract commonly
involves an implied threat by one party, the offeror, not to make the
contract unless his terms are accepted by the other party, the
offeree. Such threats are an accepted part of the bargaining
process. A threat does not amount to duress unless it is so
improper as to amount to an abuse of that process. Courts first
recognized as improper threats of physical
violence and later included wrongful seizure or
detention of goods. Modern decisions have
recognized as improper a much broader range of
threats, notably those to cause economic harm.
The rules stated in this Section recognize as improper both the older
categories and their modern extensions under developing notions of
“economic duress” or “business compulsion.” *******
Contract Defenses – Undue Influence
Rest. 2d § 177
Odorizzi v. Bloomfield School District
(Cal. 1966)
Pg. 288
1&2) discussion at an unusual or inappropriate time or place
3) insistent demand that the deal be consummated at once
4) extreme insistence on the damage of delay
5) use of multiple people negotiating against one person
6) absence of third party advisors to victim
7) insistence that there is no time to consult with advisors
Contract Defenses – Undue Influence
§ 177 When Undue Influence Makes a Contract
Voidable
(1) Undue influence is unfair
persuasion of a party who is under
the domination of the person
exercising the persuasion or who by
virtue of the relation between them is
justified in assuming that that person
will not act in a manner inconsistent
with his welfare.
(2) If a party's manifestation of
assent is induced by undue influence
by the other party, the contract is
voidable by the victim.
*******
 Contract Defenses (cont’d)
Contract defenses are the grounds on which contract
parties can get out of their contracts
1. Deception
2. Mistake
3. Duress
1. Undue influence
2. Illegality/Unenforceable on public
policy grounds
3. Incapacity
4. Unconscionability
5. Statute of frauds
Class #13
 Contract Defenses - Illegality
Can the same be said of the defense of
illegality, i.e., when a contract term is
“unenforceable on grounds of public policy?”
Four recurring areas:
1. Contracts prohibited by statute
2. Contracts in violation of licensing statutes
3. Covenants not to compete
4. Tangential illegality
 Illegality = Unenforceable on Public
Policy Grounds
Rest. 2d § 178. When A Term Is Unenforceable On
Grounds Of Public Policy
(1) A promise or other term of an
agreement is unenforceable on grounds
of public policy if legislation provides
that it is unenforceable or the interest
in its enforcement is clearly outweighed
in the circumstances by a public policy
against the enforcement of such terms.
[“unenforceable” = void (as opposed to
voidable)]
 Illegality = Unenforceable on Public
Policy Grounds
Rest. 2d § 178. When A Term Is Unenforceable On
Grounds Of Public Policy
(2) In weighing the interest in the
enforcement of a term, account is
taken of
(a) the parties' justified expectations,
(b) any forfeiture that would result if
enforcement were denied, and
(c) any special public interest in the
enforcement of the particular term.
 Illegality = Unenforceable on Public
Policy Grounds
Rest. 2d § 178. When A Term Is Unenforceable On Grounds
Of Public Policy
(3) In weighing a public policy against
enforcement of a term, account is taken of
(a) the strength of that policy as
manifested by legislation or judicial
decisions,
(b) the likelihood that a refusal to
enforce the term will further that policy,
(c) the seriousness of any misconduct
involved and the extent to which it was
deliberate, and
(d) the directness of the connection
between that misconduct and the term.
 Contract Defenses – IllegalityContract
Prohibited by Law
1. Contracts expressly prohibited by law, or
which would require one party to violate a
statute
E.g., a contract to pay someone to commit a
crime
Does the interest in enforcement of the
contract outweigh the public policy against the
enforcement?
 Contract Defenses – IllegalityContract
Violates Licensing Statute
1. Contracts in violation of licensing statutes
Does the interest in enforcement of the contract
outweigh the public policy against the enforcement?
Compare:
Licenses that protect the public (K likely unenforceable)
(e.g., contract to pay an unlicensed person to
practice medicine or law)
v.
Licenses for the purpose of raising revenue
(K likely enforceable)
(e.g., a general business license or a specific
license to sell goods at a street fair – no special
expertise/state inspection – strictly revenue raising)
 Contract Defenses – IllegalityCovenants
Not to Compete
1. Covenants not to compete
Covenant not to compete typically is with (1)
someone selling a business, who might later start a
new business or take a job at which she could
compete with the business she sold, or (2) an
employee with no stake in a business, who might
leave its employ to take another job or start a new
business at which she might compete with the
former employer
Why are courts less likely to fully enforce the
latter?
Contract Defenses – IllegalityCovenants
Not to Compete (cont’d)
Wood v. May (Wash. 1968)
Wood, a master horseshoer, employed May as an
apprentice
Entered into non-compete – terms?
May progressed rapidly, and soon was shoeing the
horses for many of Wood’s customers
May left Wood’s employ, and opened his own
business 5 miles away
Took with him many of Wood’s customers

Class #14
Contract Defenses – Illegality Covenants
Not to Compete (cont’d)
Wood v. May (Wash. 1968)
What rule does court adopt with respect to
whether a non-compete agreement is illegal?
If a non-compete agreement is illegal, is there
more than one alternative for dealing with it?
Contract Defenses – Illegality Covenants
Not to Compete (cont’d)
General rule:
Non-competition agreements are enforceable
if reasonably necessary to protect business
and goodwill of employer, if reasonable in
scope, area and duration and it does not harm
the public
 What if scope is too broad?
If too broad, then alternative approaches are:
1. entire restriction is unenforceable
2. court will “blue-pencil,” i.e., line-out the
offending divisible provisions
3. court determines reasonable scope, area
and duration
Dissent’s argument
 Contract Defenses – IllegalityTangential
Illegality
1. Tangential illegality
Difficult to apply the principles set forth in
Rest. 2d § 178 in cases of “tangential
illegality,” e.g. where a suit for payment on a
contract for goods or services is met with the
defense that the contract was obtained by
commercial bribery or similar illegal act
 Contract Defenses – IllegalityTangential
Illegality
1. Tangential illegality
In such a case the contract is not (1) expressly
prohibited by law, nor is it (2) in violation of a
licensing statute designed to protect the
public, nor is it (3) at odds with a public policy
that encourages competition and the freedom
to pursue one’s occupation
Balancing here is somewhat more difficult
 Exercise 5-34
Debra Departmentstore employed Billy Buyer to be
her buyer of sunglasses for her chain of department
stores. They executed a one-year contract. One day,
Billy accepted a bribe of $10,000 from a particular
manufacturer of sunglasses, Coolshades. Billy then
signed a contract on behalf of Debra’s stores, which
committed its entire sunglasses budge to purchasing
only Coolshades sunglasses. When Debra discovered
what Billy had done, she sued to rescind the contract
between her company and Coolshades based on
illegality.
 Contract Defenses – Incapacity
Incapacity
Rest. 2d §§ 12-16
How many types of incapacity?
Contract Defenses – Incapacity (cont’d)
Rest. 2d § 12
“(1) No one can be bound by a contract who has not
legal capacity to incur at least voidable contractual
duties.”
“(2) A natural person who manifests assent to a
transaction has full legal capacity to incur contractual
duties… ” unless:
Guardianship (Rest. 2d § 13)
Infancy (Rest. 2d § 14)
Mental Illness or Disability (Rest. 2d § 15)
Intoxication (Rest. 2d § 16)
i.e., no capacity to assent
Contact Defenses – Incapacity (cont’d)
Rest. 2d § 13 – Guardianship – “property is under
guardianship by reason of an adjudication of mental illness or
defect”
Rest. 2d § 14 – Infancy – unless a statute provides otherwise,
contractual obligations are voidable if incurred prior to day
before 18 birthday
th

Rest. 2d § 15 – Mental illness or defect – “unable to

understand in a reasonable manner “the nature and
consequences of the transaction” or unable to act in a
reasonable manner in relation to the transaction and the
other party knew of the mental illness
Rest. 2d § 16 – Intoxication – voidable if other party knows he
is unable to understand or act in a reasonable manner with
respect to the transaction by reason of intoxication
Restoration of Consideration under the
Infancy Defense
Restoration of consideration. An infant
need not take any action to disaffirm his
contracts until he comes of age. … His
disaffirmance revests in the other party the
title to any property received by the infant
under the contract. If the consideration
received by the infant has been dissipated
by him, the other party is without remedy
unless the infant ratifies the contract after
coming of age or is under some non-
contractual obligation.
 Necessity Exception to Incapacity
Defenses
[Link].1993. Cit. in case cit. in sup. An applicant for
public housing sued to challenge the policy of a local
housing authority requiring minor applicants to provide a
judicial decree of emancipation. Granting summary
judgment for the housing authority, this court held that,
since under Pennsylvania law a minor could nullify a
contract, other than a contract for necessaries, by
disaffirming, and housing for a minor was not, per se, a
necessary where the minor was living with a parent or
guardian, the judicial emancipation procedure permitted the
housing authority to avoid jeopardizing sound fiscal policy
by taking a risk on such leases.
Rivera v. Reading Housing Authority, 819 [Link]. 1323, 1331, order
affirmed 8 F.3d 961 (3d Cir.1993).
 How drunk do you need to be?
b. What contracts are voidable. The standard of competency
in intoxication cases is the same as that in cases of mental
illness. If the intoxication is so extreme as to prevent any
manifestation of assent, there is no contract. Otherwise the other
party is affected only by intoxication of which he has reason to
know. A contract made by a person who is so drunk he does not
know what he is doing is voidable if the other party has reason to
know of the intoxication. Where there is some understanding of
the transaction despite intoxication, avoidance depends on a
showing that the other party induced the drunkenness or that the
consideration was inadequate or that the transaction departed
from the normal pattern of similar transactions; if the particular
transaction in its result is one which a reasonably competent
person might have made, it cannot be avoided even though
entirely executory.
 Exercise 5-35
Donnie Drinker, who did not own a car, went into Bob’s Bar for
drinks. Donnie entered the bar complaining about having to take
the bus to work every day because the bus was unreliable. After
seven drinks and some dickering about price, Donnie entered
into a contract with Bob, the bar’s owner and bartender, to buy
Bob’s car for $5,000 (the car’s fair market value). The next
morning, Donnie awakened inside the car with the car’s title
tucked into his pocket. Donnie sued to rescind the contract. At
trial, Donnie truthfully testified that, when he awakened, he had
no recollection of having discussed a contract, must less any
memory of having signed the contract. All he remembered the
next morning was that he had gone into the bar and complained
about the bus system. Will Donnie prevail at trial?
 Hypo
Debbie, who was aged 17½ and looked old for her
age (she looked about 21) entered into a contract
with Pedro, a car dealer, to buy a new car for
$20,000. The contract, which was 30 pages long,
included a clause that state, “I represent I am at least
18 years of age.” Debbie signed the contract (without
reading anything other than the price) while Pedro
watched. Debbie used the car for six months. Two
days after her 18th birthday, she crashed the car into
a telephone pole, destroying the car. The next day,
she sued to rescind her contract with Pedro. Would
she win?
 Restatement 2nd § 15 Mental
Illness or Defect
(1) A person incurs only voidable contractual duties
by entering into a transaction if by reason of mental
illness or defect
(a) he is unable to understand in a reasonable manner
the nature and consequences of the transaction, or
(b) he is unable to act in a reasonable manner in
relation to the transaction and the other party has
reason to know of his condition.

(2) Where the contract is made on fair terms and the

other party is without knowledge of the mental
illness or defect, the power of avoidance under
Subsection (1) terminates to the extent that the
contract has been so performed in whole or in part
or the circumstances have so changed that
avoidance would be unjust. In such a case a court
may grant relief as justice requires.
Contract Defenses – Unconscionability
Policing “one-sided” contracts
Declining to enforce “outrageous” terms in
contracts
Contract Defenses – Unconscionability
(cont’d)
Rest. 2d §208. UNCONSCIONABLE
CONTRACT OR TERM
If a contract or term thereof is
unconscionable at the time the
contract is made a court may refuse
to enforce the contract, or may
enforce the remainder of the
contract without the unconscionable
term, or may so limit the application
of any unconscionable term as to
avoid any unconscionable result.
Contract Defenses – Unconscionability
(cont’d)
Rest. 2d §208. UNCONSCIONABLE CONTRACT
OR TERM
Comment:
c. Overall imbalance. Inadequacy of
consideration does not of itself invalidate a
bargain, but gross disparity in the values
exchanged may be an important factor in a
determination that a contract is unconscionable
and may be sufficient ground, without more, for
denying specific performance. See §§79, 364.
Such a disparity may also corroborate indications
of defects in the bargaining process, or may
affect the remedy to be granted when there is a violation of a
more specific rule. Theoretically it is possible for a contract to
be oppressive taken as a whole, even though there is no
weakness in the bargaining process and no single term which
is in itself unconscionable. Ordinarily, however, an
unconscionable contract involves other factors as well as
Contract Defenses – Unconscionability
(cont’d)
Illustrations:
1. A, an individual, contracts in June to sell at a fixed price per ton to
B, a large soup manufacturer, the carrots to be grown on A's farm.
The contract, written on B's standard printed form, is obviously
drawn to protect B's interests and not A's; it contains numerous
provisions to protect B against various contingencies and none
giving analogous protection to A. Each of the clauses can be read
restrictively so that it is not unconscionable, but several can be read
literally to give unrestricted discretion to B. In January, when the
market price has risen above the contract price, A repudiates the
contract, and B seeks specific performance. In the absence of
justification by evidence of commercial setting, purpose, or effect,
the court may determine that the contract as a whole was
unconscionable when made, and may then deny specific
performance.
Contract Defenses – Unconscionability
(cont’d)
§ 1-302. Variation by Agreement.
(a) Except as otherwise provided in subsection (b) or
elsewhere in [the Uniform Commercial Code], the effect of
provisions of [the Uniform Commercial Code] may be varied
by agreement.
(b) The obligations of good faith, diligence,
reasonableness, and care prescribed by [the Uniform
Commercial Code] may not be disclaimed by agreement. The
parties, by agreement, may determine the standards by which
the performance of those obligations is to be measured if
those standards are not manifestly unreasonable. Whenever
[the Uniform Commercial Code] requires an action to be taken
within a reasonable time, a time that is not manifestly
unreasonable may be fixed by agreement.
*******
Contract Defenses – Unconscionability
(cont’d)
§ 2-302. Unconscionable contract or Clause.
(1) If the court as a matter of law finds the contract or any
clause of the contract to have been unconscionable at the
time it was made the court may refuse to enforce the
contract, or it may enforce the remainder of the contract
without the unconscionable clause, or it may so limit the
application of any unconscionable clause as to avoid any
unconscionable result.
(2) When it is claimed or appears to the court
that the contract or any clause thereof may be
unconscionable the parties shall be afforded a
reasonable opportunity to present evidence
as to its commercial setting, purpose and
effect to aid the court in making the
determination.
Contract Defenses – Unconscionability
(cont’d)
Williams v. Walker-Thomas Furniture
Co. ([Link]. 1965)
What provision of the contract was at issue?
Do you think that similar provisions are typical
or atypical in a commercial contract?
How did the court frame the defense of
unconscionability?
How did the court rule?
 Contract Defenses – Unconscionability
(cont’d)
Williams v. Walker-Thomas Furniture Co.
([Link]. 1965)
1. Party has little bargaining power
2. Hence little real choice
3. Signs a commercially unreasonable contract
4. With little or no knowledge of contract terms
5. Then “it is hardly likely that his consent, or even an
objective manifestation of his consent, was ever
given to all the terms”
Contract Defenses – Unconscionability
(cont’d)
Williams v. Walker-Thomas Furniture Co.
([Link]. 1965)
“3. Signs a commercially unreasonable contract”
Who decides this?
How does a court decide this?
Does the court normally consider whether a
contract is reasonable, whether the consideration
is adequate, etc.?
What policies are implicated?
Contract Defenses – Unconscionability
(cont’d)
Williams v. Walker-Thomas Furniture
Co. ([Link]. 1965)
“4. With little or no knowledge of contract
terms”
What if party asserting the defense had
knowledge or and understood the contract
terms?
What policies are implicated?
Contract Defenses – Unconscionability
(cont’d)
Lhotka v. Geographic Expeditions,Inc.
([Link]. 2010)
Lhotka signed a release form
Releasing GeoEx from liability “to the maximum
extent permitted by law” and
Consenting to mediation and binding arbitration
What happened on Mount Kilimanjaro?
 Contract Defenses – Statute of Frauds
Certain contracts must be in writing and executed by
the party against whom enforcement is sought –
typically required by state statutory law
1. Land sale
2. Suretyship (guaranty)
1. Contract not to be performed within 1 yr.
2. Contracts for sale of goods ≥ $500 (UCC 2-201)
3. Contracts made in consideration of marriage
4. Contracts by executors to answer for a duty owed
by their decedents
 Contract Defenses – Statute of Frauds
§ 2-201. Formal Requirements; Statute
of Frauds.
(1) Except as otherwise provided in this section a contract
for the sale of goods for the price of $500 or more is not
enforceable by way of action or defense unless there is
some writing sufficient to indicate that a contract for sale
has been made between the parties and signed by the
party against whom enforcement is sought or by his
authorized agent or broker. A writing is not insufficient
because it omits or incorrectly states a term agreed
upon but the contract is not enforceable under this
paragraph beyond the quantity of goods shown in such
writing.
Contract Defenses – Statute of Frauds

§ 2-201. Formal Requirements;

Statute of Frauds.
(2) Between merchants if within a reasonable time a
writing in confirmation of the contract and sufficient
against the sender is received and the party
receiving it has reason to know its contents, it
satisfies the requirements of subsection (1) against
such party unless written notice of objection to its
contents is given within 10 days after it is received.
Contract Defenses – Statute of Frauds
§ 2-201. Formal Requirements; Statute of
Frauds.
(3) A contract which does not satisfy the requirements of subsection
(1) but which is valid in other respects is enforceable
(a) if the goods are to be specially manufactured for the buyer and
are not suitable for sale to others in the ordinary course of the
seller's business and the seller, before notice of repudiation is
received and under circumstances which reasonably indicate that
the goods are for the buyer, has made either a substantial beginning
of their manufacture or commitments for their procurement; or
(b) if the party against whom enforcement is sought admits in his
pleading, testimony or otherwise in court that a contract for sale was
made, but the contract is not enforceable under this provision
beyond the quantity of goods admitted; or
(c) with respect to goods for which payment has been made and
accepted or which have been received and accepted (Sec. 2-606).
 Mini Review
Formation
Did the parties enter into an enforceable contract?
Mutual assent to bargained for exchange and consideration
Is there an otherwise enforceable promise/contract?
Promissory estoppel – Rest. 2d § 90
Other enforceable promises – Rest. 2d §§ 82-89 + 91-94
Defenses
Notwithstanding the formation of a contract, is there a
defense to formation, e.g., mistake, duress, incapacity,
etc.?

Class #15
 Remedies
If there is a contract, and no defense (i.e., there is an
enforceable contract), THEN:
WHAT REMEDIES DOES THE NON-BREACHING PARTY
HAVE FOLLOWING THE OTHER PARTY’S BREACH?
WHAT IS A “BREACH?”
1. Non-performance - e.g., party required to perform
simply never shows up
2. Defective performance – party shows up and
performs, but performance is not materially up to the
standard required by the contract
Remedies will differ depending on the nature of the breach
 Contract Remedies (cont’d)
What are the non-breaching party’s rights?
1. Damages provided by law of contracts or
2. Restitution or
3. Agreed damages (agreed to in advance)
or
Coercive equitable relief, e.g., a court’s ordering
the other party to perform or enjoining the other
party from breaching the contract
See Diagram 6-1 for visualization
 Contract Remedies – Damages
Core goal of remedy for contract breach –
by the payment of money
to put the non-breaching plaintiff into the
same economic condition
it would have been in had there been no
breach
Damages are economic equivalent for loss ---
in most cases breaching party will NOT be
compelled to specifically perform its promise
 Contract Remedies – Damages
One consequence of this rule is that:
if non-breaching party is better off by breach
by counterparty (e.g., non-breaching party
agreed to pay $10k for a car the fair market
value of which is $8k), then the non-breaching
party was not harmed by the breach, and
generally cannot recover “benefit of the
bargain” damages
 Damages (cont’d)
Core goal of contract law of damages is to:
Put the Plaintiff in the Performance Position
E.g., Π agreed to buy a car with a fair market
value of $20k from Δ for $12k
Δ breached
What will give Π the benefit of his bargain,
i.e., put the Π in the performance position?
 Damages (cont’d)
The calculation is slightly more complicated:
1. General damages (DIV [diminution in
value] or COR [cost of repair]), plus
2. Special damages (reliance , i.e., costs
incurred by non-breaching party performing
or preparing to perform + consequential, e.g.,
lost profits), minus
1. Costs and losses avoided (by non-breaching
party)
 Damages (cont’d)
Aim in awarding these damages is to put the
non-breaching party in the same economic
position that she would be in if the other
party had adequately performed, rather than
breached
Aim is NOT a windfall for the non-breaching
party
 Damages – General Damages
1. General damages = diminution in value
to non-breaching party resulting from breach
Damages = FMV that Π would have obtained
by Δ’s performance minus the contract
price
E.g., Δ agreed to build house on land Δ owns,
and sell it to Π for $100k, that with land
would be worth $125k once built
Damages = $125k (house + land value) minus
$100k contract price = $25k damages
 Damages – General Damages
If instead Δ agreed to build house on land Δ
owns, and sell it to Π for $150k, that with land
would be worth $125k once built
No damages to Π because $125k (house +
land value) minus $150k contract price = no
damages (Π avoided a $25k loss as a result of
Δ’s breach)
 Damages – General Damages
What if the Δ breached by defective
performance, e.g., Δ did not construct the
house precisely as required by the contract?
Defective performance
Cost of repair – “COR” or
Diminution in value – “DIV”
COR and DIV are not always the same amounts,
as we shall see
See Table 6-1
 Damages – Special Damages
2. Special Damages
(1) reliance damages, and/or
(2) consequential damages
Reliance damages – damages incurred
preparing to perform or performing, unless
it’s money that would have been spent
anyway
Consequential damages – indirect losses
resulting from breach, including lost profits
Damages – Costs and Losses Avoided
3. Costs and losses avoided
E.g., non-breaching party Π contracted with Δ
to build Δ’s house for $180k
Δ paid $100k, then defaulted
Total cost to Π to build the house would be
$200k
If Δ performed the K, then the non-breaching
Π would lose $20k – this amount (the costs
and losses avoided) will be deducted from the
$80k
 Damages (cont’d)
Rest. 2d § 347. Measure Of Damages In General
Subject to the limitations stated in §§ 350
-53, the injured party has a right to damages based on
his expectation interest as measured by
(a) the loss in the value to him of the
other party's performance caused by
its failure or deficiency, plus
(b) any other loss, including incidental
or consequential loss, caused by the
breach, less
(c) any cost or other loss that he has
avoided by not having to perform.
 Damages (cont’d)
Rest. 2d § 347. Measure Of Damages In General
Comment:
a. Expectation interest. Contract damages are
ordinarily based on the injured party's expectation
interest and are intended to give him the benefit of
his bargain by awarding him a sum of money that
will, to the extent possible, put him in as good a
position as he would have been in had the contract
been performed. See § 344(1)(a).
*******
 Damages (cont’d)
What if Π also took certain action in reliance
on the promise?
2nd acronym/mnemonic of the day:
Reimburse Riches Relinquished in Reliance
What if Δ gained, e.g., contract price already
was paid in whole or in part by Π?
3rd acronym/mnemonic of the day:
Garnish Gains Gotten (by breaching party)
 Damages (cont’d)
Rest. 2d § 344. PURPOSES OF REMEDIES
Judicial remedies under the rules stated in this
Restatement serve to protect one or more of the
following interests of a promisee:
(a) his “expectation interest,” which is his
interest in having the benefit of his bargain by
being put in as good a position as he would
have been in had the contract been performed,
(b) His “reliance interest,” which is his interest
in being reimbursed for loss caused by reliance
on the contract by being put in as good a
position as he would have been in had the
contract not been made, or
(c) His “restitution interest,” which is his
interest in having restored to him any benefit
that he has conferred on the other party.

See comments to Rest. 2d § 344

 Exercise 6-3 (5)
Paula entered into a contract to purchase land from
David for $250,000, which is the appraised market
value of the land. Paula made a $25,000 down
payment, and further of payments of $750 for a
survey and $500 on title investigations. David
breached. At the time of David’s breach, Paula was
under contract to resell the land to Eric for $275,000.
Identify and classify each item of damage Paula might
recover. Based on what you have learned so far, what
do you think her total dollar recovery would be?
Damages – Compensatory Damages

Donovan v. Bachstadt (N.J. 1982)

“Serious losses should not be borne by the
vendee of real estate to the benefit of the
defaulting vendor.”
Δ agreed to convey marketable title, and
breached
Compensatory damages = benefit of bargain
Damages – Compensatory Damages
(cont’d)
Donovan v. Bachstadt (cont’d)
“The traditional test is the difference between the
market price of the property at the time of the
breach and the contract price.”
But if buyer had contracted to sell the property,
then “it is reasonable to measure his damages in
terms of the actual lost profit.”
Court holds that damages are (value of property –
contract price) + costs of preparing for closing
(survey, search and counsel fees)
 Damages (cont’d)
§ 2-708. Seller's Damages for Non-acceptance or
Repudiation.
(1) Subject to subsection (2) and to the provisions of this Article
with respect to proof of market price (Section 2-723), the measure
of damages for non-acceptance or repudiation by the buyer is the
difference between the market price at the time and place for
tender and the unpaid contract price together with any incidental
damages provided in this Article (Section 2-710), but less expenses
saved in consequence of the buyer's breach.
(2) If the measure of damages provided in subsection (1) is
inadequate to put the seller in as good a position as performance
would have done then the measure of damages is the profit
(including reasonable overhead) which the seller would have made
from full performance by the buyer, together with any incidental
damages provided in this Article (Section 2-710), due allowance for
costs reasonably incurred and due credit for payments or proceeds
of resale.
 Damages (cont’d)
Neri v. Retail Marine Corp. (N.Y. 1972)
Πs entered into K to purchase boat for $12.6k,
with $4,250 deposit
Πs rescinded K, because Π Mr. Neri about to
undergo hospitalization
Δ kept deposit and sold boat to a 3rd party for
the same $12.6k price
Πs argue no loss to Δ
 Damages (cont’d)
Neri v. Retail Marine Corp. (N.Y. 1972)
Πs argue no loss to Δ
Δ argues it would have sold 2 boats, and
made 2x the profit
Δ proved that its profit would have been
$2,579, + it spent $679 for storage, etc. +
$1,250 attorneys’ fees
 Damages (cont’d)
Neri v. Retail Marine Corp. (cont’d)
If seller has one or limited supply, then if seller
sells to another party for same price no damages
But if seller has unlimited supply, then seller is
entitled to lost profit under UCC 2-708 + other
incidental damages, e.g., storage etc.
Here, Π is are entitled to return of $4,250 deposit,
less $2,579 lost profit, less $674 incidental
damages ($997)
 Review
1. General Damages - usually loss in value
(DIV) or cost to repair/remediate (COR) plus
1. Special Damages
Reliance Damages (essential = prep. to perf. or
perf.; incidental = other – S&W p. 348)
Consequential Damages (e.g., lost profits) minus
2. Costs and Losses Avoided
In many cases, Π can recover both general
(BOB) damages and reliance damages

Class #16
 Damages (cont’d)
Wilson Salvage Co. v. Hays (Tex. 1976)
Buyer, Hays, sued seller, Wilson Salvage, for breach of oral
contract for the sale and delivery of used bricks
Hays paid $6k for 600k used bricks (1¢ per brick), but received
only 400k bricks
Jury found that market price was 5¢ per brick
Therefore found $8k damages
200k bricks x 5¢ market price = $10k, minus contract price of
200k bricks x 1¢ = $2k
$10k - $2k = $8k general damages for loss of bargain
+ $2k paid for the 200k bricks – reliance damages (Why
get this?)

Class #16
 Damages (cont’d)
Wilson Salvage Co. v. Hays (cont’d)
Jury also found consequential damages
$6,250 lost profits, minus $2,605 expenses to realize the
profits (for cleaning the bricks?), = $3,645 net lost profits
But under UCC 2-715, consequential damages are
those “which could not reasonably be prevented by
cover or otherwise”
No evidence that Hays made any effort to cover or otherwise
to prevent or mitigate the loss resulting from Wilson
Salvage’s failure to deliver the 200K bricks
Therefore, $8k difference in FMV and contract price, + $2k
paid for bricks not delivered, + interest at the judgment rate
Consequential damages not available
 HYPO
Buyer and Seller enter into a contract whereby Buyer
agrees to purchase 10,000 widgets from Seller for
$20,000. Seller refuses to perform. If Buyer does
nothing other than sue for damages, buyer cannot
recover
a. Cover damages measured by the contract price
minus the cost of cover
b. Market damages measured by the fair market
value minus the contract price
c. Consequential and incidental damages
d. Any portion of the purchase Buyer has paid
 Damages (cont’d)
Groves & Sons v. John Wunder Co. (Minn. 1939)
Π Groves sued for breach of contract, and was awarded $15k
“Sorely disappointed by that sum, he appeal[ed].”
7-yr. lease from Π, Groves, to Δ, Wunder, and Wunder agreed
to remove gravel and leave the property “at a uniform grade”
Π alleged that Δ only removed the best gravel
Cost of removing pursuant to the contract was $60k (COR)
But value of property had Δ performed would have been
$12,160 (DIV), and judgment was for that amount
Reversed – damages are the $60k
 Economic Waste Doctrine
Rooted in equity and justice, the economic waste doctrine centers on
the idea that, although damages measured by the reduction in
property value may not be sufficient to place the injured party in the
same position they would have been in if the contract had been
properly performed, their financial outcome will be substantially
similar.
Take for example a situation where a contractor installed several
hundred square feet of expensive ceramic tile in a commercial
building, just the wrong color. Or, they installed the wrong brand of
windows throughout the building, but with similar performance
specifications. Or, they installed a roof with defective discoloration on
the backside of a house. It is likely that repairs in any one of these
circumstances could result in unreasonable economic waste.
Intentional breaches might not get the benefit of this doctrine.
Only apply this doctrine if the non-breaching party can still get the
substantial benefit of the bargain.
 Damages (cont’d)
Peevyhouse v. Garland Coal & Mining Co.
(Okla. 1962)
Πs Peevyhouse sued Δ Garland Coal for damages
on breach of contract
Πs owned farm with coal deposits, and leased it to
Δ for 5 years for strip mining
Δ agreed to restore
Parties stipulated that all covenants in the coal
lease agreement were performed, except that the
remedial work was not; Δ conceded that that work
was not done
 Damages (cont’d)
Peevyhouse v. Garland Coal & Mining
Co. (cont’d)
Was there any issue before the trial or
appellate court of whether or not Δ
breached?
What is the damage issue before the court?
What does statutory law have to do with it?
Holding?
 Damages (cont’d)
§ 348. Alternatives To Loss In Value Of Performance
(1) If a breach delays the use of property and
the loss in value to the injured party is not
proved with reasonable certainty, he may
recover damages based on the rental value of
the property or on interest on the value of the
property.
(2) If a breach results in defective or
unfinished construction and the loss in value
to the injured party is not proved with
sufficient certainty, he may recover damages
based on.
(a) the diminution in the market price of the
property caused by the breach, or
(b) the reasonable cost of completing
performance or of remedying the defects if
that cost is not clearly disproportionate to the
probable loss in value to him.
 Limitations on Damages
[Link]
2. Forseeability
3. Certainty
Limitations on Damages - Avoidability

Rest. 2d §350. AVOIDABILITY AS A

LIMITATION ON DAMAGES
(1) Except as stated in Subsection (2),
damages are not recoverable for loss
that the injured party could have
avoided without undue risk, burden, or
humiliation.
(2) The injured party is not precluded
from recovery by the rule stated in
Subsection (1) to the extent that he has
made reasonable but unsuccessful
efforts to avoid loss.
Limitations on Damages – Avoidability
(cont’d)
Rockingham County v. Luten Bridge
Co. (4th Cir. 1929)
If one party repudiates the contract, then is
the non-breaching party entitled to complete
the contract and then recover the contract
price?
What is non-breaching party entitled to
recover?
Limitations on Damages – Avoidability
Parker v. Twentieth Century Fox
Limitations on Damages – Avoidability
(cont’d)
Parker v. Twentieth Century-Fox Film
Corp. (Cal. 1970)
Π, Parker, had contract to appear in “Bloomer Girl”
Δ, 20th Century-Fox, repudiated, and offered her
employment in “Big Country,” on somewhat
different contract terms
What is rule stated by majority?
How does majority apply rule?
What is dissent’s rule and analysis?
Limitations on Damages – Forseeability
1. Avoidability
[Link]
3. Certainty

Class #17
Limitations on Damages – Forseeability
(cont’d)
Rest. 2d §351. UNFORESEEABILITY AND RELATED
LIMITATIONS ON DAMAGES
(1) Damages are not recoverable for loss that the
party in breach did not have reason to foresee as a
probable result of the breach when the contract was
made.
(2) Loss may be foreseeable as a probable result of a
breach because it follows from the breach
(a) in the ordinary course of events, or
(b) as a result of special circumstances, beyond the
ordinary course of events, that the party in breach
had reason to know.
(3) A court may limit damages for foreseeable loss by
excluding recovery for loss of profits, by allowing
recovery only for loss incurred in reliance, or
otherwise if it concludes that in the circumstances
justice so requires in order to avoid disproportionate
compensation.
Limitations on Damages – Forseeability
(cont’d)
Hadley v. Baxendale (Court of Exchequer
1854)
What is the rule stated by the court with
respect to the Π’s recovery of lost profits as
damages?
Limitations on Damages – Forseeability
(cont’d)
Victoria Laundry (Windsor) Ltd. v.
Newman Industries Ltd. (KB 1949)
Π, Windsor Laundry, ordered a boiler from Δs,
Newman Industries et al.
Δs delivered it 20 wks. late
Π sued for breach of K, and awarded 110£
Π appealed, for award of lost profits
What is the key fact emphasized by the app. court?
What is the evidence in support of that fact?
Limitations on Damages – Forseeability
(cont’d)
Victoria Laundry (Windsor) Ltd. v.
Newman Industries Ltd. (cont’d)
What was basis for Π’s claim for lost profits?
What did trial court require?
What rule did the appellate court state?
Limitations on Damages – Forseeability
(cont’d)
Prutch v. Ford Motor Co. (P.2d 1980)
Tractor, plow, disc harrow, and hay baler were
defective
Was Ford liable for Prutch’ crop loss?
Is actual knowledge by breaching party of
foreseeable event the causes damages required?
Or are there circumstances under which the
breaching party should have know, and therefore is
liable for those damages?
 Exercise 6-19(1)
P chartered a ship from a ship owner for one year with an option to
renew for a further year at a time when market charter rates were very
low. P later sub-chartered the ship to a third party at a market rates,
which were double the rates fixed in the charter. The contract between
ship owner and P provided that P should make payment monthly in
advance and entitled ship owner to terminate the contract if any
payment was not made on time. P made payments by wire transfer
from its account with the Continental Illinois National Bank in Chicago
(“Continental”). On P’s instructions, Continental would debit P’s
account, and, in turn, instruct its correspondent bank, Swiss Bank, to
transfer funds to ship owner’s account with the Banque de Paris in
Geneva, Switerzerland. After successfully making a number of
payments using this method, P failed to make a monthly payment
($27,000) on time because Swiss Bank failed to comply with
Continental’s instructions due to a mix up. Ship Owner terminated the
charter. In a lawsuit brought by P against Swiss Bank, the court held
that P’s lost profits based on the difference between the charter and
subcharter rates ($2 million) were insufficiently foreseeable. Why?
 Exercise 6-19(2)
P, a mining company, paid D, a railroad, thousands of
dollars to transport an enormous piece of mining
equipment to P’s work site. The piece of equipment
was so large that it had to be loaded on to five
separate railroad cars. The bill of lading described the
machinery as “used mining equipment.” D breached
the contract by delivering the equipment late. P sued,
seeking as damages what it had paid to rent a piece
of machinery between the date when D should have
delivered Ps machine and the date when D actually
delivered P’s machine. The court held this loss was
foreseeable. Why?
 Exercise 6-19(3)
P purchased a tractor-trailer and insured it against
theft and other risks with D insurer. The policy noted
on its front page that the vehicle would be used for
commercial purposes and that P’s occupation was a
hauler of dry freight. P used the tractor in his
business for 14 months until it was stolen. P reported
the theft to the police and to D. D delayed in settling
the policy and as a result P suffered lost profits. The
court held that the lost profits were foreseeable.
Why?
 Exercise 6-19(4)
P contracted to sell his house to D in Maine in
January, the sale to close in May. D failed to raise
the purchase money and breached the contract.
P was unable to sell the house for another year
and had to incur extra costs repurchasing winter
equipment and for snow removal. The court
held that the extra costs were not foreseeable.
Why not?
 Exercise 6-19(5)
P contracted to work for D. When P was hired, D
told him he had “job security,” a term D never
defined and P never asked D to define. Shortly
after P started working, D terminated P’s
employment. P sued D for breach, seeking
among other things, damages for emotional
distress. D asserted foreseeability as a limitation
on P’s recovery of damages for emotional
distress.
 § 353 Loss Due to Emotional
Disturbance
Recovery for emotional disturbance will be
excluded unless the breach also caused bodily
harm or the contract or the breach is of such
a kind that serious emotional disturbance was
a particularly likely result.
Illustration 3
A makes a contract with B to conduct the funeral for B's husband
and to provide a suitable casket and vault for his burial. Shortly
thereafter, B discovers that, because A knowingly failed to
provide a vault with a suitable lock, water has entered it and
reinterment is necessary. B suffers shock, anguish and illness as a
result. In an action by B against A for breach of contract, the
element of emotional disturbance will be included as loss for
which damages may be awarded.
1. Avoidability
2. Foreseeability
3. Certainty
Limitations on Damages – Certainty
(cont’d)
Rest. 2d §352. UNCERTAINTY AS
A LIMITATION ON DAMAGES
Damages are not recoverable for
loss beyond an amount that the
evidence permits to be
established with reasonable
certainty.
Limitations on Damages – Certainty
(cont’d)
Non-breaching party seeking damages must
prove:
1. fact of damage by preponderance of
the evidence
2. amount of damages
Limitations on Damages – Certainty
(cont’d)
Freund v. Washington Square Press,
Inc. (N.Y. 1974)
Π entered into contract for Δ to publish his
book
Δ breached
Limitations on Damages – Certainty
(cont’d)
MindGames, Inc. v. Western
Publishing Co., Inc. (7th Cir. 2000)
What does court conclude about the “new
business rule” under AK law today

Does that end the certainty issue?

Dissent’s conclusion?
 Return to Reliance Damages
1. General Damages - usually loss in value
(DIV) or cost to repair/remediate (COR)
1. Special Damages – (S285)
Reliance Damages (essential =
prep. to perf. or perf.; incidental =
other)
Consequential Damages
2. Costs and Losses Avoided
In many cases, Π can recover both general
(BOB) damages and reliance damages
Class #19
Special Damages – Reliance Damages
In some cases, though, a Π can only recover
reliance damages
Two forms of reliance damages:
(1) essential reliance damages – cost of preparing
to perform or performing the contract
(2) incidental reliance damages – all other
expenditures made in reliance on a contract or on
the breach
 Reliance Damages (cont’d)
BBB (3Bs)
Bring non-breaching party Back to Beginning
NOT PPPP (4Ps) (Put Party in Performance
Position)
 Damages (cont’d)
Rest. 2d § 344. PURPOSES OF REMEDIES
Judicial remedies under the rules
stated in this Restatement serve to
protect one or more of the following
interests of a promisee:
(a) His “expectation interest,” *******,
(b) His “reliance interest,” which is
his interest in being reimbursed for
loss caused by reliance on the
contract by being put in as good a
position as he would have been in
had the contract not been made, or
(c) His “restitution interest,”*******.
 Reliance Damages (cont’d)
§ 349. Damages Based on Reliance
Interest
As an alternative to the measure of damages stated in §
347, the injured party has a right to
damages based on his reliance interest,
including expenditures made in
preparation for performance or in
performance, less any loss that the party
in breach can prove with reasonable
certainty the injured party would have
suffered had the contract been
performed.
 Reliance Damages (cont’d)
Reimer v. Badger Wholesale Co., Inc.
(Wis. 1988)
Reimer given exclusive territory by Badger
Would be paid minimum wage base salary
plus commission
90-day trial period
Reimer quit prior job, where he earned $350
per week without commission
Spent $2k to relocate
 Reliance Damages (cont’d)
Reimer v. Badger Wholesale Co., Inc. (cont’d)
Badger fired Biddle after 17-1/2 days, for lack of sales
Though expert testified that the 13 sales Reimer made
were “very good for a salesperson in new territory.”
Jury awarded $16.5k
Badger moved for new trial
Court – jury award “does not shock judicial
conscience”
BUT cannot find evidentiary support for an award
which exceeds $16.2k --- $14.1 lost wages + $2.1k
moving expenses --- no basis for $5k award for
“incidental and consequential damages”
 Reliance Damages (cont’d)
Reimer v. Badger Wholesale Co., Inc.
(cont’d)
Did Reimer seek recovery of the benefit of his
bargain/expectation interest?
What would put Reimer in the position he
would have been in had the contract not been
made?
See Rest. 2d § 344
 Reliance Damages (cont’d)
Rest. 2d § 344. PURPOSES OF REMEDIES
a. *******The promisee may have changed his position in
reliance on the contract by, for example, incurring expenses in
preparing to perform, in performing, or in foregoing
opportunities to make other contracts. In that case, the court
may recognize a claim based on his reliance rather than on his
expectation. It does this by attempting to put him back in the
position in which he would have been had the contract not
been made. The interest protected in this way is called
"reliance interest."
Although it may be equal to the expectation interest, it is
ordinarily smaller because it does not include the injured
party's lost profit.
 Reliance Damages (cont’d)
Designer Direct, Inc. v. DeForest
Redevelopment Authority (7th Cir. 2002)
Designer Direct (Levin) sued DeForest
Redevelopment Authority (DRA) for breach of
contract between the parties
What was the contract?
How did DRA breach?
How did trial court determine damages?
 Reliance Damages (cont’d)
Designer Direct, Inc. v. DeForest
Redevelopment Authority (cont’d)
What did the 7th Cir. rule re: the $50k? Why?
What kind of damages?
What did the 7th Cir. rule re: the $35k? Why?
What is the 7th Cir.’s description of the
purpose of reliance damages?
 Reliance Damages (cont’d)
Designer Direct, Inc. v. DeForest
Redevelopment Authority (cont’d)
Did Levin’s claimed reliance damages arise
from acts that it took before or after it
entered into the K with DRA?
What did the 7th Cir. rule re: the $490k?
What argument can you make that costs
incurred before the contract was signed are
recoverable as reliance damages?
 Reliance Damages (cont’d)
§90. PROMISE REASONABLY INDUCING
ACTION OR FORBEARANCE
(1) A [A] promise [B] which the
promisor should reasonably expect to
induce action or forbearance on the
part of the promisee or a third person
and [C] which does induce such
action or forbearance [D] is binding if
injustice can be avoided only by
enforcement of the promise. The
remedy granted for breach may be
limited as justice requires.
 Exercise 6-27
D agreed to buy P’s only boat (P was not a boat
manufacturer or retailer). The boat had a FMV of
$12,000; D agreed to pay $12,500. D breached. P
reasonably resold the boat for $12,000 and, during
the time P was looking for a new buyer, P spent $50
for upkeep on the boat, $200 for storage, and $75 for
insurance. What damages can P Recover?

What damages could P recover if P was able to resell

the boat for $12,500.
 Exercise 6-27(3)
D, a famous actor, entered into a contract with P film company to
star in a film. At the time the parties made their contract, P
already had hired a director ($2M) and cinematographer ($500K)
and had rented some equipment needed for the film ($100K). D
was aware of these expenditures at the time the parties signed
the contract, P hired a costume director ($50K). D repudiated the
contract. After six months of approaching every other possible
famous actor and being rejected, P decided not to go forward
with the project. Assume P made a reasonable effort to minimize
damages.
a. Why would P be unlikely to seek to recover benefit-of the
bargain damages?
b. Should P be allowed to recover damages based on
expenditures made before the contract was signed?
C. To what damages would P be entitled?
 Reliance Damages (cont’d)
Hoffman v. Red Owl Stores, Inc. (Wis.
1965)
Πs’ alleged promise made by Δ, on which Πs
relied
What did they do in reliance on the alleged K?
What did court rule re: damages?
 Reliance Damages (cont’d)
ONE LAST POINT:
§ 349. Damages Based on Reliance
Interest
As an alternative to the measure of damages stated in §
347, the injured party has a right to
damages based on his reliance interest,
including expenditures made in
preparation for performance or in
performance, less any loss that the party
in breach can prove with reasonable
certainty the injured party would have
suffered had the contract been
performed.
 Restitution
Is, first, a remedy for “unjust enrichment”
Unjust enrichment: (1) Δ obtained a benefit at
Π’s expense (enrichment); and (2) Δ’s
retention of that benefit would be unfair
(unjust)

Class #20
 Restitution (cont’d)
Π party is entitled to restitution from Δ party who was
unjustly enriched:
1. Π has performed a contractual obligation,
but damages would not be efficacious
2. Π is victim of tort that both harmed Π/victim
and benefitted tortfeasor
3. Π mistakenly over-performed under an
alleged K or mistakenly performed under an alleged K
that the court has deemed unforeseeable or non-
existent
4. Π has partially performed a K and then
breached it, but the benefit to the non-breaching party
exceeds the harm the breaching party caused
 Restitution (cont’d)
Measure of recovery is the same in 1-3, but is
different in 4
(1) Under what circumstances may a party
recover restitution?
(2) What is the measure of damages?
 Restitution (cont’d)
A. Restitution to Non-Breaching Party Instead
of Other Contract Damages
Chodos v. West Publishing Co. (9th Cir.
2004)
West breached K with Chodos when it refused
to publish book on fiduciary duties
Chodos appealed $300K
jury verdict
 Restitution (cont’d)
Chodos v. West Publishing Co. (cont’d)
Ground for appeal was that Dist. Court’s jury instructions on
method for measuring quantum meruit (unjust
enrichment) recovery was erroneous under CA law
In CA, measure of recovery is “reasonable value of the
services rendered, provided they were of direct benefit to the
Δ,” i.e., the amount that it would have cost the Δ to obtain the
services from another person --- or the “open market,”
“comparable charge” for such services --- see Rest. 2d 371
Quantum meruit/restitution recovery ≠ lost business
opportunity
Affirmed
 Restitution (cont’d)
U.S. v. Algernon Blair, Inc. (4th Cir. 1973)
Case involved GC and SC’s dispute over who is
to pay for cranes used in a construction
project
Who breached?
What is the rule for restitution recovery for
quantum meruit?
 Restitution (cont’d)
Rest. 2d §371. MEASURE OF
RESTITUTION INTEREST
If a sum of money is awarded to protect a party's
restitution interest, it may as justice requires be
measured by either
(a) the reasonable value to the other party of what
he received in terms of what it would have cost
him to obtain it from a person in the claimant's
position, or
(b) the extent to which the other party's property
has been increased in value or his other interests
advanced.
 Restitution (cont’d)
B. A short diversion – Restitution as an
Alternative to Suing for a Tort
If a Δ obtains benefit from committing a tort,
such as trespass on land or conversion of
personal property, then Δ may be required to
pay restitution based on the value that the Δ
obtained
 Exercise 7-5 (1)
Dave converts Riley’s car, worth $10,000, and
sells it to Cindy for $12,000. What may Riley
recover as damages? May Riley recover
restitution? If so, what may Riley recover as
Restitution?
 Exercise 7-5 (2)
Danielle accidentally crashes her car into Ben’s
car, causing Ben’s car to need $5,000 in repairs.
What may Ben recover as damages? May Ben
recover restitution? If so, what may Ben recover
as restitution?
 Exercise 7-5 (3)
Darci operates Darci’s cement factory in a way
that causes dust to rain on Jeff’s property. Jeff
sues for restitution, seeking Darci’s profits from
operating the factory in this way. Most courts
would deny Jeff’s request. Why?
 Restitution (cont’d)
C. Restitution for Erroneous Performance of
an Alleged Contract
Π may recover restitution for (1) mistakenly
over performing under a K, or (2) performing
under a K that turns out to be unenforceable
 Restitution (cont’d)
Earhart v. William Low Co. (Cal. 1979)
Π alleged that Δ induced Π to commence
construction of a mobile home park on land
owned by the Δ and adjoining land owned by
a 3rd party
Trial court ordered restitution for benefit or
work done on Δ’s land, but nothing for the
work done on the adjoining property
Why?
 Restitution (cont’d)
Earhart v. William Low Co. (cont’d)
Was there a contract between Δ and Π?
What did Π testify?
Was there another contract between Δ and a 3rd
party?
On what ground(s) does the Cal. Sup. Ct. find that
there was an enforceable promise?
What rule does the court state for the recovery of
restitution in this case?
 Restitution (cont’d)
D. Restitution to a PARTY WHO HAS BREACHED A
CONTRACT
Kutzin v. Pirnie (N.J. 1991)
Πs, the Kutzins (the sellers), and Δs, the Pirnies
(the buyers), entered into a K for the sale of the
Kutzins’ house to the Pirnies for $365k
Buyers made $36k deposit
Dispute over modifications to contract
Sellers sued for specific performance
Buyers counterclaimed for return of $36k deposit
 Restitution (cont’d)
Kutzin v. Pirnie (cont’d)
What did trial court find and hold?
Why did the sellers, the Kutzins, appeal?
What is a liquidated damages clause?
Was there such a provision in the contract?
What did the appellate court rule?
What did the supreme court rule?
 Exercise 7-8
Jacob contracted with Dawn to build Dawn a church edifice.
Jacob finished the building and Dawn took possession. The
building’s ceiling was two feet lower than promised, the
windows were shorter and narrower than promised, and the
seats were narrower than promised. Jacob’s breach was in good
faith. Dawn objected to the errors, although Dawn was able to
make full use of the building. The building could not be fixed
without partially demolishing and rebuilding it. Because the
building was designed to be a church and was fully functional as
a church, the defects had no effect on the value of the building.
Jacob sued for restitution based on the reasonable value of his
services. Will his restitution claim succeed?
 Restitution (cont’d)
Rest. 2d § 374. Restitution In Favor Of Party In Breach
(1) Subject to the rule stated in Subsection (2), if
a party justifiably refuses to perform on the
ground that his remaining duties of performance
have been discharged by the other party's
breach, the party in breach is entitled to
restitution for any benefit that he has conferred
by way of part performance or reliance in excess
of the loss that he has caused by his own breach.
(2) To the extent that, under the manifested
assent of the parties, a party's performance is to
be retained in the case of breach, that party is
not entitled to restitution if the value of the
performance as liquidated damages is
reasonable in the light of the anticipated or
actual loss caused by the breach and the
difficulties of proof of loss.
Agreed Damages and Other Tangential
Contract Provisions
“Agreed” or “Liquidated” Damages
Two terms for the same thing
A clause in a contract that fixes in advance the damages
payable by a breaching party
Written contracts typically contain numerous
provisions that address issues that may arise
between the parties that are to some extent
tangential to the core bargained for exchange
between the parties – an “agreed” or “liquidated”
damage clause is one of these

Class #21
“Boilerplate?” Contract Provisions
Some other, similar contractual clauses include Agreed or
liquidated damages
Entire agreement/merger/integration
Savings
No oral modification
Time of the essence
Force majeure
Choice of law
Arbitration
Indemnification
Prohibition against assignment
Covenants not to compete in employment contracts or
contracts for the sale of a business
 Agreed or Liquidated Damages
Notwithstanding the contract policy of
freedom of contract, such provisions are not
always enforceable precisely as agreed to and
written
“Agreed” or “Liquidated” Damages
1.

1. Were the damages difficult to ascertain when the

K was made?
2. Is the amount of liquidated damages reasonable
in light of the actual and/or anticipated damages?
Agreed or Liquidated Damages (cont’d)
Leeber v. Deltona Corp. (1988)
Δs The Deltona Corporation and Marco Surfside,
Inc. appealed from judgment in favor of Πs, Leeber,
Morton and Drewry
Πs entered into purchase agreement for their
purchase of condo units constructed by Deltona,
with 15% ($22,530) down payment/deposit
Purchase agreement provided that the $22,530
was to be retained by Deltona as liquidated
damages in the event of a breach by the Πs
Agreed or Liquidated Damages (cont’d)

Leeber v. Deltona Corp. (A.2d 1988)

Πs failed to close by extended closing date
Δs notified Πs of default and retained the
deposit, then sold the unit for more $
Trial court entered judgment for Πs that
liquidated damages provision was
unconscionable
What is rule under applicable law?
Agreed or Liquidated Damages (cont’d)

Leeber v. Deltona Corp. (cont’d)

Πs did not dispute that damages were
not ascertainable at the time the
agreement was made
Only remaining issue is whether amount was
unconscionable
Liquidated damages provisions favored under
FL law
15% is reasonable on its face
Agreed or Liquidated Damages (cont’d)
Leeber v. Deltona Corp. (cont’d)
FL law provided that, under a RE K with a liquidated
damages clause, a seller is denied specific performance
by the buyer and its damage recovery is limited to the
liquidated damages amount
Thus, a buyer has nothing to lose by challenging the
liquidated damages amount (deposit forfeited per
clause if B loses; part of deposit returned if B wins) –
so the court needs to be careful about invalidating
liquidated damages clauses or every one will be
challenged
Reversed
 Exercise 8-3(2)
Drummer agrees to play the drums with Rock Band
for three weeks worth of concerts for $10,000. The
contract includes the following term, “If either party
breaches this contract, the other will pay $15,000 as
liquidated damages and not as a penalty.” After two
weeks, Drummer takes a job with another band. The
concerts for the third week were sold out before the
parties ever signed their contract. Rock Band hires a
suitable replacement for Drummer for $10,000. Is the
clause a valid liquidated damages clause or a penalty
clause?
 Exercise 8-3(3)
Physician agreed to provide health care services to patients who are
members of Wellbeing HMO. Under the terms of the agreement
between Physician and the HMO, Physician received compensation
from Wellbeing in return. The agreement contained the following
term:
“In the event that any Member disenrolls from Wellbeing’s health plan
to be treated by you [Physician] under some other financial
arrangement other than Wellbeing’s health plan, then you shall pay to
HMO the amount of $700 for each such Member who is treated by
you. You hereby agree to waive any claim that this amount is a
penalty.”
Physician became affiliated with Feelgood, a competing HMO, and 100
of his patients left Wellbeing and enrolled with Feelgood. Wellbeing
seeks $70,000 from Physician under the term in the agreement. Is the
clause a valid liquidated damages clause or a penalty clause?
Agreed or Liquidated Damages (cont’d)
U.S. v. Hayes ([Link]. 1986)
Δ given scholarship to medical school in exchange for
her performing 2 years of service with the National
Health Service Corps
In the 2nd year of her residency, she notified the NHSC
that she had abandoned her internal medicine
residency and had initiated a 3-year residency in
dermatology
She failed to perform the obligations she incurred with
respect to her scholarship
Statute and contract provide for treble (3x) damages
(3x $30k scholarship amount = $90k)
Agreed or Liquidated Damages (cont’d)

U.S. v. Hayes (cont’d)

Modern trend is for courts to enforce
liquidated damages provisions
Parties bargained at arms’ length
Virtually impossible to determine the actual
damages to the U.S. by the Δ’s breach
Is not a penalty
Agreed or Liquidated Damages (cont’d)
Rest. 2d §356. LIQUIDATED DAMAGES
AND PENALTIES
(1) Damages for breach by either
party may be liquidated in the
agreement but only at an amount
that is reasonable in the light of the
anticipated or actual loss caused by
the breach and the difficulties of
proof or loss. A term fixing
unreasonably large liquidated
damages is unenforceable on
grounds of public policy as a penalty.
Agreed or Liquidated Damages (cont’d)
Rest. 2d §356. LIQUIDATED DAMAGES AND
PENALTIES
Comment:
a. Liquidated damages or penalty. The parties to a
contract may effectively provide in advance the damages that are to
be payable in the event of breach as long as the provision does not
disregard the principle of compensation. The enforcement of such
provisions for liquidated damages saves the time of courts, juries,
parties and witnesses and reduces the expense of litigation. This is
especially important if the amount in controversy is small.
However, the parties to a contract are not free to provide a penalty
for its breach. The central objective behind the
system of contract remedies is compensatory,
not punitive. Punishment of a promisor for
having broken his promise has no justification
on either economic or other grounds and a term
providing such a penalty is unenforceable on
grounds of public policy.
Agreed or Liquidated Damages (cont’d)
Rest. 2d §356. LIQUIDATED
DAMAGES AND PENALTIES
Comments:
b. Test of penalty.....A determination
whether the amount fixed is a penalty turns on a
combination of these two factors. If the difficulty
of proof of loss is great, considerable latitude is
allowed in the approximation of anticipated or
actual harm. If, on the other hand, the difficulty of
proof of loss is slight, less latitude is allowed in that
approximation..
Agreed or Liquidated Damages (cont’d)
Rest. 2d §356. LIQUIDATED DAMAGES
AND PENALTIES
Comments....
c. Disguised penalties.....Neither the parties’
actual intention as to its validity nor their
characterization of the term as one for liquidated
damages or a penalty is significant in determining
whether the term is valid.
d. Related types of provisions....A term that
fixes as damages an amount that is unreasonably small
does not come within the rule stated in this Section,
but a court may refuse to enforce it as unconscionable
under...§208.....
Will Punitive Damages Be Awarded to
the Non-Breaching Party?
“Furthermore, a court will not ordinarily award
damages that are described as ‘punitive,’ intended
to punish the party in breach, or sometimes as
‘exemplary,’ intended to make an example of that
party. No matter how reprehensible
the breach, damages are generally limited to
those required to compensate the injured party
for lost expectation, for it is a fundamental
tenet of the law of contract
remedies that an injured party
should not be put in a better
position than had the contract been
performed.” Farnsworth, Contracts (emphasis
added)
Will Punitive Damages Be Awarded to
the Non-Breaching Party?
This fundamental tenet of the law of contract
remedies, that punitive or exemplary damages
are not available to the non-breaching party,
no matter how reprehensible the breach,
applies regardless of whether the contract
does not or does contain an agreed damages
provision
 Coercive Equitable Relief
Coercive Equitable Relief: A court order requiring a
party to act or refrain from acting
NOT AUTOMATIC
Chapter Topics
1. What are the fundamental requirements for a
party’s obtaining specific performance/injunction
against breach?
2. What are the discretionary factors?
3. What are the requirements for obtaining an
injunction to enforce a covenant not to compete?

Class #22
Coercive Equitable Relief (cont’d)
Rest. 2d §359. EFFECT OF ADEQUACY OF DAMAGES
(1) Specific performance or an injunction will not be
ordered if damages would be adequate to protect
the expectation interest of the injured party.
Comments:
a. Bases for requirement....During the development of the
jurisdiction of courts of equity, it came to be recognized that
equitable relief would not be granted if the award of
damages at law was adequate to protect the
interests of the injured party. There is, however, a
tendency to liberalize the granting of equitable relief
by enlarging the classes of cases in which damages
are not regarded as an adequate remedy. This tendency
has been encouraged by the adoption of the Uniform Commercial Code,
which "seeks to further a more liberal attitude than some courts have
shown in connection with the specific performance of contracts of sale. "
Comment 1 to Uniform Commercial Code §2-716. In accordance with this
tendency, if the adequacy of the damage remedy is uncertain, the
combined effect of such other factors as uncertainty of terms, insecurity
as to the agreed exchange, and difficulty of enforcement should be
considered…
 Coercive Equitable Relief (cont’d)
When is equitable relief, such as specific
performance or a restraining order, available?
1. Is it difficult or impossible to calculate damages
(e.g., sale of family heirloom between family
members)?
1. Is the subject matter irreplaceable (unique goods,
etc.)?
2. Is the breaching party insolvent or is it otherwise
unlikely that damages can be collected?
See Rest. 2d § 360
Coercive Equitable Relief (cont’d)
§ 357 Availability of Specific Performance and Injunction
(1) Subject to the rules stated in §§ 359-69,
specific performance of a contract duty will
be granted in the discretion of the court
against a party who has committed or is
threatening to commit a breach of the duty.
(2) Subject to the rules stated in §§ 359-69, an
injunction against breach of a contract duty
will be granted in the discretion of the court
against a party who has committed or is
threatening to commit a breach of the duty
if
(a) the duty is one of forbearance, or
(b) the duty is one to act and specific
performance would be denied only for reasons
that are inapplicable to an injunction.
Coercive Equitable Relief (cont’d)
Comment:
a. Specific performance. An order of specific
performance is intended to produce as nearly as is practicable
the same effect that the performance due under a contract
would have produced. It usually, therefore, orders a party to
render the performance that he promised. (On the form of
the order, see § 358.) Such relief is seldom granted
unless there has been a breach of contract, either
by non-performance or by repudiation. In
unusual circumstances, however, it may be
granted where there is merely a threatened
breach. See Subsection (1).
b. Injunction….
Coercive Equitable Relief (cont’d)
b. Injunction
A court may by injunction direct a party to
refrain from doing a specified act. This is
appropriate in two types of cases.
Coercive Equitable Relief (cont’d)
In the first, the performance due under the
contract consists simply of forbearance, and the
injunction in effect orders specific performance.
See Paragraph (2)(a). *******
In the second type of case, the performance due
under the contract consists of the doing of an act
rather than of forbearance, and the injunction is
used as an indirect means of enforcing the duty to
act. See Paragraph (2)(b). Instead of ordering that
the act be done, the court orders forbearance from
inconsistent action. *******
 Coercive Equitable Relief (cont’d)
Illustrations:
1. A contracts with B to give B the “first refusal”
of A's house on stated terms. A later offers to
sell the house to others without first offering
it to B and B sues A to enjoin him from doing
this. An injunction may properly be granted.
Coercive Equitable Relief (cont’d)
Illustrations:
2. A, B and C form a partnership to practice veterinary
medicine in a town for ten years. In the partnership
agreement each makes an enforceable promise that if,
on the termination of the partnership, the practice is
continued by the other two members, he will not
practice veterinary medicine in the same town during
its continuance up to a maximum of three years. A
leaves the partnership and the practice is continued by
B and C. A immediately threatens to begin the practice
of veterinary medicine in the same town, and B and C
sue to enjoin A from doing so. An injunction may
properly be granted.
Coercive Equitable Relief (cont’d)
Illustrations:
3. A, the owner of a large factory, contracts to
take all of his requirements of electricity from
B, who promises to build a new electric plant
at a place where it would not otherwise be
profitable. A repudiates the contract and B
sues A to enjoin him from using electricity that
is not supplied by B. An injunction may
properly be granted.
Coercive Equitable Relief (cont’d)
Rest. 2d § 359 Effect of Adequacy of Damages
(1) Specific performance or an injunction will
not be ordered if damages would be adequate
to protect the expectation interest of the
injured party.
(2) The adequacy of the damage remedy for
failure to render one part of the performance
due does not preclude specific performance or
injunction as to the contract as a whole.
(3) Specific performance or an injunction will
not be refused merely because there is a
remedy for breach other than damages, but
such a remedy may be considered in exercising
discretion under the rule stated in § 357.
Coercive Equitable Relief (cont’d)
Rest. 2d §360. FACTORS AFFECTING
ADEQUACY OF DAMAGES [S366]
In determining whether the remedy in
damages would be adequate, the
following circumstances are
significant:
(a) the difficulty of proving damages
with reasonable certainty,
(b) the difficulty of procuring a suitable
substitute performance by means of
money awarded as damages, and
(c) the likelihood that an award of
damages could not be collected.
Coercive Equitable Relief (cont’d)
Rest. 2d §360. FACTORS AFFECTING ADEQUACY
OF DAMAGES
Comments....
b. Difficulty in proving damages. The damage remedy
may be inadequate to protect the injured party's expectation
interest because the loss caused by the breach is too difficult to
estimate with reasonable certainty....Some types of interests are by
their very nature incapable of being valued in money. Typical
examples include heirlooms, family treasures and works of art that
induce a strong sentimental attachment. Examples may also be
found in contracts of a more commercial character.
The breach of a contract to transfer shares of stock may cause a loss
in control over the corporation ....The breach of a covenant not to
compete may cause the loss of customers of an unascertainable
number or importance. The breach of a requirements contract may
cut off a vital supply of raw materials. In such situations, equitable
relief is often appropriate.
Coercive Equitable Relief (cont’d)
Rest. 2d §360. FACTORS AFFECTING
ADEQUACY OF DAMAGES
Comments....
c. Difficulty of obtaining substitute. If the injured
party can readily procure by the use of money a suitable
substitute for the promised performance, the damage remedy
is ordinarily adequate.
Entering into a substitute transaction is generally a more
efficient way to prevent injury than is a suit for specific
performance or an injunction and there is a sound economic
basis for limiting the injured party to damages in such a case.
Furthermore, the substitute transaction affords a basis for
proving damages with reasonable certainty, eliminating the
factor stated in Paragraph (a)....
Coercive Equitable Relief (cont’d)
Rest. 2d §360. FACTORS AFFECTING
ADEQUACY OF DAMAGES
Comments....
e. Contracts for the sale of land. Contracts
for the sale of land have traditionally been accorded a
special place in the law of specific performance. A
specific tract of land has long been regarded as unique
and impossible of duplication by the use of any
amount of money. Furthermore, the value of land is to
some extent speculative. Damages have therefore
been regarded as inadequate to enforce a duty to
transfer an interest in land, even if it is less than a fee
simple.....
Coercive Equitable Relief (cont’d)
Campbell Soup Co. v. Wentz (3rd Cir. 1948)
Π, Campbell Soup Co., entered into a K with the Δs, the
Wentz’s, farmers who agree to sell all of the Chantenay
carrots that they grew on 15 acres of their farm for $23
to $30 per ton at time of delivery
Contract price for January 1947 was $30 per ton
Market price in January 1947 was $90 per ton
Wentzes told Campbell they would not deliver to
Campbell at the K price, and sold the carrots to Lojeski,
who resold some to Campbell and sold others on the
open carrot market
Coercive Equitable Relief (cont’d)
Campbell Soup Co. v. Wentz (cont’d)
Campbell sued the Wentzes, seeking specific
performance
Did trial court grant Campbell this relief?
Why?
Did 3rd Circuit on appeal grant Campbell this
relief? Why?
 Exercise 9-3
a. Cindy Canning Company sues a farmer to enforce a
contract to sell Cindy all of his tomatoes where the
season for packing tomatoes is only six weeks long
and Cindy hires a large, short-term work force
solely to help with the packing during those six-
weeks.
b. Buyer Blake sues for specific performance of a
contract for a second-hand airplane where there
are three other similar, but not identical, airplanes
available for sale in the world.
 Exercise 9-3
c. Buyer Blake sues to enforce a Seller’s promise to sell Buyer (a
shampoo manufacturer) all of its output of lemongrass (a crop
used in the manufacture of, among other things, shampoo).
d. Buyer Blake buys a new car and sues to enforce Car Dealer’s
promise to sell.
e. Buyer Blake buys a laptop computer rated by all the magazines
as the best where the Seller/Manufacturer only sells its
computers directly to consumers (like some computer
manufacturers used to do).
f. Buyer Blake sues to require Seller to perform its promise to
continually adjust a piece of manufacturing equipment that
Seller sold to Buyer and then installed to Buyer’s plant. The
equipment only can be adjusted on site.
 Policy
Why not make specific performance available
on demand?

If you contract with Britney Spears to perform

at your party, why would a court likely not
grant specific performance?
 Exercise 9-4
Plaintiff Pete agrees to pay Defendant Dave
$200,000 for land that he later learns is worth
$400,000. Can a court refuse to grant specific
performance because the price is unfair? What if
the land were later determined to be worth
$300,000? $250,000.
 Discretionary Considerations in
Granting Specific Performance
Laclede Gas Co. v. Amoco Oil Co. (8th Cir.
1973)
Gas supply agreement between predecessors to Δ,
Amoco, and Π, Laclede
Laclede had right to cancel after 1 year; Amoco did
not
2-3 yrs. later, Amoco reduced supply and raised
price to Laclede
What did trial court rule?
What does Amoco contend on appeal, and what
does the circuit court rule re: each?
 Discretionary Considerations in
Granting Specific Performance (cont’d)
Laclede Gas Co. v. Amoco Oil Co.
(cont’d)
Amoco’s arguments on appeal
1.

1. No mutuality of remedy
2. Specific performance would require constant and
long-term court supervision
3. K was indefinite and uncertain
4. Laclede’s remedy at law was adequate
Held by 8th Cir.?
 Discretionary Considerations in
Granting Specific Performance (cont’d)
Van Wagner Advertising Corp. v. S & M
Enterprises et. al. (N.Y. 1986)
Michaels leased to Π, Van Wagner Advertising
Corp., space on a wall for erecting and leasing
advertising billboards, located near and visible
from an exit ramp of the Midtown tunnel in NYC
3-year term plus 7 years’ more of options =
potential 10-year term
Van Wagner erected a sign, and leased it to Asch
Advertising, Inc. for 3 years
 Discretionary Considerations in
Granting Specific Performance (cont’d)

Van Wagner Advertising Corp. v. S & M

Enterprises et. al. (cont’d)
Michaels then sold the building to S & M
Enterprises, and sent a letter to Van Wagner
purporting to cancel the lease
What did the trial court find and hold?
Parties cross-appealed, and App. Div. affirmed
N.Y. Ct. App. granted the parties’ leave to appeal
 Discretionary Considerations in
Granting Specific Performance (cont’d)
Van Wagner Advertising Corp. v. S &
M Enterprises et. al. (cont’d)
“Whether or not to award specific
performance is a decision that rests in
the sound discretion of the trial court…”
Van Wagner – specific performance
must be granted because the demised
space was unique
 Discretionary Considerations in
Granting Specific Performance (cont’d)
Van Wagner Advertising Corp. v. S & M
Enterprises et. al. (cont’d)
For this court, the “point at which breach of a
contract will be redressable by specific
performance thus must lie not in any inherent
physical uniqueness of the property but instead in
the uncertainty of valuing it”
In addition, a court in determining whether to
impose equitable remedies considers the possible
inequity to both parties
Held
 Exercise 9-6 (Excessive Court Supervision)
Would the following cases require excessive court supervision and
therefore make specific performance inappropriate?
a. Plaintiff contracts with Defendant for Defendant to build Plaintiff a
widget manufacturing factory for $27.5 billion. The plans required
Defendant to build a factory specifically tailored to Plaintiff’s widget
manufacturing process and the parties anticipated the project would
take three years.
b. Contract for Defendant to build Plaintiff a space in a shopping center
for a department store where Defendant was already building two
other such spaces in the same mall using the same plans.
c. Contract for Defendant to build Plaintiff a two-story, 4,000 square foot
home according to standardized plans developed by Defendant’s
architect.
d. Specific performance of a McDonald’s franchise contract between
McDonalds, Inc., and a franchisee.
Specific Performance or Injunction
Rest. 2d § 358 Form of Order and Other Relief
(1) An order of specific performance or an
injunction will be so drawn as best to
effectuate the purposes for which the contract
was made and on such terms as justice
requires. It need not be absolute in form and
the performance that it requires need not be
identical with that due under the contract.
(2) If specific performance or an injunction is
denied as to part of the performance that is
due, it may nevertheless be granted as to the
remainder.
(3) In addition to specific performance or an
injunction, damages and other relief may be
awarded in the same proceeding and an
indemnity against future harm may be
required.
 Specific Performance or Injunction
(cont’d)
Travellers Int’l, AG v. Trans World
Airlines, Inc. (S.D.N.Y. 1989)
K: “Travellers was to advise TWA on marketing,
advertising, development of new Tour products,
preparation of promotional budgets, projection of
expenses and revenues and production and
distribution of brochures”
TWA would produce and distribute the brochures,
and provide the tours and brochures
TWA by notice to Travellers purported to terminate
the K

Class #23
 Specific Performance or Injunction
(cont’d)
Travellers Int’l, AG v. Trans World
Airlines, Inc. (S.D.N.Y. 1989)
Travellers sought a permanent injunction
requiring TWA to perform
What rule does the court state?
What facts does the court find?
What is the court’s judgment?
 Exercise 9-8
Plaintiff agreed to work for Defendant as his
chauffeur, house manager, companion and
nurse, and in exchange, Defendant agreed to
revise his will to grant her ownership of his cars
and the right to live in his house and use his
furnishings for the rest of her life. Plaintiff
performed her promised duties for a few years,
at which time Defendant more or less forced her
out of the house. Plaintiff sued for specific
performance. Result? Why?
Specific Performance or Injunction
(cont’d)
Laches
Unclean hands
 Specific Performance or Injunction
(cont’d)
Green v. Higgins (Kan. 1975)
Action by Green for specific performance of a
K for his purchase of real estate
Dist. Court dismissed --- why?
How did [Link]. rule?
Why?
 Specific Performance or Injunction
(cont’d)
Injunctions to Enforce Covenants Not to
Compete
Enjoining Seller not to compete against the
business he/she just sold
Enjoining Employee Currently Working for
Employer from Leaving and Taking a Job with
a Different Employer
Enjoining Employee who Formerly Worked for
Employer from Violation of Non-Compete
 Exercise 9-10
In which of the following cases should an injunction be
granted to the employer?
a. A contract between a music hall and an “exceptionally
talented” organist where there were “five other
organists of comparable ability for hire in the area.”
b. A contract between a law school and a new, untenured
contract professor. What if the professor is tenured?
What is she is known nationally in her field?
c. A contract between a law firm and an associate? A
contract between a law firm and a partner? What
additional facts would you need to know about the
partner to evaluate this problem?
 Specific Performance or Injunction
(cont’d)
DeSantis v. Wackenhut Corp. ([Link].J.
1990)
DeSantis was employed by Wackenhut Corp., and
signed a non-competition agreement – what were
the terms of the non-compete?
Resigned under threat of termination
Became involved in new ventures, in competition
with Wackenhut
Sent announcements to Wackenhut customers
Within 6 mos., obtained one of those customers
and might have obtained another
 Specific Performance or Injunction
(cont’d)
DeSantis v. Wackenhut Corp. (cont’d)
Wackenhut sought to enjoin
Lower court – granted
App. court’s ruling?
Why?
 Specific Performance or Injunction
(cont’d)
A.N. Deringer, Inc. v. Strough (2d Cir. 1996)
A.N. Deringer Inc. was a customs broker who
formerly employed Strough, who left Strough after
10 years and took a job with Fritz Companies, Inc.
Strough had signed a non-compete with Deringer,
with a 90-day term and a 100-mile radius
Strough violated the covenant, and Deringer
commenced action to enforce non-compete and
for damages
 Specific Performance or Injunction
(cont’d)
A.N. Deringer, Inc. v. Strough (cont’d)
What did trial court rule?
What Rule re: damages did app. court
consider?
What Rule re: the enforceability of non-
competes did the app. court state?
What did the app. court find and hold?
 Contract Meaning
To what did the parties agree?
Farnsworth: “It is well to remember that
many potential disputes over the law
of a contract never would arise
because the contract is well drafted,
and that many actual disputes would
not have arisen had the contract been
better drafted. Each case involving a
dispute over the law of the contract is
therefore a lesson for the drafter of
other contracts.”
Class #25
 Contract Meaning
1. What promises and other terms are part of
the contract (what comprises the contract)?
2. What do the words of the contract mean, and
therefore, what does the contract obligate the
parties to do (what does the contract mean)?
3. Did the parties perform (or did one breach)?
4. If one party breached, what is the
consequence?
Contract Meaning – The Parol Evidence
Rule
General Rule: If the parties have entered into a
complete, written, “integrated” K regarding the
subject matter of the K, then no prior oral or
written agreements are part of the K
But: (1) certain terms may be implied to be part of
the K, both under common law and UCC Art. 2
(remember, the law and the courts sometimes
will find sufficient certainty though the express K
terms are somewhat uncertain); (2) the law
imposes certain obligations, e.g., good faith; and
(3) an oral condition to performance may be part
of the K (R2d 217)
 The Parol Evidence Rule
What is “parol evidence” or “extrinsic
evidence?”
Evidence of alleged contract terms that are
not in the written, “integrated” contract
 The Parol Evidence Rule
The parol evidence rule can be likened to a wall or
a gate --- it provides that:
(1) the fact-finder (e.g., the judge or jury) is precluded
from hearing evidence of a term that allegedly was
agreed to orally or in writing prior to a complete
(integrated) written agreement
(2) or orally at the time that the parties entered into
that agreement, and
(2) even if the evidence may be heard by the fact-
finder, the fact-finder still may conclude that the
alleged additional term was not an agreed upon
term of the contract
The Parol Evidence Rule (cont’d)
Integration clause:
Completely integrated (final as to all terms --- generally
bars admission of extrinsic evidence)
Partially integrated (final as to some terms --- only
evidence consistent with the terms of the writing will be
admissible)
Not integrated (extrinsic evidence will be admissible)
Further, evidence of fraud, mistake, undue
influence and/or duress is usually admissible, as is
evidence that might aid the court in its
interpretation of an ambiguous term
Parol Evidence – Integrated Agreements
Rest. 2d §209. INTEGRATED AGREEMENTS
(1) An integrated agreement is a writing or
writings constituting a final expression of
one or more terms of an agreement.
(2) Whether there is an integrated
agreement is to be determined by the court
as a question preliminary to determination
of a question of interpretation or to
application of the parol evidence rule.
(3) Where the parties reduce an agreement
to a writing which in view of its
completeness and specificity reasonably
appears to be a complete agreement, it is
taken to be an integrated agreement unless
it is established by other evidence that the
writing did not constitute a final expression.
Parol Evidence – Integrated Agreements
(cont’d)
Rest. 2d §209. INTEGRATED
AGREEMENTS
Comments:
b. Form of integrated agreement.
No particular form is required for an
integrated agreement. Written contracts,
signed by both parties, may include an explicit
declaration that there are no other
agreements between the parties, but such a
declaration may not be conclusive....
Parol Evidence – Integrated Agreements
(cont’d)
Rest. 2d §209. INTEGRATED AGREEMENTS
Comments:
c. Proof of integration. Whether a writing has been
adopted as an integrated agreement is a question of fact to be
determined in accordance with all relevant evidence. The issue is
distinct from the issues whether an agreement was made and
whether the document is genuine, and also from the issue whether
it was intended as a complete and exclusive statement of the
agreement. See §210; compare Uniform Commercial Code §2-202.
Ordinarily the issue whether there is an integrated agreement is
determined by the trial judge in the first instance as a question
preliminary to an interpretative ruling or to the application of the
parol evidence rule. See §212, 213. After the preliminary
determination, such questions as whether the agreement was in
fact made may remain to be decided by the trier of fact.
Parol Evidence – Integrated Agreements
(cont’d)
Rest. 2d §210. COMPLETELY AND PARTIALLY
INTEGRATED AGREEMENTS
(1) A completely integrated agreement is an
integrated agreement adopted by the
parties as a complete and exclusive
statement of the terms of the agreement.
(2) A partially integrated agreement is an
integrated agreement other than a
completely integrated agreement.
(3) Whether an agreement is completely or
partially integrated is to be determined by
the court as a question preliminary to
determination of a question of
interpretation or to application of the
parol evidence rule.
Parol Evidence – Integrated Agreements
(cont’d)
Rest. 2d §210. COMPLETELY AND PARTIALLY
INTEGRATED AGREEMENTS
Comment:
a. Complete integration. The definition in Subsection (1)
is to be read with the definition of integrated agreement in
sec. 209, to reject the assumption sometimes made that
because a writing has been worked out which is final on some
matters, it is to be taken as including all the matters agreed
upon. Even though there is an integrated agreement,
consistent additional terms not reduced to writing may be
shown, unless the court finds that the writing was assented to
by both parties as a complete and exclusive statement of all
the terms....
Parol Evidence – Integrated Agreements
(cont’d)
Rest. 2d §210. COMPLETELY AND PARTIALLY
INTEGRATED AGREEMENTS
Comment:
b. Proof of complete integration. That a writing
was...adopted as a completely integrated agreement may be
proved by any relevant evidence. A document in the form of
a written contract, signed by both parties and apparently
complete on its face, may be decisive of the issue in the
absence of credible contrary evidence. But a writing cannot
of itself prove its own completeness, and wide latitude must
be allowed for inquiry into circumstances bearing on the
intention of the parties. [see R2d 214(1) and (2)]
Parol Evidence – Integrated Agreements
- Example
6.2 Entire Agreement. This Agreement,
together with the exhibits hereto, contains the
entire understanding and the full and complete
agreement of the parties and supersedes and
replaces any prior understandings and
agreements among the parties with respect to
the subject matter hereof (including, without
limitation, the offer letter, dated May 6, 2009,
between the Company and Employee).
 Parol Evidence (cont’d)
The Parol Evidence Rule (R2d 213) is a rule
both of substantive law and evidentiary law
The rule applies to extrinsic evidence of a prior
oral or written contract term, for which there is
no extra consideration
The rule also applies to extrinsic evidence of a
contemporaneous oral term, for which there is
no extra consideration
 Parol Evidence (cont’d)
Five Rules – PER does not apply to extrinsic
evidence of :
1. subsequent oral or written K term
2. oral or written K term if separate, additional
consideration
3. contemporaneous written term
4. orally agreed condition to performance
(R2d 217)
5. exceptions listed in R2d 214
 Exercise 10-3
a. Abel and Betty negotiate for the purchase and sale of Abel’s
car. During negotiations, the parties agree that Abel will repair
all the dents in the car before delivering it to Betty. The parties
later sign a written document that states a price, the subject
matter of the contract (the car), and the time and place of
performance, but makes no mention of the promise to repair.
Betty sued Abel for breach and seeks to testify about the
promise to repair the dents. Do these facts raise a parol
evidence rule issue?
b. If, in the above hypo, the parties had agreed that, in exchange
for Abel repairing the debts, Betty would paint Abel’s house,
would these facts raise a parol evidence rule issue?
c. If, in the above hypo, the parties agreed to increase the total
price Betty was paying to an amount that reflected the cost to
Abel of repairing the dents, would these facts raise a parol
evidence rule issue?
 Exercise 10-3
d. If, in the above hypo, Abel’s promise to make the repairs was
in a writing but not in the writing the parties later signed, would
these facts raise a parol evidence rule issue?
e. If, in question d. above, the parties signed the written promise
to make the repairs at the same time they signed the writing,
would these facts raise a parol evidence rule issue?
f. If, in the above hypo, the parties had made the repair
agreement ten minutes after signing the writing, would these
facts raise a parol evidence rule issue?
g. What would be the outcome in question f, above, if the
subsequent promise was made orally and the writing contained
an integration clause?
 Parol Evidence (cont’d)
Is it possible for a K to not be integrated at all?
“A contract is not integrated at all if either it is
not in writing or if it is in writing but none of its
terms are final.”
e.g., oral contracts
e.g., (1) draft + oral agreement, or (2) one party claims
a writing that the other party never saw, agreed to, or
signed, is a binding agreement
 Parol Evidence (cont’d)
How to determine if a contact is partially or completely
integrated?
Williston –
Is there a “merger” or “integration” clause in the K?
If yes, then completely integrated
If no merger/integration clause, then does the K appear to be
complete on its face (within its “4 corners”)
If yes, then completely integrated, unless the parties “naturally
would have omitted” the extrinsic term from the writing
Corbin –
All evidence rule – integration clause is but one factor - what
did the parties intend?
 The Parol Evidence Rule
Rest. 2d §213. EFFECT OF INTEGRATED
AGREEMENT ON PRIOR AGREEMENTS
(PAROL EVIDENCE RULE)
(1) A binding integrated agreement
discharges prior agreements to the
extent that it is inconsistent with
them.
(2) A binding completely integrated
agreement discharges prior
agreements to the extent that they
are within its scope.
 The Parol Evidence Rule (cont’d)
Rest. 2d §213. EFFECT OF INTEGRATED
AGREEMENT ON PRIOR AGREEMENTS
(PAROL EVIDENCE RULE)
Comments:
a. Parol evidence rule. This Section states what is
commonly known as the parol evidence rule.... It
renders inoperative prior written agreements as well
as prior oral agreements. Where writings relating to
the same subject matter are assented to as parts of
one transaction, both form part of the integrated
agreement. Where an agreement is partly oral and
partly written, the writing is at most a partially
integrated agreement. See §209.
BUT SEE Rest. 2d §214!
The Parol Evidence Rule (cont’d)
Rest. 2d §213. EFFECT OF INTEGRATED
AGREEMENT ON PRIOR AGREEMENTS (PAROL
EVIDENCE RULE)
Comments (cont’d):
b. Inconsistent terms. Whether a binding agreement is
completely integrated or partially integrated, it supersedes
inconsistent terms of prior agreements. To apply this rule, the court
must make preliminary determinations that there is an integrated
agreement and that it is inconsistent with the term in question. See
§209. Those determinations are made in accordance with all
relevant evidence, and require interpretation both of the integrated
agreement and of the prior agreement. The existence of the prior
agreement may be a circumstance which sheds light on the
meaning of the integrated agreement, but the integrated
agreement must be given a meaning to which its language is
reasonably susceptible when read in the light of all the
circumstances. See §§212, 214.
The Parol Evidence Rule (cont’d)
Rest. 2d §213. EFFECT OF INTEGRATED
AGREEMENT ON PRIOR AGREEMENTS
(PAROL EVIDENCE RULE)
Comments (cont’d):
c. Scope of a completely integrated
agreement. Where the parties have adopted a writing as
a complete and exclusive statement of the terms of the
agreement, even consistent additional terms are superseded.
See §216. But there may still be a separate agreement
between the same parties which is not affected. To apply the
rule of Subsection (2) the court in addition to determining
that there is an integrated agreement and that it is completely
integrated, must determine that the asserted prior agreement
is within the scope of the integrated agreement. Those
determinations are made in accordance with all relevant
evidence....
The Parol Evidence Rule (cont’d)
BUT!!!!!!! R2d § 214. Evidence Of Prior Or
Contemporaneous Agreements And Negotiations
Agreements and negotiations prior to or
contemporaneous with the adoption of a
writing are admissible in evidence to
establish
(a) that the writing is or is not an integrated
agreement;
(b) that the integrated agreement, if any, is
completely or partially integrated;
(c) the meaning of the writing, whether or
not integrated [i.e., a term used in the
contract is ambiguous];
(d) illegality, fraud, duress, mistake, lack of
consideration, or other invalidating cause;
(e) ground for granting or denying rescission,
reformation, specific performance, or other
 Mitchill v. Lath
the Laths owned a farm
the Laths also owned an “ice house” which was across the
road on land owned by a third party
they agreed to sell the land to Mrs. Mitchill
Mrs. Mitchill did not like the icehouse across the street and so
the Laths orally agreed to remove it as part of the
consideration for the sale of the farm
the parties signed a written contract for $8,400 for the sale of
the land, the contract did not mention the removal of the ice
house
the Laths never removed the ice house
Holding?
 Parol Evidence (cont’d)
Mitchill v. Lath (N.Y. 1928)
A substantive rule, or a rule of evidence?
How does the majority state the Rule?
Does the dissent take issue with the Rule?
Does the dissent take the Williston – 4 corners
approach, or the Corbin – intent of the parties
approach?
 Parol Evidence (cont’d)
UCC § 2-202. Final Written Expression: Parol
or Extrinsic Evidence.
Terms with respect to which the confirmatory memoranda of
the parties agree or which are otherwise set forth in a writing
intended by the parties as a final expression of their agreement
with respect to such terms as are included therein may not be
contradicted by evidence of any prior agreement or of a
contemporaneous oral agreement but may be explained or
supplemented
(a) by course of dealing or usage of trade (Section 1-205) or by
course of performance (Section 2-208); and
(b) by evidence of consistent additional terms unless the court
finds the writing to have been intended also as a complete
and exclusive statement of the terms of the agreement.
 Masterson v. Sine
The Mastersons conveyed to the Sines land
under a deed that contained an option for the
Mastersons to repurchase the land within 10
years
The Deed did not contain the potential
repurchase price
Did majority allow extrinsic evidence in to
interpret this contract?
Dissent’s view on assignment issue?
 Parol Evidence (cont’d)
Masterson v. Sine (Cal. 1968)
What rule does the court state with respect to
integration and parol evidence?
Had California courts followed Williston or Corbin
regarding the extent to which a contract is
integrated?
What policies are furthered by the parol evidence
rule?
How does this court state the parol evidence rule?
Does Masterson depart from Mitchell v. Lath?
 Parol Evidence (cont’d)
Masterson v. Sine (cont’d)
Dissent:
Criticizes the majority opinion on what bases?
What does the dissent say about whether
option was “assignable” and the benefit of it
went to the grantors’ successors and assigns,
or was “personal” to the grantors and could
only be exercised by them?
Lee v. Joseph E. Seagram & Sons,
Inc.
Lees family owned a wholesale liquor distributor
Lees wanted to sell their business to Carter (an
affiliate of Seagram))
Lees asked that as part of the deal that Seagram
set up the Lees with a new distributorship in
another city (Seagram’s vp Yogman orally agreed)
Sale agreement did not include this promise and
Seagram never gave Lees another distributorship
Less sued to enforce the oral agreement
 Parol Evidence (cont’d)
Lee v. Joseph E. Seagram & Sons, Inc.
(2d Cir. 1977)
Was there an integration clause?
What did this court find regarding “implied
integration?”
Was the alleged relocation agreement a
“complete” agreement?
 Luria Bros. & Co., Inc. v. Pielet Bros. Scrap
Iron & Metal, Inc. (7th Cir. 1979)
Luria and Pielet have a long history of doing business together
both Luria and Pielet were a buyer, seller and processor of scrap metal
Pielet was represented by Bloom, who was a former employee of Luria
Pielet and Luria engaged in extensive telephone negotiations for the sale of
35,000 tons of scrap metal from Pielet to Luria at ($42 or $49 per ton)
Both parties made notes of the oral conversations
Bloom signed a sales confirmation with the main details of the contract and
mailed it to Luria (stamped confirmation copy and stating that it should be
signed and returned, but failure to return does not void the contract”) (Dec 31
for delivery)
Luria also mailed a confirmation form that was the same except for delivery
date and mode of shipment (Oct 31 for delivery) and containing preprinted
terms on the back including an integration clause
Bloom objected to the delivery date in Luria’s form, and Luria agreed to send a
revised form reflecting Dec 31 delivery, which it never did
Delivery was late (after Dec 31) and Luria eventually sued
Pielet claims there was no contract formed and that there was a condition to
performance
 Parol Evidence (cont’d)
Luria Bros. & Co., Inc. v. Pielet Bros.
Scrap Iron & Metal, Inc. (7th Cir. 1979)
What comprised the contract in Luria?
Why was the buyer, Luria, permitted to
introduce parol evidence?
Why was the seller, Pielet, not permitted to
introduce parol evidence?

Class #26
 Parol Evidence – UCC 2-202
UCC § 2-202. Final Written Expression: Parol
or Extrinsic Evidence.
Terms with respect to which the confirmatory memoranda of
the parties agree or which are otherwise set forth in a writing
intended by the parties as a final expression of their agreement
with respect to such terms as are included therein may not be
contradicted by evidence of any prior agreement or of a
contemporaneous oral agreement but may be explained or
supplemented
(a) by course of dealing or usage of trade (Section 1-205) or by
course of performance (Section 2-208); and
(b) by evidence of consistent additional terms unless the
court finds the writing to have been intended also as a
complete and exclusive statement of the terms of the
agreement .
 Parol Evidence – UCC 2-202 (cont’d)
UCC § 1-205. Course of Dealing and Usage of
Trade.
(1) A course of dealing is a sequence of previous conduct
between the parties to a particular transaction which is fairly
to be regarded as establishing a common basis of
understanding for interpreting their expressions and other
conduct.
(2) A usage of trade is any practice or method of dealing
having such regularity of observance in a place, vocation or
trade as to justify an expectation that it will be observed with
respect to the transaction in question. The existence and
scope of such a usage are to be proved as facts. If it is
established that such a usage is embodied in a written trade
code or similar writing the interpretation of the writing is for
the court.
*******
Parol Evidence – UCC 2-202 (cont’d)

UCC § 2-208. Course of

Performance or Practical
Construction.
(1) Where the contract for sale involves repeated
occasions for performance by either party
with knowledge of the nature of the
performance and opportunity for objection to
it by the other, any course of
performance accepted or acquiesced in
without objection shall be relevant to
determine the meaning of the agreement.
*******
Parol Evidence – UCC 2-202 (cont’d)
Interpretive Priorities of Express
Terms, Course of Performance, and
Course of Dealing and Usage of Trade
UCC § 2-208. Course of Performance or
Practical Construction.
*******
(2) The express terms of the agreement and any such
course of performance, as well as any course of dealing
and usage of trade, shall be construed whenever
reasonable as consistent with each other; but when
such construction is unreasonable, express terms shall
control course of performance and course of
performance shall control both course of dealing and
usage of trade (Section 1-205).
 Exceptions to the Parol Evidence Rule
1. An Oral Condition Precedent to Formation (R2d
217)
2. Evidence of Fraud, Mistake and the Like (R2d
214(d) and (e))
3. Evidence to Help Interpret an Ambiguous Contract
(R2d 214(c))
If one of these exceptions applies, THEN:
(1) the extrinsic evidence will be admitted,
- and -
(2) the evidence will be admitted for the
limited purpose reflected in the exception, not for
the purpose of adding a new term to the contract
Exceptions to the Parol Evidence Rule
(cont’d)
[Link] Oral Condition Precedent to
Formation
See Rest. 2d § 217
Where the parties to a written
agreement agree orally that
performance of the agreement is
subject to the occurrence of a
stated condition, the agreement is
not integrated with respect to the
oral condition.
Exceptions to the Parol Evidence Rule
(cont’d)
2. Evidence of Fraud, Mistake and the Like;
Evidence of Invalidating Causes
§ 214 Evidence of Prior or Contemporaneous Agreements and
Negotiations
Agreements and negotiations prior to or contemporaneous with the
adoption of a writing are admissible in evidence to establish
(a) that the writing is or is not an integrated agreement;
(b) that the integrated agreement, if any, is completely or partially
integrated;
(c) the meaning of the writing, whether or not integrated;
(d) illegality, fraud, duress, mistake, lack of
consideration, or other invalidating cause;
(e) ground for granting or denying rescission,
reformation, specific performance, or other
Exceptions to the Parol Evidence Rule
(cont’d)
Morris v. Morris (Ga. App. 2006)
Executor Morris brought declaratory judgment
action to determine whether option given by
deceased father to son for purchase for $260k was
for 548 or 312 acres
Trial court permitted parol evidence for purpose of
proving whether or not there had been a mistake
Executor appeals
What did appellate court hold?
 Exceptions to the Parol Evidence Rule
(cont’d)
2. Evidence of Fraud, Mistake and the Like
Remember Contract Defenses?
1. Deception
2. Mistake
3. Duress
1. Undue influence
2. Illegality
3. Incapacity
4. Unconscionability
5. Statute of frauds
See Rest. 2d § 214(d) “… or other invalidating cause.”
Exceptions to the Parol Evidence Rule
(cont’d)
3. Evidence to Help Interpret an
Ambiguous Contract
Bethlehem Steel Co. v. Turner Constr. Co.
(N.Y. 1957)
What did term “component materials” mean
Did majority opinion determine that there was an
ambiguity?
Did dissent?
What would dissent have done with respect to
extrinsic evidence?
 Exceptions to the Parol Evidence Rule
(cont’d)
1. Evidence to Help Interpret an Ambiguous
Contract
§ 214 Evidence of Prior or Contemporaneous Agreements and
Negotiations
Agreements and negotiations prior to or contemporaneous with the
adoption of a writing are admissible in evidence to establish
(a) that the writing is or is not an integrated agreement;
(b) that the integrated agreement, if any, is completely or partially
integrated;
(c) the meaning of the writing, whether or not
integrated;
(d) illegality, fraud, duress, mistake, lack of consideration, or other
invalidating cause;
(e) ground for granting or denying rescission, reformation, specific
performance, or other
Exceptions to the Parol Evidence Rule
(cont’d)
Pacific Gas & Elec. Co. v. G.W.
Thomas Drayage & Rigging Co. (Cal.
1968)
What rule does the PG&E case state?
Same rule as Bethlehem Steel?
If the rule of PG&E were to be generally
adopted, would there be anything left of the
parol evidence rule?
 Exercise 10-15
P and D enter into a contract for the sale and
purchase of horsemeat for use in dog food. The
contract states that the meat “shall be 50%
protein.” P, the seller, delivers meat that is 49.7%
protein and D refuses delivery. P then sues D for
breach and seeks to admit evidence of trade
usage (a term of art in the horsemeat trade)
under which the term 50% protein” is
understood to mean between 49.5% and 50%
protein. Analyze whether the contract is
ambiguous.
Exceptions to the Parol Evidence Rule
(cont’d)
Trident Center v. Connecticut General
Life Insurance Co. (9th Cir. 1968)
On what basis does Trident argue that
prepayment penalty clause is ambiguous?
What does 9th Cir. conclude?
Assuming that contract is not ambiguous, is
the extrinsic evidence admissible under CA
law?
 Diagram 10-4
Page 580 has a summary of the parol
evidence rule
When writing practice exams that involve the
parol evidence rule, try working your way
through this chart
 Contract Interpretation (cont’d)
1. What promises and other terms are part of the
contract (what comprises the contract)?
Parol evidence rule, etc.
2. What do the words of the contract
mean, and therefore, what does the
contract obligate the parties to do
(what does the contract mean)?
3. Did the parties perform (or did one breach)?
4. If one party breached, what is the consequence?

Class #27
Contract Interpretation (cont’d)
2. What do the words of the contract
mean, and therefore, what does the
contract obligate the parties to do
(what does the contract mean)?
Transactional lawyers --- draft and negotiate
contracts executed by their clients: seek to identify
and avoid meaning problems in contracts
Litigation lawyers --- try cases the issues in which
are contract disputes, often involving disputed
meanings contract terms
 Contract Interpretation (cont’d)
Diagram 11-1 - Interpretation
Any ambiguity?
1. Patent ambiguity: ambiguity that appears on
the face of the document (e.g., term “indemnify”
(PG&E) or “car” (auto, train, elevator, &c) can mean
different things)
2. Latent ambiguity: ambiguity that is only
revealed after learning additional information (e.g.,
evidence of trade usage showing that, in the industry,
“50%” means “49.5 to 50%”
3. An ambiguous gap: contract is silent regarding

an issue that has arisen (e.g., Wood v. Lucy -

implied obligation to obtain endorsements)
 Contract Interpretation (cont’d)
Kinds of patent ambiguity
1.

1. A word can have more than one meaning (e.g., what’s a

“chicken?”)
2. Sloppy grammar (e.g., “I agree to wash your wife’s car
right away, next, your new car and all other cars you
own by the end of the week” – does “end of the week”
refer to my deadline to perform or does it define the
cars that I will wash?)
3. Different terms of the contract conflict with one another
--- e.g., “1.1 This contract may be terminated at will by
A by notice to B;” and “12.12 This contract may be
terminated by either party for cause only, on 15 days’
written notice given to the other party.”
Contract Interpretation (cont’d)
But “[t]here really is only one
type of ambiguity: A contract
does not clearly address an
issue that has arisen in its
performance.” Omaha Life and
Georgia Decedent
Contract Interpretation (cont’d)
Frigaliment Importing Co. v. B.N.S.
International Sales Corp. (S.D.N.Y. 1960)
What is a “chicken?”
Only young, tender spring chicken suitable for
frying or broiling, or
Only older, tougher hens suitable only for
stewing, or
Either?
Contract Interpretation (cont’d)
Landon v. Twentieth Century-Fox Film
Corp. (S.D.N.Y. 1974)
Landon wrote the book “Anna and the King”
Gave certain rights to Twentieth Century-Fox in
1944
Did the 1944 agreement give Fox the right to
produce the 1972 TV series?
How does the court rule?
Why?
An insurance company (I) and an insulation manufacturer (M) entered
into an insurance contract by which I insured M against legal defense
costs and damages judgments in connection with any lawsuit for
“liability to others for property damage caused by the manufacturer’s
insulation products.” During the policy period, a homeowner installed
insulation in his home that was made by M. The insulation contained
asbestos. The insulation, because it is undamaged and fully functional,
has not caused any health injuries, but the presence of the insulation
has reduced the property value of the home. The homeowner sued M
to recover for his lost property value. I refused M’s request that I
defend the lawsuit and pay any judgment if one was awarded. M sued
the insurer for breach.
Assume M introduced evidence that I had not denied coverage for
loss-in-value claims, notwithstanding an absence of physical damage,
under past contracts between I and other insureds. Assume I
introduced evidence that all other insurance companies interpret
contracts the same way I is arguing it should be interpreted.
Killer Cable Corporation (KCC) represented 960 cable television
companies across the U.S. 354 of those companies subscribed
through KCC to MTVN. KCC and MTVN entered into an agreement
in which, among other things, KCC agreed to occasional rate
increases by MTVN under specific circumstances. The rate increase
contract term stated: “Upon no less than (60) days prior written
notice to Affiliate, MTVN shall have the right to increase the rate,
from time to time during the Term hereof, as part of an industry-
wide rate increase or modification.” Two years into the contract,
MTVN gave KCC 60-day notice of a planned rate increase in
accordance with the 60 day notice provision. 90% of MTVN’s
affiliates were affected by MTVN’s rate increase. MTVN was the
only network that had a rate increase.
Assume that KCC introduces evidence that, in another clause of the
contract, the parties also had used the term “industry” in such a
way that it only could be referring to the network industry. Assume
that MTVN introduces evidence that shows that KCC drafted the
contract.
C worked at a paper manufacturing company. Chris purchased
disability insurance which provided that he would be entitled to
“66% of his earnings in the month prior to the incident” if he was
injured and declared disabled. During the month of March, C
made $8,000. However, in April, Chris took unpaid vacation from
April 1 through April 14. Three days after returning to work, on
April 17, Chris was injured while operating a forklift. Chris’s
doctor declared him physically disabled and the insurance
company sent him a check that was equal to 66% of his earnings
from March 17 through April 17. Chris believes he has been
underpaid.
Assume that Chris introduced evidence that he understood
“month” to refer to a calendar month. The insurance company
introduced evidence that it meant to refer to a month’s worth of
days (i.e., 30 or 31 days). A state statute requires employers to
provide disability insurance and declares that the “purpose of
this statute” is “to ensure that all employees who become
disabled receive at least 2/3 of their income.”
Contract Interpretation (cont’d)
Raffels v. Wichelhaus, 159 Eng. Rep. 375
(1864)
Contract for cotton from a ship called “Peerless”
sailing from Bombay
There are 2 ships called “Peerless,” each of which
sailed from Bombay to England, one of which left
Bombay in Oct., the other in Dec.
Π, seller, sought to enforce K for Dec. sailing
Court --- latent ambiguity, therefore…
Holding?
Contract Interpretation (cont’d)
Haines v. City of New York (N.Y. 1977)
NYC agreed in 1924 to construct a sewage system
for the Town of Hunter and the Village of
Tannersville
All costs of operations and house connections at
the expense of NYC
Π, developer, sought to connect 50-house
development in the 1950s
Held: City not required to continually pay the cost
of expansion
 Exercise 11-11
In 1935, Railroad Company entered into a contract
with City in which City granted Railroad permission to
use a bridge owned by City for a railroad line.
Railroad agreed to maintain the bridge. The
arrangement had no ending date. This arrangement
worked perfectly fine until 2007, when Railroad
decided to abandon the line and remove its tracks
from the bridge. Railroad did so and left the bridge in
good repair. By 2009, the bridge needed repairs
again. The City demanded that Railroad make the
necessary repairs. Must Railroad make the repairs?
 Contract Performance and Non-
Performance
Thinking Like a Deal Lawyer
Translating the business deal into a contract
Recurring issues, including:
1. Money
2. Risk
3. Control
4. Standards
5. Endgame/Performance/Remedies

Class #28
 Contract Performance and Non-
Performance (cont’d)
Rest. 2d Contracts § 224.
Condition Defined
A condition is an event, not certain to occur,
which must occur, unless its non‐occurrence is
excused, before performance under a contract
becomes due.
 Conditions
The conditions that we will consider in chapter 12
affect the performance and the order of
performance by the parties
Conditions
Express
Condition is expressly stated in the K
Constructive
Basis by which the courts and the law order performance
Implied-in-fact
Condition which the courts and the law conclude the parties
must have intended to be part of the agreement, even
though it is not expressly stated in the agreement
 Express Conditions
Tacoma Northpark, LLC v. NW, LLC (Wash.
2004)
O’Connor agreed to purchase from NW several lots of
real estate being developed
K subject to final plat approval, and NW warranted that
it would be obtained prior to closing
K also subject to O’Connor’s obtaining financing and
inspection and other reports
Delays and extensions
O’Connor assigned 2 lots to United Builders, and NW
transferred 2 lots to United Builders and 2 to O’Connor
 Express Conditions (cont’d)
Tacoma Northpark, LLC v. NW, LLC
NW still could not obtain site plan approval
Offered to sell to O’Connor “as-is”
O’Connor declined, and NW sold to Tacoma
Northpark, but did not tell Tacoma Northpark
about the K with O’Connor
Tacoma Northpark filed action to quiet title
Trial court ruled for NW and Northpark
Why?
 Express Conditions (cont’d)
Tacoma Northpark, LLC v. NW, LLC
O’Connor appealed
What did O’Connor argue
How did the court rule?
 Express Conditions (cont’d)
Tacoma Northpark, LLC v. NW, LLC
Promise (duty + NW has B/P re: impossibility
of performance) or condition (GF effort + NW
needs only establish that it made such a GF
effort)
What is the significance of phrases such as
“subject to” and “contingent upon?”
Does promisor have any obligations with
respect to a condition?
 Express Conditions (cont’d)
Howard v. Federal Crop Ins. Corp. (4th
Cir. 1976)
FCIC insured tobacco crop
Insurance policy provided that Π would not
destroy the stalks of the damaged tobacco
prior to inspection by the insurance adjuster
Trial court: Was Π’s compliance with § 5(f) a
condition precedent to its recovering on the
policy?
Trial court’s ruling?
 Express Conditions (cont’d)
Howard v. Federal Crop Ins. Corp.
(cont’d)
Insured appealed
If condition to recovery, then plowing stalks under
precludes recovery by insured
If promise not to plow stalks under, then Δ may
recover damages for Π’s breach, but that breach
would not, standing alone, cause a forfeiture of
the policy
 Express Conditions (cont’d)
Howard v. Federal Crop Ins. Corp. (cont’d)
Several rules of construction:
Abhorrence of a forfeiture
Insurance policies are generally construed against the
insurer
Expression of one thing is to the exclusion of another
What does 4th Cir. hold?
Does it grant Π’s motion for summary judgment?
 Restatement 261 Illustration 2
A, an insurance company, issues to B a policy of
insurance containing promises by A that are in
terms conditional on the happening of certain
events. The policy contains this clause:
“provided, in case differences shall arise touch
any loss, the matter shall be submitted to
impartial arbitration, whose award shall be
binding on the parties.” This is a promise to
arbitrate and does not make an award a
condition precedent of the insurer’s duty to pay.
 Restatement 261 Illustration 3
A, an insurance company, issues to B an insurance
policy in usual form containing this clause: ‘In the
event of disagreement as to the amount of loss it
shall be ascertained by two appraisers and an
umpire. The loss shall not be payable until 60 days
after the award of the appraisers when such an
appraisal is required.’
This provision is not merely a promise to arbitrate
differences but makes an award a condition on the
insurer’s duty to pay in case of disagreement.
 Implied conditions
What is an implied condition in law?
A condition that is not expressly mentioned in
the contract but is imputed by law from the nature of
the transaction or from the conduct of the parties.
A term or obligation implied by law in a contract, any
breach of which will entitle the innocent party not only
to damages but to treat the contract as discharged. In
a contract of sale of goods there are implied conditions
that the seller has the right to sell the goods, that the
goods will correspond with the contract description,
and, in the case of sales in the course of business, that
the goods are of satisfactory quality and fit for the
buyer's declared purpose. If these conditions are not
satisfied then the buyer can walk.
Implied conditions need not be completely satisfied by only
substantially satisfied in many cases where to do otherwise would
cause undue hardship.
 Express Conditions (cont’d)
Oppenheimer v. Oppenheim (N.Y. 1995)
What was the contract clause at issue?
Did Π precisely comply with the clause?
Did Π substantially comply with the clause?
What was the jury’s verdict?
What did the trial court decide on motion for judgment
notwithstanding the verdict?
What did Appellate Division (appellate court) rule?
What did Court of Appeals (NY’s highest appellate
court) rule?
 Express Conditions (cont’d)
“Pay when paid” clauses
Southern States Masonry v. J.A. Jones
Construction (La. 1987)
What do §§ 2, 3 and 4 of K provide?
What did trial court and 5th Cir. rule?
What did the La. court rule?
Why would the parties to the Ks have signed
the Ks with this degree of ambiguity?
 Express Conditions (cont’d)
§ 227 Standards of Preference with Regard
to Conditions
Illustrations:
1. A, a general contractor, contracts with B, a sub-
contractor, for the plumbing work on a construction project. B is
to receive $100,000, “no part of which shall be due until five
days after Owner shall have paid Contractor therefor.” B does
the plumbing work, but the owner becomes insolvent and fails
to pay A. A is under a duty to pay B after a reasonable time.
2. A, a mining company, hires B, an engineer, to help reopen
one of its mines for “$10,000 to be payable as soon as the mine
is in successful operation.” $10,000 is a reasonable
compensation for B's service. B performs the required services,
but the attempt to reopen the mine is unsuccessful and A
abandons it. A is under a duty to pay B $10,000 after the
passage of a reasonable time.
 Express Conditions (cont’d)
§ 227 Standards of Preference with Regard to
Conditions
Illustrations:
3. A, a mining company, contracts with B, the owner of an untested
experimental patented process, to help reopen one of its mines for
$5,000 paid in advance and an additional “$15,000 to be payable as
soon as the mine is in successful operation.” $10,000 is a reasonable
compensation for B's services. B performs the required services, but
because the process proves to be unsuccessful, A abandons the attempt
to reopen the mine. A is under no duty to pay B any additional amount.
In all the circumstances the risk of failure of the process was, to that
extent, assumed by B.
4. A contracts to sell and B to buy land for $100,000. At the same
time, A contracts to pay C, a real estate broker, as his commission,
$5,000 “on the closing of title.” B refuses to consummate the sale.
Absent a showing of a contrary intention, a court may conclude that C
assumed this risk, and that A's duty is conditional on the sale being
consummated. A is then under no duty to pay C.
 Exercise 2-15 (2)
Paula was a real estate agent. Paula entered into a
contract with Solomon by which Paula agreed to serve as
the real estate agent for the sale of LongAcre, a track of
vacant land owned by Solomon. The contract provided
that, if Paula sold the house on behalf of Solomon, Paula
would be paid her real estate agent fee “when Seller
(Solomon) was paid the purchase price at the close of
escrow for such sale.” One week later, with Paula’s
professional and highly competent assistance, Solomon
and a buyer named Barb entered into a contract for the
purchase and sale of LongAcre. Close of escrow was
scheduled for one month later. However, at the last
possible moment, Barb backed out of the deal. Paula
sued Solomon for her fee. Who would win and why?
 Express Conditions (cont’d)
“Time of the Essence” clauses
Pederson v. McGuire (S.D. 1983)
What is a “time of the essence” provision?
Is it implied?
If so, on what facts?
Is there a 2nd possible ground for the court’s
holding?

Class #29
 Time of the Essence (cont’d)
Is time of the essence implied by a stated date for
performance?
If the K states a specific time for performance, and
one party fails to perform by that date: (1) will a
court find that a failure to perform by that time is a
breach, or(2) will it find that the non-performing
party has a reasonable time after the stated date
within which to perform?
Court will consider the nature of the contract in
determining whether the stated date was sufficiently
material to for it to require strict performance by that
date
 Time of the Essence (cont’d)
What if the contract expressly provides that time is of
the essence?
“Equity abhors a forfeiture… notwithstanding the
presence of a boilerplate time is of the essence clause,
a court of equity will relieve a party from the forfeiture
that would otherwise occur as the result of a slight and
innocent delay. If the forfeiture is egregious enough,
or the delay slight enough and the breaching party
sufficiently innocent, even a negotiated time is of the
essence provision will yield to the demands of equity.”
15 Williston on Contracts § 46:11 (4th ed.)
 Exercise 12-7
The City of Columbia has been chosen as the site of
the Super Bowl in the year 2018. You are the city
attorney and you have been directed to prepare a
contract with Connie’s Construction, a construction
firm that the city has hired to build a new football
stadium. The stadium must be completed by January
19, 2018, or the city will be humiliated on a national
scale and suffer enormous financial losses. The city
wants to be assured that the stadium is completed on
time. Draft an appropriate contract clause.
 Sample Answer
Instead of simply saying “time is of the essence” be specific and
explicit
For example, you could address the concern that a court might not
enforce a time is of the essence provision by adding the following
provision to “Termination” section: “The parties acknowledge that
due to [describe time constraints on the parties], if a party wishes to
terminate this contract in accordance with section __ [the drop-
dead-date provision], that party will not be required to give the
other party any time beyond the Drop-Dead Date to allow that party
to satisfy any condition or perform any obligation under this
agreement.”
A second example, “The City’s duty to pay is expressly conditioned
on Connie’s completion of the stadium on or before January 19,
2018 and on the stadium being constructed in accord with the plans
and specifications to the satisfaction of City’s architect and
engineer.”
 Time of the Essence (cont’d)
Rest. 2d § 229 Excuse of a Condition to Avoid
Forfeiture
To the extent that the non-
occurrence of a condition would
cause disproportionate forfeiture,
a court may excuse the non-
occurrence of that condition
unless its occurrence was a
material part of the agreed
exchange.
Drafting Books
 Time of the Essence (cont’d)
Rest. 2d § 237 Effect on Other Party's Duties of
a Failure to Render Performance
Except as stated in § 240, it is a
condition of each party's
remaining duties to render
performances to be exchanged
under an exchange of promises
that there be no uncured material
failure by the other party to
render any such performance due
at an earlier time.
 Time of the Essence (cont’d)
Rest. 2d § 241 Circumstances Significant in Determining Whether a
Failure Is Material
In determining whether a failure to render or to
offer performance is material, the following
circumstances are significant:
(a) the extent to which the injured party will be
deprived of the benefit which he reasonably
expected;
(b) the extent to which the injured party can be
adequately compensated for the part of that
benefit of which he will be deprived;
(c) the extent to which the party failing to perform
or to offer to perform will suffer forfeiture;
(d) the likelihood that the party failing to perform
or to offer to perform will cure his failure, taking
account of all the circumstances including any
reasonable assurances;
(e) the extent to which the behavior of the party
failing to perform or to offer to perform comports
with standards of good faith and fair dealing.
 Time of the Essence (cont’d)
See e.g., Foundation Dev. Corp. v. Loehmann's
, 163 Ariz. 438, 788 P.2d 1189, 1197, 1198, cited in Rest. 2d § 241

Rest. 2d § 241 comment: “two-day delay did not warrant

forfeiture, notwithstanding the ‘time of the essence’
provision. Applying this Restatement section, the court
concluded that the tenant breached a material provision of
the lease in so trivial or immaterial a manner that forfeiture
was inequitable. The court stated that the facts regarding the
tenant's investment, the tenant’s lack of history as to previous
breach during almost 10 years of occupancy, and the size of
the breach relative to the entire amount of money annually
due supported the trial judge's finding that the breach was
trivial.”
 Express Conditions (cont’d)
“Satisfaction” clauses
Mattei v. Hopper (Cal. 1958)
If “commercial value or quality, operative
fitness, or mechanical utility” (objective?)
standard?
If “fancy, taste, or judgment” (subjective)
standard?
 Exercise 12-9
Buyer purchased a washing machine on the
condition that it worked to his “satisfaction.” If
Buyer were to later claim dissatisfaction, return
the washing machine, and refuse to pay for it,
which of the two standards discussed in Mattei
would the court use to determine whether the
buyer has breached the contract?
 Exercise 12-9
Owner entered into a contract with Contractor for Contractor to
extend Owner’s house by building Owner a conservatory. Owner
agreed to pay on the condition that his architect certifies in
writing that he was “satisfied” with the workmanship. Contractor
built the conservatory. Because of relatively minor defects, which
did not significantly affect the value or use of the conservatory,
but which could not be repaired without tearing down the
conservatory and starting over, the architect refused to certify
that he was “satisfied.” Owner therefore refused to pay.
a. Which of the two standards would the court use to determine
whether Owner has breached the contract?
b. Under the standard you identified above, argue both sides of
the issue as to whether Owner has breached.
 Constructive Conditions
Rules Regarding the Creation of
Constructive Conditions
1. Courts generally impose constructive conditions to determine
the order of performance under bilateral contracts
2. The K can contain terms that form the basis for the court’s
ordering performance (e.g., “after,” “before” etc.)
3. If performance is expected by the parties at the same time,
then each must perform (render) or offer to perform (tender)
at the same time
4. If one party’s performance requires a period of time, and the
other party can perform at once, then the party whose
performance requires time must perform first
Constructive Conditions (cont’d)
Some Rules Regarding Effect + Types of
Constructive Conditions
(1) Constructive condition precedent/dependent –
one party must perform first, and 2nd party’s
performance is conditioned on perf. by 1st
(2) Constructive condition concurrent – parties
obligated to perform at the same time
(3) Independent constructive condition – party
must perform regardless of whether the other
party has performed
 Constructive Conditions (cont’d)
(1) Constructive condition precedent (party whose
performance requires a period of time must
perform
before party who can perform all at once) Example:
“Painter + homeowner agree that painter will paint
house for $10k”
(2) Constructive condition concurrent (if parties can
perform at the same time, they must) Example:
“Homeowner and buyer agree that homeowner will sell
house to buyer for $200k”
(3) Independent constructive condition (2nd party must
perform
even if 1st party is not performing)
Constructive Conditions (cont’d)
What is meant by “performance?”
Is more than “substantial performance”
required?
If not, what are consequences of less
than “perfect” performance?
Constructive Conditions (cont’d)
Kingston v. Preston (King’s Bench 1773)
What was the business deal between Π and
Δ?
What did Π allege regarding the order of
performance?
What did Δ allege regarding the order of
performance?
What did the court hold?
Constructive Conditions (cont’d)
Price v. Van Lint (N.M. 1941)
What was the transaction between the parties?
What positions did the parties’ take, through their
respective counsel?
What kind of constructive condition did the trial court
determine existed in the K?
What did it hold?
What Rule did the appellate court apply?
What kind of constructive condition did it determine
existed in the K?
What did it hold?
 Restatement § 234 Order of
Performances
(1) Where all or part of the performances
to be exchanged under an exchange of
promises can be rendered simultaneously,
they are to that extent due
simultaneously, unless the language or the
circumstances indicate the contrary.
(2) Except to the extent stated in
Subsection (1), where the performance of
only one party under such an exchange
requires a period of time, his performance
is due at an earlier time than that of the
other party, unless the language or the
circumstances indicate the contrary.
Constructive Conditions (cont’d)
Ziehen v. Smith (N.Y. 1896)
Π was buyer
Δ was seller
What was the deal between the parties?
What type of condition did the N.Y. [Link]. ?
What is Rule stated by N.Y. [Link].?
Where was the intent of the parties?
Was the constructive condition strictly construed?
Constructive Conditions (cont’d)
Stewart v. Newbury (N.Y. 1917)
Construction contract between the parties
No term regarding timing of payment
Π, the builder, billed Δ, a manufacturing
company, $896 for work done
Δ did not pay and Π stopped work
What did trial judge charge the jury?
What Rule did the appellate court state?
Constructive Conditions (cont’d)
SUBSTANTIAL PERFORMANCE
Rest. 2d § 241 Circumstances Significant in
Determining Whether a Failure Is Material
In determining whether a failure to render or to
offer performance is material, the following
circumstances are significant:
(a) the extent to which the injured party will be
deprived of the benefit which he reasonably
expected;
(b) the extent to which the injured party can be
adequately compensated for the part of that
benefit of which he will be deprived;
(c) the extent to which the party failing to perform
or to offer to perform will suffer forfeiture;
(d) the likelihood that the party failing to perform
or to offer to perform will cure his failure, taking
account of all the circumstances including any
reasonable assurances;
(e) the extent to which the behavior of the party
failing to perform or to offer to perform comports
with standards of good faith and fair dealing.
Constructive Conditions (cont’d)
Plante v. Jacobs (Wis. 1960)
What is the issue that the court must decide?
What is “substantial performance?”
Is there something between “substantial
performance” and “complete performance?”
Does the counterparty have a remedy with
respect to the gap between the two?
Constructive Conditions (cont’d)
SUBSTANTIAL PERFORMANCE
If A’s performance is a constructive
condition of B’s performance, then
only “substantial” performance is
required from A before B can
recover on the contract (i.e., before
B can force A to perform)
B’s recovery and A’s performance
NOT the full contract price: instead
in contract price less DIV or COR
Rule does NOT generally apply to an
express condition
 Perfect Tender Rule
General common law rule is the “perfect
tender rule”
Farnsworth: “During the nineteenth century a
rule developed that a buyer was entitled to
reject goods unless the seller made a ‘perfect
tender.’ The requirement of perfection
covered not only the quantity and quality of
the goods but also the details of the
shipment.”
 Perfect Tender Rule (cont’d)
“In the words of Learned Hand, ‘There is no
room in commercial contracts for the doctrine
of substantial performance.’ This rule of strict
performance remained unchallenged during
the first half of the twentieth century. In its
terms, it applied even though it was not
practical for the seller to resell the rejected
goods as, for example, if the goods were
perishable or specially manufactured.”
Farnsworth, Contracts (4th Ed.) § 8.12
 Perfect Tender Rule (cont’d)
The shortcomings of the rule include that:
The buyer’s right to reject does not depend on the
buyer’s having been harmed
The rule provides an easy way for a buyer to escape
from its contractual obligations if it no longer needs the
goods or market conditions have changed
Rule has been eroded, primarily by (1)
“materiality” requirement, (2) implied right to
cure, and (3) equitable doctrine against forfeiture
But UCC mostly still follows the rule (UCC 2-601)
 Perfect Tender Rule (cont’d)
§ 2-601. Buyer's Rights on Improper
Delivery.
Subject to the provisions of this Article on breach in
installment contracts (Section 2-612) and unless
otherwise agreed under the sections on contractual
limitations of remedy (Sections 2-718 and 2-719), if the
goods or the tender of delivery fail in any respect to
conform to the contract, the buyer may
(a) reject the whole; or
(b) accept the whole; or
(c) accept any commercial unit or units and reject the rest.
 Perfect Tender Rule (cont’d)
Some erosion in Art. 2 by related provisions
UCC 2-508 (seller’s right to cure after buyer’s
rejection of the goods)
UCC 2-608(1) (buyer can revoke acceptance
only if non-conformity “substantially impairs”
the value of the goods to the buyer)
UCC 2-612(2) (same “substantial impairment”
requirement for installments)
 Divisibility
Divisibility as an Excuse or Non-Excuse for Performance
§ 240 Part Performances as Agreed Equivalents
If the performances to be exchanged under
an exchange of promises can be apportioned
into corresponding pairs of part
performances so that the parts of each pair
are properly regarded as agreed equivalents,
a party's performance of his part of such a
pair has the same effect on the other's
duties to render performance of the agreed
equivalent as it would have if only that pair
of performances had been promised.
Sterling (orange buyer/packer) v. Tipton (dressed hogs/hogs
on the hoof)

Class #30
 Divisibility (cont’d)
Sterling v. Gregory (Cal. 1906)
Π, orange grower, entered into a contract to sell
oranges from “Upper Orchard” to Δ
Π brought suit, alleging that Δ breached before
completing the purchase of all of the oranges from
the Upper Orchard
What did Δ allege in its answer?
What did trial court decide?
What did appellate court rule?
 Divisibility (cont’d)
Which is divisible?
B orders Anna Karenina for $10, On the Road
for $4, and the Girl on the Train for $10
B orders 3 vol. set of Blackstone’s
Commentaries for $8 per volume, for a total
price of $24
Rest. 2d § 240
 Divisibility (cont’d)
Tipton v. Feitner (N.Y. 1859)
Contract for hogs
What were the key components of the contract?
Written or oral?
What if any performance by Π?
What if any performance by Δ?
Referee’s decision?
Court of Appeals decision?
 UCC Divisibility
§ 2-307. Delivery in Single Lot or
Several Lots.
Unless otherwise agreed all goods called for by a
contract for sale must be tendered in a single
delivery and payment is due only on such
tender but where the circumstances give
either party the right to make or demand
delivery in lots the price if it can be apportioned
may be demanded for each lot.
 UCC Divisibility (cont’d)
§ 2-612. "Installment contract";
Breach.
*******
(3) Whenever non-conformity or default with
respect to one or more installments substantially
impairs the value of the whole contract there is a
breach of the whole. But the aggrieved party
reinstates the contract if he accepts a non-
conforming installment without seasonably
notifying of cancellation or if he brings an action with
respect only to past installments or demands
performance as to future installments.
 Contract Interpretation (cont’d)
1. What promises and other terms are part of the
contract (what comprises the contract)?
Parol evidence rule, etc.
2. How do courts determine what the words of the
contract mean, and therefore, what the parties to
the contract are obligated to do (what does the
contract mean)?
3. Did the parties perform (or did one
breach)?
4. If one party breached, what is the
consequence?

Class #31
Excuse of Conditions and Discharge of
Obligations
Key Definitions (S&W p. 592-593)
“Breach” – any deviation from perfect performance,
including both “non-performance” and “defective
performance”
“Discharge” – both (1) liberation of a party from its
contractual obligations, and (2) the result of a party’s
fully performing
“Excuse” or “excuse of condition” – condition on which
a duty is dependent is treated by the court as
irrelevant or is put aside, so that, even if condition did
not occur, the party is not released from the duty
Excuse of Conditions and Discharge of
Obligations (cont’d)
List of Excuses and Grounds for Discharge – (Table 12-1
– S&W p. 593)
Grounds for Non-Performance or Non-Occurrence
1.

1. Non-occurrence of a prior condition

2. Waiver
3. Estoppel
4. Prevention/Failure to Cooperate/Bad Faith
5. Extreme forfeiture
6. Impracticability/Impossibility
7. Frustration
8. Anticipatory Repudiation
9. Failure to Give Adequate Assurances
Effect (Table 12-2 – S&W p. 594)
 Non-occurrence of a prior condition
1.

1.

1. Non-occurrence of a prior condition

2. The non-occurrence discharges or excuses
any duty that is dependent on the
occurrence of the condition (unless the
court treats the condition as irrelevant or
otherwise puts it aside, e.g., constructive
condition in Price)
2. Waiver of condition
Intentional relinquishment of a known right
(in this case, that performance requires
satisfaction of condition)
 Waiver, Estoppel, Prevention/Failure to
Cooperate/Bad Faith
1. Estoppel regarding non-occurrence of
condition
Misstatement or failure to disclose a fact +
justifiable reliance by other party can estop
party from asserting the non-occurrence of a
condition
2. Prevention/Failure to Cooperate/Bad Faith
Can be ground for discharge, or excuse for
non-occurrence of condition
Waiver, Estoppel, Prevention/Failure to
Cooperate/Bad Faith (cont’d)
Schultz v. Los Angeles Dons, Inc. (Cal.
App. 1951)
Facts
What term does the court imply with respect
to Schultz’ performance?
What express contract terms are at issue?
How does court address written notice
requirement?
Waiver, Estoppel, Prevention/Failure to
Cooperate/Bad Faith (cont’d)
Prousi v. Cruisers Div. of KCS Intern, Inc.
([Link]. 1997)
Π, Prousi, bought a yacht from Greenwich Boat
Works, an authorized dealer for Δ
On maiden voyage, yacht engine stalled several
times en route to DE and MD, which events Π
reported to GBW
Matters grew worse from there
Δ moved for summary judgment
What was the condition?
Waiver, Estoppel, Prevention/Failure to
Cooperate/Bad Faith (cont’d)
Prousi v. Cruisers Div. of KCS Intern,
Inc. (cont’d)
What are waiver rules stated by the court?
Was the condition waived?
On what facts did court rule?
What did it rule?
Is this the end of the case?
Exercise 12-22
Exercise 12-23
Waiver, Estoppel, Prevention/Failure to
Cooperate/Bad Faith (cont’d)
Fay v. Moore (Pa. 1918)
Was there a waiver?
How did court interpret requirement of an
architect’s certificate of completion as a
condition for payment?
Was there bad faith?

Exercise 12-24
 Extreme Forfeiture
1. Extreme Forfeiture (see Rest. 2d § 229 – S509)
Alcazar v. Hayes (Tenn. 1998)
Accident
Insurance policy required notice – when required?
No notice given
Suit brought 1 year after accident
Trial court?
1st appellate court?
 Extreme Forfeiture (cont’d)
Alcazar v. Hayes (cont’d)
Issue?
What is the traditional view?
Does the traditional view comport with the words
of the written insurance policy?
What is the modern trend?
What are grounds for trend?
Is public policy a proper basis for a court to
vary the express terms of a contract?
 Extreme Forfeiture (cont’d)
Alcazar v. Hayes (cont’d)
Does Tenn. follow the “modern trend?”
What Rules does the court consider?
Which Rule does the court adopt?
Why?
Exercise 12-25
 Extreme Forfeiture (cont’d)
§ 229. Excuse of a Condition to
Avoid Forfeiture
To the extent that the non‐occurrence of a
condition would cause disproportionate
forfeiture, a court may excuse the non‐
occurrence of that condition unless its
occurrence was a material part of the agreed
exchange.
Exercise 12-26
 Anticipatory Repudiation and Failure of Assurances
1.

1.

1. Anticipatory Repudiation
2. Failure of Assurances
Anticipatory Repudiation and Failure of
Assurances
What is a repudiation (aka anticipatory
repudiation) by one party, and what does it
empower the counterparty to do?
Repudiation is (1) a party’s unequivocal
manifestation, (2) prior to the party’s
performance becoming due, (3) of the party’s
intention not to render the promised
performance
Repudiation (a) gives the other party a claim for
damages for total breach, and (b) discharges the
other party from its obligation to perform
Rest 2d § 253
Anticipatory Repudiation and Failure of
Assurances (cont’d)
Wallace Real Estate Investment, Inc. v.
Groves (Wash. 1994)
Agreement of Sale for sale of 10 acres of commercial
property by Groves and Silers to Cox for $1.52M
Finding: price was established to encourage a “quick,
cash sale”
$20k note as down payment
30-day feasibility study period
$15k per month to extend closing date (up to 12x)
If feasibility condition satisfied, then $20k still
liquidated damages
Anticipatory Repudiation and Failure of
Assurances (cont’d)
Wallace Real Estate Investment, Inc.
v. Groves (cont’d)
Cox assigned to Wallace Real Estate Invt., Inc.
Sellers and Wallace negotiated further 2 mo.
extensions at $30k per mo., closing scheduled
for 12/17/90
Wallace did not attend closing --- sellers
retained $260k “earnest money” ($20k + (12 x
$15k = $180k) + (2 x $30k = $60k) = $260k)
Anticipatory Repudiation and Failure of
Assurances (cont’d)
Wallace Real Estate Investment, Inc. v.
Groves (cont’d)
Trial: for sellers
Ct. App.: for sellers
Liquidated damages clause --- what did court hold?
Anticipatory breach --- what did court hold?
Why?
Exercise 12-27
Exercise 12-28
Anticipatory Repudiation and Failure of
Assurances (cont’d)
K & G Construction Co. v. Harris (Md. 1960)
Contractor sued subcontractor
For what?
Subcontractor counterclaimed against contractor
For what?
Trial court/jury: for subcontractor
Appellate court: promises between GC and Sub
were “mutually dependent”
What consequence?
[Link]. of Md.’s decision?
Exercise 12-29
Anticipatory Repudiation and Failure of
Assurances (cont’d)
Cobb v. Pacific Mutual Life Insurance Co.
(Cal. 1935)
Cobb Π appellee
Pacific Mutual Δ appellant, issued life and disability
policies in 1926 and 1929
What did the court say was the main difference
between the 2 policies?
What did ins. co. allege in denying coverage?
Did Π make misrepresentations?
Anticipatory Repudiation and Failure of
Assurances (cont’d)
Cobb v. Pacific Mutual Life Insurance Co.
(cont’d)
Jury and trial court: no fraud
Dist. Court of appeal sustained finding of no fraud
What is the issue on appeal to the Cal. Sup. Ct.?
Why is this an exception to the anticipatory
repudiation rule?
What is the exception?
Exercise 12-30
Exercise 12-31
Anticipatory Repudiation and Failure of
Assurances (cont’d)
Drake v. Wickwire (Alaska 1990)
Drake signed an exclusive listing agreement with
Hosley, to sell certain land
Hosley found buyers, and they signed a purchase
and sale agreement
Rest. 2d § 250 (comment b. – “statement must be
“sufficiently positive to be reasonably interpreted
to mean that the party will not or cannot perform”)
Rest. 2d § 251 – what is the constructive condition?
Exercise 12-32
 Assurances (cont’d)
AMF, Inc. v. McDonald’s Corp. (7th Cir. 1976)
McDonald’s ordered 23 computerized cash registers from
AMF, Inc.
AMF began in 1966 to market the individual components of “a
completely automated restaurant system, including its model
72C computerized cash register involved here”
Delivery scheduled beginning in Feb. 1969, continuing through
first half of 1969
May 1 – still no working machine
AMF rescheduled for July 1969 to January 1970
Pilot unit not scheduled for delivery until July 1969
AMF engineer on project not to commence until March 1969
What should McD’s do?
 Assurances (cont’d)
AMF, Inc. v. McDonald’s Corp. (cont’d)
“Reasonable grounds for insecurity” is a
question of fact, the existence of which gives
the party a power to demand in writing
“adequate assurance”
If the party does not receive “adequate
assurance” of future performance within a
“reasonable time” not exceeding 30 days,
then the party making the justified demand
by repudiate
 Assurances (cont’d)
AMF, Inc. v. McDonald’s Corp. (cont’d)
AMF argued no formal written demand for
assurances under 2-609
Court: UCC to be liberally construed, and
formalistic approach rejected --- substantively,
AMF knew that McD’s had suspended performance
until it received adequate assurance
Discussions at March 18 and May 1 meetings
deemed demand
Adequate assurance not provided, therefore McD’s
may terminate under UCC 2-609(4)
 Assurances (cont’d)
Cancel under UCC 2-609, 2-610 and 2-711
§ 2-609. Right to Adequate Assurance of
Performance.
(1) A contract for sale imposes an obligation on each party that the
other's expectation of receiving due performance will not be
impaired. When reasonable grounds for insecurity arise with
respect to the performance of either party the other may in writing
demand adequate assurance of due performance and until he
receives such assurance may if commercially reasonable suspend
any performance for which he has not already received the agreed
return.
*******
(4) After receipt of a justified demand failure to provide within a
reasonable time not exceeding thirty days such assurance of due
performance as is adequate under the circumstances of the
particular case is a repudiation of the contract.
 Assurances (cont’d)
§ 2-610. Anticipatory Repudiation.
When either party repudiates the contract with respect to a
performance not yet due the loss of which will substantially impair
the value of the contract to the other, the aggrieved party may
(a) for a commercially reasonable time await performance by the
repudiating party; or
(b) resort to any remedy for breach (Section 2-703 or
Section 2-711), even though he has notified the
repudiating party that he would await the
latter's performance and has urged retraction;
and
(c) in either case suspend his own performance
or proceed in accordance with the provisions of
this Article on the seller's right to identify goods
to the contract notwithstanding breach or to
salvage unfinished goods (Section 2-704).
 Assurances (cont’d)
§ 2-711. Buyer's Remedies in General;
Buyer's Security Interest in Rejected Goods.
(1) Where the seller fails to make delivery or repudiates or the
buyer rightfully rejects or justifiably revokes acceptance then
with respect to any goods involved, and with respect to the
whole if the breach goes to the whole contract (Section 2-612),
the buyer may cancel and whether or not he has done so may
in addition to recovering so much of the price as has been
paid
(a) “cover” and have damages under the next section as to all
the goods affected whether or not they have been identified
to the contract; or
(b) recover damages for non-delivery as provided in this
Article (Section 2-713).
 Assurances (cont’d)
RULE STATED IN RESTATEMENT IS SIMILAR:
Rest. 2d § 251 When a Failure to Give Assurance May Be
Treated as a Repudiation
(1) Where reasonable grounds arise to
believe that the obligor will commit a breach
by non-performance that would of itself give
the obligee a claim for damages for total
breach under § 243, the obligee may demand
adequate assurance of due performance and
may, if reasonable, suspend any performance
for which he has not already received the
agreed exchange until he receives such
assurance.
(2) The obligee may treat as a repudiation
the obligor's failure to provide within a
reasonable time such assurance of due
performance as is adequate in the
circumstances of the particular case.
 Assurances (cont’d)
Exercise 12-33
Exercise 12-34
 Performance and Non-Performance
(cont’d) – Impracticability + Frustration
Grounds for Non-Performance or Non-Occurrence
1.

1.

1. Non-occurrence of a prior condition

2. Waiver
3. Estoppel
4. Prevention/Failure to Cooperate/Bad Faith
5. Extreme forfeiture
6. Impracticability/Impossibility
7. Frustration
8. Anticipatory Repudiation
9. Failure to Give Adequate Assurances
Tables 12-1 and 12-2 – S&W pp. 593-594
Class #32
 Impracticability
Elements of Impracticability (S&W p.
633)
1.

1. Occurrence of an unforeseen event

2. Event makes a party’s performance
impracticable (i.e., so vitally different from what was
expected as to alter the essential nature of the
performance)
3. Non-occurrence of the event a basic
assumption on which contract was made
4. Party claiming impracticability (a) had no
fault in causing the event, and (b) did not
assume the risk ((a) no contractual assumption or
(b) unforeseeable or (c) not within her control nor was she
the best person to avoid loss)
5. Exercise 12-35
 Impracticability (cont’d)
What is the effect of impracticability?
If the impracticable performance is a material
part of the agreed exchange, then it is
excused and the rest of the K is discharged
If the impracticable performance is a not
material part of the agreed exchange, then it
is excused but the rest of the parties’
obligations under the K must be performed
 Impracticability (cont’d)
Rest. 2d § 261. Discharge by
Supervening Impracticability
Where, after a contract is made, a party’s
performance is made impracticable without his
fault by the occurrence of an event the non‐
occurrence of which was a basic assumption on
which the contract was made, his duty to render
that performance is discharged, unless the
language or the circumstances indicate the
contrary.
Rest. 2d § 263
 Impracticability and the UCC
§ 2-615. Excuse by Failure of Presupposed
Conditions.
Except so far as a seller may have assumed a greater obligation
and subject to the preceding section on substituted
performance:
(a) Delay in delivery or non-delivery in whole or in part by a
seller who complies with paragraphs (b) and (c) is not a breach
of his duty under a contract for sale if performance as agreed has
been made impracticable by the occurrence of a contingency
the non-occurrence of which was a basic assumption on
which the contract was made or by compliance in good faith with
any applicable foreign or domestic governmental regulation or
order whether or not it later proves to be invalid.
 Impracticability (cont’d)
Taylor v. Caldwell (UK 1863)
Πs agree to rent the Surrey Gardens and
Music Hall from Δs for 4 different days
Venue burned to the ground before the 1st
concert date
What was the issue before the court?
What does the contract say?
What Rule does the court state?
 Impracticability (cont’d)
Taylor v. Caldwell (cont’d)
What kind of condition does the court find in
the contract?
On what basis does the court find that the
condition was part of the contract?
What is the Rule?
Exercise 12-36
Exercise 12-37
 Impracticability (cont’d)
National Ass’n of Postmasters of U.S.
v. Hyatt Regency Washington (D.C.
[Link]. 2006)
NAPUS contracted to hold 3 conferences
(block of rooms and amenities) at the Hyatt,
on specified dates in each of 2002, 2003 and
2004
NAPUS then cancelled the 2003 and 2004
conferences
Why?
 Impracticability (cont’d)
National Ass’n of Postmasters of U.S. v.
Hyatt Regency Washington (cont’d)
Did this make it impossible to hold the conferences as
scheduled?
What specific word did the court use?
Did the parties attempt to resolve before Π filed suit?
What proposals did each make to the other?
Π’s suit and Δ’s countersuit
Motions in court below
How did trial court rule?
 Impracticability (cont’d)
National Ass’n of Postmasters of U.S.
v. Hyatt Regency Washington (cont’d)
Π appeals
Parties dispute meaning of contract
What does appellate court say about the
relationship between the parol evidence rule
and the whether a ruling on the SJ motions
was legally appropriate?
 Impracticability (cont’d)
National Ass’n of Postmasters of U.S. v.
Hyatt Regency Washington (cont’d)
What kind of condition is the court analyzing?
What 2 contract provisions are primarily at issue?
How does the court interpret those clauses?
How does it rule?
Exercise 12-38
Exercise 12-39
 Impracticability (cont’d)
American Trading & Production Corp. v.
Shell International Marine, Ltd. (2nd Cir.
1972)
Shell (charterer) contracted with Am. Trading &
Prod. Co. (owner) for owner to transport Shell’s
lube oil from TX to Mumbai
1967 War results in closure of the Suez Canal while
the ship was en route
Were there communications between the parties
about what to do?
What route did the ship follow, and what did the
owner bill Shell after the owner delivered the oil?
 Impracticability (cont’d)
American Trading & Production Corp. v.
Shell International Marine, Ltd. (cont’d)
What did the trial court rule?
Did the K expressly provide for passage via the Suez
Canal?
What K provisions did the owner argue in support of its
interpretation of the contract?
What does the court say about a “mere increase in
cost alone?”
Court concedes that these cases are “vexing and
difficult”
Exercise 12-40
 Impracticability (cont’d)
Mineral Park Land Co. v. Howard (Cal. 1916)
Π owned land on a wash known as Arroyo Seco in South
Pasadena
Δs agreed with the public authorities to build a concrete
bridge across the Arroyo Seco
Π entered into K with Δs by which Π granted Δs the right to
take and haul from Π’s land all the gravel and earth necessary
for the fill and cement work for the proposed bridge
Δs agreed to pay per cubic yard
Δs only took about 50% of the amount required, and paid for
only part of the amount taken
What facts were relevant to the impracticability dispute?
 Impracticability (cont’d)
Mineral Park Land Co. v. Howard (cont’d)
How does the court state the issue before it?
What did the trial court rule?
Why?
What does the appellate court rule with respect to the
Δs’ obligation to perform with respect to the gravel
that was below the water line?
How does it reconcile “impossibility” with
“impracticability?”
How do you reconcile this, earlier case, with the later
case of Am. Trading v. Shell, and the evolution
described by Farnsworth?
Exercise 12-41
 Impossibility v. Impracticability
A brief diversion for clarification:
Earlier common law cases required impossibility
arising from:
1. post-formation illegality,
2. death of promisor under personal services K (e.g.,
actor, director, executive, unincorporated
contractor)
3. Act of God (e.g., stable owner’s obligation to
return horse excused because horse died through
no fault of the stable owner; or Surrey Gardens
and Music Hall burned to the ground)
Impossibility v. Impracticability (cont’d)
Farnsworth: This earlier doctrine of
“impossibility” has evolved toward a candid
recognition “that the judicial function is to
determine whether, in light of exceptional
circumstances, justice requires a departure
from the general rule that a promisor bears
the risk of increased difficulty of
performance.”
 Impracticability (cont’d)
Mutual Life Ins. Co. of N.Y. v. Johnson (1934)
Mutual Life issued life/disability insurance policy to Cooksey
What were the conditions/requirements to Mu Life
performing by paying Cooksey the benefits?
Quarterly premium payment due Nov. 16, 1931
Grace period of 31 days
What key additional facts were at issue?
Why did the SCOTUS take the case on certiorari?
What is the issue before the court?
What Rule does the court state?
Exercise 12-42
 Impracticability/Frustration of Purpose
Compared
Frustration of Purpose
Impracticability
1. 1.

1. Occurrence of an unforeseen 1. Occurrence of an unforeseen event

event 2. Event substantially
2. Event makes a party’s frustrates a party’s
performance principle purpose in
impracticable (i.e., so making the K (the
vitally different from transaction no longer
what was expected as to makes any sense)
alter the essential 3. Non-occurrence of the event a basic
nature of the assumption on which contract was
made
performance) 4. Party claiming impracticability had
3. Non-occurrence of the event a no fault in causing the event
basic assumption on which 5. and did not assume the risk ((a) no
contract was made contractual assumption or (b)
4. Party claiming impracticability had unforeseeable or (c) not within her
no fault in causing the event control nor was she the best person
to avoid loss
5. and did not assume the risk ((a) no
contractual assumption or (b)
unforeseeable or (c) not within
her control nor was she the best
person to avoid loss
Class #33
 Frustration of Purpose
Krell v. Henry (K.B. 1903)
Π Krell sued Δ Henry for 50£ unpaid amount of 75£
agreed to be paid in exchange for use of flat at 56A Pall
Mall for 2 days (not nights)
Henry had responded to “announcement” in the
windows of the flat, that “windows to view the
coronation processions were to be let”
Contract made no mention of coronation or any
purpose of the contract
Procession did not occur, through no fault of either
party
Henry refused to pay 50£ balance
 Frustration of Purpose (cont’d)
Krell v. Henry (cont’d)
What case did the court cite at the start of its
analysis?
Is it the same?
What facts did the court consider?
What Rule did the court state?
Exercise 12-43
Exercise 12-44
Exercise 12-45
 Frustration of Purpose (cont’d)
Aluminum Co. of America v. Essex Group,
Inc. ([Link]. 1980)
Π ALCOA and Δ Essex in 1967 entered into long-term
(16 yr. + 5 yr. Essex extension option) supply agreement
re: processing of aluminum, “whereby ALCOA would
supply Essex with its long-term needs for aluminum
that Essex could use in its manufacturing operations”
K contained escalation formula based on WPI-IC
ALCOA sued Essex --- for what relief and on what
grounds?
Essex counterclaimed --- for what?
Essex also answered and responded to ALCOA’s
request for relief --- on what grounds?
 Frustration of Purpose (cont’d)
Aluminum Co. of America v. Essex
Group, Inc. (cont’d)
Index --- how formulated
What did the court find was the purpose of
the formula
Intervening events
 Frustration of Purpose (cont’d)
Aluminum Co. of America v. Essex Group,
Inc. (cont’d)
What were Essex’ arguments regarding ceiling and
floor prices and the allocation of risk?
How did court respond to these arguments?
What is the “focus” of impracticability and frustration,
according to the ALCOA v. Essex court (S&W p.
661)?
Did the court find rule or impracticability, frustration,
or both?
What remedy?
Exercise 12-46
Exercise 12-47
 Next Week
Class 34 – 4/4: Begin Part 7 - Non-
Party Rights to Contracts (pp.
671-698).
Class 35 – 4/5: Continue Part 7 -
Non-Party Rights to Contracts
(698-710).
Class 36 – 4/7: Complete Part 7 -
Non-Party Rights to Contracts
(pp. 723-735).
 Non-Party Contract Rights
Other than the parties, who else can enforce rights
under the contract (i.e., who has standing)?
Who, other than the initial parties, has rights or
duties under the contract?
Diagram 13-1 (S&W p. 672)
3 situations in which persons who are not parties
to the contract may have rights
1. Third-party beneficiaries
2. Assignment of rights and delegation of duties
3. Novation

Class #34
 Third-Party Beneficiaries
K party 1 *(“promisee”) gives consideration
to K party 2 *(“promisor”) who in exchange makes
a promise
That benefits person 3, who is not a party to the
contract
Clearly, a K
Clearly, enforceable between K parties 1 and 2
Question: is the K enforceable by the non-party
beneficiary of the K party 2’s promise to K party
1
Assignments of Rights and Delegations
of Duties
K party 1 and K party 2 make a K (K1), with no
intention of benefiting a 3rd party
K party 1 then enters into a K (K2) with a 3rd
party, and pursuant to K2 assigns its rights or
delegates its duties under K1 to that 3rd party
 Novation
K party 1 and K party 2 make a K (K1), with no
intention of benefiting a 3rd party
K party 1 wants out from under K1
K party 1 and K party 2 enter into K2 with a
third party, (1) for the purpose of binding the
third party to perform the same or similar
obligations that K party 1 had under K1, and
(2) which also releases K party 1 from her
obligations under K1
 Non-Party Contract Rights (cont’d)
1. Third-Party Beneficiaries/
2. Assignments of Rights and Delegations of
Duties/
3. Novation
Exercise 13-2
Exercise 13-3
 Third-Party Beneficiaries
Creation of Third-Party Beneficiaries
Does the K create rights for a non-party?
Does the K (1) give third-party (2) standing to
enforce the K promises that benefit her (3)
against the party required under the K to perform
for the third-party’s benefit?
A “troubled,” “tortured,” and “formalistic”
history
Third-Party Beneficiaries (cont’d)
Intended Third-Party Beneficiaries
Lawrence v. Fox (N.Y. 1859)
Facts: Holly lent money to Δ Fox on Fox’s promise,
given to Holly, that Δ Fox would pay back the Holly-Fox
loan to Π Lawrence (rather than to Fox)
Δ Fox breached on his obligation to repay the loan, and
Π Lawrence (not a party to the K) sued Fox
What is the court’s holding?
What does the dissent say?
Exercise 13-4
Third-Party Beneficiaries (cont’d)
Seaver v. Ransom (N.Y. 1918)
Facts?
What is privity, and why does it matter?
To which of the 4 types of third-party
beneficiary situations does the court liken this
case?
Exercise 13-5
Exercise 13-6
Third-Party Beneficiaries (cont’d)
Third-Party Beneficiaries of Attorney-Client
Contracts
Heyer v. Flaig (Cal. 1969)
Who is the purported third-party beneficiary?
What contractual duty is owed?
What is the issue with the statute of
limitations?
Exercise 13-7
Third-Party Beneficiaries (cont’d)
Third-Party Beneficiaries of Government Ks
H.R. Moch Co. v. Rensselaer Water Co.
(N.Y. 1928)
Who is the Π?
Who is the Δ?
Who were the parties to the K?
How does the court analyze the K with respect to
the third-party beneficiary issues?
Exercise 13-8
Third-Party Beneficiaries (cont’d)
Rest. 2d § 302. Intended and Incidental Beneficiaries
(1) Unless otherwise agreed between
promisor and promisee, a beneficiary of a
promise is an intended beneficiary if
recognition of a right to performance in the
beneficiary is appropriate to effectuate the
intention of the parties and either
(a) the performance of the promise will
satisfy an obligation of the promisee to pay
money to the beneficiary; or
(b) the circumstances indicate that the
promisee intends to give the beneficiary the
benefit of the promised performance.
(2) An incidental beneficiary is a beneficiary
who is not an intended beneficiary.
Third-Party Beneficiaries (cont’d)
§ 304 Creation of Duty to Beneficiary
A promise in a contract creates a duty in the
promisor to any intended beneficiary to perform the
promise, and the intended beneficiary may enforce
the duty.
c. Promise to pay the promisee's debt. Where the performance of
the promise will satisfy an obligation of the promisee to pay money to the
beneficiary, the promisee is surety for the promisor. The contract is an
asset of the promisee, and on grounds of simplicity and convenience of
remedy the beneficiary is allowed a direct action against the promisor
without joining the promisee, instead of a procedure like garnishment or a
suit to realize on an asset of the debtor not available to seizure by
ordinary legal process. The direct remedy also protects the beneficiary in
reliance on the promise; his reliance is likely to take the form of inaction
and to be difficult or impossible to prove. Promises to render
performances other than the payment of money may be similar but
require a manifestation of intention to give the benefit of the performance
to the beneficiary.
Third-Party Beneficiaries (cont’d)
Rest. 2d § 315 Effect of a Promise of Incidental
Benefit
An incidental beneficiary
acquires by virtue of the promise
no right against the promisor or
the promisee.
Third-Party Beneficiaries (cont’d)
Rest. § 133 Definition of Donee Beneficiary, Creditor Beneficiary, Incidental Beneficiary
(1) Where performance of a promise in a contract will benefit a person
other than the promisee, that person is, except as stated in
Subsection (3):

(a) a donee beneficiary if it appears from the terms of the promise in view
of the accompanying circumstances that the purpose of the promisee in
obtaining the promise of all or part of the performance thereof is to make
a gift to the beneficiary or to confer upon him a right against the promisor
to some performance neither due nor supposed or asserted to be due from
the promisee to the beneficiary;
(b) a creditor beneficiary if no purpose to make a gift appears from the
terms of the promise in view of the accompanying circumstances and
performance of the promise will satisfy an actual or supposed or asserted
duty of the promisee to the beneficiary, or a right of the beneficiary
against the promisee which has been barred by the statute of Limitations
or by a discharge in bankruptcy, or which is unenforceable because of the
Statute of Frauds;
(c) an incidental beneficiary if neither the facts stated in Clause (a) nor
those stated in Clause (b) exist.
(2) Such a promise as is described in Subsection (1a) is a gift promise.
Such a promise as is described in Subsection (1b) is a promise to
discharge the promisee's duty.
(3) Where it appears from the terms of the promise in view of the
accompanying circumstances that the purpose of the promisee is to
benefit a beneficiary under a trust and the promise is to render
performance to the trustee, the trustee, and not the beneficiary under
the trust, is a beneficiary within the meaning of this Section.
Third-Party Beneficiaries (cont’d)
Martinez v. Socoma Companies (Cal. 1974)
Πs are class of unemployed persons suing Δs job
training cos. who contracted with the government
What statute specifically addressed the third-party
beneficiary issue?
What qualification does the court state that can
preclude third-party creditor beneficiary status?
… donee beneficiary status?
On what facts does the court reach its conclusion?
What does the court hold?
Exercise 13-9
Exercise 13-10
Third-Party Beneficiaries (cont’d)
Rest. § 145 Beneficiaries Under Promises to the United States, a State,
or a Municipality
A promisor bound to the United States or to a State
or municipality by contract to do an act or render a
service to some or all of the members of the public,
is subject to no duty under the contract to such
members to give compensation for the injurious
consequences of performing or attempting to
perform it, or of failing to do so, unless,
(a) an intention is manifested in the contract, as
interpreted in the light of the circumstances
surrounding its formation, that the promisor shall
compensate members of the public for such injurious
consequences, or
(b) the promisor's contract is with a municipality to
render services the non-performance of which would
subject the municipality to a duty to pay damages to
those injured thereby.
Third-Party Beneficiaries (cont’d)
Rest. 2d § 313 Government Contracts
(1) The rules stated in this Chapter apply to contracts
with a government or governmental agency except to
the extent that application would contravene the
policy of the law authorizing the contract or
prescribing remedies for its breach.
(2) In particular, a promisor who contracts with a
government or governmental agency to do an act for
or render a service to the public is not subject to
contractual liability to a member of the public for
consequential damages resulting from performance
or failure to perform unless
(a) the terms of the promise provide for such liability; or
(b) the promisee is subject to liability to the member of
the public for the damages and a direct action against the
promisor is consistent with the terms of the contract and
with the policy of the law authorizing the contract and
prescribing remedies for its breach.
Third-Party Beneficiaries (cont’d)
Statutory Third-Party Beneficiaries, e.g., UCC
2-318 warranties enforceable by third-parties
Exercise 13-11

Class #35
Third-Party Beneficiaries (cont’d)
§ 2-318. Third Party Beneficiaries of Warranties Express or
Implied.
[Note: If this Act is introduced in the Congress of the United States
this section should be omitted. (States to select one alternative.)]
Alternative A
A seller's warranty whether express or implied extends to any natural person who is in
the family or household of his buyer or who is a guest in his home if it is reasonable to
expect that such person may use, consume or be affected by the goods and who is
injured in person by breach of the warranty. A seller may not exclude or limit the
operation of this section.
Alternative B
A seller's warranty whether express or implied extends to any natural person who may
reasonably be expected to use, consume or be affected by the goods and who is
injured in person by breach of the warranty. A seller may not exclude or limit the
operation of this section. (NOTE – Delaware has adopted this version).
Alternative C
A seller's warranty whether express or implied extends to any person who may
reasonably be expected to use, consume or be affected by the goods and who is
injured by breach of the warranty. A seller may not exclude or limit the operation of
this section with respect to injury to the person of an individual to whom the warranty
extends.
Third-Party Beneficiaries (cont’d)
Vesting of Third-Party Beneficiary Rights
If two parties enter into a K, under which they
intended to benefit a third-party, those two
parties remain in control of their contract
What if they change their minds, and
terminate or modify the contract?
Third-Party Beneficiaries (cont’d)
Robson v. Robson ([Link]. 1981)
Who were the K parties?
Who was claiming to be a third-party beneficiary?
H & W separation and divorce
Must a third-party beneficiary be the sole
beneficiary of the K?
Subsequent modification of the K
Does Π (W) have standing to sue?
Third-Party Beneficiaries (cont’d)
Robson v. Robson (cont’d)
When does “vesting occur” in a creditor
beneficiary relationship?
Why?
A “time-consuming diversion?”
Is a “donee” beneficiary relationship different?
Can reliance be presumed?
Gift law v. K law
“until delivery there exists no gift, but rather, merely the
promise of a gift”
Is a “promise a gift” ordinarily enforceable as a K?
How might such a promise be enforceable?
Third-Party Beneficiaries (cont’d)
Robson v. Robson (cont’d)
Had the Π relied on the K?
Had the third-party rights “vested?”
How does the court rule?
Rest. 2d § 311
Exercise 13-13
Third-Party Beneficiaries (cont’d)
Rest. 2d § 311 Variation of a Duty to a Beneficiary
(1) Discharge or modification of a duty to an intended
beneficiary by conduct of the promisee or by a
subsequent agreement between promisor and promisee
is ineffective if a term of the promise creating the duty so
provides.
(2) In the absence of such a term, the promisor and
promisee retain power to discharge or modify the duty by
subsequent agreement.
(3) Such a power terminates when the beneficiary, before
he receives notification of the discharge or modification,
[A] materially changes his position in justifiable reliance
on the promise or [B] brings suit on it or [C] manifests
assent to it at the request of the promisor or promisee.
(4) If the promisee receives consideration for an
attempted discharge or modification of the promisor's
duty which is ineffective against the beneficiary, the
beneficiary can assert a right to the consideration so
received. The promisor's duty is discharged to the extent
of the amount received by the beneficiary.
Third-Party Beneficiaries (cont’d)
Enforcement by Third-Party Beneficiaries
Rest. 2d §§ 304 and 307
Exercise 13-14
Third-Party Beneficiaries (cont’d)
§ 307 Remedy of Specific Performance
Where specific performance is
otherwise an appropriate
remedy, either the promisee or
the beneficiary may maintain a
suit for specific enforcement of a
duty owed to an intended
beneficiary.
Third-Party Beneficiaries (cont’d)
Promisee’s Rights against Promisors
Suit and?
Exercise 13-15
Third-Party Beneficiaries (cont’d)
Promisor’s Defenses
Rouse v. U.S. ([Link]. 1954)
Facts?
What does the court rule?
Exercise 13-17
Non-Party Contract Rights (cont’d)
Third-Party Beneficiaries
Assignments and Delegations
Novation

Class #36
 Assignments and Delegations
Assignments of Rights and Delegations of Duties
K rights may be assigned by an “assignor” (the
K party) to an “assignee”
K duties may be delegated by an “obligor” or
“delegator” (the K party) to a “delegate”
Exercise 14-3
 Assignments and Delegations (cont’d)
Globe & Rutgers Fire-Insurance Co. v. Jones
(Mich. 1902)
Jones was general agent for Rutgers Fire-Insurance
Company for the State of Michigan under 5-year K
Rutgers merged, during K term, with Globe Fire-
Insurance Company, to form the Globe & Rutgers Fire
Insurance Co.
What did the N.Y. merger statute provide with respect
to the rights and interests, and obligations and
liabilities of the 2 companies upon the merger?
What did Jones do?
Π Globe & Rutgers sued Jones
 Assignments and Delegations (cont’d)

Globe & Rutgers Fire-Insurance Co. v.

Jones (cont’d)
What did Π argue?
What did lower court rule?
What Rule does the appellate court state?
In whose favor?
Assignments and Delegations (cont’d)
Macke Co. v. Pizza of Gaithersburg, Inc.
([Link]. 1970)
Appellees/defendants operated 6 pizza shops
Entered into contract with Virginia Coffee Service,
Inc. to have installed in each location a cold drink
vending machine
Macke Co. bought Virginia Coffee Service’s assets,
and Virginia assigned the 6 K’s to Macke Co.
Appellees attempted to terminate the Ks
Macke sued from breach and damages
Assignments and Delegations (cont’d)
Macke Co. v. Pizza of Gaithersburg, Inc.
(cont’d)
What is the issue before the court re:
characterization of the type of contract and
performance?
What Rule does the court state?
What does the court decide?
On what basis?
Distinguish Macke Co. from Globe &
Rutgers?
Exercise 14-7
Assignments and Delegations (cont’d)
Rest. 2d § 317. Assignment of a Right
(1) An assignment of a right is a manifestation of the assignor’s
intention to transfer it by virtue of which the assignor’s right to
performance by the obligor is extinguished in whole or in part and
the assignee acquires a right to such performance.
(2) A contractual right can be assigned unless
(a) the substitution of a right of the assignee for the right of the
assignor would materially change the duty of the obligor, or
materially increase the burden or risk imposed on him by his
contract, or materially impair his chance of obtaining return
performance, or materially reduce its value to him, or
(b) the assignment is forbidden by statute or is otherwise
inoperative on grounds of public policy, or
(c) assignment is validly precluded by contract.
Assignments and Delegations (cont’d)
Rest. 2d § 318 Delegation of Performance of Duty
(1) An obligor can properly delegate the
performance of his duty to another unless the
delegation is contrary to public policy or the
terms of his promise.
(2) Unless otherwise agreed, a promise
requires performance by a particular person
only to the extent that the obligee has a
substantial interest in having that person
perform or control the acts promised.
(3) Unless the obligee agrees otherwise,
neither delegation of performance nor a
contract to assume the duty made with the
obligor by the person delegated discharges
any duty or liability of the delegating obligor.
Assignments and Delegations (cont’d)
Rest. 2d § 328. Interpretation of
Words of Assignment; Effect of
Acceptance of Assignment
(1) Unless the language or the circumstances
indicate the contrary, as in an assignment for
security, an assignment of “the contract” or of “all
my rights under the contract” or an assignment in
similar general terms is an assignment of the
assignor’s rights and a delegation of his
unperformed duties under the contract.
Assignments and Delegations (cont’d)
Rest. 2d § 328. Interpretation of Words of
Assignment; Effect of Acceptance of
Assignment
(2) Unless the language or the circumstances indicate the
contrary, the acceptance by an assignee of such an
assignment operates as a promise to the assignor to
perform the assignor’s unperformed duties, and the obligor of
the assigned rights is an intended beneficiary of the promise.
Caveat: The Institute expresses no opinion as to
whether the rule stated in Subsection (2) applies
to an assignment by a purchaser of his rights
under a contract for the sale of land.
See also Rest. 2d §§ 316- 324 et seq.
 Assignments and Delegations (cont’d)
UCC § 2-210. Delegation of
Performance; Assignment of
Rights.
(1) A party may perform his duty through a
delegate unless otherwise agreed or unless the
other party has a substantial interest in having
his original promisor perform or control the
acts required by the contract. No delegation of
performance relieves the party
delegating of any duty to perform or
any liability for breach.
*******
Assignments and Delegations (cont’d)
UCC § 2-210. Delegation of Performance;
Assignment of Rights. *******
(2) Unless otherwise agreed all rights of either seller or buyer
can be assigned except where the assignment would
materially change the duty of the other party, or increase
materially the burden or risk imposed on him by his contract,
or impair materially his chance of obtaining return
performance. A right to damages for breach of the whole
contract or a right arising out of the assignor's due
performance of his entire obligation can be assigned
despite agreement otherwise.
(3) Unless the circumstances indicate the contrary a
prohibition of assignment of "the contract" is to be
construed as barring only the delegation to the assignee of
the assignor's performance. *******
Assignments and Delegations (cont’d)
UCC § 2-210. Delegation of Performance;
Assignment of Rights. *******
(4) An assignment of "the contract" or of "all my rights
under the contract" or an assignment in similar general
terms is an assignment of rights and unless the language or
the circumstances (as in an assignment for security)
indicate the contrary, it is a delegation of performance of
the duties of the assignor and its acceptance by the
assignee constitutes a promise by him to perform those
duties. This promise is enforceable by either the assignor or
the other party to the original contract.
(5) The other party may treat any assignment which
delegates performance as creating reasonable grounds for
insecurity and may without prejudice to his rights against
the assignor demand assurances from the assignee (Section
2-609).
 Next Week
Class 37: Begin Part 8 – Contract
Law Problems (pp. 739-748).
Class 38: Continue Part 8 –
Contract Law Problems (pp. 748-
753).
Class 39: Complete Part 8 –
Contract Law Problems (pp. 753-
776).
Requirements for Effective Assignments
and Delegations
Baker v. Eufaula Concrete Co. (Ala. 1990)
Bakers leased 30-acre parcel to Eufaula Concrete
for 10 years, to “mine, process, and remove sand,
gravel, and/or field dirt” from the land
$.25 per cu. yd. 1st 5 yrs., $.35 per cu. yd. 2nd 5 yrs.
Lease prohibited assignment
Eufaula Concrete assigned to Williams Bros.
Eufaula sued everyone
What did trial court rule?

Class #37
Requirements for Effective Assignments
and Delegations (cont’d)
Baker v. Eufaula Concrete Co. (cont’d)
What was the trial court’s reasoning?
What did the acquisition agreement say re:
the purported assignment?
What does the appellate court rule?
Why?
Exercise 14-8
Exercise 14-9
Requirements for Effective Assignments
and Delegations (cont’d)
Rest. 2d § 322 Contractual Prohibition of
Assignment
(1) Unless the circumstances
indicate the contrary, a contract
term prohibiting assignment of
“the contract” bars only the
delegation to an assignee of the
performance by the assignor of a
duty or condition. *******
Requirements for Effective Assignments
and Delegations (cont’d)
Rest. 2d § 322 Contractual Prohibition of Assignment ******
(2) A contract term prohibiting assignment
of rights under the contract, unless a
different intention is manifested,
(a) does not forbid assignment of a right to
damages for breach of the whole contract or a
right arising out of the assignor's due
performance of his entire obligation;
(b) gives the obligor a right to damages for
breach of the terms forbidding assignment
but does not render the assignment
ineffective;
(c) is for the benefit of the obligor, and does
not prevent the assignee from acquiring
rights against the assignor or the obligor from
discharging his duty as if there were no such
prohibition.
Rights and Liabilities of Parties Involved
with Assignments and Delegations
Imperial Refining Co. v. Kanotex Refining
Co. (8th Cir. 1928)
Π Imperial Refining Co. agreed to purchase from
Fern Oil Co. 7/8 of the oil and gas produced from a
Fern well for a period of one year
Π assigned K to Δ Kanotex
Kanotex then refused to run the oil produced by
Fern at the well
In prior action, Fern sued Imperial
 Rights and Liabilities of Parties Involved
with Assignments and Delegations (cont’d)
Imperial Refining Co. v. Kanotex Refining
Co. (cont’d)
Result of Fern-Imperial suit?
What are the 2 issues before the court in the
Imperial v. Kanotex suit?
1. How does the court characterize the K?
What does it decide?
2. What general rule does the court state regarding the
right of one party to assign K rights (i.e., the rights of
the assigning party to receive performance from the
other party to the K)?
 Rights and Liabilities of Parties Involved
with Assignments and Delegations (cont’d)
Imperial Refining Co. v. Kanotex Refining
Co. (cont’d)
What did the K between Imperial and Kanotex
provide?
What does the court say about the rights and
duties under the Imperial-Fern K following the
Imperial-Kanotex assignment?
How does it decide the statute of limitations issue?
How does it rule?
 Rights and Liabilities of Parties Involved
with Assignments and Delegations (cont’d)
Exercise 14-10
Exercise 14-11
 Rights and Liabilities of Parties Involved
with Assignments and Delegations (cont’d)
Rest. 2d § 329 Repudiation by Assignor and Novation with
Assignee
(1) The legal effect of a repudiation by an
assignor of his duty to the obligor of the
assigned right is not limited by the fact that
the assignee is a competent person and has
promised to perform the duty.
(2) If the obligor, with knowledge of such a
repudiation, accepts any performance from
the assignee without reserving his rights
against the assignor, a novation arises by
which the duty of the assignor is discharged
and a similar duty of the assignee is
substituted.
 Rights and Liabilities of Parties Involved
with Assignments and Delegations (cont’d)
Rest. 2d § § 333 Warranties of an Assignor
(1) Unless a contrary intention is manifested, one
who assigns or purports to assign a right by
assignment under seal or for value warrants to
the assignee

(a) that he will do nothing to defeat or impair

the value of the assignment and has no
knowledge of any fact which would do so;
(b) that the right, as assigned, actually exists
and is subject to no limitations or defenses
good against the assignor other than those
stated or apparent at the time of the
assignment;
(c) that any writing evidencing the right
which is delivered to the assignee or
exhibited to him to induce him to accept the
assignment is genuine and what it purports
to be. *******
 Novations
Novation Described:
K party 1 wants out from under K1
K parties 1 and 2 enter into K2 with a third party, (1) for
the purpose of binding the third party to perform the 1
same or similar obligations that K party 1 had under K ,
and (2) which also releases K party 1 from her
obligations under K 1

Rest. 2d § 280 Novation

A novation is a substituted contract
that includes as a party one who was
neither the obligor nor the obligee of
the original duty.
Exercise 14-12