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Meta Themes/Organizational Tools

Stories of Contract Law:o Freedom to Contract: contract is a foundation of our economic and political freedomo Social Relationships: contract is a fundamental human relationship entailing cooperation and fair

treatment of otherso Economic: voluntary transactions lead to efficient outcomes

Merchant under UCC: § 2-104(1): merchant is a “person who deals with goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods 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 has having such knowledge or skill.”

Contract Formation and the Objective Theory of Intent

Case: Lucy v. Zehmer Concepts:

o Bilateral Contract: Contract where both sides make promise, promise for promise (ex: I promise to pay you, if you promise now that you will walk across the Brooklyn Bridge)

o Unilateral Contract: One involving an exchange of promise for performance (offeree doesn’t promise, only act)

“If you walk across the Brooklyn Bridge, I promise to pay you 1K as soon as you finish.” Beginning of performance by offeree makes the offer temporarily irrevocable in a unilateral

contract o Objective theory of intent : how a reasonable observer would interpret the situation, excludes individual’s

account of personal intent Rationales:

Promisor’s conduct: deters wrongful conduct, opportunism, lying Promisee is protected, reliance on promise (so long as the reliance is reasonable)- allows

people to trust contracts and therefore incentivizes people to use them Majoritarian preference : most parties generally want the courts to enforce objective intent Utilitarian: reduces the cost of factual inquiry within lawsuits

Conduct as a manifestation of intent Learned Hand: All about the objective theory- even, “it were proved by twenty bishops that either

party when he used the words intended something else than the usual meaning which the law imposes on them, he would still be held, unless there were some mutual mistake, or something else of the sort.”

o Subjective theory of intent : meeting of the minds, will theory, must take into account what is in an individual’s head

However, the promisee’s subjective belief in the promise/seriousness of the promise matters. o Good Faith : Honesty in fact in the conduct or transaction (RS §205, UCC 1-201)o Capacity to Contract :

Intoxication is not an excuse as it is voluntary unless induced to drink by the other party, or as excused by some extreme

Mental illness, infants, guardianship: protected classes are treated differently Restatement:

o §1: Contract Defined: 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 o §2: Promise; Promisor; Promisee; Beneficiary

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(1) A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made.

(2) The person manifesting the promise is the promisor. (3) The person to whom the manifestation is addressed is the promisee. . . .

o §3: Agreement/ Bargain Defined: Agreement = manifestation of mutual assent on the part of 2 + persons Bargain = agreement to exchange promises, or to exchange a promise for a performance

narrower meaning than agreement o §7: Voidable Contracts:

A voidable contract is one where one or more parties have the power, by a manifestation of election to do so, to avoid the legal relations created by the contract, or by ratification of the contract to extinguish the power of avoidance. Protected classes must have capacity to contract

o §12: Capacity to contract You have to have legal capacity to incur at least voidable contractual duties. Unless: under

guardianship, an infant, or mentally ill or defective, or intoxicated.o §13: Guardianship o §14: Infants: enters only voidable contracts until 18o §15: Mental Defect only voidable contracts

(1) If unable to understand in a reasonable manner the nature and consequences of the transaction, or 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 no longer applies…

o §16: Intoxication A person incurs only voidable contractual duties by entering into a transaction if the other party

has reason to know that by reason of intoxication (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.

Comment B Different if the other party induced the drunkenness o §17: Requirements of a bargaino §18: Manifestation of Assent

If no one takes it seriously, then not a contract. However, if one party is not privy to the joke, takes it as serious, it is a contract. The non-joking party may have a cause of action. Also if the setting hints to a joke, that is to be taken into consideration.

o §19: Conduct as Manifestation of Intent: (1) The manifestation of assent may be made wholly or partly by written or spoken words or by

other acts or by failure to act. (2) The conduct of a party is not effective as a manifestation of his assent unless he intends to

engage in the conduct and knows or has reason to know that the other party may infer from his conduct that he assents.

(3) The conduct of a party may manifest assent even though he does not in fact assent. In such cases a resulting contract may be voidable because of fraud, duress, mistake, or other invalidating cause. Actual intent doesn’t matter about what’s manifested

o §21: Intention to be legally bound Neither real nor apparent intention that a promise be legally binding is essential to the formation

of a contract, but a manifestation of intention that a promise shall not affect legal relations may prevent the formation of a contract…

UCC: Not applicable in the section

Enforceability: Benefits, Detriments, and Bargains

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Case: Hamer v. Sidway Concepts:

Consideration doctrine : additional requirement after mutual assent To constitute consideration, a performance or a return promise must be bargained for. 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.

Posner: “Consideration is the legal sentinels that patrol the border between law and reputation.” Means by which courts identify legally enforceable promises If consideration is watered down to be interpreted as any benefit, real or imagined, to the

promisor, all promises become enforceable, even intra-family gift promises courts don’t want to go this far

o Bargain theory : An agreement to exchange promises or to exchange a promise for a performance or to exchange performances

Benefit/Detriment consideration theory was replaced by bargain theory in most places (NOT ALL)

Adopted for the practicality of: Executory contracts (exchange of promises) and Third party promisors/promisees

Benefit of bargain theory over the benefit/detriment test is that in executory contracts and with third party promisors, it’s hard to see the benefit and the detriment

o Benefit/Detriment Consideration Test : Helps distinguish between gratuitous promise and a bargain Benefit to Promisor OR detriment to promisee Used in Hamer v. Sidway (Legal right: legal ability to act in a certain manner; see Hamer where

he gave up the legal right to drink/smoke; considered detriment to promise)o Adequacy of Consideration (Peppercorn Theory) :

If the requirement of consideration is met, there is no additional requirement of (a) a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or (b) Equivalence in the values exchanged; or (c) “Mutuality of obligation.

Courts “will not ask whether the thing which forms the consideration does in fact benefit the promisee   . . . or is of any substantial value to anyone” (p. 36) “We need not speculate on the effort which may have been required to give up the use of those stimulants.” (p. 37)

Court should not get into value assumptionso Gift Promises & Non-protection:

Gift Promises ≠ consideration Reasons: Evidentiary Concerns, Administrative concerns, Protect vulnerable promisors,

Encourage gratuitous promising, Extralegal enforcement sufficient Restatement:

o §17: Requirement of a bargain The formation of a contract requires a bargain in which there is a manifestation of mutual assent

to the exchange and a consideration. . . .o §21: Intention to be legally bound

Neither real nor apparent intention that a promise be legally binding is essential to the formation of a contract, but a manifestation of intention that a promise shall not affect legal relations may prevent the formation of a contract…

o §71: Requirements of consideration Requirement of exchange/ types of exchange To constitute consideration, a performance or a return promise must be bargained for which

means that it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise. Includes: (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 some other person. It may be given by the promisee or by some other person. 3rd party okay

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Comment Bargained for = in the typical bargain, the consideration and the promise bear a reciprocal relation of motive or inducement: the consideration induces the making of the promise and the promise induces the furnishing of the consideration. Objective theory of intent applies!

Illustration 9 A promises B, his nephew aged 16, that A will pay B $1000 when B becomes 21 if B does not smoke before then. B’s forbearance to smoke is a performance and if bargained for is consideration for A’s promise. (HAMER)

§72: Exchange of Promise for Performance: o With a few exceptions, any performance which is bargained for is consideration

§75: Exchange of Promise for Promiseo With a few exceptions, a promise which is bargained for is consideration if, but only if, the

promised performance would be considerationo §79: Adequacy of consideration Mutuality of Obligation

Consideration is met if a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee . . . .

If the requirement of consideration is met, there is no additional requirement of equivalence in the values exchanged . . .

Comment Valuation is left to the parties, since it’s their valuation that matters. o §81: Consideration as motive or inducing cause

UCC: Not Applicable in the case

Incomplete Contracts and the Role of the Courts

Case: Sun Printing & Publishing Assn. v. Remington Paper & Power Co. Concepts:

o Theory of Certainty : § 33, 34; UCC 2-204, 306, 309 Restatement Despite manifestation of intent, unless contract terms are certain it’s not binding.

It’s certain if terms provide a basis for determining the existence of a breach and for giving an appropriate remedy. Multiple open terms may signify a lack of intention. Can still be certain if terms are left open that are to be determined in the course of the performance.

UCC: Even though there may be one or more terms open, the contract doesn’t fail if parties intended to make a contract AND there is a reasonable basis for giving an appropriate remedy

Rationale for Certainty Doctrine: (both reflected in the restatement) Actual Intent Theory : courts deny enforcement if gaps manifest lack of contractual

intent. R2d § 33(3) o Parties have not agreed to make a contracto Even if parties have agreed, they don’t want court to fill in gapso Court’s role is minimal/passive

Court Regulation Theory : courts deny enforcement if “too many” gaps exist, even if parties intended to contract and want court to fill those gaps. R2d § 33(2)o Court enforcement cannot be within the complete control of contracting partieso “We agree to contract on whatever terms the court deems reasonable.”o Court’s role is more active

Parties have freedom to contract, refusing to fill the gap will promote stability and predictability, it may have been just an agreement to agree, otherwise would make the contract over (Majority-Sun Printing)

Parties thought they were making a contract, should compel to contract (Dissent- Sun Printing)

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Restatement:o §33: Certainty

(1) Even if intended and manifested, cannot be an offer/accepted as contract unless the term are 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) If indefinite it can show that the manifestation of intention was not intended/ not to be thought of a contract

Relaxation from the strict interpretation of indefiniteness that courts had followed in cases like Sun Printing. § 33 and § 2-204 leave plenty of room for courts to apply the indefiniteness doctrine aggressively, and do not necessarily dictate a different outcome in Sun Printing.

o §34: Certainty and choice of terms: effect of performance or reliance 1) The terms of a contract may be reasonably certain even though it empowers one or both parties

to make a selection of terms in the course of performance (agreement to agree). (2) Part performance under an agreement may remove uncertainty and establish that a contract enforceable as a bargain has been formed. (3) Action in reliance on an agreement may make a contractual remedy appropriate even though uncertainty is not removed Reliance investment removes certainty

UCC:o §1-103: Construction and Purposes of UCC

UCC = 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.

Law applies otherwise in principles of law and equity unless specified codes exists in UCCo §2-102: Transactions in GOODS only, unless otherwise statedo 2-103: Goods as defined (does not include information!)o 2-105(1): Definition of goods:

“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.

o 2-106(1): Definition of contract, agreement, etc. o 2-204:Formation of contract:

As applied to certainty 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.

Comment: Rather, commercial standards(…trade usage) on the point of “indefiniteness” are intended to be applied, this Act making provision elsewhere for missing terms needed for performance, open price, remedies and the like.

o 2-305 : Open price term: 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. 

Comment: (4) Where, however, the parties intend not to be bound unless the price be fixed or agreed and it is not fixed or agreed there is no contract. In such a case the buyer must return any goods already received or if unable so to do must pay their reasonable value at the time of delivery and the seller must return any portion of the price paid on account.

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Interpretation and the Role of Context

Case: Nanakuli Paving & Rock Co. v. Shell Oil Co., Inc. Concepts:

o Contractual interpretation by court relies on: Contractual language, Conduct and context (trade usage, course of dealing, course of performance), and Good faith

o Trade Usage : Trade usage = practice/method that is so commonplace in a place, vocation, or trade, that it is to

be expected in a contract. Existence and scope must be provable. Important when engaged in or should be aware of… may give meaning to contract or

supplement…o Course of Performance :

Course of Performance = sequence of conduct between the parties to a particular transaction- if involves repeated transactions, if the other party knows of the nature of performance and has an opportunity to reject it but acquiesces instead, 2 times at least = performance,

Can discourage generous terms by companies, don’t want to have to always be generous Within this specific performance- contract-transaction-thing

o Course of Dealing : sequence of conduct concerning previous transactions between parties, regarded as establishing a

common basis How they’ve dealt with the other party in past transactions-dealings-things

o Priority of interpretive evidence (hierarchy): Depends on if the express terms are reasonably consistent with other items No total negation of an express term is allowed. Closer an item is to actual intent- then more of a priority UCC 1-303 and Restatement §202, §203

Express terms prevail Course of performance course of dealing Trade usage o Parol evidence : gives priority to written document over what was said prior or contemporaneously to the

agreement yet may supplement or explain with course of dealings/performance/usage §213 final agreement discharges prior agreements

2-202 says that context evidence is sometimes parole evidence. Not part of the writing, implied terms in the UCC, 2-202 were worried that trade usage/courses would be excluded as parole. Makes explicit that always allowed to supplement a writing, an application of the restatements rule. Nanakuli is an interpretation case for that reason.

o Good Faith: §205 performance and enforcement doctrine 1-201: Good faith means honesty in fact in the conduct or transaction concerned. 2-103: Good faith in the case of a merchant means honesty in fact and the observance of

reasonable commercial standards of fair dealing in the trade. Shell to provide price protection due to previous dealings… Perhaps. Shell was definitely

supposed to tell in advance of price change. Restatement:

o §202: Rules in aid of interpretation same as UCC!

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o §203: Standards of Preference in interpretation same as UCC o §212: Interpretation of integrated agreemento §213: parole evidence rule integrated agreement on prior agreements

UCC: o 1-303: Course of performance, course of dealing, and trade usage

Give particular meaning to specific terms supplement or qualify the terms of the agreement Must be consistent with express terms. Cannot negate! Hierarchy: Express terms prevail

Course of performance course of dealing Trade usage Course of performance is a sequence of conduct between the parties to a particular transaction

that exists if: (1) the agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and (2) the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces to it without objection.

Course of dealing is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.

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 must be proved as facts. If it is established that such a usage is embodied in a trade code or similar record, the interpretation of the record is a question of law.

o 1-304: Good Faith Every contract or duty UCC imposes an obligation of good faith in its performance and

enforcement. 1-302: Good faith may not be disclaimed by agreement. Parties can make alternate

standards if those standards are not manifestly unreasonable. Whenever UCC requires an action to be taken within a reasonable time, a time that is not manifestly unreasonable may be fixed by agreement.

1-201: Good faith means honesty in fact in the conduct or transaction concerned. 2-103: Good faith in the case of a merchant means honesty in fact and the observance of

reasonable commercial standards of fair dealing in the trade.o 2-202: Parole Evidence:

Gives priority to written document (express terms) over what was said prior or contemporaneously to the agreement yet may supplement or explain with course of dealings/performance/usage

May not be contradicted, but may be explained or supplemented (a) by course of dealing or usage of trade or by course of performance and (b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.

Comment 2: (a) makes admissible evidence of course of dealing, usage of trade and course of performance to explain or supplement in order that the true understanding of the parties as to the agreement may be reached. Assumption that the course of prior dealings between the parties and the usages of trade were taken for granted when the document was phrased. Unless carefully negatedHierarchy: course of actual performance by the parties is considered the best indication of intent.

o 2-305: Open price term A price to be fixed by the seller or by the buyer means a price for him to fix in good faith…. But

in the normal case a “posted price” . . . satisfies the good faith requirement.

Contractual Performance and the Role of Fault

Case: Jacob & Youngs v. Kent7

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Concepts:o Sequential performance problems exist. o Substantial Performance :

Substantial, though imperfect, performance satisfies the condition on the other party’s duty to perform, Substantial performance = no material failure

o Perfect Tender Rule : UCC 2-601 Woodard V. Fuller (precedent) Relaxed perfect tender to be Now on such a contract there may be a recovery without perfection. Look to good faith and

intention to comply with substantial compliance, despite small defects (caused by inadvertence/unintentional acts) so long as the defects must not run through the whole, or be so essential as that the object of the parties

Related to right to cureo Condition vs. Promises:

Advantages of Conditions Condition operates as a self-help remedy (owner need not go to court, just refuse to pay)

Builder has a right to recover in restitution Create knife-edge incentives- exaggerate punitive measures and enhance benefits Can protect parties from problems of proof Protect parties from insolvency risk ex: if owner promise to pay is conditional, can

simply not pay versus getting in the line of creditors to get at the debt Disadvantage of Conditions

Promisees as reluctant to accept conditions in many instances pay for the privilege Interpretation: can be used to avoid forfeiture courts can interpret it either way …

Impossibility: where it is impossible to comply with a condition the party is excused from compliance.

Substantial performance: party protected by a condition cannot reject the performance of a promisor who substantially (but not perfectly) complies with the condition can sue for damages however, despite subst. perf.

o Condition : Condition doctrine is technically a performance doctrine, not a formation doctrine; however, conditions are a formation problem when the condition is related to the acceptance of the offer

Non-promissory Condition on performance (insurance): “Insurer will pay Insured for any loss by fire occurring on the premises.”

Non-promissory Condition on formation (unilateral contract): “If you find my lost cat, I will pay you $100.”

Promissory condition : “If you breach your promise by failing to use Reading pipe, I do not have to make any

further payment to you.”o Promises not conditional on each other are independento Promises conditional on each other are dependent

Constructive Conditions : modern system, implied Each party’s promise/performance is a condition of the other party’s duty to perform,

even if not expressly stated. Promises are presumed to be dependent if the nonperformance is a material breach

Cardozo’s Guidelines for when Material: (aligns with §241) Reason for breach: Willful breach condition Degree of deviation: Greater deviation condition Substitution Costs: Low substitution costs condition Language used: Must include idiosyncratic desires in language of contract Subject Matter: Distinction between fields of art and mere utility Victim conduct: Must be in good faith

To draft a condition: Use conditional language and state remedial consequences, Be selective in identifying

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conditions; avoid blanket “everything is a condition” term (the Incredibles problem), Be consistent in language, Use recitals (“Whereas . . .”) to signal idiosyncrasy

o Intent for existence of conditions: Actual (subjective) Intent : what did the parties actually agree to?

Court serves interpretive function Presumed (objective) Intent : what would the parties have done had they actually agreed on the

matter? Objective theory presumes that the promisor has the intent that a promisee would reasonably infer from the promisor’s words and actions Presumed intent: most promisors are not idiosyncratic; presuming non-idiosyncratic intent is best estimate of the promisor’s actual intent

Court serves gap-filling function Justice (idealized) Intent : what should the parties have agreed to? even if promisor is

idiosyncratic, promisor is in best position to avoid misunderstanding, and so should be given incentive to reveal idiosyncrasy

Court serves regulatory function Potential intents in Kent : Idiosyncratic Valuations & Opportunism:

Restatement: o §224: Condition

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.

o §225: Effects of the Non-Occurrence of a Condition Performance of a duty subject to a condition cannot become due unless the condition occurs or its

non-occurrence is excused. Unless it has been excused, the non-occurrence of a condition discharges the duty when the

condition can no longer occur.  Non-occurrence of a condition is not a breach by a party unless he is under a duty that the

condition occur.o §226: How an event may be a condition:

An event may be made a condition either by the agreement of the parties [mutual intent] or by a term supplied by the court [court regulation].

o §227: Standards of preference with regard to conditionso §228: Satisfaction of the obligor as a condition o §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.

o §237: Effect on other parties performance, of a failure to perform 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.

o §241: Circumstances Significant in Determining Whether a Failure Is Material (a) the extent of deprivation of the benefit that was reasonably expected;  (b) adequate compensation (c) the extent to which breacher will suffer forfeiture; (d) the likelihood the breacher will cure his failure (e) the extent to which the behavior of breacher comports with standards of good faith and fair

dealing. *** Consistent with Cardozo’s guidelines in J&Y

UCC: o §2-508: Right to Cure Cure by Seller of Improper Tender or Delivery

If good is rejected as substandard, seller can attempt to cure and is allowed, within time of contract, to make a conforming delivery

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If the buyer rejects a non-conforming tender, which reasonably conformed in the seller’s view, seller can reasonably have more time in order to submit conforming tender

o § 2-601: Perfect tender rule! 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.

Risk Allocation and Excuse

Case: NIPSCO v. Carbon County Coal Co Concepts:

o Risk Allocation : Contracts involve exchanges of risk as well as exchanges of goods or services All contracts

can be viewed as providing “insurance” against certain risks, e.g. market price fluctuations Insurance contract is paradigm of pure risk allocation contract Risk allocation function is a key reason courts enforce executory contracts (Posner) Some view impossibility and frustration as devices for allocating the cost of insurance to

the party that can more easily obtain insurance against, or absorb-low probability risk… Rests on commonness of risk and unforeseeability of risk

o Superior Risk Bearer : One way to interpret presumed intent is to assign risk to the party better able to reduce, mitigate

(obtain substitute), or insure against that risk.o Force Majeure Clauses : written excuse clause

Frees both parties from obligation due to extraordinary event outside of control of parties; expressly written into contract

Not intended to disturb risk allocation of contract FM clause doesn’t make a promise illusory b/c it comes into play only for acts beyond the party’s

controlo Pre-Modern = Absolute (Strict) Liability :

party who assumes contractual obligation must perform no matter what, unless promisor contracts expressly for excuse

Paradine v. Jane: landlord successfully sued tenant for rent even though tenant was not able to occupy premises due to invasion

Stees = strict liability in the USA (house that sinks into swamp) Move to modern excuse doctrine with the music hall case (Taylor v. Caldwell) and the coronation

cases (origin of frustration of purpose)o Excuse Doctrines and Intent :

Courts have developed doctrines of excuse, which they view as consistent with the presumed intentions of the parties, i.e. what they “would have agreed” to had they considered the matter (hypothetical bargain)

Impracticability & Frustration o Frustration = buyer (in restatement, not in UCC)

Frustration: about purpose, not about whether or not it was possible coronation viewing: he could still possibly rent his room, but didn’t want to pay that

price Will exist if purpose of contract has become valueless by virtue of some supervening

event not the fault of the party seeking discharge (excuse). Must establish there is a supervening act leading to frustration, the parties did not reasonably foresee the act, the purpose of the contract has been destroyed

Obscene rise in cost/decrease in value is generally not an excuse o Impracticability = seller (Used to be called impossibility)

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Impracticability: you physically cannot complete it (i.e. if regulator in NIPSCO had explicitly said you can’t buy) i.e. music hall burning down

Test for impracticability: Extreme and unreasonable difficulty/expense, nonoccurrence was basic assumption of the parties. Mere change in degree of difficulty or expense does not amount to impracticability because these are risks a fixed-price contract is intended to cover.

o Good Faith : (Restatement §205) (UCC 1-201) Good faith is honesty in fact in the conduct or transaction.

o Efficient Breach Theory : Joint Profits: (p - c) + (v - p) = v – c Joint Profits (after market has changed):(p - c) + (m’ - p) = m’ – c

Because joint profits < 0, breach is “efficient” in the sense that resources are being “wasted” by performance. Alternatively, if one party owned the power plant and the mine, that party would not mine the coal.

Doesn’t take into consideration of ex post renegotiations, doesn’t consider reliance investment

POSNER Coase theorem: Post Breach renegotiation

In post-breach negotiation, if performance is inefficient they will bargain around it Restatement:

o §261: Impracticability (Seller) 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.

Comment d: change in cost isn’t impracticability o §264: Prevention by Governmental Regulationo §265: Frustration (Buyer)

Where, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.

Frustration: about purpose, not about whether or not it was possible i.e. coronation viewing: he could still possibly rent his room, but didn’t want to pay that

priceo §302: Third party interests are limited in contract law to third-party beneficiarieso §359: Adequacy of damages regarding specific performance

Specific performance or an injunction will not be ordered if damages would be adequate to protect the expectation interest of the injured party.

o §360: How to determine what is adequate: Evaluate: (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.

UCC:o 1-103: Unless displaced by UCC, law and laws of equity applyo 1-305: Remedies to be liberally administered

The remedies provided by UCC must be liberally administered to the point of expectation damages but neither consequential or special damages nor penal damages may be had except as specifically provided in UCC or by other rule of law.

o 2-615: Excuse by failure of presupposed condition Except so far as a seller may have assumed a greater obligation and subject to the preceding

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section on substituted performance: 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 in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.  . . .

Court declines to rule on NIPSCO’s statutory interpretation question of whether UCC § 2-615 applies to buyers as well as sellers.

Comment 4: Price change doesn’t count only crazy things spurred by ear. Embargo, crop shortage, etc. which either causes a marked increase in cost or altogether prevents the seller from securing supplies necessary to his performance, is within the contemplation of this section. . .

Comment 5: Where a particular source of supply is exclusive under the agreement and fails, the present section applies. The same holds true where a particular source of supply is shown by the circumstances to have been contemplated or assumed by the parties at the time of contracting.

Comment 8: Exemptions don’t apply if contingency was sufficiently foreshadowed

Comment 10: Governmental interference can’t excuse unless it truly supervenes in such a manner as to be beyond the seller’s assumption of risk. Any action by the party claiming excuse which causes or colludes in inducing the government action preventing his performance would be in breach of good faith and would destroy his exemption.

o 2-703: Seller’s remedies in general:o 2-708: Seller’s Damages for Non-Acceptance or Repudiation Expectation Damages

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, but less expenses saved in consequence of the buyer’s breach. . . . If expected is not adequate 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.

2-719: (When goods are accepted by buyer but not paid for); this is a kind of specific performance under the UCC

o 1. When buyer fails to pay price when its due, the seller can recover (along with any incidental damages), the price

Goods accepted or conforming goods lost within a commercially reasonable time, AND

o Goods identified to the contract if the seller is unable to resell them at a reasonable princeo 2. Where the seller sues for the price, he must still hold onto the goods unless he’s able to

resell them at a reasonable price. Net proceeds of resale are then credited to buyero 2-716: When specific performance is okay: When $$ is inadequate or unique or hard to determine

1) Specific performance may be decreed where the goods are unique or in other proper circumstances. 

(2) The decree for specific performance may include such terms and conditions as to payment of the price, damages, or other relief as the court may deem just. 

Damages and the Role of Substitute Performance

Case: Globe Refining Co. v. Landa Cotton Oil Co.

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Concepts:o Presumed intent and damages :

Measure of damages is based on mutual consent and presumed intent Unlike in tort, the “parties themselves, expressly or by implication, fix the rule by which damages

are to be measured” If the contract does not set damages, court should fill in the gap based on “what the parties

probably would have said” Apply “terms which it may fairly be presumed the promisor would have assented to Impose “liability the seller fairly may be supposed to have assumed consciously, or to have warranted the buyer reasonably to suppose that it assumed”

Motive for breach is immaterial think of breach as a choice between performance and damages, rationally choose which is best and most efficient.

o Market Damage Rule and Promisee Incentives : the market damage rule encourages promisee mitigation by presuming that such mitigation is desirable, and by depriving the promisee of any lost profit damages that the promisee could have avoided by mitigating

Market damages rule does not discourage cover so long as the only variable that changes is the market price and the Buyer’s value exceeds its total costs, including cover

Market damage rule: Cost of cover, If cover expenses are lower, those savings would be deducted from the market damage remedy as provided in UCC § 2-712, 2-713,  Does not discourage cover so long as the only variable that changes is the market price and the Buyer’s value exceeds its total costs, include cover

o Strict Liability and Excuse: Seller is not easily excused, for ex: if a fire burned down the factory, the could still fulfill contract

by buying from other source at market price deters opportunistic breach Holmes – Path of the law Lesson: if a contract is for fungible goods for which there are ample substitutes available on the

market, the market damage rule should be applied whatever the cause of the breach, because the rule effectively presumes that the breach is opportunistic.

Promisor Incentives: the market damage rule deters opportunistic breach (i.e. one that attempts to undo the risk allocation created by a fixed contract price) by disgorging any gains to the promisor from attempting to benefit from a change in the market price

o Tacit Agreement Test : a party who breaches a contract is not liable for damages unless they were contemplated at the time of making the contract and effectively incorporated into the contract

“The knowledge of special damages must be brought home to the party sought to be charged “Mere notice to a seller of some interest of probable action of a buyer is not enough necessarily

and as a matter of law to charge the seller with special damage on that account if he fails to deliver the goods.” also applies to Hadley.

Rejection of the tacit-agreement rule: UCC § 2-715 cmt. 2 and R2d § 351 cmt. a reject the “tacit agreement” rule, and thus potentially allow lost profit damages in a large number of cases

o Incidental Damages : (type of expectation) in mitigation damages try and find substitute Incidental damages can include charges and expenses involved in effecting cover §2-715 (1) Incidental damages: expenses reasonably incurred in inspection, receipt,

transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions; allows recovery for delay as well

o Consequential : (type of expectation) not defined Hadley foreseeability rule applies Consequential and incidental damages are subcategories of expectation damages available in

some cases (§2-715 and §347) 2-715: (2) Consequential damages resulting from the seller’s breach include (a) any loss resulting

from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and (b) Injury to person or property proximately resulting from any breach of warranty.

If the buyer and seller had dealt with each other before, this is most likely satisfied; “reason to know” is enough

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o Lost profits: Lost profits (sales – (production and delivery)), only when other remedies are inadequate to protect seller’s expectation interests = Lost profits are type of consequential damages under 2-715, Profits = revenues – costs

Makes sense for buyer to recover revenues only if buyer has incurred costs (reliance) and these are irretrievably lost (i.e. can’t be resold or salvaged)

Restatement: Not applicable in this case UCC:

o 1-305: Remedies to be liberally administered Comment 1: “compensatory damages are limited to compensation”

o 2-711: Buyer’s remedies in general Where seller breaches or the buyer is justified in rejecting the good (if affects the whole contract)

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 (restitution)

Cover and have damages under the next section as to all the goods affected Recover damages for non-delivery

o 2-712: Cover by buyer (1) After a breach within the preceding section the buyer may “cover” by making in good faith

and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller.

(2) The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages as hereinafter defined but less expenses saved in consequence of the seller’s breach.

(3) Failure of the buyer to effect cover within this section does not bar him from any other remedy…

o 2-713: Buyers damages from non-delivery or repudiation ***perfect calculation*** The measure of damages for non-delivery or repudiation by the seller is the difference between

the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages but less expenses saved in consequence of the seller’s breach.

o 2-715: Buyer’s incidental and consequential damages (mitigation/cover expenses) (1) Incidental damages resulting from the seller’s breach include expenses reasonably incurred in

inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effective cover and any other reasonable expenses incident to the delay or other breach.

(2) Consequential damages resulting from the seller’s breach include: (a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise . . . .

Contract Damage Measures and the Goal of Compensation

Case: Freund v. Washington Square Press, Inc. Concepts:

o Compensation v. Punishment Punishment would foil the purpose and societal interest in contracts Would incentivize promisors to take excessive precaution which would adjust the price of all

contracts Promisees would be incentivized toward opportunism via breach

o Market v. nonmarket damages: Market Damage Rule applies along with Mitigation doctrine Nonmarket = Assume now that the buyer cannot get a substitute either at time of contracting or

after breach.

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o Compensation: making the victim whole Fuller & Perdue:

three compensatory “interests”: expectation, reliance, restitution In competitive market for goods, and perfect substitution is possible at no additional

cost expectation=reliance=market damages (Fuller & Perdue) Cost of completion is generally included as a compensation damage (makes 4) Market damage rule is consistent with all four “compensatory” interests

o Expectation Damages: Farnsworth says: general measure = loss in value +other loss – cost avoided – loss avoided. Put promisee in position promisee would have been in had contract been performed Ideal a

ceiling for damages Standard” measure: § 344: cmt a, §377 cmt a, UCC § 1-305 Justification:

Philosophically justified: expectation represents value of promise Economically justified: expectation damages permit/encourage efficient breaches and

discourage inefficient breaches Reliance and restitution are used when there are measurement difficulties and potentially in the

absence of fault Nonmarket: damages = value, expectation damages protect idiosyncratic value (v), which now

must be proved Generally, doesn’t take into account the idiosyncratic when cover is available

o Reliance : put promisee in position that promisee would have been in had the promisee never entered into the contract. §349

Tort damages pursue this goal Market: If there is a competitive market for goods, and perfect substitution is possible at no

additional cost, then expectation=reliance=market damages (Fuller & Perdue) Nonmarket: Reliance damages are now expenditures only, not lost opportunities. (p+ r)

otherwise, if seller didn’t exist, wouldn’t be able to buy elsewhere = no lost opportunity Expectation > Reliance Reliance (expenditure) damages can thus be used as a proxy for expectation when v

cannot be determined (expectation floor)o Restitution : promisor must restore to promisee benefit received. §371

Disgorgement of unjust gain Market: In the interpretation of restitution as disgorgement, restitution=market damages Nonmarket: p (assuming buyer has paid seller, and buyer’s expenditures do not benefit seller)

Expectation > Restitutiono Cost of completion : Put promisor in position promisor would have been in had promisor performed.

§348(2)(b) Variant of expectation damages Liquidated specific performance Katz Typically used in construction cases just not J&Y If the seller has done part of the work, cost of completion damages give the buyer an amount

necessary for the buyer to have the work completed by someone else while paying no more than the original contract price.

o Nominal damages: Formal vindication of rights to injury, used in Freund.

o Limitations on Damages : Mitigation, Foresight, Certainty, Emotional Disturbance, Punitive, Procedural (attorney fees, and

prejudgment interest < Market rate) Duty to mitigate presumed wanted by parties as it reduces damages

o Theories of consideration damages

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Bargain theory = expectation Detriment = reliance Benefit = restitution

Ex Ante (before performance)

Ex Poste (After performance)

Promisor Restitution Cost of completionPromisee Reliance Expectation

Restatement: o §344: Purpose of Remedies:

Expectation Reliance Restitution o §345: Judicial Remedies Availableo §346: Availability of Damageso §347: Measure of Damages in general

Illustration 1: A contracts to publish a novel that B has written. A repudiates the contract and B is unable to get his novel published elsewhere. Subject to the limitations stated in §§ 350-353, B’s damages include the loss of royalties that he would have received had the novel been published together with the value to him of the resulting enhancement of his reputation.

o §348: Cost of completion: Put promisor in position promisor would have been in had promisor performed (2)(b)

o §349: Reliance: put promisee in position that promisee would have been in had the promisee never entered into the contract.

o §350: Mitigation/ Avoidability on limitation of damages (1) 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. Restatement version of cover! Burden of proof that mitigation was possible is on the breaching party.

o §351: Foreseeability Look at Hadley!o §352: Certainty: because services are not fungible

Illustration: Freund A contracts to publish a novel that B has written. A repudiates the contract and B is unable to get his novel published elsewhere. If the evidence does not permit B’s loss of royalties and of reputation to be estimated with reasonable certainty, he cannot recover damages for that loss, although he can recover nominal damages

o §353: Emotional Disturbanceo §354: Prejudgment interest often < market rates o §355: Punitive Damageso §356: Penalty Rule for Liquidated Damages In a comment: Compensation goal is often distinguished

from goal of “punishment.” o §370: Requirement that benefit be conferred Restitution o §371: Restitution measurement: promisor must restore to promisee benefit received.

(B) interpretation of restitution as disgorgement, restitution=market damageso §373: Restitution when other party is in breach

UCC: Not applicableo UCC on mitigation:

Buyer must cover for defective goods; if buyer doesn’t cover when he could have done so, he’ll still be entitled to the difference b/w market price at time of breach and contract price, but, but he’ll lose ability to collect other consequential damages)

Damage Limitations and the Default Rule Paradigm16

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Case: Hadley v. Baxendale Concepts:

o Specific Contracts : (obligation de resultat) to achieve a specific end (ex: new shaft arrive in 2 days) o Contracts for Effort : (Obligation de moyen) breach of common carrier’s promise to use due care and

diligence in conveying the shaft within a reasonable time (French: obligations de moyen)o Foresight required :

Hadley both the Size of loss: R2d § 351 cmt. a (loss that “actually occurred” must be foreseeable) and Likelihood of loss: carrier may not have been aware that the mill would remain closed until the shaft was replaced. R2d § 351, illus. 1

Courts may be more willing to find losses “foreseeable” the more opportunistic the promisor’s breach appears to be.

For non-opportunistic (e.g. negligent) breaches, foreseeability rule may leave promisee with reliance damages. See R2d § 351(3)

o Hadley Rule : General (Average) Damages

Damages are recoverable if they “arise naturally, i.e. according to the usual course of things”

Special (Idiosyncratic) Damages Damages not ordinarily flowing from the breach are recoverable only if they were “in

the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it,” which can be shown if the “special circumstances . . . were communicated . . . and thus known to both parties.”

Hadley adopts a stricter standard of foreseeability than tort lawo Rejection of the tacit-agreement rule:

UCC § 2-715 cmt. 2 and R2d § 351 cmt. a reject the “tacit agreement” rule, and thus potentially allow lost profit damages in a large number of cases

o Rule requires more than “foreseeability”; it requires that damages be “probable” o Consequential: Parties often attempt to exclude consequential damages

Full expectation (consequential) damages may be most appropriate when breaches are opportunistic (this is not the traditional understanding, however).

o Adverse Selection : if promisor cannot distinguish between thin-shelled (high damages) promisee and thick-shelled (low damages) promisee, and promisor is liable for all damages, promisor will increase price to cover potential losses to thin-shell promisees, which could in turn drive thick-shell promisees out of the market, leading to still higher prices and more thick-shell promisees declining to contract

o Moral Hazard : promisee can affect the thickness of his shell ex ante (precautions) or ex post (mitigation). Full damage rule does not provide incentive to promisee to take these steps

o Mitigation of Damages Rule : Mitigation of damages rule also encourages mitigation, but that rule puts burden on breaching

party to prove that mitigation is possible; foreseeability doctrine (like market damages) puts burden on promisee to prove mitigation is not possible.

Restatement: §351: damages aren’t recoverable if they weren’t foreseeable as probable result of breach for breaching party

(ref. Hadley with foreseeability)o Foreseeability of a substitute is really important; is P aware that if D breaches, they may try to find a

substitute? (1) Damages are not recoverable, if no reason to foresee the damages. (2) Loss is foreseeable as a probable result when (a) ordinary course of events, (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

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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.

o §352: Certainty: Damages aren’t recoverable when evidence can’t establish reasonable certainty

o §353: Emotional Disturbance Can’t recover EDD in contracts unless breach caused bodily harm or if ED was a particularly

likely result of contract o §355: Punitive Damages:

Not recoverable unless breach was also a tort for which punitive damages were recoverableo §356: Penalty Rule for Liquidated Damages:

unreasonable large liquidation is unenforceable on public policy grounds o Procedural limitations (i.e. attorney’s fees)

UCC: o 2-706: Resale Damages: seller entitled to difference b/w contract price and the price at which seller resold,

times the quantity not taken Hadley Rule: Courts won’t award consequential damages for breach unless damages fall into one

of two classes:o 2-714: Buyer’s Damages for Breach in Regard to Accepted Goods

(1) Where the buyer has accepted goods and given notification may recover as damages for any non-conformity of tender the loss resulting in the ordinary course of events from the seller’s breach reasonably

(3) In a proper case any incidental and consequential damages under the next section may also be recovered.

o 2-715: Buyer’s Incidental and Consequential Damages (2) Consequential damages resulting from the seller’s breach include (a) any loss resulting from general or particular requirements and needs of which the seller at the

time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and

(b) injury to person or property proximately resulting from any breach of warranty. UCC § 2-715 cmt. 2 and R2d § 351 cmt. a reject the “tacit agreement” rule, and thus

potentially allow lost profit damages in a large number of caseso 2-719: Limitation on remedy:

(b) Resort to a remedy as provided is optional unless the remedy is expressly agreed, in which case it is the sole remedy.

(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act.

(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not. Many parties contract around consequential damages.

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Introduction to Contract Defenses and the Role of Inequality

Case: Williams v. Walker-Thomas Furniture Co. Concepts:

o Replevin : provisional remedy allowing a party to take control of disputed personal property and hold it until court decides its owner

Remedy has since been greatly restricted in consumer caseso Cross-collateral clauses: not inherently bad…o Unconscionability : a formation doctrine

Up to the court to decide Unconscionability focuses on contract terms, not facts (cf. mistake, misrepresentation); it

generally provides a defense to promise breaking rather than an affirmative ground for enforcing promises

Remedy is generally rescission or reformation (nonenforcement or partial enforcement) Depends greatly on context Substantive or procedural Doctrine of presumptive bargaining assumes defects as opposed to a specific, proved problem

(fraud, duress, mistake) o Williams v. Walker test :

*Absence of meaningful choice (unequal bargaining power) Standardized terms: direct evidence of lack of choice Structural problems: market power of seller Procedural defects: no reasonable opportunity to understand terms (procedural

unconscionability) *Terms unreasonably favorable to other party in light of social mores and business practice

(substantive unconscionability)o Absence of Meaningful Choice :

Form Contract: Should contract law be suspicious of take-it-or-leave-it contracts, whose terms are

completely set by one party, without any meaningful chance for negotiation by the other party?

Seller Market Power Monopoly: Effect of competitive markets: no unlimited choice of goods and services, competition

leads to uniformity in price, standardization reduces cost Effect of standardization: good (efficiency) or bad purposes? Monopoly generally charges higher prices and restricts output, generally provides higher

“quality” product so long as consumers are willing to pay for its cost (though it might charge above-competitive price for high quality), sometimes have incentive to offer higher quality goods or services than some consumers want as a way of excluding competitors (e.g. professional services)

Situational Monopoly: Specific investments: one party relies in contractual relationship rendering it vulnerable.

Other party may change terms after investment. Situational monopoly as an unconscionability problem depends on view of timing of the

contract. Although unconscionability is concerned with contract formation, ongoing relationships may involve multiple contracts, and so if each purchase is separate- leads to unconscionability on subsequent contracts affected by situational monopoly.

o Substantive v. Procedural Some courts have endorsed a “sliding scale test,” under which the greater the procedural

unconscionability, the more willing the courts are to relax the requirements for substantive unconscionability, and vice versa

o Substantive Unconscionability: 19

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Cross-collateral clauses are permitted under UCC Article 9 as well as the MD Retail Installment Act.

Reasons for clauses: high default rates, rapid depreciation of goods, high cost of collection repossession, high labor costs/risks of working in socio-economic sector.

Nevertheless, unlawful for seller in repossessing goods to get a windfall (the goods whose value > what buyer owes aka overcollateralization) Per UCC § 9-504(2). Seller may nevertheless get a windfall in fact if the buyer either does not know her rights or cannot afford to litigate the issue (though in that case, not clear how unconscionability doctrine would help the buyer). Typically, however, in consumer cases there is a deficiency, not a surplus

Substantive unconscionability may depend greatly on context. Few clauses inherently are unconscionable. If a term is not substantively unconscionable, the P will general lose. Unless court uses sliding scale.

o Procedural Unconscionability: Asymmetrical information : Consumers, even if sophisticated, lack information that sellers have.

Issues:o Rational ignorance : if the risks of harmful terms are so remote that they do not

justify the costs of discovering them.o Lemons problem (adverse selection) : rational consumer ignorance can lead to bad

terms driving out good ones; consumers buy too many goods with “poor quality” terms because they do not recognize poor quality

o Problem: distinguishing between term degradation from conscious decisions by consumers to pay lower prices knowing they are getting lower quality.

Non-Court Resolutions for asymmetrical information:o Reputation : consumers hurt by bad clauses (or perhaps Consumer Reports and the

like) tell otherso Competition : other sellers inform consumers of bad clauses of their competitorso Term uniformity : If seller knows some buyers are knowledgeable, but not which

ones, so seller cannot “term discriminate,” then all buyers get the benefit of the few knowledgeable buyers

Cognitive Deficiencies : Unfair Persuasion : focus on seller’s actions, sharp practices

o Manner of Sales: door to door saleso Fine print, obscure language, and lack of comparative price terms could suggest

intent to deceive or mislead, but could also be innocent cost-saving devices o Ex: Williams v. Walker Door-to-door sales may facilitate fraud by

salespeople, working on commission, who have incentive never to let consumers be fully paid up

Transactional Incapacity : focus on consumer characteristicso Capacity doctrine does not usually cover these kinds of issues; unconscionability

is not limited to traditional forms of incapacity can protect the dumb. o Courts should perhaps hesitate to assume too quickly that consumer lacks capacity

to understand.o Paternalism : Should the courts interfere paternalistically on behalf of individuals?

Intervenes with freedom to contract Consumption “addiction” or desire to “keep up with the Joneses” may lead consumers to buy too

many “luxury” goods and pay too little attention to “necessities”. However, hard to determine when applies and when an item is a necessity or productive asset.

Third party effects of enforcement (effect on kids, effect on crime, concerns led to abolishment of debtor’s prison)

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o Posner’s minimum welfare theory: State is committed both to a free market and a safety net (minimum welfare) for all citizens

Welfare Opportunism (moral hazard): given the safety net, poor people have an incentive to enter too many high-risk contracts because the downside consequences are mitigated by anticipated government aid (bailout)

Welfare Circumvention : poor people may not buy the mix of goods needed to maintain minimum welfare

State engages in “public oversight of relief funds,” e.g. though the food stamp program as a result.

Strategic consideration: By intentionally restricting credit to poor people, courts using the unconscionability doctrine may be maintaining the viability of the welfare system

Restatement:o §178: Unenforceable for public policy reasonso § 208: Unconscionable contract or term

If a contract or term is unconscionable at formation 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.

Illustration 4: A, a packer, sells and ships 300 cases of canned catsup to B, a wholesale grocer. The contract provides, “All claims other than swells must be made within ten days from receipt of goods.” Six months later a government inspector, upon microscopic examination of samples, finds excessive mold in the cans and obtains a court order for destruction of the 270 remaining cases in B’s warehouse. In the absence of justifying evidence, the court may determine that the quoted clause is unconscionable as applied to latent defects and does not bar a claim for damages for breach of warranty by B against A.

Illustration 5: Williams v. Walker: On B’s default, A sues for possession of all the items sold. It may be determined that either the quoted clause or the contract as a whole was unconscionable when made.

Illustration 6: A, a corporation with its principal office in State X, contracts with B, a resident of State X, to make improvements on B’s home in State X. The contract is made on A’s standard printed form, which contains a clause by which the parties submit to the jurisdiction of a court in State Y, 200 miles away. No reason for the clause appears except to make litigation inconvenient and expensive for B. The clause is unconscionable.

UCC: o §2-302: Unconscionability

(1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at formation the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may limit the application of any unconscionable clause as to avoid any unconscionable result.

(2) When court believes any clause to be uncons. 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 (chance to defend itself)

o UCC § 9-504(2): Overcollateralization Prevents seller creditor from keeping excess value. Seller must hold disposition sale and return

any surplus over debt owed by buyer back to buyer (cf. penalty rule in damages)

The Bargain Theory of Contract

Consideration

Cases: Lake Land Employment Group of Akron, LLC v. Columber; Petroleum Refractionating Corp. v. Kendrick Oil Co.; Harrington v. Taylor; Hamilton Bancshares Inc. v. Leroy

o Lake Land Employment Group:21

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Majority: Forbearing from firing is considered consideration by the majority, Employee non-compete clause is refraining from firing employee and continuation of at will, With at will one is able to change the terms of the contract at any time

Dissent: There was no consideration for the employee’s promise to adhere to the noncompete

clause because the employee got no benefit above and beyond the previous at will arrangement and the employer incurred no additional detriment. Applies pre-existing duty rule to at will contract

Views this as contract modification versus the formation of a new contract (which majority believes even in light of continuing relationship) however modern tendency for the court to be more flexible in upholding contract modification anyways

o Petroleum Refractionating Corp. v. Kendrick Oil: Seller Claims: Buyer breached contract by refusing to take full amount of oil specified in the

contract. Seller is entitled to “resale damages” (a version of market damages): the difference between the contract price (40¢/barrel) and the price at which seller resold the oil (25¢/barrel), times the quantity not taken

Buyer Responds: Seller breached because the oil did not conform to the contract, under constructive conditions doctrine, Seller’s material breach means Buyer may stop performing, buyer’s promise to pay was not supported by consideration because Seller’s return promise was “illusory”

Consideration as the Seller rightly terminates, it cannot sell the contracted-for oil to anyone else; thus, Seller would not be able to opportunistically take advantage of a market price increase. Past performance is not consideration as performance counts as consideration only for goods already delivered, not for part of contract that remains executory. Cf. Sun Printing; Lake Land

o Harrington v. Taylor: Promisor (Taylor) promises to pay promisee (Harrington) damages Harrington suffered when she

intervened to save Taylor’s life Moral consideration : Taylor was morally obligated to promise compensation to Harrington Past consideration : Taylor received a benefit that caused him to make the promise Court, however, rejects these possibilities and finds the promise unenforceable for lack of

consideration as moral and past consideration do not count because promise is gratuitous. Benefit/detriment test: interpreted to mean that the promise must precede benefit or detriment.

o Hamilton Bancshares Inc. v. Leroy Promisor: Leroy (shareholder/offeror/optionor/potential seller) and Promisee: Hamilton

Bancshares (offeree/optionee/potential buyer). Promise: hold stock sale offer open for 80 days Consideration for promise: One Dollar and other good and valuable consideration & $5000.00

earnest money applied to the purchase price of the shares subject to this option Rule of offer and acceptance: Consideration doctrine as demonstrating that offers are generally

revocable by the offeror unless there is a separate promise of irrevocability supported by independent consideration

Alternatively, an option is a distinct contract requiring its own consideration Payment for options as consideration:

Stock options often have significant market value In option contracts, courts often allow very small amounts to satisfy consideration

requirement Concepts:

o At-Will-Employment: Employer can fire employee at any time for any reason; employee can quit at any time for any

reason Default employment rule. Can be contracted around. Courts have resisted a just cause default as

don’t want to open up to second guessing, due to factual issues. Why we have so many anti-discrimination laws. Cohen’s weter balloon theory of

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pressure Consideration concerns with employee’s promise not to compete:

Employer’s continuation of the at-will relationship OR Employer’s forbearance from discharging the employee

May consider at-will a reverse unilateral contract: employee promises in exchange for employer’s “performance.”

Symmetry: either side can end the contract for both parties, ends obligation for both unless there is a covenant not to compete

o Exceptions to At-Will : Implied in fact contract (e.g. handbook, salary term includes time), Promissory estoppel (reliance), Good faith, Public policy (whistleblowing), Discrimination (race, sex, disability, age, religion, anti-union), To defend again these claims, employer must often have a good reason for termination

o Unilateral vs. Bilateral: Unilateral Contract: employer promises to pay the stated wage if the employee does the specified

work. Commitment issue per R2d § 2(1) At will is generally viewed as unilateral. Or reverse unilateral.

Bilateral Contract: employer promise remains the same, employee promises to perform requested work if the employer does not fire the employee and the employee does not quit

Lake Land is viewed as bilateral by the courto Covenant not to compete :

Enforceable if they impose reasonable restrictions on time, geography, and subject matter. Not enforceable if deemed to be contracts in restraint of trade and therefore unenforceable as a

matter of public policy and if illegal under the antitrust laws. (ex: cartel) Employer’s justification: protect property rights in information Problem: employee may be denied reasonable chance to earn a living Lake land: Court’s caveat: noncompete clause may still be unenforceable if “unreasonable” Consideration issues:

Employer’s continuation of the at-will relationship OR Employer’s forbearance from discharging the employee

May consider at-will a reverse unilateral contract: employee promises in exchange for employer’s “performance.”

Alternative approach: exposure to information in which employer asserts a legitimate property right would be sufficient consideration for promising to adhere to a covenant not to compete, rendering length of time of employment would be irrelevant, unless length of time corresponded to the amount of employee exposure to protected information

o Adequacy of consideration: Wouldn’t care about the value of the consideration given, difficult to value forbearance anyway,

doesn’t have to be explicit consideration, implicit is okay o Term Employment Contracts : as opposed to at will contractso Pre-existing duty rule : contract modifications are generally not enforceable unless there is additional

consideration for modification promise Deters coerced modifications when promisor is vulnerable (has made relationship-specific investments)

o Illusory Promises : Purported promise that does not in fact “commit” the promisor to anything. See Restatement 2d §

2. Cannot be consideration for promise, and therefore performance is not required/promise is not binding. Can be binding on one side.

As in Petroleum: Seller reserved the right to terminate the contract An illusory promise is uncertain in commitment because the promisor has complete discretion to

determine whether to perform promise VERSUS an indefinite promise which is uncertain in meaning because the parties have not

specified what will happen in a particular situation (i.e. the contract has a “gap”).

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o Mutuality of Obligation : Either parties must be bound or neither is bound (symmetry/equality), if one party is not “bound” because it has made an illusory promise, neither is the other party. Abandoned in RST 2nd.

Mutuality doctrine does not always apply to unilateral contracts; party offering the unilateral contract may be bound before the other party is

o Output and Requirements Contracts and Illusory Promises: Problematic as quantity terms is missing and that in theory the output or requirements could be 0

o Consideration and the UCC: Article 2 has no consideration rule as UCC defers to the common law on this subject. § 1-103(b):

makes common law of consideration applicable in absence of an applicable UCC term. Not a goods kind of issue: goods transactions typically involve bargains, not gratuitous promises, Addresses problems traditionally dealt with in the common law as “consideration” problems in

other wayso Nominal consideration : consideration so small as to suggest no real bargaino Firm Offer : Firm offer is a kind of options contract. Firm offer is rule in UCC that basically makes an

offer irrevocable if satisfies 2-205. Options contracts are usually enforced by consideration (stock or real estate) issue is where you don’t pay for them, and firm offer is an exception to the general traditional rule of consideration. Firm offer is about formation.

Firm Offers (UCC): Allowing irrevocable offers even if there is no consideration (2-205); this is allowed when:

It’s a merchant, a signed writing, and says explicitly it will be held open If a firm offer lists a period longer than three months, it becomes revocable after 3

months (it’s still valid offer) If it’s a firm offer in a sales contract, but its made by a non-merchant (i.e. a consumers), it is not

firm and therefore revocable (only merchants can make firm offers) Restatement:

o §2: Purported promise that does not in fact “commit” the promisor to anything. o §25: Options Contract:

An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor’s power to revoke an offer.

o §34: performance counts as consideration, only for goods already received, not for future performanceo §71: Timing rule consideration given before a promise cannot be bargained for. (sought by the

promisor in exchange for his promise” or “given by the promisee in exchange for that promise) (For Harrington)

Illustration 2: A receives a gift from B of a book worth $10. Subsequently A promises to pay B the value of the book. There is no consideration for A’s promise. This is so even though B at the time he makes the gift secretly hopes that A will pay him for it. As to the enforcement of such promises, see § 86.

o §73: Performance of a legal duty: Performance of a legal duty owed to a promisor 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.

o §74: Settlement of Claims: (1) Forbearance of asserting claim/defense (if claim/defense is 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. (Subjective intent?)

o §77: Illusory and Alternative Promises: A promise/ apparent promise ≠ consideration if by its terms the promisor reserves a choice of

alternative performances unless (a) each of the alternative performances would have been consideration if it alone had been bargained for; or (b) one of the alternative performances would

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have been consideration and there is or appears to the parties to be a substantial possibility that before the promisor exercises his choice events may eliminate the alternatives which would not have been consideration.

Illustration 1: A offers to deliver to B at $2 a bushel as many bushels of wheat, not exceeding 5,000, as B may choose to order within the next 30 days. B accepts, agreeing to buy at that price as much as he shall order from A within that time. B’s acceptance involves no promise by him, and is not consideration.

Illustration 3: A offers to deliver to B at $2 a bushel as many bushels of wheat, not exceeding 5,000, as B may choose to order within the next 30 days, if B will promise to order at least 1,000 bushels within that time. B accepts. B’s promise is consideration since it reserves only a limited option and cannot be performed without doing something which would be consideration if it alone were bargained for.

Illustration 5: A promises to act as B’s agent for three years on certain terms, starting immediately; B agrees that A may so act, but reserves the power to terminate the agreement on 30 days notice. B’s agreement is consideration, since he promises to continue the agency for at least 30 days.

Illustration 7: A orders goods from B for shipment within three months, reserving the right to cancel the order before shipment. B has the goods in stock and accepts the order. A’s promise to pay for the goods is consideration for B’s promise to ship, since B can prevent cancellation by shipping immediately.

o §79: Mutuality of Obligation: If the requirement of consideration is met, there is no additional requirement of. . (c) mutuality of

obligation.o §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 conferred as a gift or for other reasons the promisor has not been unjustly enriched; or (b) if the return promise’s value is disproportionate to the benefit.

Illustration 2: A lends money to B, who later dies. B’s widow promises to pay the debt. The promise is not binding under this Section.

Illustration 3: A has immoral relations with B, a woman not his wife, to her injury. A’s subsequent promise to reimburse B for her loss is not binding under this Section.

Illustration 7: A saves B’s life in an emergency and is totally and permanently disabled in so doing. One month later B promises to pay A $15 every two weeks for the rest of A’s life, and B makes the payments for 8 years until he dies. The promise is binding.

o §87: Options Contract: An offer is binding as an option contract if it (a) is in writing and signed by the offeror, recites a

purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or (b) is made irrevocable by statute.

(2)An offer that offeror should reasonably expect to induce substantial action/forbearance by the offeree before acceptance and which actually induces action/forbearance is binding as an option contract as necessary to avoid injustice.

o §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 given unexpected circumstances when contract formed; or (b) as provided by statute; or (c) as justice requires enforcement in view of material change of position in reliance on the promise.

o §90: Promise reasonably inducing action or forbearance (1) Promise that promisor should reasonably expect to induce action/forbearance by promisee or

3rd person and which actually induces action/forbearance is binding if enforcement of promise is the only way to avoid injustice. Remedy granted for breach may be limited as justice requires.

(2) A charitable subscription or a marriage settlement is binding under Subsection (1) without 25

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proof that the promise induced action or forbearance.o §186: Promise in restraint of trade:

(1) Unenforceable for public policy if unreasonably in restraint of trade.

(2) A promise restrains trade if performance would limit competition or restrict the promisor in the exercise of a gainful occupation.

o §187: Non-ancillary restraints on competition (if not a supplemental part of the agreement) A promise to refrain from competition that imposes a restraint that is not

subordinate/supplementary to an otherwise valid transaction or relationship is unreasonably in restraint of trade.

o §188: Ancillary Restraints on competition: (supplementary part of agreement) (1) A restraint that is ancillary, is unreasonable, in light of a promise to limit competition if (a)

the restraint is greater than needed to protect the promisee’s legitimate interest, or (b) the promisee’s need is outweighed by the hardship to the promisor and the likely injury to the public. (2) Ancillary promises imposing restraint include: (b) a non-compete clause

Illustration 7: A employs B as advertising manager of his retail clothing store. As part of the employment agreement, B promises not to work in the retail clothing business in the same town for three years after the termination of his employment. B works for A for five years but does not deal with customers and acquires no confidential trade information in his work. B’s promise is unreasonably in restraint of trade and is unenforceable on grounds of public policy.

Illustration 8: A employs B as an instructor in his dance studio. As part of the employment agreement, B promises not to work as a dance instructor in the same town for three years after the termination of his employment. B works for five years and deals directly with customers but does not work with any customer for a substantial period of time and acquires no confidential information in his work. B’s promise is unreasonably in restraint of trade and is unenforceable on grounds of public policy.

UCC:o 1-103(b): Purpose/Construction of UCC Common law of consideration applicable in absence of an

applicable UCC termo 2-106: Definition of termination: a way UCC deals with consideration and illusory promises.

(3) “Termination” occurs when either party pursuant to a power created by agreement or law puts an end to the contract otherwise than for its breach. On “termination” all obligations which are still executory on both sides are discharged but any right based on prior breach or performance survives.

o 2-205: Firm Offers (MERCHANT) Merchant offers to buy/sell goods, signed writing, with assurance offer will be held open/not

revocable (regardless of consideration) for stated period/reasonable period/< 3 months. o 2-209: Modification, Rescission, or waiver:

(1) A modification within this Article doesn’t need consideration to be binding. (2) If a signed contract excludes modification/rescission sans signature cannot be modified/rescinded without a signature, except when 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 statute of frauds is applicable (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

Comment 2: Modifications must be in good faith. Bad faith to escape performance on the original contract terms is barred, bad faith modification/extortion/ unreasonable violates good faith. Mere technical consideration cannot support bad faith mod. Merchant good

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faith test = observance of reasonable commercial standards of fair dealing in the trade. This may require proof of an objective reason for seeking a modification. Specifically, matters like market shift/which causes loss, is adequate reason for mod. Even though doesn’t qualify for legal excuse. Per 2-615 and 2-616 (Excuse by failure of presupposed condition.)

o 2-306: Output, Requirements, and Exclusive Dealings: (1) Requirements contract where quantity is measured by output of seller OR needs of buyer may

occur in good faith except that no unreasonable/disproportionate quantity compared to estimate/or trade usage/or course of dealings may be tendered or demanded.

(2) A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.

o 2-309: (3) Termination of a contract by one party except on the happening of an agreed event requires

that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable.

o 2-706: Seller’s Resale: Under the conditions stated in Section 2-703 (seller’s remedies). Seller may resell the goods

concerned or the undelivered balance thereof (cover). Requires good faith and reasonability as cover, seller may recover the difference between the resale price and the contract price together with any incidental damages allowed under the provisions of this (§ 2-710), but less expenses saved in consequence of the buyer’s breach.

Reliance Cases:

o Ricketts v. Scothorn: Consideration: Court finds no consideration because Scothorn made no promise to quit and

Ricketts did not make quitting a condition of his promise. Conditional promise shows an exchange: Ricketts seeks Scothorn’s quitting “in exchange for” his promise to pay.

Testing benefit detriment test outer limits. Increased likelihood is not a future bargain.

o Cohen v. Cowles Media Co.: Promise: (A) Reporters made the promise of confidentiality, acting as agents of the newspaper

(Control, Consent, On Behalf Of) OR (B) But did the reporters have authority to make a promise of confidentiality on behalf of the newspaper?

Actual authority = spoken or in writing Apparent authority if it appears to someone like Cohen that they have the authority,

apparent is enough for the courts Bargain? (A) Reporters sought information in exchange for their promise of confidentiality;

Cohen gave information in exchange for that promise OR (B) Confidentiality just a necessary condition for Cohen’s providing the information what sought in exchange was the publishing of the story, which the reporters did not promise.

SCOTUS: Majority: 1st Amendment does not bar enforcement of the promise under promissory

estoppel. “[G]enerally applicable laws do not offend the First Amendment simply because their enforcement against the press has incidental effects on its ability to gather and report the news.” Promissory estoppel is law of general applicability. Press must act “lawfully” in reporting the news. Breaching promise of confidentiality is not acting “lawfully.” Promising confidentiality no different constitutionally from promising to pay a bonus to a news source for information

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o Blackmun: 1st Amendment applies because of the content of the speech (political discourse), not because of the identity of the speaker (press)

o Souter: There can be no doubt that the fact of Cohen’s identity expanded the universe of information relevant to the choice faced by Minnesota voters in that State’s 1982 gubernatorial election, the publication of which was thus of the sort quintessentially subject to strict First Amendment protection. . . . The propriety of his leak to respondents could be taken to reflect on the character of the candidate who had retained him as an adviser. An election could turn on just such a factor; if it should, I am ready to assume that it would be to the greater public good, at least over the long run.”

Remand: Justice Argument: Newspaper could have achieved the same journalistic result by simply

reporting the source as “someone close to the opposing gubernatorial ticket” and Newspapers have strong ethic of keeping promises of confidentiality

o Midwest Energy, Inc. v. Orion Food Systems, Inc.: Not a contract because: (1) No signature as required per the statute of frauds, and (2) no mutual

assent. Contract also fails for indefiniteness: Indefiniteness: Hoffman v. Red Owl (note 1) applies § 90 in case in which not all terms had been agreed upon.

Agency issue: Ries’ authority is debated. Majority: Dissent:

Younghouse unilaterally dropped Cinnamon Street Bakery products (made by Orion) in August, which suggests she did not believe that Ries had made a promise of a franchise. Younghouse unreasonably ignored warnings in Orion’s offering circular. Would have built a larger store anyway to accommodate any franchise.

Concepts:o Promissory Estoppel Elements:

Clear and Definite Promise: Doesn’t need to be in words

Promisor intends to induce reliance (foreseeable): Foreseeable (Reasonably Expected) Reliance:

Circular argument Reasonable reliance is unaddressed in Midwest

Actual Reliance: Enforcement Necessary to Avoid Injustice:

Definite and Substantial Reliance and Reasonable Reliance Often left to be determined by remand

Limitation on Remedy as Justice Requires: Expectation and Reliance In determining damages, court takes into consideration how bad the behavior is (not

deliberate = reliance only; deliberate: reliance + expectation damages) Following circumstances are significant: Availability of other remedies, i.e. cancellation and restitution Definite and substantial character of action/forbearance Reasonableness of action/forbearance

o Equitable Estoppel : Generally involves a misrepresentation and involves a defense to an otherwise valid action, not an

affirmative claim of enforcement. See American National Bank (note 1)o Enforcing as Promissory Estoppel v. enforcing as Contract:

Intent of the Parties : do they believe they are engaged in making a legally binding contract” Bad Consequences : “to impose a contract theory on this arrangement puts an unwarranted legal

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that ethical relationship” o Relationship between consideration and promissory estoppel

Complementary (Dawson)? Mutually exclusive (Gilmore)?

o Timing and P.E.: Reliance before a promise cannot be reliance on a promise Timing issue of reliance- must rely ONLY AFTER promise was made, sequence and timing

become super important o Damages and Promissory Estoppel:

Expectation damages: speculative, hard to know what would have happened to Cohen. Reliance damages: Lost wages & Lost opportunity? Restitution damages: Extra revenue to the newspaper from sales due to story Midwest: Successful mitigation: substitute does not mean an equal substitute, lost credibility for

advertising, redo floor plan, delay in opening due to need for substituteo PE is usually used when there is some potential defect in contract formation, such as lack of consideration

(Ricketts), lack of intent to be bound (Cohen), lack of agreement (Orion), or statute of frauds (R2d § 139). NOTE: Promissory estoppel has been used in cases of indefinite promises, not just in cases where consideration is absent

Restatement:o §2: Promise; Promisor; Promisee; Beneficiary

(1) A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made.

o §21:Intention to be legally bound Intention to be legally bound (real nor apparent) is not essential to the contract form. A

manifestation not to be legally bound may prevent contract formation.o §26: Preliminary Negotiations

Manifestation of willingness to enter into bargain is not an offer if offeree knows/reason to know offeror does not intend to contract until further manifestation of assent.

o §27: Existence of contract where written memorial is contemplated Sufficient manifestations of assent will not be prevented from being operative by the fact that

parties also manifested intention to prepare/adopt a written memorial; Circumstances may show, however, that the agreements are preliminary negotiations.

o §33: Certainty:o §34: Certainty and Choice of Terms; Effect of Performance or Reliance

(3) Action in reliance on an agreement may make a contractual remedy appropriate even though uncertainty is not removed.

o §81: Consideration as Motive or Inducing Cause: (1) If what is bargained for does not of itself induce the making of a promise, is still consideration (2) The fact that a promise does not of itself induce a performance or return promise does not

prevent the performance or return promise from being consideration for the promise.o §90: Promise reasonably inducing action or forbearance

(1) Promise that promisor should reasonably expect to induce action/forbearance by promisee or 3rd person and which actually induces action/forbearance is binding if enforcement of promise is the only way to avoid injustice. Remedy granted for breach may be limited as justice requires.

(2) A charitable subscription or a marriage settlement is binding without proof that the promise induced action or forbearance.

Comment B: 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

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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.

Illustration 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.

Illustration 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.

Illustration 9: The facts being otherwise as stated in Illustration 8, B gives A the erroneous information deliberately and with C’s approval and requires A to buy the assets of a deceased former dealer and thus discharge C’s “moral obligations” to the widow. C is liable to A not only for A’s expenses but also for the lost profit on 30 radios.

o §130: Contract not to be performed within a year (1) If a promise cannot be fully performed in a year from time of contract, Statute of Frauds

applies until 1 party completes performance. o §139: Enforcement by Virtue of Action in Reliance:

(1) A promise that promisor should reasonably expect to induce action/forbearance by promisee/3rd person which actually induces action/forbearance is enforceable, notwithstanding the Statute of Frauds, if enforcement is the only means to avoid injustice. The remedy granted for breach is to be limited as justice requires. (Identical to the UCC language)

(2) To determine if injustice can be avoided: factors to consider: (a) the availability and adequacy of other remedies, particularly cancellation and

restitution; (b) the definite/substantial character of the action/forbearance in relation to the remedy

sought; (c) as the action/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) Reasonableness of the action/forbearance; (e) Extent to which the action/forbearance was foreseeable by the promisor.

The Restitution Interest Cases: Bailey v. West

o Court denies implied in law contract claim: Bailey “was a mere volunteer who boarded and maintained ‘Bascom’s Folly’ at his own risk and

with full knowledge that he might not be reimbursed for expenses he incurred incident thereto.” No acceptance by West. Unjust enrichment

Concepts:o Express v. Implied in Fact Contracts:

Express contract : promise is stated orally or in writing Implied in fact contract : promise inferred from conduct No practical difference between two theories

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o Quasi Contract = implied in law contract, quasi-contract, unjust enrichment, restitution Quasi-Contract: not a contract, but a method constructed by courts to avoid unjust enrichment by

permitting the P to bring an action in restitution to recover the amount of the benefit conferred on the D

Occurs when: o 1. No contract was attempted but P still deserves to recover (i.e. emergency situation)

method of quantifying damages: amount recovered would likely be a “reasonable fee” for emergency (i.e. tugboat) services, set at market rates; not a subjective amount that D placed on the service

o 2. Attempt at contract where unenforceability was unforeseeable due to SoF and parties performed

o 3. If P breached (type of contributory negligence), can recover restitution cost minus D’s damages for the breach (so long as it wasn’t willful).

ex: breaching P gets to recover value to owner of work done, even when it wasn’t substantial performance of contract

o No promise necessary for implied in law contractso Enforcement of quasi contract doesn’t take into account intention of parties

o Elements of quasi-contract Benefit conferred on defendant by plaintiff Appreciation, acceptance, and retention by defendant Unjust enrichment of defendant

o Implied in Law v. Implied in Fact Contracts: Implied in Law:

No promise (even an implicit one) is necessary for implied in law contracts Reason for enforcement of implied in law contracts is independent of the intentions of the

parties. In implied in law the intention of the parties doesn’t really matter don’t need a promise

Implied in Fact: Implied in fact = not based on words, based on conduct, all other elements of the contract

are present Belief must be reasonable, entitle to assume, implication of circumstance

o Effect of unknown party : Just because he doesn’t know with whom, doesn’t mean can’t have contract: Unilateral: whoever find my dog Auction: whoever submits the highest bid

o Doctor v. Street Musician Hypothetical: Emergency services = transaction cost

Doctor is performing services that an unconscious person would have difficulty transacting for in advance; no such difficulty in street musician case

Appreciation: Average vs. Idiosyncratic Person: Most people would want doctor to treat them if they

were unconscious, but perhaps most people would not want music played on a street corner.

Gratuitous vs. Professional Services Professionals expect to get paid and in return expect to perform emergency services as

part of their professional obligations, whereas street musicians generally expect only voluntary contributions.

Nonprofessionals have no duty to rescue. Perhaps it would even be insulting to “good Samaritans” to presume they would rescue only on the assumption that they would be paid

Measurement of Value: we know what doctors usually charge for their services, but “price” of street music is less clear

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Professionals are restrained by ethical obligations not to provide excessive or unnecessary care. Restatements:

o § 4: How a Promise may be made: A promise may in words (oral or written) or inferred wholly/partly from conduct. Illustration 2: Implied in Fact Contract: A, on passing a market, where he has an account, sees a

box of apples marked “25 cts. each.” A picks up an apple, holds it up so that a clerk of the establishment sees the act. The clerk nods, and A passes on. A has promised to pay twenty-five cents for the apple.

Illustration 3: A’s wife, B, separates from A for justifiable cause, and, in order to secure necessary clothing and supplies, [B] buys them from C and charges their cost to A. A is bound to pay for them, though he has directed C not to furnish his wife with such supplies; but A’s duty is quasi-contractual, not contractual.

o §19: Reporter’s Note: The distinction between an actual agreement inferred from the parties’ conduct and a quasi-

contract implied as a matter of law to avoid unjust enrichment are nicely made in Bailey v. West o §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 conferred as a gift or for other reasons the promisor has not been unjustly enriched; or (b) if the return promise’s value is disproportionate to the benefit.

Illustration 2: A lends money to B, who later dies. B’s widow promises to pay the debt. The promise is not binding under this Section.

Illustration 3: A has immoral relations with B, a woman not his wife, to her injury. A’s subsequent promise to reimburse B for her loss is not binding under this Section.

Illustration 7: A saves B’s life in an emergency and is totally and permanently disabled in so doing. One month later B promises to pay A $15 every two weeks for the rest of A’s life, and B makes the payments for 8 years until he dies. The promise is binding.

UCC: NA

Chapter 3: Negotiation and Formation of the Contract

Offer Cases:

o Ford Motor Co. v. Russell: Advertisement as offer. Background: Monticello Ford offered in an advertisement to sell a 1988 Ford Escort Pony with

financing at 11%. Russell accepted Monticello Ford’s offer when she showed up at the car dealership. Given higher rate, then defaulted on payments.

o Davis v. Satrom: Termination of Offers:

Concepts:o Rules for Offer and Acceptance:

Matter when there is a time gap between the two events and something changes during that time Restatement has many specific rules for offer and acceptance as parties may not find it necessary

or desirable to negotiate the terms of their negotiation UCC downplays formal rules; emphasizes flexibility, and allows courts to find formation if

possibleo Nature of the Offer:

Offer is the penultimate step before a bargain is concluded. One further step is both necessary and sufficient

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Offer must contain that the offeror promises to adhere to the terms of the offer conditional on the offeree’s acceptance of the offer before its termination

o Advertisements as offers: Advertisements are generally not offers, unless they are clear, definite, explicit, and leave nothing

open for negotiation Reasons for advertisements ≠ offers

Creditworthiness of buyer: Give seller an opportunity to check on the creditworthiness of buyer/borrower (important in Ford Motor).

Limited Quantity: Advertisements are addressed to many people; seller may not have sufficient quantity to sell to all buyers

Indefinitenesso Majoritarian Default : if most people understand advertisements not to be offers, save sellers the costs of

overriding the defaulto Penalty Default : could make the default rule that advertisements are offers to encourage sellers, as the

repeat players, to clarify their intentionso Role of Counteroffers:

Counteroffer terminates prior offer and it cannot be revived for purpose of acceptance.o Role of Revocation:

Revocation must be communicated to the offeree or offeree must otherwise find out about it. Once revocation occurs, there is no longer an offer left on the table to be accepted Timing Issues:

If buyer received seller’s revocation before buyer accepted, then the good faith of the lawyer is irrelevant and court’s discussion is unnecessary. If, however, there was no effective revocation, then the lawyer’s conduct matters If buyer sent out the acceptance letter before receiving the revocation, the revocation would not be effective

Restatement: o §17: Requirements of a bargain:

(1) The formation of a contract requires a bargain in which there is a manifestation of MUTUAL ASSENT and CONSIDERATION

o §22: Modes 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 is valid even if offer/acceptance/moment of formation

cannot be identified.o §24: Offer Defined:

An offer is the manifestation of willingness by the offeror to enter into a bargain. Manifestation made in manner to justify the offeree’s understanding that assent/acceptance to bargain is invited/will conclude deal.

o §26: Preliminary Negotiations: Manifestation of willingness to enter into bargain is not an offer if offeree knows/reason to know

offeror does not intend to contract until further manifestation of assent. Illustration 1: A, a clothing merchant, advertises overcoats of a certain kind for sale at

$50. This is not an offer, but an invitation to the public to come and purchase. The addition of the words “Out they go Saturday; First Come First Served” might make the advertisement an offer.

Illustration 2: A advertises that he will pay $5 for every copy of a certain book that may be sent to him. This is an offer, and A is bound to pay $5 for every copy sent while the offer is unrevoked.

Illustration 3: A writes to B, “I can quote you flour at $5 a barrel in carload lots.” This is not an offer, in view of the word “quote” and incompleteness of the terms. The same words, in response to an inquiry specifying detailed terms, would probably be an offer;

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and if A added “for immediate acceptance” the intent to make an offer would be unmistakable.

Illustration 4: A writes to B, “I am eager to sell my house. I would consider $20,000 for it.” B promptly answers, “I will buy your house for $20,000 cash. There is no contract. A’s letter is a request or suggestion that an offer be made to him. B has made an offer.

o §36: Methods of termination of the power of acceptance: (1) An offeree’s PoA 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) Offeree’s PoA is terminated by non-occurrence of a condition of acceptance. o §38: Rejection:

(1) Offeree’s PoA is terminated by offeree’s rejection, unless the offeror has manifested a contrary intention.

(2) A manifestation of intention not to accept an offer is a rejection unless the offeree manifest intention to take deal anyway (under further advisement.)

o §39: Counter-offers: (1) A counter-offer = offer from offeree to offeror about same matter/issue that proposes a

different substitute bargain. (2) An offeree’s power of acceptance is terminated by counter-offer, unless, offeror manifested a

contrary intention, or unless, the counter-offer manifests a contrary intention of the offeree.o §41: Lapse of Time:

(1) An offeree’s power of acceptance is terminated after time specified or if not stated, after a reasonable time. (2) Reasonability is a question of fact and circumstance dependent.

(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.

o §42: Revocation by Communication from Offeror Received by Offeree Offeree can no longer accept an offer when offeree has received from offeror a manifestation of

revocation. o §43: Indirect Communication of Revocation:

Power of acceptance is terminated when the offeror revokes offer (definite action inconsistent with intention to contract) and the offeree hears/knows about it.

o §48: Death or Incapacity of Offeror or Offeree Power of acceptance is terminated if a party dies or no longer has legal capacity

o §59:Purported Acceptance which adds qualifications Illustration 2: A makes a written offer to sell B a patent in exchange for B’s promise to pay

$10,000 if B’s adviser X approves the purchase. B signs the writing in a space labeled “Accepted:” and returns the writing to A. B has made a conditional promise and an unconditional acceptance. There is a contract, but B’s duty to pay the price is conditional on X’s approval.

UCC:o 2-204: Formation in General

(1) A contract may be made in any manner sufficient to show agreement, including conduct, which recognizes the existence of such a contract (by both parties).

(2) A contract may be made by agreement even if the moment of its making is undetermined. (3) Even though terms are left open, a contract for sale does not fail for indefiniteness if intended

to contract and there a basis for giving remedyo 2-206: Offer and Acceptance in Formation of a Contract

(1) Unless otherwise indicated by language or circumstances (a) an offer to contract shall be construed as inviting acceptance in any manner/medium

reasonable in the circumstances;

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(b) An order/offer to buy goods for current shipment is thought of as inviting acceptance by (i) prompt promise or (ii) prompt/current shipment of conforming or non-conforming goods. However a shipment of non-conforming goods ≠ an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer.

o 2-209: Modification: (1) Contract modifications in this article don’t need consideration. Comment 2: Modifications be in good faith. Bad faith to escape performance on the original

contract terms is barred, bad faith modification/extor tion/ unreasonable violates good faith. Mere technical consideration cannot support bad faith mod. Merchant good faith test = observance of reasonable commercial standards of fair dealing in the trade. This may require proof of an objective reason for seeking a modification. Specifically, matters like market shift/which causes loss, is adequate reason for mod. Even though doesn’t qualify for legal excuse. Per 2-615 and 2-616 (Excuse by failure of presupposed condition.)

Acceptance:

Cases: o Ardente v. Horano Mid-South Packers, Inc. v. Shoney’s Inc.

Majority: Mid-South’s April 17, 1982 “Proposal” was an offer. Shoney’s accepted the offer when it

placed its first order in July 1982. Each time Shoney’s subsequently placed an order, it formed a new contract, i.e. it was a new acceptance of Mid-South’s ongoing offer at its listed price. Contract was not a requirements contract. Shoney’s did not promise to buy exclusively from Mid-South.

Mid-South therefore at most had to hold the offer open for three months, from April 17 to July 17. Shoney’s accepted Mid-South’s new, August 12 offer when it placed its orders on August 18 and subsequently, and paid the new price.

Shoney’s attempts to preserve the old (lower) price were ineffective. The fact that Shoney’s secretly intended to withhold difference between new and old price once it decided to stop buying from Mid-South is also irrelevant under the objective theory of contract. Shoney’s could have, but did not, reserve its rights to pay the old price while paying the new price; it cannot challenge the new price now

Dissent: Concepts:

o Master of the Offer: Offeror has the right to control not only the terms of the offer but how the offer is to be accepted. Freedom of contract (autonomy): allow people to bargain for what they want, even if it is

idiosyncratic, so long as other person knows of offer’s requirements. Offer can rule out as acceptance action that would otherwise be acceptance. Offeror does not have right to deem an act that would not generally be an acceptance to count as

an acceptance, if that act would have been undertaken by offeree in any event and so does not manifest intent by the offeree

o Rationales for the mailbox rule: Loss of Control : once offeree sends acceptance, it is out of her control Certainty : need certain time for acceptance Reliance : protect reliance of offeree against revocation by offeror Superior Risk Bearer : put the risk on the offeror who, as master of the offer, can make receipt

necessary for acceptanceo Overtaking rejection:

Hypothetical: Offeree accepts by mail, then rejects; offeror receives rejection first. Mailbox rule applies and acceptance prevails over subsequently made, first received rejection.

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Rationale: But application of mailbox rule here prevents offeree from speculating at offeror’s expense during the time mail is in transit (free option)

Potential reactions by offeree: Offer to rescind the contract, Breach (anticipatory repudiation), Prevent offeree from

enforcing the contract if the offeror relies on the rejection, e.g. by selling to third partyo Overtaking Acceptance:

Hypothetical: Offeree rejects, then accepts by mail before offeror receives rejection. Mailbox rule is trumped by prior rejection; offeree’s mailed acceptance now does not prevail, even though rejection by offeree is generally not effective until receipt by offeror, unless acceptance is first received by offeror.

Depending on timing: Offeror may rely on rejection if rejection arrives before acceptance (though that’s already

an exception to the mailbox rule; see #1) Offeree could be considered at fault for speculating (free option), though unlike in

previous example, no contract existed when offeree changed her mind In this example, fault trumps formality; in prior example, fault supports formality

o Overtaking Revocation: Hypothetical: Offeror revokes, then offeree accepts by mail before receiving revocation. Mailbox

rule applies as offeree’s mailed acceptance takes priority over offeror’s revocation unless offeree receives revocation first

Mailbox rule does not apply to offers, revocations, or rejections Protects innocent offeree against an offeror who could have avoided the risk of a mailbox rule

acceptance either by overriding the mailbox rule in the initial offer or by using a more immediate communication method for revocation.

o Mailbox Rule and Email: Example 3-4: With email is offeror’s emailed revocation effective as “received” by offeree if offeror sends

revocation and it arrives in offeree’s inbox before offeree emails acceptance (and perhaps before offeree even read the offer), but offeree has not read revocation before emailing acceptance? Yes: revocation is effective if received, even if not read.

o Options Contracts: Contra to the mailbox rule:

Offeror cannot revoke an option contract, so the offeree is already protected In many options, the offeror is compensated for bearing the risk of offeree speculation

Restatement: o §25: Options Contracts: an options contract is a promise which meets the requirements for the formation

of a contract and limits the promisor’s power to revoke an offer.o §30: Form of Acceptance invited:

(1) Acceptance may be required through affirmative answers OR performance OR refraining from performing specified act or may allow offeree to decide how to accept.

Illustration 1: A sends a letter to B stating the terms of a proposed contract. At the end he writes, “You can accept this offer only by signing on the dotted line below my own signature.” A replies by telegram, “I accept your offer.” There is no contract.

o §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.

o §37: Termination of Power of Acceptance under Option Contract The power of acceptance in options 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.

o §40: Time when rejection or counter-offer terminates power of acceptance:

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Rejection/counter-offer, by mail or telegram, does not terminate the power of acceptance until received by the offeror. Limits power of acceptance so that subsequent acceptance is only a counteroffer. Unless the acceptance is received by the offeror prior to the rejection being received by the offeror.

Illustration 1: A makes B an offer by mail. B immediately after receiving the offer mails a letter of rejection. Within the time permitted by the offer B accepts. This acceptance creates a contract only if received before the rejection, or if the power of acceptance continues under §§ 37-39.

o §42: Revocation by Communication from Offeror Received by Offeree: Offeree can no longer accept an offer when offeree has received from offeror a manifestation of

revocation. Illustration 2: A sends B an offer by mail to buy a piece of land for $5000. The next day

A sends B a letter stating that unless B has already accepted A revokes the offer and makes a new offer to buy the same land for $4800. B receives A’s second letter after he has duly mailed a letter of acceptance, but promptly sells the land to C without further communication with A. The sale is a breach of contract by B.

Illustration 3: A sends B an offer by mail to buy a piece of land. The next day A sends B a letter stating that A has changed his mind and will not buy the land even if B has already accepted the offer. B receives A’s second letter after he has duly mailed a letter of acceptance but promptly sells the land to C. B’s duty of performance is discharged.

o §43: Indirect Communication of Revocation: o §45: Option Contract Created by Part Performance or Tender

(1) When offer designates acceptance via performance, and not by promissory acceptance, an options contract is created when offeree tenders or begins part performance.

(2) The offeror’s duty of performance for any option contract by performance/tender is conditional on complete tender of the invited performance.

o §50: Acceptance of Offer Defined; Acceptance by Performance; Acceptance by Promise (1) Acceptance = manifestation of assent to the terms made by the offeree, in manner

invited/required by the offer. (2) Acceptance by performance requires part performance/tender. 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.o §54: Acceptance by Performance; Necessity of Notification to Offeror

(1) When performance = acceptance, no notice is necessary to make acceptance effective, unless offeror requests notification.

(2) If offeree who accepts via performance has reason to know offeror will not know of acceptance promptly/with certainty, then the offeror has no contractual duty unless: (a) offeree uses reasonable diligence to notify or (b) offeror learns of performance/acceptance in a reasonable time or (c) offeror indicates notice isn’t required.

Unilateral contract acceptance: When offer is a unilateral contract, most courts now hold that offeree must give notice of his acceptance after he has done the requested act.

o §56: Acceptance by Promise; Necessity of Notification to Offeror Except as stated in § 69(silence/inaction as acceptance) or where the offer manifests contrary

intention, it is essential for an acceptance by promise: (1) Offeree use reasonable diligence to notify offeror of acceptance OR (2) offeror get

acceptance seasonably.o §57: Effect of Equivocal Acceptance:

Where notice is needed for the acceptance of a promise, the offeror isn’t bound by acceptance unless he understands/knows it’s an acceptance.

o §59: Purported Acceptance which adds qualifications

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A reply to an offer which purports to accept it but is conditional on the offeror’s assent to terms additional to or different from those offered is not an acceptance but is a counter-offer.

Illustration 1: A makes an offer to B, and B in terms accepts but adds, “This acceptance is not effective unless prompt acknowledgment is made of receipt of this letter.” There is no contract, but a counter-offer.

o §61: Acceptance which requests change in terms: An acceptance which asks for change/addition to terms of offer is not invalid unless the

acceptance is made conditional to assent of changed/added terms. Illustration 1: A offers to sell B 100 tons of steel at a certain price. B replies, “I accept your offer.

I hope that if you can arrange to deliver the steel in weekly installments of 25 tons you will do so.” There is a contract, but A is not bound to deliver in installments.

o §62: Effect of Performance by Offeree Where Offer Invites Either Performance or Promise (1) If offeree has choice between acceptance by promise and acceptance by performance, the

tender/start of performance is an acceptance by performance. (2) Such an acceptance operates as a promise to render complete performance.

o §63: Time when acceptance takes affect: Unless the offer states otherwise, (a) an acceptance in designated manner/medium is

operative/completes manifestation of mutual assent once out of the offeree’s possession regardless of if reaches the offeror; except in OPTIONS CONTRACTS where (b) an acceptance is not operative until received.

(b) an acceptance under an option contract is not operative until received by the offeror. B/c an option contract, as a promise not to revoke an offer over a period of time, already

has the protections for the offeree that the mailbox rule was concerned about In many options, offeror is compensated for bearing risk of offeree speculation

Illustration 7: A mails an offer to B to appoint B A’s exclusive distributor in a specified area. B duly mails an acceptance. Thereafter B mails a letter which is received by A before the acceptance is received and which rejects the offer and makes a counter-offer. On receiving the rejection and before receiving the acceptance, A executes a contract appointing C as exclusive distributor instead of B. B is estopped to enforce the contract.

o §69: Acceptance by Silence or exercise of dominion. (1) Silence/inaction functions as acceptance only:

(a) When offeree takes offered benefit and has a reasonable opportunity to reject them and reason to know benefits were offered with the expectation of compensation.

(b) Offeror has designated inaction/silence = manifest acceptance and the offeree in by silence/inaction intends to accept the offer

(c) As a result of previous dealings, reasonable that the offeree should notify the offeror if he does not intend to accept.

o §77:Illusory and alternative promises: Illustration 5: A promises to act as B’s agent for three years on certain terms, starting

immediately; B agrees that A may so act, but reserves the power to terminate the agreement on 30 days notice. B’s agreement is consideration, since he promises to continue the agency for at least 30 days. Suggests that if you have a termination clause based on 30 day performance clause= renders it not illusory as it makes a contract to continue for at least 30 days

o §87: Options Contract: (1) An offer is binding option contracts if (a) in writing and signed by the offeror, (b) there’s

purported consideration and (c) proposes an exchange on fair terms within a reasonable time. (2)An offer that offeror should reasonably expect to induce substantial action/forbearance by the

offeree before acceptance and which actually induces action/forbearance is binding as an option contract as necessary to avoid injustice.

o §201:Whose Meaning Prevails UCC:

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o 1-201: General Definitions (b)(37) Signed includes using any symbol executed or adopted with present intention to adopt or

accept a writing.o 1-205: Reasonable time; seasonablenesso 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.

Reservation of rights: can explicitly reserve your rights, for example when paying by check. Insurance companies do this frequently. Common business practice, use words like without prejudice to Shoney’s doesn’t use it and therefore blew it.

o 2-202:Parole Evidence Rule: Final written expression: Gives priority to written document (express terms) over what was said prior or

contemporaneously to the agreement yet may supplement or explain with course of dealings/performance/usage

May not be contradicted, but may be explained or supplemented (a) by course of dealing or usage of trade or by course of performance and (b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.

o 2-204: Formation in general: (3) Even though terms are left open, a contract for sale does not fail for indefiniteness if intended

to contract and there a basis for giving remedy May be able to determine these later on.

o 2-205: Firm Offers: Only applies to merchants! Merchant offers to buy/sell goods, signed writing, with assurance offer will be held open/not

revocable (regardless of consideration) for stated period/reasonable period/< 3 months. o 2-206: Offer and acceptance in formation of contract:

(1) Unless otherwise indicated by language or circumstances (a) an offer to contract shall be construed as inviting acceptance in any manner/medium

reasonable in the circumstances; (b) An order/offer to buy goods for current shipment is thought of as inviting acceptance by (i)

prompt promise or (ii) prompt/current shipment of conforming or non-conforming goods. However a shipment of non-conforming goods ≠ an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer.

o 2-207(3): Additional terms in acceptance of confirmation: (1) A definite/seasonable acceptance/written confirmation that is sent in reasonable time operated

as acceptance even though state additional terms to OR different terms than in offer unless that acceptance is expressly conditional on assent to the additional/different terms.

(3) Conduct by both parties (that recognizes contract) is enough to establish a contract, even though there isn’t a contract per the writings. Valid terms are those that in the writings both of the parties agree to along with supplementary default terms of UCC.

o 2-209: Modification: (1) Contract modifications in this article don’t need consideration. Comment 2: Modifications be in good faith. Bad faith to escape performance on the original

contract terms is barred, bad faith modification/extortion/ unreasonable violates good faith. Mere technical consideration cannot support bad faith mod. Merchant good faith test = observance of reasonable commercial standards of fair dealing in the trade. This may require proof of an objective reason for seeking a modification. Specifically, matters like market shift/which causes loss, is adequate reason for mod. Even though doesn’t qualify for legal excuse. Per 2-615 and 2-616 (Excuse by failure of presupposed condition.)

o 2-306: Output, Requirements, and exclusive dealings

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(1) Requirements contract where quantity is measured by output of seller Or needs of buyer may occur in good faith except that no unreasonable/disproportionate quantity compared to estimate/or trade usage/or course of dealings may be tendered or demanded.

o 2-606: What constitutes acceptance of goodso 2-607: Effect of acceptance; notice of breach; burden on establishing breach after acceptance; notice of

claim or litigation to person answerable over.

Construction Contract Formation Problem

Cases: o Double AA Builders, Ltd. v. Grand State Const. LLC

Problem: Prime Contract is usually formed before Subcontract is formed Promissory Estoppel Analysis:

Promise: Sub made a promise in its bid: “Our price is good for 30 days.” Court interprets Sub’s bid as a promise by Sub not to revoke its offer. No indefiniteness problem: faxed quotation included job name, scope of work, price, payment time term

Foreseeable Reliance: Sub “realized that if its bid was the lowest, General Contractor might rely on the bid in preparing its overall project price” (p. 133)

Actual Reliance: General incorporated Sub’s bid into its own proposal Reasonable (Justifiable) Reliance: not discussed Sub can argue that it made a mistake

in its bid; if General should have realized the mistake (e.g. an omitted 0), then General cannot reasonably rely

Injustice: court does not address o Justice Traynor: Drennan: Precedent for AA

Although the general responded right away. Generally a concern about the general, and what the general might be doing in the time period Could be bid-shopping or bid-chopping. Court suggested that if the general was taking time in order to shop or chop then it would forfeit using promissory estoppel- waived as result of shopping, and that justice would not require P.E. However, Drennan did not have specific 30 day period, like AA.

Concepts:o Traditional Contracting Construction Problem: In Prime Contract, General makes an offer to Owner by

submitting its bid. In Subcontract, Sub makes an offer to General by submitting its bid.Until Owner accepts General’s offer, General has the right to revoke its offer at any time for any reason. Until General accepts Sub’s offer (which does not happen until after Owner accepts General’s offer), Sub has the right to revoke its offer at any time for any reason. Thus, General might be bound to Owner but have no enforceable contract with Sub

o Construction Misbehavior: Bid Shopping: Bid shopping allows other subs to “free ride” on low bidder’s efforts, distorting

the auction process Bid Chopping: General comes back to Sub after being awarded the contract from Owner and

demands a lower price no traditional contract at this point so General is not coercing a “modification” General does take the risk that Sub would refuse, but what does General lose by asking

o Justice and Timing in Construction: Vulnerability: Sub is less vulnerable, as General is not likely to withdraw from Prime Contract

with Owner; often it has to post a bond, which General forfeits if it withdraws. Subs may send multiple bids to many Generals; if it is low bidder for one General, it is likely low bidder for others, so it may get the subcontract anyway. Sub may not rely substantially on its bid until General gets Prime Contract from Owner

o Promissory Estoppel v. Contract:

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As implied in law: Court holds that a promissory estoppel action is not “contractual,” or is at most an “implied in law” contract, which is not sufficient to receive attorney fees.

As consideration: Promissory estoppel used in this context is not a “substitute for the entire contract” but rather a substitute for the consideration requirement for option contracts

o Traditional Bilateral Construction Contract: Neither Sub nor General is bound until stage 4 (mutuality of obligation) General is protected against the risk of losing the contract with the Owner, and is free to bid shop

or bid chop, but General is subject to the risk that the Sub will pull out or raise its price after the Owner accepts General’s bid

Sub is protected against risk of a mistaken bid but is vulnerable to the risk that General will not accept its bid on the offered terms

This is traditional as opposed to P.E. eligible contracts James Baird v. Gimball: Learned Hand applied traditional analysis.

Hand Argues against P.E. for construction cases in Baird case: he rejects, saying PE is about gift contracts- courts have since then disagreed with hand and applied promissory estoppel to many areas of contract law

o Irrevocable Option Offer: Sub is bound at stage 1, but General not bound until stage 4 Best for General, riskiest for Sub, General does not pay Sub for an option No consequence to General for bid shopping or bid chopping (note that a counter-offer does not

terminate an option) Courts consistently rejected this theory because the doctrinal requirements for options are

generally not met. Why not view Sub’s bid as a bargain in which Sub promises to hold its offer open in exchange for

General’s (implied) promise not to bid shop or bid chop after using Sub’s bid? Sub does not usually “recite a purported consideration” for its bid as contemplated by

Restatement 2d § 87(1)(a) UCC Firm Offer Rule, § 2-205, is generally not applicable as subcontracts are often viewed as

service contracts, even if goods are involved, as in Double AA Builders. Moreover, subcontractor’s bid may not “by its terms give[] assurance that it will be held open,” though Double AA Builders Sub’s did.

o Promissory Estoppel and Construction Contracts: Sub bound at least by stage 3, and perhaps at stage 2; General not bound until stage 4. Binding

Sub at stage 2 depends on whether, if General might still withdraw its own bid to Owner, it has not “actually relied”

Decided cases tend not to arise at this stage. General may forfeit the right to enforce if it engages unsuccessfully in bid shopping or bid

chopping If General successfully bid shops, Sub has generally has no cause of action against General

because General has not promised not to do so Can promissory estoppel theory be used if the UCC applies?

o Unilateral and Construction Cases: Per RST §45 Sub bound at stage 2; General bound at stage 4 Unlike promissory estoppel theory (perhaps), Sub cannot back out between stage 2 and stage 3,

nor can Sub back out if General unsuccessfully attempts to bid shop or bid chop Courts have generally rejected this theory Sub is not usually (or primarily) bargaining for General’s act of using its bid but is instead

bargaining for General’s promise to use the Sub General’s use of Sub’s bid is not the beginning of General’s performance

o Conditional Contract

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General’s use of Sub’s bid is an acceptance but contractual obligation is conditioned on General’s getting the contract from Owner. Advantages:

Preserves mutuality of obligation AND Prevents bid shopping and bid chopping by General

Acceptance Subject to Condition : both General and Sub become bound at stage 2 Conditional Bilateral Contract : both General and Sub become bound at stage 3 Courts tend not to adopt either of these theories. As owner may not simply accept General’s bid

but may engage in negotiation with General to get concessions. General does not really make an “unconditional acceptance” when it decides to use Sub’s bid. General would also have to notify Sub of its acceptance by promise, unless Sub provides otherwise in its bid. General sometimes notifies Sub that its bid is being used.

Restatement:o §45: Option Contract Created by Part Performance or Tender:

(1) When offer designates acceptance via performance (not by promise) an options contract is created when offeree tenders or begins part performance.

(2) The offeror’s duty of performance for any option contract by performance/tender is conditional on complete tender of the invited performance.

o §56: Acceptance by Promise; Necessity of Notification to Offeror Except as stated in § 69(silence/inaction as acceptance) or where the offer manifests contrary

intention, it is essential for an acceptance by promise: (1) Offeree use reasonable diligence to notify offeror of acceptance OR (2) offeror get

acceptance seasonably. Illustration 2: A makes written application for life insurance through an agent for B Insurance

Company, pays the first premium, and is given a receipt stating that the insurance “shall take effect as of the date of approval of the application” at B’s home office. Approval at the home office in accordance with B’s usual practice is an acceptance of A’s offer even though no steps are taken to notify A.

o §59: Purported Acceptance which adds qualification Illustration 2: A makes a written offer to sell B a patent in exchange for B’s promise to pay

$10,000 if B’s adviser X approves the purchase. B signs the writing in a space labeled “Accepted:” and returns the writing to A. B has made a conditional promise and an unconditional acceptance. There is a contract, but B’s duty to pay the price is conditional on X’s approval.

o §87: Options Contract: (2) An offer that offeror should reasonably expect to induce substantial action/forbearance by the

offeree before acceptance and which actually induces action/forbearance is binding as an option contract as necessary to avoid injustice.

o §90: Promise Reasonably Inducing Action or Forbearance (1) Promise that promisor should reasonably expect to induce action/forbearance by promisee or

3rd person and which actually induces action/forbearance is binding if enforcement of promise is the only way to avoid injustice. Remedy granted for breach may be limited as justice requires.

UCC: o 2-102: What is excluded for this article (what kind of sales don’t count)o 2-205: Firm Offers:

Merchant offers to buy/sell goods, signed writing, with assurance offer will be held open/not revocable (regardless of consideration) for stated period/reasonable period/< 3 months.

Battle of the Forms

Cases: Gardner-Zemke Co. v. Dunham Bush, Inc.

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o Issue: Agreement of forms in contract creation guided by context of commercial setting, whether the offeror could reasonably believe a contract had been formed

o Problem is that most sellers want to have their terms accepted but do not want to bargain for them actively or make the whole deal dependent on a buyer’s acceptance of those terms. Cf. Ardente

o Court ultimately finds that the terms are materially different, as the original offer did not include any warranty terms, no overlap there, other form had big block print with disclaimers of warranty. Seller’s form negates warranties and replaced the ucc implied warranty with own warranty.

o Changing the remedy available is not material. Concepts:

o Battle of forms : Problem created by preprinted forms that conflict, are unread, and that attempt by their terms to preclude the adoption of terms in other party’s forms.

2 questions : has contract been formed and what are the terms How a contract is formed determines what the terms are. Main terms fought over are

warranty provisions and contractual limitations on remedies Uses common law approach to offer : Usually Buyer makes offer with purchase order.

o Mirror Image Rule : Acceptance must match the offer exactly; otherwise it is a counteroffer, which must then be

accepted. Determines if there is a contract. Frequently a: Seller’s acknowledgment sent in response to Buyer’s purchase order is therefore a

counteroffer; at this point, there is no contract on the writings. Silence is generally not acceptance enabling either party to back out.

Best when parties actually bargaining. Common law approach. As in Ardente. o Last Shot Doctrine : Terms of the last writing sent govern, determines when a contract is formed by

performance rather than by express agreement. Common law. Typically Seller sends the last document (acknowledgment) and then ships goods, which Buyer

accepts, thus creating a contract by performance. Seller’s terms win. Theoretically Buyer could send a response form and forms could continue back and forth, but

generally this does not happen.o §2-207 Tension with CL : Adhere to formalities vs. fulfill actual intentions of the parties. Further

majoritarian interests vs. protect idiosyncratic preferences. Promote cost-saving advantages of standardization vs. discourage bad faith conduct

o Contract on the writings : § 2-207(1)(clause 1) Rejects the mirror image rule, allowing conflicting forms to make a contract. Forms must agree

on the “dickered terms”. Requires writing that is a “definite expression of acceptance” or a “written confirmation”. Acceptance must also be “seasonable” and confirmation must be “sent within a reasonable time.” Which means the same thing.

Dickered terms are usually quantity and price §2-207(2) governs the terms : (for contracts made by the writing) Per Roto-Lith Approach : If in response to Buyer’s form, Seller sends a form that “states a

condition materially altering the obligation solely to the disadvantage of the offeror,” the response falls under the proviso (p. 188).

Critiques: resurrects the mirror image rule by making a purported acceptance containing “additional or different terms” a counteroffer. Reads “expressly” out of proviso.

o Language to trigger 2-207(1): Subject to : Forms stating that acceptance is “subject to” terms on your form is not sufficient to

trigger the proviso, Dorton Magic Language Approach : If offeree’s form expressly tracks the language of the proviso, it

triggers the proviso. Ex: “Our acceptance of this offer is conditional on the buyer’s acceptance of the conditions of sale.” Considered overly formal solution, doesn’t solve issue if no one reads the

Some courts say that if you use magic language, its sufficient; GZ and StepSaver courts say that

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you have to take trade usage, course of dealing, course of performance into account GZ approach to proviso: Even if you change it to the magic language, might not be sufficient

b/c needs to be objectively viewed in a commercial setting. Question is whether offeror could reasonably believe that in the context of commercial setting, contract was formed

o Contracts by writings, determination of terms : 2-207(2): Use § 2-207(2) to determine whether the terms of the acceptance or confirmation become part of

the contract. Problem: “additional” terms (do not contradict terms in offer) vs. “different” terms (contradict terms in offer)

Additional Terms : Generally offeror’s terms prevail [first shot rule]. Offeree’s additional terms become part of the contract only if offeror expressly accepts these terms or if both parties are me rchants and none of the following occurs: Offer expressly limits acceptance to terms of offer, Offeree’s terms materially alter the contract, OR Offeror notifies offeree of objection to offeree’s terms

Expressly limited offer: § 2-207(2)(a) Ex: “Acceptance of this offer is strictly limited to the terms of this offer.”

Notification of objection: § 2-207(2)(c): Objection by the offeror after the offeror gets notice of offeree’s terms is unlikely: if the offeror does not read the offeree’s form, the offeror does not know to object.

Material Alteration: § 2-207(2)(b): Clauses that materially alter contract = negation of warranty of merchantability or

warranty of fitness, termination (2-207 cmt. 4). Clauses that do not materially alter the contract = force majeure, time limitation for

complaints, reasonable limitation of remedy(2-207 cmt. 5) Implied warranty of merchantability: Warranty of merchantability: rules of the UCC that

only applies to merchants. Doesn’t require that the parties say anything, it is presumed, fit for ordinary purposes, what most people would expect the product to be able to do. Distinguished from other implied warranty. As compared to an implied warranty fitness for particular purpose.

Different Terms : Equal Treatment: Treat different and additional terms the same. Supported by cmt. 3:

and heading of §2-207 (referring only to “additional” terms), which could suggest that § 2-207 does not mean to distinguish between different and additional terms. Rationale: omission of different in § 2-207(2) was a drafting oversight

Per Se Rejection. Treat different terms as rejected unless offeror expressly accepts them. Rationale: because § 2-207(2) does not mention different terms, drafters must have intended that the different terms never automatically become part of the contract

Knockout Rule : different terms cancel each other and the principle of § 2-207(3) applies. Rationale: privileging UCC defaults over forms of either party is a reasonable solution to conflicting terms. Supported by comment 6.

Usually it’s better to be the offeror, but only if you can get a contract on the writings under § 2-207(1) and the knockout rule does not apply because offeree’s materially altering terms would drop out, offeror usually wins under § 2-207(2). Usually offeror is the buyer

o Proposal (per 2-207(2)): When offeree’s terms do not automatically become part of the contract. Cmt. 3: proposals that materially alter the offer do not become part of the contract unless

expressly accepted, whereas proposals that do not materially alter the offer do not need to be expressly accepted unless there is notice of objection.

Cmt. 6: additional terms are deemed assented to after a reasonable time if no objection is receivedo Contract by conduct: § 2-207(3)

Determining terms : per 2-207(3) Terms are those on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this act.. This section is meant to change the “last shot” doctrine

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o Contract via “true” counteroffer and acceptance : § 2-207(1) proviso is intended to preserve the ability of an offeree to make a counteroffer that

would not wind up in § 2-207(3) even if original offeror (typically Buyer) simply accepts the goods instead of responding.

May also be viewed as outside § 2-207 Gardner-Zemke: offeree can make a counteroffer by responding with a document containing

terms that differ radically from the offer. Roto-Lith’s: if Buyer knew or should have known of Seller’s terms, why should Buyer be allowed

to consciously or negligently ignore Seller’s writing Determining Terms : original offeree’s (counter offeror’s) terms govern

o Difference in terms as interpreted by § 2-207(3) versus § 2-207(2) : big difference Ex: A seller seeking to limit remedies might actually prefer that contract be formed on the

writings, for under cmt. 5, seller’s limitation of remedy is not a material alteration, and so becomes part of the contract under § 2-207(2). But under § 2-207(3), a limitation of remedy would not become part of contract because it attempts to override UCC default remedies

o Goldberg’s Best-shot Rule : Court should pick whichever of the two forms it thinks is more fair on the whole, and adopt that

form in its entirety (common in arbitration agreements). Rationale: encourage parties to make their forms as a whole more fair to both sides, something

neither the common law nor § 2-207 does Problem: what is fair?

o § 2-719: Contractual Modification or Limitation of Remedy Subject to the provisions of subsections (2) and (3) of this section and of the preceding section on

liquidation and limitation of damages, (a) the agreement may provide for remedies in addition to or in substitution for those provided

in this Article and may limit or alter the measure of damages recoverable under this Article, as by limiting the buyer’s remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods or parts . . .

(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act. . . .

o 2-207 Comment 5 says that reasonable limitation of remedy is not a material alteration, especially if there isn’t an “element of unreasonable surprise” and the 2-719 requirements are met

o Note: § 2-719(3), limitations on consequential damages OK if not unconscionable, and “limitation of damages where the loss is commercial is not” prima facie unconscionable.

Restatement: o §32: Invitation of Promise or Performanceo §59: Purported Acceptance Which Adds Qualifications:

Counteroffer = a reply to offer which even though says it accepts, but is conditional on party’s assent to additional or different terms, not an acceptance

o §62: Effect of Performance by Offeree Where Offer Invites Either Performance or Promise (1) If offeree can choose manner of acceptance (promise or performance) the tender/start of

performance is an acceptance by performance. Acceptance by start/tender is also a promise to render complete performance.

UCC: o 1-205: Reasonable time; seasonableness

(a) Reasonableness depends on nature, purpose, and circumstances of the action. (b) An action is taken seasonably if it is taken at or within the time agreed or, if no time is agreed,

at or within a reasonable time.o 2-204: formation in general:

(1) A contract for goods may be done in any manner which shows agreement, including conduct by parties.

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o 2-206: Offer and Acceptance in formation of a contract. (1) Unless otherwise indicated by language or circumstances:

(a) an offer will be construed as inviting acceptance in any manner/medium reasonable in the circumstances;

(b) An order/offer to buy goods for current shipment is thought of as inviting acceptance by (i) prompt promise or (ii) prompt/current shipment of conforming or non-conforming goods. However a shipment of non-conforming goods ≠ an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer.

o 2-207(1): Additional Terms in Acceptance or Confirmation (1) A definite/seasonable acceptance/written confirmation that is sent in reasonable time operated

as acceptance even though state additional terms to OR different terms than in offer unless that acceptance is expressly conditional on assent to the additional/different terms.

o 2-207(2): (2) Between merchants, additional terms = proposals for addition to the contract and 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.o 2-207(3):

(3) Conduct by both parties (that recognizes contract) is enough to establish a contract, even though there isn’t a contract per the writings. Valid terms are those that in the writings both of the parties agree to along with supplementary default terms of UCC.

Conduct indicating acceptance to a prior offer by itself does not trigger § 2-207(3). Rather, a § 2-207(3) contract occurs only if the parties act as if there is a contract when a contract is not formed under § 2-207(1).

o 2-207: Comments: Comment 6: “. . . Where clauses on confirming forms sent by both parties conflict each party

must be assumed to object to a clause of the other conflicting with one on the confirmation sent by himself. As a result the requirement that there be notice of objection which is found in subsection (2) is satisfied and the conflicting terms do not become part of the contract. The contract then consists of the terms originally expressly agreed to, terms on which the confirmations agree, and terms supplied by this Act, including subsection (2). . . .”

o 2-302:o 2-313: Express warranties: Created by seller in:

(a) Any affirmation/promise by seller regarding goods that affects the bargain, created express warranty that goods with confirm to affirm/promise.

(b) Any description that affects bargain creates an express warranty that the goods = description. (c) Any sample/model that affects bargain creates an express warranty (2) Formal words (warrant/guarantee) or indication of specific intention are not necessary. An

affirmation merely goods’ value OR seller’s opinion does not create a warranty. o 2-314: Implied Warranty of Merchantability:

(1) Unless excluded or modified (Section 2-316) warranty is implied in sale contract if seller = merchant of such goods. Food/drink to be consumed = sale.

2) Goods to be merchantable must do ALL of the below: (a) pass trade minimum threshold without objection (b) if fungible, be of fair average quality (c) be fit for the ordinary purposes which used (d) run(work), within the variations permitted by the agreement, of even kind, quality and

quantity within each unit and among all units involved;

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(e) be adequately contained, packaged, and labeled (f) conform to promise/affirmations on the container/label

o 2-315 : Implied Warranty: Fitness for Particular Purpose If seller knows or should know of particular purpose goods are for and knows that buyer id

relying on seller’s skill/judgment to select goods, there is (unless excluded or modified) an implied warranty that the goods shall be fit for such purpose.

o 2-316: Exclusion or modification of warranties: In order to exclude/modify implied warranty of merchantability the language must mention

merchantability and if written must be conspicuous. In order to exclude/modify the implied warranty of fitness exclusion must be by a writing and

conspicuous. Language to exclude all implied warranties of fitness is sufficient if it states, for example, that “There are no warranties which extend beyond the description on the face hereof.”

o 2-719: Contractual Modification or Limitation of Remedy: (a) Agreement may provide additional/substitute/limit the remedies that UCC allows. May by

agreement limit damages, as by limiting the buyer’s remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods or parts . . . Where circumstances cause an exclusive/limited remedy to fail of its essential purpose, remedy may be provided via UCC

Standard Forms and the Software Age: the Software Problem and Rolling Contracts

Cases: o Step-Saver Data Systems, Inc. v. Wyse Technology

See Slides for in depth analysis. Debate over what instrument formed the contract. Court says when isn’t a big issue. Can’t fail for indefiniteness as dickered terms are provided for by UCC. Nanakuli issue: acting as if there’s a warranty just to be nice and to preserve the relationship, not

to be considered course of dealing o Hill v. Gateway 2000, Inc.:

Contract was formed “after the customer . . . had a chance to inspect both the items and the terms.” Seller made an offer of the computer to Buyer when it shipped the computer. Seller, as master of the offer, invited Buyer’s acceptance by conduct, or return of the goods if terms were not acceptable. Buyer accepted Seller’s terms and formed a contract when Buyer kept the computer beyond the 30 day period specified in Seller’s form. 2-207 does not apply, since there is only one form. Court’s approach means that merchant buyers get § 2-207 protection (and often win) whereas consumer buyers are subject to the duty to read (and often lose). Isn’t this a looking-glass world?

Application of 2-207 depends on if phone conversation was deemed an oral offer. P is not a merchant.

Seller finally wins. Are arbitration clauses material alterations

Concepts: o UCC vs. RST for mixed goods and services : (software)

Predominant Purpose Test : apply Article 2 if goods part of the transaction predominates Divisibility Test : apply Article 2 to goods part of transaction and common law to services part

o Internet’s effect of battle of forms : Contract formation may occur before the writings are sent. Offeror/offeree and exact time of formation may be uncertain. Rules other than § 2-207 may regulate terms. Buyer may not send a form at all. See Hill

o Time of formation: only matters if debating formation. Not relevant for the discussion of terms. o Box-top offers as counter offers : The proviso is satisfied only if Seller’s form clearly and unequivocally

indicated that it was unwilling to proceed with the transaction unless its additional or different terms are

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included in the contract. Integration, “consent by opening,” and return clauses do not satisfy this standard. As the Court says Seller “may be relying on the purchaser’s investment in time and energy . . . to prevent the purchaser from returning the item- therefore not truly risking that customer will return product/reject contract.

o Repeat orders: Effect of course of dealings on contract formation : the repeated sending of a writing which contains standard terms, without any action with respect to the issues addressed by those terms, cannot constitute a course of dealing which would incorporate a term of the writing otherwise excluded under § 2-207.

Repeated course of dealing shows that negotiation of terms would be easily possible. o Oral contracts and terms:

Court worries about the impracticality of forcing sellers to read to buyers all of the terms over the phone or to print all the terms on a shipping box. Deems seller the offeror as a result in Hill.

o Protection of consumers vs. merchants : Market: sellers who sneak in harmful terms will suffer in reputation and sales. Other contract law doctrines impose limits on unfair terms. § 2-719(2) on damage limitation that

makes a remedy “fail of its essential purpose” and Unconscionability: § 2-302 Sellers must make terms available in advance to buyers who ask per the Magnuson-Moss

Warranty Act, which requires sellers to furnish, on demand, warranty terms (though it does also include legal remedies, probably including arbitration).

o Treatment of implied versus express warranties: UCC makes relatively easy to exclude implied warranties. How easy to exclude express

warranties, not so easy. . Negation or limitation is inoperative to the extent that such construction is unreasonable- difficult to disclaim. If party makes express warranty, it’s what you’re committed to.

§2-316: if trade usage for no warranties, than can be excluded via knockout rule/2-2073 UCC:

o 1-205: Reasonable time/seasonablenesso 1-302: Variation by agreement: Except as in (b) or other part of UCC, UCC may be varied by

agreement/contracted around. o 2-204:Formation in Generalo 2-207:Additional terms in acceptance or confirmation:

(1) A definite/seasonable acceptance/written confirmation that is sent in reasonable time operated as acceptance even though state additional terms to OR different terms than in offer unless that acceptance is expressly conditional on assent to the additional/different terms.

Comment 1: This section is intended to deal with . . . the written confirmation, where an agreement has been reached either orally or by informal correspondence between the parties and is followed by one or both of the parties sending formal memoranda embodying the terms so far as agreed upon and adding terms not discussed. . . .

o 2-208: Course of Performance or Practical Construction

Statute of Frauds

Cases o C.R. Klewin Inc. v. Flagship Properties, Inc.

Rationale: Court fights formalism with formalism by adopting its interpretation that the express terms themselves must make the contract last more than one year from the date of its making

Indefinite issue not addressed by the courto Conagra, Inc. v. Nierenberg: Sale of wheat case

Dispositive issue: is not whether or not the parties made an oral agreement but rather whether the parties formed an enforceable oral agreement.

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No dispute about terms in this appeal; ConAgra’s addition of some terms in its confirmation might have created a § 2-207 issue but these were not disputed

Nieremberg’s opportunism discussed as almost cancellation of the statute of frauds Concepts:

o Statute of Frauds: Mandatory rule. Cannot be contracted out of. Affirmative defense, defendant must raise

statute as a defense to claim of breach. Covers: Land, Contract not to be performed within one year from its making, Contract for

the sale of goods > $500, Suretyship (Contract to answer for the duty of another (guarantee)), Executor-administrator (Contract to answer for personally for the duty of a decedent if similar contract would be within the suretyship provision if the decedent were alive), Marriage

o Goals of Statute of Frauds: Prevent fraudulent claims, evidentiary function, (does not require all terms to be in writing), Cautionary function: encourage parties to appreciate the seriousness of the undertaking, and Channeling function: reduce litigation by providing easy way to insure enforceability.

Rationale for 1 year provision: faulty memory, staleness of evidence, significance of the undertaking,

o Means to avoid use of statute of frauds: Increase the burden of proof for oral contracts, reduce the damages of a party who tries to

enforce an oral contract (no single sanction), Leave it up to the parties (freedom of contract).

Exceptions: Full performance by one party (employment), Part performance (land), Promissory estoppel, UCC

o Time determination: options Express term (Date by which performance is to be completed or Duration of the contract)

SC in Klewin: Statute of frauds does not require a writing so long as no express term makes performance impossible within 1 year from the making of the contract

Indefinite duration: Uncertain duration (Contract has a specific ending event (e.g. completion of construction)

but when that event happens is uncertain). Statute of frauds applies to contracts of uncertain duration if performance could not possibly be performed within 1 year (per district court in Klewin)

Realistic Possibility of performance within 1 year: rejected in Klewin. Court worried about cost of inquiry into if possible to complete in 1 year. Court also finds it arbitrary distinction. Live and die by formalism.

Ct. disregards the distinction between contracts of indefinite and uncertain duration in Klewin

o Merchant Confirmation Exception: § 2-201(2): Between merchants. Both parties must be merchants. UCC § 2-104(3). There must be a writing that would otherwise satisfy the statute of frauds if the sender

were asserting the statute as defense Reason to know contents Objection in writing within 10 days. Reasonable time for the sender cannot be “a term

shorter than that offered the recipient. Look at ConAgra’s usual practice and its reasons

for deviating from that practice (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

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unless written notice of objection to its contents is given within 10 days after it is received.

Restatement: o §130: Contract Not to be Performed in a year:

(1) If a promise cannot be fully performed in a year from time of contract, Statute of Frauds applies until 1 party completes performance.

(2) If/when 1 party has completed performance, 1 year provision doesn’t prvent enforcement of other party’s promise.

Illustration 2: A orally promises to work for B, and B promises to employ A during A’s life at a stated salary. The promises are not within the one-year provision of the Statute, since A’s life may terminate within a year.

Illustration 5: A orally promises to work for B, and B promises to employ A for five years at a stated salary. The promises are within the Statute of Frauds. Though the duties of both parties will be discharged if A dies within a year, the duties cannot be “performed” within a year. This conclusion is not affected by a term in the oral agreement that the employment shall terminate on A’s death.

Illustration 6: [A orally promises to work for B, and B promises to employ A for five years at a stated salary. T]he agreement provides that either party may terminate the contract by giving 30 days notice at any time. The agreement is one of uncertain duration and is not within the one-year provision of the Statute.

Illustration 7: [Same facts, except that] the agreement provides that A may quit at any time. The agreement is within the Statute.

o §131: General requirement of a memorandum: Unless more formality required by statute a contract per SoF is enforceable if evidenced

by any writing, signed by party which (a) reasonably identifies the subject matter of the contract, (b) sufficient to indicate that a contract was made or offered by signer to other party. (c) states with reasonable certainty the essential terms of the promises.

o §132:Several Writings Memorandum can be several writings, so long as one writing is signed and the writings

indicated that all writings relate to the same transaction.o §134: Signature = any symbol made/adopted with an intention (actual or apparent) to authenticate

the writing as that of the signer. (131) To satisfy SoF, contract signed by one party (offer document) might be enough;

must list essential terms of unperformed promises in the contract Sufficient if it “reasonable identifies the subject matter of the contract” If a “sales order” is on letterhead, that probably sufficient for it to be signed by the party

against whom enforcement is sought o §139: Enforcement by as a result of actions in Reliance

(1) A promise that promisor should reasonably expect to induce action/forbearance by promisee/3rd person which actually induces action/forbearance is enforceable, notwithstanding the Statute of Frauds, if enforcement is the only means to avoid injustice. The remedy granted for breach is to be limited as justice requires. (Identical to the UCC language)

(2) To determine if injustice can be avoided: factors to consider: (a) the availability and adequacy of other remedies, particularly cancellation and

restitution; (b) the definite/substantial character of the action/forbearance in relation to the

remedy sought; (c) as the action/forbearance corroborates evidence of the making and terms of

the promise, or the making and terms are otherwise established by clear and convincing evidence;

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(d) Reasonableness of the action/forbearance; (e) Extent to which the action/forbearance was foreseeable by the promisor

UCC:o 1-201: Definitions:

(3) Agreement vs contract. Agreement = the bargain of the parties in fact, as found in their language or inferred from other circumstances, including course of performance, course of dealing, or usage of trade.

(12) Contract vs agreement. Contract = means the total legal obligation that results from the parties’ agreement as determined by UCC and law.

o 2-104: Definition of Merchanto 2-201: Formal requirements, statute of frauds

(1) Sale of goods for $500 + is not enforceable (as a defense) unless signed writing evidencing contract. Must be signed by the party against whom it’s being used. Writing is not insufficient if it omits/incorrectly states a dickered term. However, contract is not enforceable for larger quantity goods than agreed on in the writing.

(2) If in a reasonable amount of time, between merchants, a merchant’s sufficient confirmation is received, and other party received it and knows its contents it is OK. Unless there is a written objection to contents given within 10 days.

(3) A contract is still enforceable despite (1) (if otherwise valid) if: (a) Goods are custom ordered and not able to be resold AND seller prior to

receiving repudiation reasonably substantially began their manufacture or undertakes commitment in order to manufacture.

(b) If party who breached (and other party wants enforced) admits that there was a contract but that the contract is unenforceable above the quantity of good admitted.

(c) Goods that have been accepted and paid for/ already received and accepted. Comment 1: The required writing need not contain all the material terms of the contract

and such material terms as are stated need not be precisely stated. All that is required is that the writing afford a basis for believing that the offered oral evidence rests on a real transaction. . . . Only three definite and invariable requirements as to the memorandum are made by this subsection. First, it must evidence a contract for the sale of goods; second it must be “signed,” . . . ; and third, it must specify a quantity.

Comment 3: The only effect [of § 2-201(2)] . . . is to take away from the party who fails to answer the defense of the Statute of Frauds; the burden of persuading the trier of fact that a contract was in fact made orally prior to the written confirmation is unaffected. . . .

Parol Evidence Rule Cases:

o Baker v. Bailey No indication that the Bakers deny that there was a “common understanding” that they

would “continue to share the well water with subsequent purchasers provided that the purchasers were acceptable to the Bakers. Bakers don’t need to deny the existence of the side agreement as a condition of asserting the parole evidence rule

Either the written agreement was integrated which bars the use of parole evidence OR the writing was partially integrated and the oral evidence is inconsistent with the writing and barred. Look to merger clause and natural omission to determine.

o Masterson v. Sine Bankruptcy trustee cannot exercise an executory contract right unless it is assignable.

Trustee brought declaratory judgment action to determine whether option in this case was assignable.

Court adopts the Corbin/Restatement approach: it rejects the 4 Corners rule and finds that to determine integration, it must consider (Writing (in particular whether there is a

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merger clause), Alleged collateral agreement. Circumstances at the time of the writing ) Allows parole evidence as it’s a family affair, Putting a limit on the option in the deed

was not necessary to fulfill the purpose of the option, hard to put collaterals into a deed, ne merger clause in deed, deed does not address assignability, oral agreement is sufficient to override the assignability default.

Concepts: Parole Evidence Rule : When parties express their agreement in a writing or writings that they intend as a

final expression of their agreement, evidence of prior or contemporaneous understandings and negotiations, within the scope of the writing, cannot be admitted to contradict, or in some cases to supplement, the writing.

o Parol evidence = extrinsic evidence (outside the writing)o Parol evidence rule is about how courts should determine the parties’ intentions about how courts

should determine the parties’ substantive contractual intent (procedural/secondary intent)o effect of a final writing that parties agree on, rather than conflicting writings that parties do not

agree ono Non-formation doctrine. Determination of terms. o Last shot principle- last writing trumps what came before o Substantive rule not evidence rule. Rules of evidence regulate methods of proving relevant facts

in court, based on reliability of method. Facts not provable by one method (e.g. hearsay) may be proved by another method (e.g.

direct testimony) Evidence rules are created for reasons independent of the intentions of the parties

o Substantive rule determines which facts are relevant and must be proved by appropriate evidence PER says what facts are relevant for proving the content of agreements Cf. objective theory, which precludes evidence of subjective intent

o Rationale: encourage written record which is better than memory, constrain the jury who will be sympathetic to the little guy, deter fraud, fulfill true intent of the parties (Masterson)

Overlap with statute of frauds: both doctrineso Give priority to written agreementso Make certain oral agreements unenforceableo Aim to deter fraudulent claimso Encourage parties to put agreements in writingo Are mandatory rules that parties cannot completely contract out of

Differences between SoF and Parole Evidence o SOF( Determines whether a contract as a whole is enforceable, rather than focusing on which

terms govern, Comes up only as a defense when there is no writing or an inadequate writing, Is based on the subject matter of the contract, Cannot be modified by contract)

o PER ( Determines which terms govern, Applies only if there is a final writing, Is based on the timing and nature of the writing, Parties can contract for a stricter version of the rule by using merger (integration) clauses)

Integrated Writing: writing that the parties intend as a final expression of their agreement. R2d § 209(1)o Partial integration : writing that is final with respect to terms included but is not complete (does

not include all the terms of the agreement). R2d § 210(2) Excludes prior or contemporaneous agreements that contradict the writing. R2d § 215 Excludes prior agreements that are inconsistent with the writing. R2d § 213(1) Permits consistent additional terms. R2d § 216(1); UCC § 2-202(a)

o Complete integration : writing that parties intend as a complete and exclusive expression of their agreement. R2d § 210(1); UCC § 2-202(b)

Excludes all additional terms, even if consistent with writing. R2d § 216(1) Excludes all prior agreements if within scope of writing. R2d § 213(2); UCC § 2-202(b)

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o Question for the court. R2d §§ 209(2), 210(3); see also § 212(2) Timing of Agreements and PER:

o Prior agreements = excludedo Subsequent agreements = not excludedo Contemporaneous agreements

R2d PER: excludes all contemporaneous agreements and negotiations, whether written or oral, that contradict the writing

UCC § 2-202: excludes all contemporaneous oral agreements if they contradict the writing

Some contemporaneous writings could be viewed as part of the integration Tests for degree of integration:

o Four Corners Rule : Look only at the writing itself to determine if it is integrated (“strict” PER) If writing is incomplete on its face, no integration If writing is complete on its face, conclusive presumption of partial integration and

rebuttable presumption of complete integrationo Natural Omission Doctrine : presumption of complete integration can be rebutted by looking at

the asserted extrinsic evidence and asking if the parties would “naturally” have excluded it from the final writing; if so, the writing is merely a partial integration and the evidence is not excluded

o Corbin Approach (“soft” PER) Courts must examine the parties’ actual intent, including all available evidence of their

intent, to determine whether the writing is integrated, since integration is a question of intent

Critique: if court must look at all the circumstances to determine if the parties intended that the court look at all the circumstances, what good does the PER do?

o Restatement approach to integration : Wants to have it both ways. Writing complete on its face establishes a rebuttable presumption of partial integration. R2d § 209(3). Unlike 4 corners rule, a writing complete on its face does not establish a conclusive presumption of even a partial integration. Presumption may be rebutted by looking at “other evidence”. In particular, prior or contemporaneous agreements and negotiations can be examined. R2d § 214(a), (b)

Natural Omission Doctrine: If writing omits consistent additional term that “might naturally be omitted from the writing,” it is not completely integrated. R2d § 216(2)(b)

Separate Agreement for Separate Consideration: If a writing omits a consistent additional term agreed to for separate consideration, it is not completely integrated. R2d § 216(2)(a)

o UCC approach to integration: Partial integration can be established by “confirmatory memoranda” of buyer and seller

(8 corners rule?); otherwise, no apparent limitation on evidence that can be considered to determine integration

Even a complete integration cannot exclude trade usage, course of dealing, or course of performance evidence, unless they are “carefully negated.” Comment 2

Certain Inclusion : no complete integration unless “the additional terms are such that, if agreed upon, they would certainly have been included in the document.” Comment 3

Merger Clause: Merger clause: clause that generally says this writing is meant to be the final expression and conclusion of the parties.

Hard V. Soft PER: o Both versions encourage some form of opportunism: Under hard PER, parties have incentives to

make oral promises they do not intend to keep. Under soft PER, parties have incentives to create false extrinsic evidence

o Hard PER makes more sense if including terms in writing is easy and likelihood of fact finder enforcing agreements that parties did not make is high

o Contracting around: Soft PER is easier to contract around: parties just add a merger clause. Under hard PER, although parties could write an “anti-merger clause,” parties rarely do so, in part

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because if parties could identify the extrinsic evidence they wanted the court to consider, they would likely just include the term in the writing.

Exceptions to the PER: o No valid agreement (forgery, joke, fraud, duress). R2d § 214(d); Condition precedent to the entire

agreement. R2d § 217 (EX: “This agreement is contingent on financing.”); Interpretation of terms. R2d §§ 212, 214(c) (PER is not a rule of interpretation; it merely determines what terms are included)

o Plain Meaning Rule , a traditional common law rule of interpretation, does act to exclude extrinsic evidence if words have a plain meaning, apart from PER.

o Even complete integration cannot exclude trade usage, course of dealing, or course of performance evidence, unless they are “carefully negated.”

Good Faith and PER: o Duty of good faith is not a free-floating obligation, but is derivative of existing contractual

obligationso Court: there must be a breach of some express term before the duty of good faith applies. The

breach of an express term is a necessary, but not a sufficient condition, for bad faith Restatement :

o 155: When Mistake of Both parties as to written expression justifies reformationo 172: When Fault makes reliance unjustifiedo 204: Supplying an omitted essential term

Illustration 1: Masterson: A and his wife convey their ranch to A’s sister and her husband, reserving an option to repurchase. The parties agree orally that the property will be kept in the family, but the deed says nothing as to assignment of the option. If the deed is found to be a partial integration, the oral agreement is effective to show that the option is not assignable. If the deed is found to be a complete integration, the oral agreement is discharged and the option is assignable.

o 205: Duty of Good Faith and Fair Dealingo 209:Integrated Agreementso 210:Completely and partially integrated agreementso 212: Interpretation of Integrated Agreemento 213: Parole Evidence Rule: effect of integrated agreement on prior agreementso 214:evidence of prior or contemporaneous agreements and negotiationso 215: Contradiction of integrated termso 216: Consistent Additional Termso 217:Integrated agreement subject to oral requirement of a condition

UCC: o 2-202: Parol Evidence:

Gives priority to written document (express terms) over what was said prior or contemporaneously to the agreement yet may supplement or explain with course of dealings/performance/usage

May not be contradicted, but may be explained or supplemented (a) by course of dealing or usage of trade or by course of performance and (b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.

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