OUTLINE Case Briefs Notes Contracts II

Contracts II, Knapp Book Notes 1 of 86
CONTRACTS II, Prof. Selmi- Knapp BOOK NOTE
THE PAROL EVIDENCE RULE................................................................ 3

TWO VIEWS -CORBIN & WILLISTON ON PAROL EVIDENCE RULE..........................................3
R.2D 209 INTEGRATED AGREEMENTS.........................................................................3
R.2D 210 COMPLEXITY AND PARTIALLY INTEGRATED AGREEMENTS...................................4
R.2D 211 STANDARDIZED AGREEMENTS......................................................................4
*R.2D 213 EFFECT OF INTEGRATED AGREEMENT ON PRIOR AGREEMENTS *PAROL EVIDENCE
RULE....................................................................................................................... 4
R.2D 214 EVIDENCE OF PRIOR OR CONTEMPORANEOUS AGREEMENTS AND NEGOTIATIONS....4
R.2D 215 CONTRADICTION OF INTEGRATED TERMS........................................................5
R.2D 216 CONSISTENT ADDITIONAL TERMS..................................................................5
R.2D 217 INTEGRATED AGREEMENT SUBJECT TO ORAL REQUIREMENT OF A CONDITION........5
UCC 2-202 - FINAL WRITTEN EXPRESSION: PAROL OR EXTRINSIC EVIDENCE.......................5
EXCEPTIONS - PAROL EVIDENCE RULE DOES NOT APPLY IF..................................................5
THOMPSON V. LIBBY, MINN. S. CT., (1885) -PAROLE EVIDENCE- 4 CORNERS RULE- WIDELY
USED APPROACH-LOGS CASE, EVIDENCE OF WARRANTY NOT PERMITTED TO ALTER AGREEMENT...6
TAYLOR V. STATE FARM............................................................................................... 6
SHERROD, INC. V. MORRISON-KNUDSEN CO., S. CT. MONTANA (1991)..............................7
NANAKULI PAVING & ROCK CO. V. SHELL OIL CO., 664 F.2D 772 (9TH CIR. 1981)............7
NANAKULI PAVING & ROCK CO. V. SHELL OIL CO. 1981 - DETERMINING OBLIGATIONS >
EXTRINSIC EVIDENCE.................................................................................................. 8
PROBLEM 5-1......................................................................................................... 9
CHAPTER 6 - SUPPLEMENTING THE AGREEMENT: IMPLIED TERMS, THE

OBLIGATION OF GOOD FAITH, AND WARRANTIES................................ 10
IMPLIED TERMS....................................................................................10
WOOD V. LUCY DUFF-GORDON, CARDOZO- NY CT. OF APP., 1917.................................10
NOTES AFTER LEIBEL V. RAYNOR (P. 445)...................................................................11
IMPLIED OBLIGATION OF GOOD FAITH........................................................11
SEIDENBERG V. SUMMIT BANK, SUPERIOR CT. NJ (2002) -FRUITS OF THE CONTRACT APPROACH
............................................................................................................................ 12
COMMENT: REQUIREMENT & OUTPUT KS......................................................................14
LOCKE V. WARNER BROS., INC. (CA. CT. OF APP., 1997)..............................................14
DONAHUE V. FEDEX CORP., SUPERIOR COURT OF PA., 2000 -FIRE-AT-WILL EMPLOYEE CAN BE
FIRED.................................................................................................................... 16
IMPLIED TERMS AND UCC......................................................................................... 17
WARRANTIES (EXPRESS & IMPLIED)..........................................................18
CAVEAT EMPTOR="LET THE BUYER BEWARE".................................................................18
2-313. EXPRESS WARRANTIES BY AFFIRMATION, PROMISE, DESCRIPTION, SAMPLE............18
2-314. IMPLIED WARRANTY: MERCHANTABILITY; USAGE OF TRADE.................................18
2-315. IMPLIED WARRANTY: FITNESS FOR PARTICULAR PURPOSE...................................19
BAYLINER MARINE CORP. V. CROW, S. CT. OF VA. 1999- WARRANTIES (IMPLIED V. EXPRESS)
............................................................................................................................ 19
2-316. EXCLUSION OR MODIFICATION OF WARRANTIES................................................21
CHAPTER 7 - AVOIDANCE OF THE K - DURESS..................................... 21

DURESS.............................................................................................21
TOTEM MARINE TUG & BARGE V ALYESKA PIPELINE CO (AK. 1978).................................21
UNDUE INFLUENCE................................................................................22
ODORIZZI V BLOOMFIELD SCHOOL DISTRICT CA CT OF APP 54, 1954..............................23
MISREPRESENTATION AND NON-DISCLOSURE................................................24
SYESTER V. BANTA (IOWA S. CT. 1965)......................................................................24
HILL V. JONES (AZ CT. OF APP., 1986)......................................................................26
FRAUD CONTINUED................................................................................28
PARK 100 INVESTORS V. KARTES, INDIANA CT. APP. 1995- FRAUD/MISREP.....................28
WILLIAMS V. WALKER-THOMAS FURNITURE CO., FED(DC)CIRCUIT1965............................29
HIGGINS V. SUPERIOR COURT (CAL. CT. APP. 2006).....................................................29
ADLER V. FRED LIND MANOR, S. CT. WASH. 2004.......................................................30
PUBLIC POLICY....................................................................................33
PROBLEM 7-2......................................................................................................... 33
VALLEY MEDICAL SPECIALISTS V. FARBER, AZ. S. CT. 1999...........................................33
R.R. V. M.H., S. CT. MASS, 1998.............................................................................34
PROBLEM 7-3 - NO NOTES......................................................................................... 35
PROBLEM 7-4......................................................................................................... 35
CHAPTER 8 - JUSTIFICATION FOR NON-PERFORMANCE: MISTAKE,

CHANGED CIRCUMSTANCES, AND K MODIFICATIONS........................... 36
CATEGORIES OF RXNS FOR NON-PERFORMANCE..............................................................36
MISTAKE............................................................................................36
LENAWEE CO. BOARD OF HEALTH V. MESSERLY (MICH. 1982) MUTUAL MISTAKE- "AS IS"
CLAUSE.................................................................................................................. 36
WIL-FRED INC. V. METROPOLITAN SANITARY DISTRICT (ILL. APP. 1978) ........................37
CHANGED CIRCUMSTANCES: IMPOSSIBILITY, IMPRACTICABILITY, AND FRUSTRATION. 39
IMPRACTICABILITY (261, 2-615).............................................................................39
KARL WENDT FARM EQUIPMENT V. INT'L HARVESTOR CO. (6TH CIR. 1991)- IMPRACTICABIITY
............................................................................................................................ 39
R. 2D 265 DISCHARGE BY SUPERVENING FRUSTRATION..................................................41
MEL FRANK TOOL & SUPPLY V. DI-CHEM CO. (IOWA S. CT. 1998)..................................41
PROBLEM 8-1, P. 711.............................................................................................. 43
CONTRACT MODIFICATIONS - CNS/DURESS ISSUES........................................44
ALASKA PACKERS ASSN V. DOMENICO (9TH CIR 1902)- CNS TO MODIFY K (COMMON LAW)-
PRE-EXISTING DUTY.................................................................................................. 44
KELSEY-HAYES CO. V. GALTACO REDLAW CASTINGS CORP. (E.D. MICH 1990) - ECONOMIC
DURESS- DO K MODIFICATIONS REQUIRE NEW CNS?......................................................45
BROOKSIDE FARMS V. MAMA RIZZO'S, INC. - MUST K MODIFICATION BE IN WRITING? -NOM. 47
CHAPTER 11- EXPECTATION DAMAGES: PRINCIPLES AND LIMITATIONS. 48

EXPECTATION DAMAGES OVERVIEW.............................................................................48
ROESCH V. BRAY, OHIO 1988................................................................................... 49
AMERICAN STANDARD, INC. V. SCHECTMAN, (N.Y. 1981). - COST OF COMPLETION..............50
RESTRICTIONS ON RECOVERY OF EXPECTATION DAMAGES: FOS, CERTAINTY, AND
CAUSATION.........................................................................................51
HADLEY V. BAXENDALE, COURT OF EXCHEQUER, ENG. (1854)........................................51
FLORAFAX INTERNATIONAL, INC. V. GTE MARKET RESOURCES, INC. (OKLA. 1997)- WHEN LOST
PROFITS ARE RECOVERABLE........................................................................................ 53
ROCKINGHAM COUNTY V. LUTEN BRIDGE CO., (4TH CIR. 1929) - P'S DUTY TO MITIGATE.....53
HAVILL V. WOODSTOCK SOAPSTONE CO., INC. (VT, 2004)............................................53
JETZ SERVICE CO. V. SALINA PROPERTIES, KAN. 1993- LOSS VOLUME SELLERS...................55
PROB 11-1............................................................................................................ 55
CHAPTER 12: ALTERNATIVES TO EXPECTATION DAMAGES: RELIANCE &

RESTITUTIONARY DAMAGES, SPECIFIC PERFORMANCE, AND AGREED
REMEDIES........................................................................................ 55
WARTZMAN V. HIGHTOWER (MD. APP. 1983)- RELIANCE DAMAGES (DEVELOPMENT COSTS) 56
WALSER V. TOYOTA MOTOR SALES (8TH CIR. 1994)- TAKEAWAY......................................57
RESTITUTIONARY DAMAGES.....................................................................58
US V. ALGERNON BLAIR (4TH CIR. 1973)- RESTITUTION, QUANTUM MERUIT......................59
VENTURA V. TITAN SPORTS, INC. (8TH CIR. 1995) - QUANTUM MERUIT/UNJUST ENRICHMENT &
RESTITUTION........................................................................................................... 60
PROB. 12-1 CLASS NOTES......................................................................................... 61
REIER BROADCASTING V. KRAMER (MONT. 2003) -SPECIFIC PERFORM.- ENFORCEMENT OF
NEGATIVE COVENANT................................................................................................ 63
AGREED DAMAGES- LIQUIDATED DAMAGES CLAUSES.......................................64
WESTHAVEN ASSOC. V. C.C. OF MADISON (WISC. 2002)- LIQUIDATED/STIPULATED DAMAGES-
FAILURE TO DO BUSINESS PROVISION............................................................................ 64
SEE PROBLEMS 12-2 AND 12-3 ON PAGE 1045............................................................66
CHAPTER 10: CONSEQUENCES OF NONPERFORMANCE: EXPRESS CONDITIONS,
MATERIAL BREACH, AND ANTICIPATED REPUDIATION.........................................66
EXPRESS CONDITIONS (CONSEQUENCES OF BREACH)......................................................66
OPPENHEIMER & CO. V. OPPENHEIM (NY 1995)...........................................................66
ANTICIPATORY REPUDIATION (RETRACTION; RXNABLE UNCERTAINTY/ASSURANCES). 69
TRUMAN L. FLATT & SONS CO. V. SCHUPF (ILL. APP. 1995) - ANTICIPATORY REPUDIATION &
RETRACTION............................................................................................................ 69
HORNELL BREWING CO. V. SPRY (NY 1997) -ANTICIP. REPUD. & RXNABLE INSECURITY
(DEMAND FOR ASSURANCE)........................................................................................ 71
PROBLEM 10-2....................................................................................................... 72
The Parol Evidence Rule

i) Only used where writing is intended to memorialize the agreement and must be adopted
by both parties; if not and integrated writing parol evidence does not apply
ii) Integrated refers to a writing that is intended to be a final and complete agreement
embraced in writing (partially integrated refers to a writing that is intended to be final
but not complete because it deals with some but not all aspects of the transactions
between the parties
iii) Merger clause - states that the writing is intended to be final and complete
Two Views -Corbin & Williston on Parol Evidence Rule

1. *Corbinextrinsicevidenceshouldthenbeadmissibletoaidininterpretation
2. *Willistonreadthefourcornersofthedocument.Period.
R.2d 209 Integrated Agreements

(1) An integrated agreement is a writing or writings constituting a final expression of
one or more terms of an agreement.
(2) Whether there is an integrated agreement is to be determined by the court as a
question preliminary to determination of a question of interpretation or to application
of the parol evidence rule.
(3) Where the parties reduce an agreement to a writing which in view of its
completeness and specificity reasonably appears to be a complete agreement, it is
taken to be an integrated agreement unless it is established by other evidence that the
writing did not constitute a final expression
R.2d 210 Complexity and Partially Integrated Agreements
(1) A completely integrated agreement is an integrated agreement adopted by the
parties as complete and exclusive statement of the terms of the agreement
(2) a partially integrated agreement is an integrated agreement other than a
completely integrated agreement
(3) Whether an agreement is completely or partially integrated is to be determined by
the court as a question preliminary to the determination of a question of interpretation
or to application of the parol evidence rule
R.2d 211 Standardized Agreements
(1)Except as otherwise stated in (3), where a party to an agreement signs or otherwise
manifests assent to a writing and has reason to believe that like writings are regularly
used to embody terms of agreements of the same type, he adopts the writing as an
integrated agreement with respect to the terms included in the writing
(2) Such a writing is interpreted wherever reasonable as treating alike those similarly
situated, without regard to their knowledge or understanding of the standard terms of
the writing
(3) Where the other party has reason to believe that the party manifesting such assent
would not do so if he knew that the writing contained a particular term, the term is not
part of the agreement
*R.2d 213 Effect of Integrated Agreement on Prior Agreements *Parol
Evidence Rule
(1) a binding integrated agreement discharges prior agreements to the extent that it is
inconsistent with them parole evidence cant be used to alter or replace written
agreements
(2) a binding completely integrated agreement discharges prior agreements to the

extent that they are within its scope
(3)An integrated agreement that is not binding or that is voidable and avoided does
not discharge a prior agreement. But an integrated agreement, even though not
binding, may be effective to render inoperative a term which would have been part of
the agreement if it had not been integrated
R.2d 214 Evidence of Prior or Contemporaneous Agreements and
Negotiations
Agreements and negotiations prior to or contemporaneous with the adoption of a writing are
admissible in evidence to establishthat the writing is or is not an integrated agreementthat
the integrated agreement, if any, is completely or partially integratedthe meaning or the
writing whether or not integrated illegality, fraud, duress, mistake, lack of consideration, or
other invalidating cause ground for granting or denying recission, reformation, specific
performance, or other remedy
R.2d 215 Contradiction of Integrated Terms
Except as stated in the preceding Section, where there is a binding agreement, either
completely or partially integrated, evidence of prior or contemporaneous agreements or
negotiations is not admissible in evidence to contradict the terms of the writing
R.2d 216 Consistent Additional Terms
(1) Evidence of a consistent additional term is admissible to supplement an integrated
agreement unless the court finds that the agreement was completely integrated
(2)An agreement is not completely integrated if the writing omits a consistent additional term
which isagreed to for separate consideration, orsuch a term as in the circumstances might
naturally be omitted from the writing
R.2d 217 Integrated Agreement Subject to Oral Requirement of a
Condition
Where the parties to a written agreement agree orally that performance of the agreement is
subject to the occurrence of a stated condition, the agreement is not integrated with respect to
the oral condition
UCC 2-202 - Final Written Expression: Parol or Extrinsic Evidence
Terms with respect to which the confirmatory memoranda of the parties agree or which are
otherwise set forth in writing intended by the parties as a final expression of their agreement
with respect to such terms as are included therein may not be contradicted by evidence of any
prior agreement or of a contemporaneous oral agreement but may be explained or
supplementedby course of dealing or usage of trade or by course of performanceby evidence
of consistent additional terms unless the court finds the writing to have been intended also as
a complete and exclusive statement of terms of the agreement
1. See attached table
2. Negative rule to keep evidence out
3. Expressed in case law

4. Qualification- May penalize people for being credible - the writing says one thing but
person assures you of something else
Exceptions - Parol Evidence Rule does not apply if
1. the evidence relates to something that comes after the writing was made; still may be
barriers to enforcement
2. evidence is offered to show that effectiveness of the agreement was subject to an oral
precedent (e.g. agent can not bind must check with principal before final approval)
parties have agreed contract will not have an effect until something else occurs
3. evidence to show the agreement is invalid for any reason such as fraud, duress, undue
influence, incapacity, mistake, death, or illegality
4. evidence offered to establish a right to an equitable remedy such as reformation of the
contract (e.g. typographical error for $100 instead of $10,000)
5. evidence to show a collateral agreement between the parties
6. fraud and duress can always be shown by the parol evidence rule
7. Under the classical approach to contract law the Parol Evidence Rule is interpreted
conservatively. Some modern courts continue to use the classical approach. In the
conservative approach introducing evidence to decide if the writing is fully integrated
is not embraced
8. Under the modern view the Parol Evidence Rule is interpreted more liberally and
hence has many exceptions. In this liberal approach, evidence is likely to be
admissible to determine if a writing is completely integrated
Thompson v. Libby, Minn. S. Ct., (1885) -Parole evidence- 4 corners

rule- widely used approach-logs case, evidence of warranty not
permitted to alter agreement
A) Facts: Thompson (P) owned logs of poor quality marked H. C. A. lying in the
Mississippi river and sold them to Libby (D). The agreement was a brief
paragraph reciting the cost and markings on the logs and provisions for
payment. Libby refused to accept the logs and Thompson sued. D claimed
that P breached an oral warranty regarding the quality of the logs. At trial D
presented testimony to prove the warranty over Ps objection. Judgment was
entered for D and P appealed.
B) Claims: -Libby wants to show there was a warranty agreed upon even though
it wasn't within the actual K.
C) Issues: 1) Can parol contemporaneous evidence be used to contradict or
vary the terms of a valid written contract? 2) Under what conditions is the
admission of parol evidence admissible?
1) in general: was the oral testimony (which would contradict the terms of
the K) admissible b/c there was a written K?
D) Answers & Rules: 1) No. Parol contemporaneous evidence is inadmissible to
contradict or vary the terms of a valid written contract. 2) To justify the
admission of parol evidence, the evidence must relate to a subject distinct

from that to which the writing relates. If a writing contains on its face a
complete expression of the whole agreement, i.e. it includes terms sufficient
to render it legally binding, it is presumed that the parties have introduced
into it every material item and term, and parol evidence cannot be admitted
to add additional terms to the agreement even if that evidence relates to a
matter not addressed in the contract. The rule does not apply however where
the writing is incomplete on its face and does not purport to contain the
whole agreement.
E) Holding: For P new trial granted.
F) Rationales: The parol evidence rule is founded on the inconvenience and
injustice that would result if matters in writing, made with consideration and
deliberation and intended to embody the entire agreement of the parties,
were subject to the uncertain testimony of slippery memory. in this case there
was nothing to indicate that the writing was informal and incomplete. In a
sale of personal property a warranty as to quality is an item and term of the
contract, and not a separate and independent collateral contract, and
therefore cannot be added to the written agreement by oral testimony.
G) Notes: Williston: 4-Corners Rule: the question of integration should be
determined from the 4-corners of the writing, without resorting to other
evidence of the actual intent of the parties.
H) -collateral agreement: you can admit this evidence (if there is separate
agreement, ex. a separate agreement including a warranty) then that can
come in (Ex. if you buy an iPod and then buy apple care- you can admit
evidence of apple care)--
I) in this case court finds that this was not a collateral agreement regarding
or including the warranty
Taylor v. State Farm

A) Bad faith case involving classic excess verdict
B) UM release at issue: trial; thus, parol evidence was admissible at trial
C) State Farm says unambiguous on four corners of document
Sherrod, Inc. v. Morrison-Knudsen Co., S. Ct. Montana (1991)

facts: P is a subcontractor of COP, the subcontractor for general contractor
D/Morrison-Knudsen. Plaintiffs bid was based on a miscalculation.
Allegedly, Plaintiff was told that compensation for the additional
work would be provided.
claims, more facts:
P/Sherrod claims: that D stated that the job would involve
excavating 25,000 cubic yards. P submitted a bid based on this
information. COP and P entered into a written contract based on the
price in P's bid. P discovered that the job would involve more than
25,000 cubic yards, but signed the contract anyway because work
had already been started and COP threatened not to compensate P
for the work that had already been performed. P claims COP stated
that P would receive more than the K price to compensate for the
additional work.
COP claims to have only offered to assist Plaintiff with another

claim.
*The contract included a provision that it could not be modified by a
verbal agreement.
issue: was evidence of verbal agreemnt properly excluded?
answer: Yes. Evidence of the verbal agreement was properly excluded
rule: Under the parol evidence rule, when an agreement is put into
writing, evidence of terms outside of the written document is barred
except where there is a claim of mistake or imperfection or the
validity of the agreement is in question.
rationale: - recognizes there is an exception to the parol evidence for
fraud. However, determines that the exception does not apply
under these facts b/c fraud directly relates to the subject of the
contract. Bc alleged fraud contradicts the terms of the written K it is
inadmissible under the parol evidence rule.
Dissent. concerned that parties with greater bargaining power will not be
held accountable for their fraud. expresses several reasons why it
does not agree with the majority: 1) that it rewards the fraudulent
party creating injustice.
Nanakuli Paving & Rock Co. v. Shell Oil Co., 664 F.2d 772 (9th Cir. 1981).
A) Facts: Nanakuli Paving (P) entered into two long term contracts to purchase
its requirements of asphalt from Shell Oil (D). The contract was a fully
integrated writing and gave the price term as Shells Posted Price at time of
delivery. For several years Shell Oil charged the same price for the asphalt
despite increasing the cost to other customers. D finally increased to cost to P
and P sued, claiming that under customary trade practice there was an
implied requirement for D to protect prices. P pointed to the routine use of
price protection by asphalt suppliers. D claimed that no such trade practice
existed and that the price terms under the contract controlled. The jury
awarded $220,800 to P for Ds failure to price protect. The court set aside the
verdict and entered judgment notwithstanding the verdict for D and P
appealed.
B) Issue: Under what circumstances can trade usage and course of
performance be implied into contracts?
C) Holding and Rule (Hoffman): Trade usage and course of performance will
be implied into contracts if there is evidence that it is not inconsistent with
the terms of the contract, and they are so prevalent that the parties would
have intended to incorporate them.
1) The manner in which price protection was actually performed in Hawaii
was that it only occurred when prices increased, and only for work
committed prior to those increases on non-escalating contracts. The
courts decision was reinforced by the overwhelming nature of the
evidence that price protection was routinely practiced by all suppliers in
the small Oahu market and was therefore known to D, that it was a
realistic necessity to operate in the market and to get large government
contracts. This evidence along with Ds past performance were sufficient
to allow the jury to find that those terms were incorporated into the
contract.
2) There is no clear statement in the UCC of just how many acts are
necessary to constitute course of performance. The court noted that in the
only two times that D could have made a decision related to this contract,
D opted for price protection for P.
3) Evidence of usage is always admissible, although the express term
controls in the event of inconsistency, which is a jury question. Under the
UCC custom can be used to contradict the written agreement and usage
may be used to qualify the agreement and modify express terms although
not to negate them entirely.
D) Disposition: Reversed.
E) Concurring (Kennedy): Our opinion should not be interpreted to permit
juries to import price protection or a similarly specific contract term from a
concept of good faith that is not based on well-established custom and usage
or other objective standards of which the parties had clear notice. Here,
evidence of custom and usage regarding price protection in the asphalt
paving trade was not contradicted in major respects. This is a necessary
predicate for interpreting the contract based on the course of performance or
for a finding based on good faith that the seller was required to price protect.
Nanakuli Paving & Rock Co. v. Shell Oil Co. 1981 - Determining
Obligations > Extrinsic Evidence
A) Parties:
1) Asphalt co
2) - Supplier
B) Procedural History: Judge ruled JNOV for after jury found for for
$220800
C) Facts:
1) Long term requirements K existed between parties
2) had provided price protection during 2 previous price spikes per industry
custom
3) K mention price protection, but only express terms
D) Issue: Can a price protection custom be enforced if not included in written
contract?
E) Holding: Yes. If course of performance and trade usage indicate price
protection is understood then it can be enforced even when not in the
express terms.
F) Rules/Rationale:
1) Trade usage & actual performance favored by UCC
i) argues
(1) Trade usage should be just of Hawaii pavers, not entire industry
(2) Prior price protections were waivers, not course of performance
ii) inconsistent w/ express price term to allow price protection upon
closer inspection
iii) Hawaiian market had complete trust b/c biggest Ks were from govt that
allow price increases to be passed through
(1) No K would have included clause
2) Scope of Trade Usage
i) No UCC cases, but 2 commentators
(1) Includes non-members of an industry when actually knew or the

other party could reasonably believe he knew of it
(2) Includes those who regularly deal w/ members of the relevant trade
ii) Applicable trade = asphaltic paving trade in Hawaii
iii) Price protection was universal w/ no prior exceptions
3) Waiver or course of performance
i) 1 act count
ii) 2 acts unclear, but the only 2 possible occurance here
iii) Also rep acknowledged need to futher bargain for price protection
and implied some current existence
iv) UCC expresses preference for waiver over course of performance
(1) But only when acts are ambiguous
4) Express Terms
i) Course of dealings trumps trade usage
ii) Agreement is broader than written paper
iii) Modifications must be sufficiently definite and widespread to prevent
unilateral post-hoc revision
iv) This modification creates an exception rather than swallowing/negating
a term
5) Good Faith
i) have acted in good faith b/c no notice on increase in price
G) Holding: Reversed and reinstated jury judgment
H) Concurrence
1) This decision give broad license to write in price protection except when
custom mandates
PROBLEM 5-1
- Parol evidence rule excludes evidence because:
o Merger clause
o Express terms
o Talks occurred contemporaneously
- Parol evidence rules does not apply and evidence should be

admitted because:
o Reserves right to adjust percentages provision in the manual,

which is incorporated into the K
Adjust seems ambiguousconversation said that the

percent would only go up, not downit is a question of
interpretation
Reasonably susceptible to the interpretation that

percentages will only go up and not down
o Falls under the conditional exception
o Also possibly try a promissory estoppel argument

o The fraud doesnt relate to the subject of the Kit was

inducement
o Why would they punish you for being successful?
Chapter 6 - Supplementing the Agreement: Implied

Terms, the Obligation of Good Faith, and Warranties
Implied Terms
"implied by law"= what we mean when we speak of implied terms- implied in
law terms are terms made part of the agreement by operation of the rules of law
rather than by the agreement of the parties themselves.
Wood v. Lucy Duff-Gordon, Cardozo- NY Ct. of App., 1917

- An implied promise (or a broadly defined) promise may be sufficient to
constitute consideration.
A) Facts/Story: D =a 'creator of fashions.' She knew that dresses, other fashions would
sell for more if she put her name on them or endorsed them, so she employed P to
help her "turn this vogue into money." P/agent was to have the exclusive right,
subject always to D's approval, to place D's endorsements on the designs of others. P
was also to have the exclusive right to place D's own designs on sale, or to license
others to market them. In return, D supposed to get 50% of 'all profits and revenues'
derived from any contracts P might make. The exclusive right was to last at least 1
yr. TheexclusivecontractrequiredthattheysplitallprofitsfromWoodssalesevenlybuttherewasno
expressclausethatstatedthathewouldperform.
B) P claims: he kept K on his part, but D broke it by placing her endorsement on
fabrics, dresses, and millinery without his knowledge, and withheld the profits. The
acceptance of an exclusive agency created by an agreement is an assumption of its
duties, and a promise by the agent to undertake and perform the terms of the K may
be implied even though it is not expressed in such agreement.
C) Ds Argument: The agreement for employment lacks the element of consideration,
as the P is not bound to anything. (AKA it was an illusory promise)
D) Issue:
i) MayapromisetousereasonableeffortsbeimpliedfromtheentirecircumstancesofaK?
ii) Cananimpliedpromisetousebesteffortsbeconsideredvaluableconsideration?
iii) Canthedutyofgoodfaithcompensateforvaguenessinanagreementtoavoidinvalidationofa
Kclearlyintendedbytheparties?.
E) answers: Yes to all. for P/appellant.
F) Procedure: Appeal from S Ct, App Div by P. Appellate Division reversed an order
denying D's motion for judgment on the pleading, and dismissed the complaint.
G) Rules: A promise may be lacking, and yet the whole writing may be 'instinct with an
obligation,' imperfectly expressed. If that is so, there is a contract. AKmaylackan
explicitpromiseinordertofurtheritsgoalsortofurthergeneralbusinessefficacy.-In determining the
intention of the parties the promise has a value. It helps to enforce the conclusion
that the plaintiff had some duties.
H) Rationales: The implication of a promise here finds support in fact that: 1) D gave
an exclusive privilege. 2) P possessed a business he adapted to the placing of
endorsements as D has approved. *3) Unless P gave his efforts, neither he nor D
could ever profit. Without an implied promise, the transaction cannot have such
business efficacy, as both parties must have intended that at all events it should
have].
i) -Ps promise to pay D one-half of the profits and revenues resulting from the
exclusive agency and to render accounts monthly was a promise to use
reasonable efforts to bring profits and revenues into existence.
I) Notes:Thiscaseisanexampleofthecourtimposingadutyofgoodfaithonapartytoperformanimplied
promise.Cardozodispensedwithformalismtoenforceapromisethatwasimpliedwhenviewedinthe
contextofnumerousaspectsoftheagreement.
i) 2)courtscontinuetofollowWoodideologyUCC2306(2)imposesa"bestefforts"obligation
incaseswheretheKforsalecallsfor"Exclusivedealing"
Notes After Leibel v. Raynor (p. 445)

(1) Gap-filling provisions art 2 UCC.
(a) rationale: gap-fillers may be made on basis that they are fair or just. or
economically efficient.--> makes process less timely if certain terms
need not be bargained out. also allows them to avoid bargaining over
situations not likely to occur b/ if off chance they do occur, UCC will
settle it.
(b) SOME UCC "implied-in-law" obligations are mandatory and implied even
if parties agree otherwise
(c) but most often not mandatory and treated as gap-fillers. examples
(i) 2-308 = place of delivery
(ii) 2-310= time of pmt
(iii)2-509= risk of loss
(iv) 2-513= buyer's right of inspection
(2) implied terms as default rules: implied terms that reflect a "hypothetical
bargain"= agrmnt of parties probably wouldve been made if they bargained
over the issue.
(a) when applied?-- some argue should be premised on repeated or long-
term relationships/transactions between parties (relational theory).
others argue should be some form of consent/assent to the implied
terms (consent theory).
(3) Enforcing distributorship agrmnts: when agrmnt failed to impose def.
obligations on dealer or was of indefinite duration- at CL could be held
unenforceable for lack of CNS or mutuality of obligation.
(a) today: distributorship agrmnts usually fall w/in scope of UCC
and specifically Art. 2 as transactions in goods
(i) so implied obligations in UCC 2-306 and 2-309 should
eliminate most problems for lack of CNS or mutuality
(ii) still distribution agreements subject to termination at-will
upon rxnable notice
(4)what counts as reasonable notice? (for termination of distrib agreement)
i) determination of rxnbleness may be affected by terms in parties
present and prior agreements and industry stds
(5) effect of express termination?
(a) most modern commercial Ks will specify events of termination
Implied Obligation of Good Faith

1. -issue: when one party to a K claimed to be acting in ways either
expressly permitted or at least not forbidden by Ks terms, but other party
claims that conduct was improper and actionable.
2. -resolution: courts often employ "good faith" to aid decision-
B. -UCC revised 1-304 (formerly 1-203) saus "every K or duty" within
its scope "imposes an obligation of good faith on its performance or
enforcement"
1. "good faith"= "honesty in fact and the observations of
reasonable commercial standards of fair dealing"
C. -R.2d 205 - extends "duty of good faith and fair dealing" to every
K
1. some states don't use "Good faith" but rather "honesty in
fact"
form of bad faith conduct meaning of good faith
1. seller conceals defect disclose all material facts
2. builder willfully fails to perform in full but substantially substantial perf. w/o
deviating
performs from specifications
3. contractor openly abusing bargaining power to coerce refraining from abusing power
increasing K price
4. hiring broker/deliberately preventing his consummation of deal acting

cooperatively
5. conscious lack of diligence in mitigating other partys damages acting diligently
6. arbitrarily and capriciously exercising power to terminate a K acting with some reason
7. adopting overarching interpretation of K interpreting K language fairly
8. harassing other party for repeated assurances of performance adopting adequate

assurances
3. "fruits of the K" approach= in every K there is implied covenant that
neither party shall do anything to have effect of destroying/injuring right
of other party to receive benefits/fruits of the K (implied obligation of good
faith and fair dealing)
B. bad faith- one party attempts to recapture forgone opportunities
4. "reasonable expectations approach"= good faith should protect
rxnable expectations
5. "new textualist approach"= gives near absolute priority to express
terms and renders implied futy of good faith irrelevant in many situations
6. ALL AGREE= good faith conduct means not undermining the spirit of the K
Seidenberg v. Summit Bank, Superior Ct. NJ (2002) -fruits of the

contract approach
A) Facts/Story: in 1997 Seidenberg and another P sold their insurance
brokerage business to Summit Bank (D) in exchange for 445,000 shares of
stock in D's parent corporation. Ps placed shares in escrow until 2010 to take
care of remaining liabilities and agreed to work for Summit as executives of
brokerage firms. The employment agreements acknowledged the joint
obligation to work together, and provided that Ps and D would formulate a
joint marketing program to provide the brokerage firm with access to Ds
marketing resources. Said Ps would take lower salaries but would increase
with sales- also said minimum of 5 yr employment and employed til age 70
unless terminated. Ps didn't get salary increases and D later terminated Ps in
1999.
B) P's claims: breach of contract, contending that D had failed to honor its
obligations regarding joint marketing, thereby impacting negatively Ps
expected compensation and future involvement. Ps claimed that their
allegations gave rise to an inference of bad faith and that D had never been
committed to developing the business with Ps, and that D had merely sought
to acquire Ps business to operate it themselves.
C) Procedure: All claims except Ps claim of a breach of the implied covenant of
good faith and fair dealing were settled. trial court dismissed remaining
claim, holding that the sellers sought to use parol evidence to prove an oral
agreement made beyond the four corners of the written contract. Also found
that Ps were sophisticated enough in business to get the assurances put in
writing. Ps appealed.
D) Issues:
1) Must a court allow parol evidence in determining whether a breach of the
covenant of good faith has occurred?
2) Is a claim under the implied warranty of good faith and fair dealing
negated merely because the claimant had equal bargaining power, had
engaged counsel, or was not financially vulnerable when negotiating the
agreement?
E) Answers:
1) Yes.
2) No.
F) RULES:
1) -bargaining power, engaging a lawyer, and financial vulnerability are
factors that trier of fact may consider in weighing the sufficiency of
plaintiffs claim but they are not the only factors.
2) The covenant of good faith and fair dealing is contained in all contracts
and mandates that neither party do anything which will have the effect of
destroying or injuring the right of the other party to receive the fruits of
the contract.
i) -There are limits and the implied covenant of good faith and fair
dealing cannot override an express ,, term in a contract. The implied
covenant can require that a contracting party act in good faith when
exercising discretion in performing its contractual obligations. It may
occur that a party will be found to have breached the implied covenant
even if the action complained of does not violate a pertinent express
term.
3) test: To determine what is considered a good faith performance, the court
must consider the expectations of the parties and the purposes for which
the contract was made.
4) Good faith has three uses:
(1) permits inclusion of terms and conditions not in written contract.
2) Allows for redress of bad faith even if no express term breached
3) permits inquiry into a party's exercise of discretion expressly
granted by a contract's terms.
note: can't override express terms in K w/ good faith
5) parol evidence rule prohibits the introduction of oral promises which
tend to alter or vary an integrated written instrument. A parol agreement
which contradicts the express words of a written contract necessarily is
ineffectual and evidence of it inadmissible.
i) -Parol evidence may be admitted in order to provide
understanding of the parties intentions.
ii) -The parol evidence rule does not come into play until the true
intentions of the parties is determined.
iii) -The rule cannot inhibit the application of the implied covenant of good
faith and fair dealing because that covenant is contained in all
contracts made by operation of law.
G) Rationale: In this case Ps do not seek to contradict or alter any express term
in their written contract, but rather question Ds good faith in both its
performance and termination of the contract.
1) It would be difficult, if not impossible, to make that determination without
considering evidence outside the written contract. Therefore, in
determining whether a breach of the covenant has occurred, a court must
allow for parol evidence.
2) Ps allegations of bad faith and ill motives are sufficient to survive

dismissal.
H) Holding: Reversed and remanded

I) Notes:
i) -Mathis case= intent may matter more than reasonability of conduct
(re. standards of industry) in open price terms K dispute. UCC revised
1-201(b)(20) recognizes obligations of both subjective honesty in fact
and objectively reasonable behavior (courts seemingly think it should
be in that order of importance)
ii) -lender liability= usually cases involving interaction between express
terms and proposed limits derived from implied oblig of good faith,-
generally involve an express grant of authority to lender to terminate
credit or demand prompt repayment weighed against claim by debtor
that lender must exercise the discretion in good faith.
Comment: Requirement & Output Ks

a. both- Establish maximum and minimum quantities of goods to be refused
or produced.
b. *requirement Ks: buyer's agreement to buy exclusively from seller.
c. criticisms early on: held invalid initially as lacking CNS or mutuality, or

being to indefinite or vague to enforce
d. Prof Corbin: CNS exists b.c of commitment by buyer to either buy from
that seller, or not buy at all R.2d 77
e. UCC even today seems to require that these output Ks be made exclusive
so that Corbin's premise above applies and thus it is not an illusory
promise or sham CNS
a. sometimes courts will find implied promise of exclusivity
f. Where contractual limitations are not expressed, UCC 2-306(1) which

sets a good faith standard on minimums and maximums except where
limited or exceeded based on prior trade.
a. reduction in buyer's demand usually deemed in good faith IF

resulting directly from reasons/forces beyond buyer's control
g. *output Ks: agreements to sell exclusively to a buyer all the goods that
the seller may product
h. Feld v. Henry S. Levy & Sons, Inc. (1975): contract for purchase of bread
crumbs was breeched when D shut down his bread crumb oven and relied
on contract language stating all produced to terminate contract. Court
held that this was not in good faith.
Locke v. Warner bros., Inc. (CA. Ct. of App., 1997)

A) Facts/Story: P Sandra Locke had been in relationship (1975-1989) w Clint
Eastwood after acting with him. P appellant was given a "pay or play"
directing deal. Eastwood secretly told Warner Bros. it would reimburse them
her salary "pay" fee if they agreed not to develop her work. D paid the
compensation of $1.5 million under the agreement and gave her an office on
the studio lot and an administrative assistant BUT did not develop any of
Locke's proposed projects or hire her to direct any films.
1) Eastwood secured development deal for her w/ Warner in exchange for her
dropping her case against him. Contemporaneously w. Locke/Eastwood
settlement agreement, Locke entered into a written agreement with
Warner, Nov 27, 1990. Agreement had two basic components: 1) Locke
would receive $250,000 per year for 3 yrs for a non-exclusive first look
deal. It required Locke to submit to Warner any picture she was
interested in developing before submitting it to any other studio. Warner
then had 30 days either to approve or reject a submission. 2) a $750,000
pay or play directing deal. The provision is called pay or play because
it gives the studio a choice: it can either play the director by using the
director's services, or pay the director his or her fee.
2) Unbeknownst to P at time, Eastwood had agreed to reimburse Warner for
the cost of her K if she did not succeed in getting projects produced and
developed. Early in the second year of the 3-yr K, Warner charged
$975,000 to an Eastwood film, Unforgiven.
B) P's claims: development deal was a sham, that D never intended to make
any films with her, and that D's sole motivation in entering into the
agreement was to assist Eastwood in settling his litigation with Locke.
Testimony that D's officials told ppl they wouldn't make movie with P.
C) D's arguments: had similar deals with others at same time that had similar
lack of success, -odds are slim a producer can get a project into development
and even slimmer director will be hired to direct film. industry standards gave
it a right to reject scripts/proposals outright
D) Procedure: P appeals a judgment following trial ct. grant of summary
judgment for D. Rationale for trial court decision: not place for court- court
should not substitute its judgment for studio's creative decisions/judgment.
Warner had no obligation either to put into development any of the projects
submitted to the studio for its consideration The implied covenant of good
faith and fair dealing cannot be imposed to create a contract different from
the one the parties negotiated for themselves Warner had the option to
pass on each project Locke submitted andwas not required to have a good
faith or fair basis for declining to exercise its right to develop her material.
Such a requirement would be improper and unworkable.
E) Issue: Did D breached its contract with P by failing to evaluate her proposals
on their merits?
F) Answer: There is sufficient fact to conclude that D may have acted in bad
faith by categorically rejecting Ps work and refusing to work with her. Part of
her agreement was that they would accept her proposals and consider them
(their good faith CNS could be implied)- if they only intended to pay her, they
shouldn't have made the pay or play agreement. trial court erred in failing
to distinguish b/w D's right to make subjective creative decision (not
reviewable for reasonableness) and the requirement the dissatisfaction be
bona fide or genuine.
G) holding: REVERSED, FOR P
H) Rules: In every K there is an implied covenant that neither party shall do
anything having the effect of destroying or injuring the right of the other
party to receive the frutis of the contract. -Defining good faith: In contracts
providing for one partys discretion based on a judgment on the other party
or its work, such judgment must be genuine in order to be performed in good
faith
i) -implied covenant of good faith and fair dealing is limited to assuring
compliance with the express terms of the K and cannot be extended to
create obligations not contemplated in the k
ii) -If Ds had been given right to do what they did by express terms of K,
there could be no breach
iii) -Fraudulent intent may be inferred from such circumstances as
defendant's failure even to attempt performance of contract.
iv) -When it is a condition of obligor's contractual duty that he or she be
subjectively satisfied with respect to obligee's performance,
subjective standard of honest satisfaction is applicable.
v) -Where contract involves matters of fancy, taste, or judgment,
promisor is the sole judge of his satisfaction; if he asserts in good faith
that he is not satisfied, there can be no inquiry into reasonableness of
his attitude.
I) Rationales: Fact questions existed regarding whether movie studio violated
implied covenant of good faith and fair dealing and breached its film
development contract with prospective director by categorically refusing to
work with her, irrespective of the merits of her proposals, thus precluding
summary judgment in favor of studio in prospective director's action for
breach of contract. P had testimony from two witnesses each saying that D
never planned to make a movie with P. Merely because D paid P the
guaranteed compensation under the K does not establish good faith by D. If
D acted in bad faith and categorically rejecting all Ps work and refused to
work with her, irrespective of the merits of her work, such conduct is not
beyond the reach of the law.
J) NOTES- R.2d 205:Every contract imposes upon each party a duty of good
faith and fair dealing in its performance and its enforcement.
Donahue v. FedEx Corp., Superior Court of PA., 2000 -fire-at-will

employee can be fired
A) Facts/Story: Donahue(P) was a permanent FedEx employee from Nov. 1979
-Jan. 1997. He was a whistleblower --questioned numerous invoices which
did not comport with repair orders in his dept. He also called FedEx's
attention to other improprieties, such as FedEx's failure to pay invoices and
Marshall, his boss's, practice of directing auto body work to a Cleveland auto
body shop owned by a person with whom Marshall vacationed. He also said
they told him to falsify documents, etc. Marshall accused Donahue of gross
misconduct, specifically that Donahue made a racial remark in front of
another FedEx employee, and was accused of making derogatory remarks
about Marshall to vendors and others. FedEx has a Guaranteed Fair Treatment
Procedure ("GFTP") for employee grievances.
B) P claims: 1) employer had violated the duty of good faith and fair dealing
which is implied into all contracts under Pennsylvania law by terminating him
in contravention of GFTP and making sham review of his conduct under GFTP.
2) D violated public policy in firing him based on Penn. Human relations act.
3) his superior performance at work was sufficient CNS to make him more
than a fire-at-will employee. 4) D violated pub policy by alleging complaints
against him in retaliation, he says.
1) because his employer had a written policy containing a fair treatment
procedure for employee grievances, the employer had assumed
contractual duties to the employee to hear his grievances fairly and in
good faith
C) Issue: Did the employer breach the implied duty of good faith and fair
dealing and did the grievance procedure impose any separate contractual
duties?
D) Answer: No.
E) rationale: P cannot maintain an action for breach of the implied duty of good
faith and fair dealing, insofar as the underlying claim is for termination of an
at-will employment relationship. The GFTP expressly states that "the policies
and procedures set forth by the Company provide guidelines for management
and other employees during employment but do not create contractual rights
regarding termination or otherwise."
1) rejects the argument that P furnished sufficient additional consideration to
overcome the presumption that he is an at-will employee simply b/c he
alleged that he gave superior work performance.
2) Somers differed bc in that the P recovered specifically for breach of
implied duties connected to the profit sharing provision- not for the
termination per se. (employer breached duty of good faith by withholding
from P compensation that appeared to have already been earned before
termination)
3) Baker- a narrow holding- actually went for D in the end but held that
college was contractually obligated to render sincere and substantial
performance of prof's duties by which he would be evaluated- this was
only time this court ever had applied duty of good faith and fair
dealings applies to termination of at-will employment
relationship**
4) public policy: Donahue could not prove that Federal Express had violated
any statutory law or public policy, although the conduct might under some
circumstances be considered unscrupulous.
i) -public policy in Pennsylvania favors employers being able to freely
discharge their at-will employees, unless a positive statutory law or
other public policy of the Commonwealth is violated.
ii) **court has routinely rejected claim that it violates pub policy for
private employers to be allowed legally to fire employees for
whistleblowing
F) rules: In an at-will employment relationship, the duty of good faith and fair
dealing applies to those contractual terms that exist beyond the at-will
employment relationship.
1) When the employee was under no legal duty to report the acts at
issue, a private employer cannot violate public policy by firing an
employee for whistle-blowing.
2) -Superior performance is not good enough to be classed differently than
an at-will employee because that is what is expected.- additional CNS
exists when an employee affords his employer a substantial benefit
other than the services which the employee is hired to perform
3) A cause of action for wrongful discharge will only exist where the
termination of an at-will employment relationship is in violation of public
policy. e.g. require an employee to commit a crime, cannot prevent an
employee from complying with a statutory duty, and cannot discharge an
employee when a statute specifically prohibits the discharge.
G) procedure: trial court allowed demurrer for D
H) holding; affirmed
I) notes:
1) if the K establishes legally cognizable duration of employment, it can be
found not at-will, but the presumption unless otherwise stated (in the US)
is that employees are at will. - promises of permanent employment often
found unenforceable
2) Majority of Js ALLOW public policy exception to at-will doctrine- IF a
"Clear mandate" of public policy founded on constitutional, legislative,
admin, or established judicial authority can be identified. e.g. if fired b/c
refused to commit perjury-
3) minority (NY, Ala.) REJECT public policy exception:
4) role of additional cns is to show parties' intent to have relationship beyond
at-will K
5) employee handbook: employers can create a duty of good faith on
themselves (re: at will employees) if they put it in their handbook that
they wont fire except for good cause- but NOT ALL courts agree that
statements in manuals re: job security are contractually binding
6) promissory estoppel: detrimental reliance of discharged employee may
serve as basis for relief (Ex. employee moved for company to take new
post and they fired her after she moved)- but some courts hold that at will
nature of employment makes it unreasonable to substantially rely on idea
that you'll remain employed
Implied Terms and UCC

A) Implied Terms:
1) A contract providing exclusivity of agency implies in fact an obligation on
the party receiving the rights of agency to give his best efforts to perform.
This consideration makes the contract binding, and the other party forfeits
agency. (Wood v. Lucy, Lady Duff-Gordon)
B) UCC:
i) Terms not specified in contracts for sale of goods might be filled-in by
the UCC
ii) (Leibel v. Raynor Manufacturing Co.)
(a) When termination is not provided for, the UCC permits
termination so long as reasonable notice is given. (Leibel v.
Raynor Manufacturing Co. / UCC 2-309)
Warranties (Express & Implied)

caveat emptor="let the buyer beware"
17th c. developed concept- seller has no responsibility for quality of
product sold unless a warranty given
o Chandelor= held for D b/c "bare [oral] affirmation that it was a
bezar stone without warranting that it was is no cause of action"
o end of 19th century- gradually reversed rule of caveat emptor-
imposed "implied warranties" by law/statute- not based on
agreement b/w parties
An EXPRESS WARRANTY exists for a product if written or verbal word
from the seller indicates a specific promise regarding the product.
(Bayliner Marine Corp. v. Crow / UCC 2-313)
2-313. Express Warranties by Affirmation, Promise, Description,

Sample.
(1) Express warranties by the seller are created as follows:
(a) Any affirmation of fact or promise made by the seller to the buyer
which relates to the goods and becomes part of the basis of the bargain
creates an express warranty that the goods shall conform to the
affirmation or promise.
(b) Any description of the goods which is made part of the basis of the
bargain creates an express warranty that the goods shall conform to the
description.
(c) Any sample or model which is made part of the basis of the bargain
creates an express warranty that the whole of the goods shall conform to
the sample or model.
(2) It is not necessary to the creation of an express warranty that the seller use
formal words such as "warrant" or "guarantee" or that he have a specific
intention to make a warranty, but an affirmation merely of the value of the goods
or a statement purporting to be merely the seller's opinion or commendation of
the goods does not create a warranty.
An IMPLIED WARRANTY of merchantability exists for a product if

consumers have a standard of expectation regarding the products
performance (Bayliner Marine Corp. v. Crow / UCC 2-314)
o implied warranties often made in non-UCC transactions
ex. warranty of habitability in leases of dwellings
most states now recognize implied warranties of

habitability
Uniform Residential Landlord Tenant Act (p 499)
2-314. Implied Warranty: Merchantability; Usage of Trade.

(1) Unless excluded or modified (Section 2-316), a warranty that the goods shall
be merchantable is implied in a contract for their sale if the seller is a merchant
with respect to goods of that kind. Under this section the serving for value of
food or drink to be consumed either on the premises or elsewhere is a sale.
(2) Goods to be merchantable must be at least such as
(a) pass without objection in the trade under the contract description; and
(b) in the case of fungible goods, are of fair average quality within the
description; and
(c) are fit for the ordinary purposes for which such goods are used; and
(d) run, within the variations permitted by the agreement, of even kind,
quality and quantity within each unit and among all units involved; and
(e) are adequately contained, packaged, and labeled as the agreement

may require; and
(f) conform to the promise or affirmations of fact made on the container or

label if any.
(3) Unless excluded or modified (Section 2-316) other implied warranties may
arise from course of dealing or usage of trade.
Am IMPLIED WARRANTY OF FITNESS for a particular purpose exists
if the buyer expressed an intention to the seller before purchase, or the
seller otherwise knew of the buyers intended purpose for the product
o (Bayliner Marine Corp. v. Crow / UCC 2-315)
2-315. Implied Warranty: Fitness for Particular Purpose.

Where the seller at the time of contracting has reason to know any particular
purpose for which the goods are required and that the buyer is relying on the
seller's skill or judgment to select or furnish suitable goods, there is unless
excluded or modified under the next section an implied warranty that the goods
shall be fit for such purpose.
Bayliner Marine Corp. v. Crow, S. Ct. of VA. 1999- warranties (implied v.

express)
A) Facts
i) In the summer of 1989, John R. Crow was invited by John Atherton,
then a sales representative for Tidewater Yacht Agency, Inc.
(Tidewater), to ride on a new model sport fishing boat known as a 3486
Trophy Convertible, manufactured by Bayline Marine Corp. Crow piloted
the boat for a short period of time, but was not able to determine its
speed. Crow asked Atherton about the maximum speed and Atherton
explained that he had no personal experience with the boat or
information concerning the boat's performance. Atherton gave Crow
copies of the "prop matrixes," which listed the maximum speed for
each model. The 3486 Trophy Convertible was listed as having a
maximum speed of 30 miles per hour when equipped with a size
"20x20" or "2019" propeller. The boat Crow purchased did not have
either size propeller but, instead, had a size "20x17" propeller. At the
bottom of one of the "prop matrixes" was a disclaimer stating that the
data was for comparative purposes only. In August 1989, Crow entered
into a written contract for the purchase of the 3486 Trophy Convertible
in which he had ridden for $120,000. When Crow took delivery of the
boat, he noticed that the boat's speed measuring equipment, indicated
that the boat's maximum speed was 13 mph. Crow immediately
returned to Tidewater to report the problem. In 1992,
B) P's claims:
i) Crow filed a motion for judgment alleging breach of express warranties
and implied warranties of merchantability and fitness for a particular
purpose.
(a) -prop matrixes= express warrantee that boat can travel 30mph
max.
C) Issue
i) Whether there was sufficient evidence that the boat manufacturer
breached an express warranty and implied warranties of
merchantability and fitness for a particular purpose.
D) Answer/Holding
i) No. There was not enough evidence of breach.
2) Rationale
i) no breach of express warranty. = The statements in the "prop
matrixes" provided by Bayliner did not relate to the particular boat
purchased by Crow, or to one having substantially similar
characteristics.
(a) -compares this case w/ Daughtrey - statements made by seller
were about specific piece of jewelry sold
(b) -By their plain terms, the figures stated in the "prop matrixes"
referred to a boat with different sized propellers that carried
equipment weighing substantially less than the equipment on
Crow's boat.
(c) -brochure statement was not express warranty- -A statement
purporting to be merely the seller's opinion or
commendation of the goods does not create a warranty.
ii) no breach of implied warranty of merchantability= no evidence
addressing the standard of merchantability in the trade or whether
Crow's boat failed to meet that standard.
(a) -no evidence that it wasn't fit to be an offshore fishing boat just
b/c it couldn't travel 30mph
iii) no breach of an implied warranty for a particular purpose=
Crow did not prove that he made known to the seller the particular
purpose for which the boat was required.
(a) -boat engines were used for 850 hours without any problems
(b) -implied warranty of fitness is question of fact
E) Rules
1) Express warranties are created by an affirmative promise which becomes
part of the basis of the bargain. -- whether affirmation of fact by seller =
express warranty is a question of fact
2) To be merchantable, the goods must be such as would pass without
objection in the trade and as are fit for the ordinary purposes for which
such goods are used.
3) To establish an implied warranty of fitness for a particular purpose, the
buyer must prove as a threshold matter that he made known to the seller
the particular purpose for which the goods were required.
F) Procedure
i) -Trial court = for P- on breach of express and implied warranties of
merch. and fitness for particular award: 135K damages plus
prejudgment interest
G) Notes:
1) UCC ways to create express warranty= making representation about
goods, giving description, or displaying sample or model
i) pre-code law required buyer to prove reliance
ii) unclear whether reliance required under UCC (See 2-313)
(1) some courts (Ct. App. Cal- Keith case) believe cmnt 3 to 2-313 does
not require reliance
2) implied warranty of merch= involved in vast spectrum of cases- from
purchase of epensive equip. to purchase of hamburger
3) elements required for implied warranty of fitness for particular
purpose= 1) liability not limited to merchant sellers; 2) warranty created
only when buyer relies on seller's skill/judgment to select suitable goods
for buyer. and 3) seller has rxn to know buyer relied
4) disclaimers of express warranties= see 2-316 below. may be created
orally or by one of several writings- existence of disclaimer may turn on
parol evidence
i) some courts allow parol evidence, others don't
5) disclaimers and implied warranties= see UCC 2-316(2) and (3)-
"language must mention merchantability and in the case of writing must
be conspicuous"
i) disclaiming language for fitness warranty= must be in writing
(unlike merchantability warr.) but can be less specific than that for
warranty of merchantability
2-316. Exclusion or Modification of Warranties.

(1) Words or conduct relevant to the creation of an express warranty and words
or conduct tending to negate or limit warranty shall be construed wherever
reasonable as consistent with each other; but subject to the provisions of this
Article on parol or extrinsic evidence (Section 2-202) negation or limitation is
inoperative to the extent that such construction is unreasonable.
(2) Subject to subsection (3), to exclude or modify the implied warranty of
merchantability or any part of it the language must mention merchantability and
in case of a writing must be conspicuous, and to exclude or modify any implied
warranty of fitness the 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."
(3) Notwithstanding subsection (2)
(a) unless the circumstances indicate otherwise, all implied warranties are
excluded by expressions like "as is", "with all faults" or other language
which in common understanding calls the buyer's attention to the
exclusion of warranties and makes plain that there is no implied warranty;
and
(b) when the buyer before entering into the contract has examined the
goods or the sample or model as fully as he desired or has refused to
examine the goods there is no implied warranty with regard to defects
which an examination ought in the circumstances to have revealed to him;
and
(c) an implied warranty can also be excluded or modified by course of

dealing or course of performance or usage of trade.
(4) Remedies for breach of warranty can be limited in accordance with the
provisions of this Article on liquidation or limitation of damages and on
contractual modification of remedy (Sections 2-718 and 2-719).
Chapter 7 - Avoidance of the K - Duress

Duress
A contract is voidable if the plaintiff can prove distress by demonstrating 1) that it
involuntary accepted the terms of another party, 2) circumstances permitted no
alternative, and 3) such circumstances were the result of coercive acts of the
other party (meaning that duress must result from defendants actions and not
just by plaintiffs necessities)
(Totem marine Tug & Barge, Inc. v. Alyeska Pipeline Service Co.)
In most jurisdictions, economic conditions exacerbated by defendant and

threatening to bankrupt the plaintiff qualifies as duress (Totem Marine Tug &
Barge, Inc. v. Alyeska Pipeline Service Co.)
Totem Marine Tug & Barge v Alyeska Pipeline Co (AK. 1978)

A) Facts:P,Totem,enteredintoaKw/D,Alyeska,totransportpipelineconstructionmaterialsfromTXto
AK.Pcharteredabargeandatugtoaccomplishthis.
1) UponarrivalPdiscoveredthatDhadmisleadPaboutthevolumeofmaterial.

2) InwaitingforassurancesandanamendmenttotheK,Pssecondtugwasdelayedgettingthrough
PanamaCanal,thetransportdealtw/ahurricane,
3) andthenDunloadedthematerialsatLongBeachw/oPsconsentwhichnullifiedP'sinsurance.
4) DterminatedtheKw/oprovidingareasonandstatedpaymentwouldbeineither1dayorw/i6
8mos.
5) Totemreceivedasettlementandsignedareleasefor$97,500whenthedebtamtwasbtwn$260K
and$300K.
B) PsArgument:Ddeliberatelyw/hpaymentknowingthatPhadnochoicebuttoacceptaninadequatesum
insettlementofthatdebt,thusb/cofnecessityPinvoluntarilyacceptedaninadequatesettlementand
executedarelease.
C) DsArgument:Totem/P,viaV.P.Stair,executedareleasewhenPwasrepresentedbycounselatthe
negotiatingsettlementconference,fullyawareofthelegalconsequences.
D) Procedure:SupCtgrantedSummaryDF;Plappealed;S.CtofAKReversedandremanded
E) Issue:Didanygenuineissuesofmaterialfactexistrelatingtowhethertherehadbeeneconomicduress
whichwouldpermitavoidanceofthereleaseprecludedsummaryjudgmentfordefendants?
F) Answer:Yes
G) Rationale:
1) Asamatteroflaw,anduponexamofthematerialspresentedinoppositiontoDfM4Summary,P
hasmadeasufficientshowingastoeachoftheelementsofeconomicDtow/standmotionforsum.J
buthedoesneedtoshowmoreattrialtoprovehisclaim
2) OneessentialelementofeconomicduressisthatthePshowthattheotherparty,bywrongfulactsor
threats,intentionallycausedhimtoinvoluntarilyenterintoaparticulartransaction.
3) InmanycasesathreattobreachK,orw/hpaymentofdebt=wrongfulact.
4) Somectsrequirebadfaithaccompanythewrongfulact.
5) EconomicDdoesnotexistmerelyb/capersonhasbeenthevictimofawrongfulact,inadditionthe
victimmusthavenoreasonablealternativechoicebuttoagreetotheotherpartysterms,orthathehad
noadequateremedyifthethreatweretobecarriedout.
6) Anavailablealternativeorremedymaynotbeadequatewherethedelayinvolvedinpursuingthe
remedywouldcauseimmediateandirreparablelosstooneseconomicorbusinessinterest.
H) Rule:
I)Duress= used to require P to show agreement was entered into for fear of loss of
life or limb, mayhem, or imprisonment. NOW requires only that person of be
coerced, need NOT be
(a) economic duress 3 basic elements=
J) one party involuntarily accepted terms of another.
K) circumstances permitted no other alternative.
L) such circumstances were result of coercive acts of other party
(a) additional elements:
1. -this court and Cmnt C to Rest. 175 require: improper
threat must induce making of the K - must "substantially
contribute" to manifestation of assent --subjective std. to
determine this
2. mustbecausallinkbetweeneconomichardshipandthecoercion
(b) econ. duress policies= freedom of K is important, desirability of
private resolutions to be final, but also need to balance fairness-
law's role in correcting disproportionate bargaining power in
coercive circumstances
M) notes:
1) voidv.voidableKs:Ksmadeunderecon.duressaredeemedvoidableratherthanvoidsotheyare
bindingunlessdisaffirmedandmaybeexpresslyorimplicitlyratifiedbypurportedvictim
2) improperthreats=whilethreatstosueortorefusetohonoraKobligationarenotperseimproper,
theymaybeimproperifweremadein"badfaith"
Undue Influence
i) Defining coercive / threatening acts
(a) In some jurisdictions, the coercive acts committed by defendant must
be unlawful (Odorizzi v. Bloomfield School District /
following Restatement 2nd 176 (1)(a))
(b) For other actions that would make a threat improper, see Restatement
2nd 176
ii) Undue Influence:
iii) A contract is voidable if the plaintiff can prove undue influence by
demonstrating 1) susceptibility and 2) oppressive persuasion, which is
characterized by unusual timing, insistence on haste, emphasis on
consequences if not acting quickly, use of multiple persuaders, and an effort
to keep away advisors or attorneys (Odorizzi v. Bloomfield School District /
Restatement 2nd 177(1-2))
Odorizzi v Bloomfield School District CA Ct of App 54, 1954
A) Facts:POdorizziwasanelementaryteacheremployedbyDundercontracttoteachthefollowingyrasa
permanentemployee.Pwasarrestedforhomosexualactivity.Theprincipalandsuperintendentcametohis
apartmentafterhisreleasefromjail.Theystatedheshouldimmediatelyresign,therewasnotimeto
consultanatty,andifhedidnotresignimmediatelytheDistrictwouldsuspendanddismisshimand
publizetheproceedings,hisarrest,andcausehimtosufferextremeembarrassmentandhumiliation.He
wasclearedofthecriminalcharges,andthenhesoughttobereinstatedbytheschooldistrict.They
refused,sohesuedtorescindhisresignation.
B) PsArgument:ThePlsfreewillwasovercomebythetacticsusedbytheDfsatatimewhenPlwasunder
severementalandemotionalstrain.DdeliberatelywithheldpmtofacknowledgeddebtknowingPhadno
choicebuttoacceptinadequatesuminsettlementofthatdebt;thatPwasfacedw/impendingbankruptcy;
PunabletomeetdebtsotherthanbyacceptingimmediatecashpmtbyD;thusheinvoluntarilyaccepted
inadequatesettlementandreleaseofallclaims.
C) DsArgument:Plfreelysignedtheresignationw/oduress,mistake,menanceorfraud.
D) Procedure:SupCtsustainedDfsdemurrer(dismissedcaseforD);PlAppealed;CtofAppReversed
E) Issue:WhetherP/teachersufferedduressorundueinfluencewhereschoolofficialscametohisapartment
andtoldhimheshouldresignimmediatelyandthatifhedidnotresignimmediatelyhewouldbesuspended
anddismissedandthatresultantpublicity,wherewouldcausehimextremeembarrassmentandhumiliation
justafterheunderwentarrest,policequestioning,bookingandreleaseonbailandhadgone40hours
withoutsleep,hadnotimetoconsultanattorney,
F) Answer:YESundueinfluence;Noduress(schoolsthreattodismisswasnotonlytheirlegalrightbut
theirpositiveduty.)
G) Rules:
1) Undue influence=consistsof(1)unduesusceptibilityofthevulnerablepersonand(2)excessive
pressurebythedominantperson.Itincludestakinganunfairadvantageofanothersweaknessofmind;
ortakingagrosslyoppressiveandunfairadvantageofanothersnecessitiesordistress.Inessenceit
involvesexcessivepressuretopersuadeonevulnerabletosuchpressure,pressureappliedbya
dominantsubjecttoaservientsubject.
2) weaknessesdeterminethatalessenedcapacityoftheobjecttomakeafreeKexists.
(1) Theapplicationofexcessivestrengthbyadominantoveraservientsubjectisthesecond
element.
(2) UImayconsistoftotalweaknessofmind,physicalcondition,emotionalanguish/turmoil,
exhaustion,oracombination.
ii)
Undueinfluenceusuallyinvolvesseveralofthefollowing7elements:
3) discussionofthetransactionatanunusualorinappropriatetime
4) consummationofthetransactioninanunusualplace
5) insistentdemandthatthebusinessbefinishedatonce
6) extremeemphasisonuntowardconsequencesofdelay
7) theuseofmultiplepersuadersbythedominantsideagainstasingleservientparty
8) absenceofthirdpartyadviserstotheservientparty
9) statementsthatthereisnotimetoconsultfinancialadvisersorattorneys
H) Rationale:TheFactsintheamendedcomplaintareinsufficienttostateaCOAforduress,menace,fraud,
ormistake,buttheydosetoutsufficientelementstojustifyrescissionb/cofundueinfluence.
i) --Odorizzi was extremely vulnerable when the principal and superintendent
came to his apartment. He had undergone arrest, booking, questioning, and
had not slept in 40 hours. The school officials exploited these vulnerabilities
when they threatened him with embarrassment and humiliation and denied
him the opportunity to consult an attorney.
ii) -The representatives of the Dist undertook to achieve theirobjectiveby
overpersuasionandimpositiontosecurePlssignature,butnothisconsenttohisresignation
throughhighpressurecarrotandsticktechnique.
2) PwasleftnotimetoseeklegaladviceandexcessivepressurewasplacedonthePtomakethehasty
decision.
I) Notes:
1) this court and Rest. 2d. 177(1) do not require special relationship -but it is
significant factor in court's considerations
2) this court- narrower idea of duress than Rest. 177
i) is UI harder or easier to show than duress
3) role of bad faith- huge I think
4) UI and marriage= Barry bonds case- seemed he had UI over wife when he had her
sign prenup day before wedding- CA. legislature changed law afterward making
prenups ivalid if a party is not represented by counsel at time unless waives right
to counsel in separate writing
Misrepresentation and Non-Disclosure

A) -Modern law gives victims of "misrepresentation" choice of 2 avenues:
1) tort action for damages OR
2) right to avoid enforceability of K through rescission
B) rescission through defense to action to enforce K
C) or through affirmative action seeking restitution of benefits conferred on other party
D) -When/why to choose rescission?
E) choose rescission only when willing to give up the benefit you've received! (ex.
you buy a house, find out its infested with termites and seller assured you it wasn't,
but you love house and don't want to give it up-- in this case you want to seek
damages ($$), not to get your money back through rescission b/c then you'd have to
give up the house!)
F) rescission is sometimes unavailable where: victim of wrongdoing has already
conferred the benefit he received from wrongdoer to a 3rd party and thus the victim
cannot return whatever he bought (rest. of restitution 66)
1) sometimes party CAN rescind K even though misrepresentation not made w
fraudulent intent -K is voidable for either fraudulent or material misrep. - but law
may limit remedy in case of no fraudulent intent
G) Questions to ask in following cases:
1) when is misrep. actionable either through rescission or in tort?
2) when does failure to disclose info amount to misrep?
3) what effect does contractual disclaimer of representations have on injured party's
right to rescind a K or recover dxs for misrep?
Syester v. Banta (Iowa S. Ct. 1965)

A) Story: P Syester is widow- lonely, lives alone. has no family, probably around 70
years old. After husband's death P worked as "coffee girl" at store- first went to D
Aurthur Murray Dance Studio in 1954 as gift from friend- was interviewed by manager
on her 2nd visit and he sold her small course of dance lessons by May 1955 they
sold widow 3222 hours of dance lesson for which she paid $21,020.50 - according to
the dance manager she paid total of $33,500 for 4057 hours of instruction. Instructor
Carey testified at length about what happened (Was former disgruntled employee of
D at time of trial, but jury believed him and its not for appeals court to judge)
1) on May 2, 1955- P bought 1200 hours of instruction for $6K when she had already
bought 2022 hours and had only used 261 hours
2) included in her purchases, based on D's company policy, were 3 lifetime
memberships- lifetime mermberships came with purchase of 1000 or 1200 hours-
each of her 3 lifetime memberhsips entitled her to free attendance to weekly
dances for life and 2 hours of instruction or practice per month- P had attended
and says she had fun
3) manager told her at her first lifetime membership purchase that she would be a
pro dancer
4) employees at D studio trained on high-powered salesmanship- each ballroom
wired for sound so manager could hear all convos b/w student and teacher
5) P was awarded various increasing medals (bronze. silver, gold) theoretically for
advancing proficiency
6) at one point when sold gold star course of 625 hrs for $6250 she had to come
back w. a check saying "well, it took some doing [to get the money] but here it is"
7) instructor of course was "faking it"= had no idea what he was doing- all of
instructors students got gold stars
8) P eventually quit studio and sought to sue b/c instructor Carey was fired
9) **Carey testified that D bribed him with getting his job back if he persuaded P not
to sue and to go back to studio - P dropped suit/went back
10) releases
i) **they got her to sign 2 releases- 1st release didn't involve any lawyer b/c
even D's counsel wouldn't go that far; 2nd release was for $4k but it was
never paid- P signed it but D did not!
B) P's claims: P changed mind again- sued alleging fraud and misrep.
C) D's claims: releases should be complete defense, no proof of damage, claim rule
was properly stated but statement of issue including amount prayed for was
misleading
1) we were just giving our opinion
2) she left studio b/c instructor left not b/c she was upset about misrepresentation
D) Procedure: jury trial for P- compensatory award of 15K, punitive award of 40K
E) Issue: Was there enough evidence to find misrepresentation? can punitive damages
award be upheld?
F) Answer: YES! - evidence of greed was so shocking to sense of justice as to make it
rxnable for jury to award high punitive damages- this award was not beyond scope of
evidence
G) Rules:
1) P must prove 6 elements of misrep. to make K voidable
i) D made statements
ii) that were false and
iii) concerned matters material to the K and
iv) party making statements knew they were false but
v) P believed and relied on the claims and
vi) P was damaged by his reliance
2) opinion issue: modern rule- misrepresentation of state of mind is
actionable
H) Rationales:
1) to promise P that she could be pro dancer at her age was "ridiculous"- her
gullibility doesn't justify taking $29K of her money
2) people at D studio were "Carefully schooled and supervised" in high-powered
salesmanship
3) D gave to employees "8 good rules for interviewing"- which included
i) how to prevent lawyer from consulting his banker, lawyer, wife, or friend.
ii) avoid permitting your prospect to think matter over.
iii) tell prospect that has never danced be4 that its an advantage or who has
danced be4 that that is an advantage
iv) dance w prospect then tell them their rythym is good- natural ability good-
will be ballroom dancer very soon.
v) tell them "did u know you have been graded excellent in all 3 areas: rhythm
natural ability and animation"
vi) use emotional selling
4) P overcharged by almost $21 K if carey/instructor's testimony about P's ability Is
correct
5) even D's lawyer hesitated to participate b/c D's conduct seemed so improper
6) even if she left b/c instructor was fired she could not possibly have used 3 lifetime
memberships
I) Holding: affirmed for P - compensatory AND punitive damages upheld
J) Notes:
1) R.2d 162(1)(b)- fraudulent misrep. may include statements made recklessly or
negligently (so not intentionally fraudulent, but not known to be true either);
material misrep. can include innocent misrep. as long as it relates to a material
element of the K
2) other potential claims?
i) fraud- entered K with no intention of honoring it (no intention to teach her for
all of those hours or make her pro dancer)
ii) bad faith- knew she couldn't be pro dancer- were claiming to evaluate her
abilities honestly but were not- looks like locke v. Warner bros/
3) could she have rescinded? would she want to?
i) probably couldn't have b/c she has already derived at least some benefit-
used some of her dance instruction hours
ii) probably wouldn't want to bring rescission action b/c then she couldn't get
punitive award
4) was reliance reasonable??
i) maybe this isnt as critical as one would think- although its required court's
are lenient about it where other gross inequities exist, this case suggests-
misrepresentation can occur even about something contained in public record
(E.g. realtor says it's a duplex, pub records say its suitable only for single
occupant)
Hill v. Jones (AZ Ct. of App., 1986)

A) Key topic: Nondisclosure and action for rescission in context of Real Property
B) Facts:
1) 1982- P agreed to purchase house from D for $72K - seller/D was to pay for and
place in escrow a termite inspection report stating place was free from termites
i) Termite inspection came back clean.
2) central feature of house= teak floor in many rooms/entryway
3) While in the house, P noticed a "ripple" in the floor and asked D if it was from
termite damage. D answered that it was from water damage.
i) no further discussion of this issue
ii) **P wasn't satisfied w. explanation of "Water damage" but felt termite
inspection would reveal if Ds were lying
4) Shortly after the close, P noticed crumbling wood and other signs of termite
damage. - heard from neighbor that there were termites there= estimate to
repair wood floor = $5K
5) D knew of prior infestation and termite issues.
i) when sellers bought home originally, they got pamphlet about termite
damage- saw diagram of it and knew it hadnt been repaired- they did
purchase guarantees that termites would be taken care of and but they knew
it wasn't occurring
6) Inspector claimed he should have been told about previous issues. - this was
custom
i) said boxes were stacked where termite holes were
C) Procedure
1) P sued D to rescind the contract.
2) trial court= granted summary judgment for D on concealment claim
i) rationale: "so-called integration clause" in parties' agreement
3) Ct. of Appeals- this court= reversed, found for P, new trial.
D) P's claims: statements made subsequent to execution of K were relied upon

(statement that there were no termites upon inspection)
E) D's claims: tries to distinguish b/w past and present presence of termites- says past
isnt a huge issue- says even if they did have duty to disclose, claims their
nondisclosure did not influence buyer
F) Issues:
1) Does seller of property have a duty to advise the buyer of material facts within
his knowledge pertaining to the value of the property?
2) Are termite damage and existence of past infestation material facts?
G) Answers
1) YES A seller of a property must advise the buyer of material facts within his
knowledge pertaining to the value of the property.
2) YES numerous courts have found this to be true
H) RULE
1) integration clause cannot shield sellers from liability if buyers can prove fraud
2) parol evidence always admissible in cases of fraud
3) Materiality: a matter is material if it is one with which a rxnable person would

attach importance in determining his choice of action w regard to transaction in
question
i) past vs. present termite presence: cannot draw hard and fast line- "materiality
is an elastic concept not limited by termites' health"
4) reliance: doesn't need to be evidence that they relied for jury to find for P if in
fact they might have relied and bad faith by DA
5) The doctrine of caveat emptor has waned in its influence recently.
6) R.2d 161: modern rule: vendor has an affirmative duty to disclose

material facts where:
7) Disclosure is necessary to prevent a pervious assertion from being a

misrepresentation or from being fraudulent or material
8) Disclosure would correct a mistake of the other party as to a basic assumption on
which that party is making the K AND if nondisclosure amounts to a failure to act
in good faith and in accordance with reasonable standards of fair dealing.
9) Disclosure would correct a mistake of the other party as to the contents or effect
of a writing, evidencing or embodying an agreement in whole or in part.
10) The other person is entitled to know the fact because of the relationship of trust
and confidence between them.
11) R. 2d 164(1)- policy of finality rightly gives way to policy of promoting honest
dealings b/w parties where misrepresentation is fraudulent or material
I) Rationale:
1) Although K law favors finality of transactions, it is unjust to strictly enforce the
policy favoring finality in certain circumstances.
2) FL Supreme Court, CA courts, KS courts said the duty to disclose arises "where
the seller of a home knows of facts materially affecting the value of the property
which are not readily observable and are not known to the buyer, the seller is
under a duty to disclose them to the buyer."
3) The inquiry by the buyers whether the ripple was termite damage imposed a
duty upon sellers to disclose what information they knew concerning the
existence of termite infestation in the residence.
J) Notes:
1) SEE 161(b).
i) Keeton's proposed factors to consider whether fairness requires disclosure

of material info:
(1) diff in degree of intelligence b/w parties (community sense of justice)
(2) relation b/w parties
(3) manner in which info is acquired -whether by chance, effort, or by illegal
act- this makes a different in ethical judgment
(4) nature of fact not disclosed- greater duty to disclose known intrinsic defect
if its not likely to be found by rxnable inspection**
(5) termites issue?- isnt it likely to be found??
(6) general class to which person who is concealing info belongs- seller (êr
duty) or purchaser?
(7) nature of K itself- releases and insurance Ks require almost all facts to be
disclosed
(8) importance of fact not disclosed
(9) any conduct of non-disclosing person - active concealment? anything that
might prevent purchaser from buying at agreed upon price (aka incurring
him additional costs) should be fraudulent as matter of law
2) Kronman's economic analysis:
i) draws distinction b/w info casually acquires and info obtained thru deliberate
and costly inquiry
(1) disclosure of deliberately attained info shouldn't be required- we want
incentive for parties to learn things - protects investment- it cost
something to obtain that info!
(2) casually acquired info SHOULD be disclosed if party knows buyer doesn't
know it= b/c it didn't cost him anything to obtain that info!
3) sometimes states have disclosure laws requiring higher std. of
"reasonable care" in disclosure- so even negligent nondisclosure could be a
problem- this requires actual damages though- not just decreased value of home
in abstract-exception to damages req.--> treble damages (???) may be
available if there is willful failure to deliver disclosures
4) usually disclaimers don't bar actions in tort- but "Specific disclaimer of
representations" might- b/c might show lack of justified reliance- this specific
disclaimer wouldn't apply to rescission though
i) note/exam: False rep. of material fact ALWAYS ground for rescission
5) fiduciary relationships lawyer/client, trustee/beneficiary
Fraud continued..
Park 100 Investors v. Kartes, Indiana Ct. App. 1995- FRAUD/Misrep.
A) takeaway: husband and wife running late and rushed to sign lease w/
personal guaranty assuming it only contained what had already been
discussed; it did not. They didn't pay full amt of their obligation per the K
they signed w. P. P sued them. Held: P not responsible for paying the $ b/c
there was a misrepresentation and fraud
B) Parties: P/Park 100 is suing the D/Kartes in their personal capacity for
Monetary damages.
C) P's claims: Park 100 asserts that the D/Kartes signed a personal guaranty on
a lease for a term of years. Even though the Kartes sold their interest to
Saffron Associates who failed to make the loan payments, they remain
personally liable under the terms of the guaranty which they signed.
D) D's defenses: they were fraudulently induced by Scannels misrepresentations into
signing the personal guaranty. That fraud under these circumstances negates their
assent. That the Kartes, as knowledgeable business people, were not justified in
relying upon Scannells statements, and that it was their failure to read the document
that proximately caused their injury.
1) What about the fact that the Kartes did not read the papers before
signing them. Was this action reasonable? They claim it was because 1.
They were on their way to a their daughters wedding rehearsal dinner. 2. The
company was to move into the building over the next two days. 3. They
consulted their attorney who said that the lease papers had been approved;
Scannell stood by while this conversation took place. 4. Issue of a personal
guaranty had never been raised during contract negotiations. 5. The document
they signed was entitled Lease Agreement.
E) Procedure:
i) Trial Court: for D/Kartes- fraud negated D's consent
ii) Appeals court: affirmed, for D/Kartes.
F) Issues: Did trial court err in its conclusion that P/Park 100 used fraudulent means
to procure the signatures of the Ds/Karteses on the guaranty of lease?
G) Answer: No, trial court did NOT err; sufficient evidence to find fraud; affirmed
H) Rationale/Elements of FRAUD:
i) What was the material misrepresentation of past or existing fact in this case?
(a) Scannel said that the papers were lease papers. Did not say that it
was a personal guaranty.)
ii) Was this statement false? Yes.
iii) Was it made with knowledge or in reckless ignorance of the falsity of the
statement? It appears on the facts that Scannell knew the statement
was false.
iv) Was the statement relied upon by the Kartes? Yes.
v) Was it reasonably relied upon?? --yes, for factors listed above in D's claims,
D/Kartes acted with ordinary care and diligence.
vi) Did it proximately cause their injury? Kartes say yes. Park 100 say no.
I) Rule:
1) -While a person relying on anothers representations must use ordinary care and
diligence to guard against fraud, the requirement of reasonable prudence in
business transactions is not carried to the extent that the law will ignore an
intentional fraud practiced on the unwary.
2) --Fraud is for the trial court to determine. The appellate court is not to reweigh
the evidence and substitute its judgment for that of the trial court. Instead, the
appellate court is to decide if there is sufficient evidence to support the trial
courts finding. Where the trial courts conclusion is not clearly erroneous, the
trial courts decision should stand.
Williams v. Walker-Thomas Furniture Co., Fed(DC)Circuit1965

A) Topics: add-on/cross-collateral clauses; UNCONSCIONABILITY; misrep. and
fraud; duty to read
B) Facts: P/Appellant bought furniture from D on credit and the K Ps signed contained a
provision which stated that the balance will remain due on every item purchased until
the balance due on all items, whenever purchases, was liquidated. In case of default
of payment, all the furniture on which balance is due will be taken back by the
appellee. (So basically, if you made every payment except the last one, they took
back the furniture, kept the money you paid them, and you got nothing!) The
appellants bought furniture in 1962 and defaulted on payment. They had also
purchased furniture from appellee in 1957 on which they had some payment
leftover. D/Walker-Thomas sued to repossess (replevin) all the items purchased
since 1957.
1) Under the terms of the contract, as long as Williams owed $1 on a single item,
every single item, including the ones they'd completely paid for was still
repossessable.
2) This is known as an add-on or cross-collateral clause.
i) Under a cross-collateral agreement, if you owe money on any one item,

you owe money on all the items.
C) D's claims: Williams argued that the contract should be considered void because it
was so one-sided that it was unconscionable.
D) Procedure: District level= for D/appellee. Int. App. Court affirmed- found that
although the K clearly favored Walker, there was no fraud or misrepresentation. The
Court noted that the fact that Williams had not even read the contract was irrelevant,
since there is always a duty to read.
E) Issues:
1) Did the court have the power to refuse enforcement of Ks that it found to be
unconscionable?
2) Were the terms of the contract in the current case so unfair that enforcement
should be withheld?
F) Answers/Holding:
1) Yes-- The lower courts stated that the courts do not have the power to deny
enforcement of Ks that are unconscionable. But this court ruled that the courts
do enjoy this power.
2) Not decided- case remanded for new trial.-- K in the instant case was
unconscionable, but the lower courts had not made any rulings as a matter of law
on this, so the case and the issue had to be remanded.
G) Rationales/Rules:
1) UCC 2-302- recently enacted by Congress - specifically provides that a court

may refuse to enforce a K which it finds to be unconscionable at the time it was
made.
2) Scott v. United States stated that: If a K be unreasonable and unconscionable,

but not void for fraud, a court of law will give to the party who sues for its breach
damages, not according to its letter, but only such as he is equitably entitled
to
i) shows that courts refusing to enforce such Ks is not a novel concept.
3) As far as the K in this case is concerned, a new trial was ordered to determine
whether the terms of the contract are so unfair that enforcement should be
withheld.
H) Notes:
1) ProceduralUnconscionability:mannerinwhichKwasmadewasunconscionable("takeitorleave
itsituation,emergencysituation,necessity,etc.)
2) SubstantiveUnconscionability:TermsoftheKareunconscionable(b/csogreatlyfavoroneparty,
forexample)
Higgins v. Superior Court (Cal. Ct. App. 2006)

A) takeaway: Cal. state appeals court would not enforce arbitration agreement
because the parties obligation to arbitrate was not mutual.
B) facts: 5 siblings in the Higgins family participated in the reality TV program Extreme
Makeover: Home Edition. The siblings, who ranged in age from 14 to 21, moved in
with acquaintances from church after their parents died. Producers of the program
decided to create an episode in which they renovated the neighbors' small apartment
where the children were living into a 9-bedroom home.
1) release: Two weeks before filming, the producers sent the participants an
agreement and release. On top of page it said "I have read carefully" etc. etc.-
but The last section of the agreement was smaller font than rest, not in bold, was
only 4 small paragraphs and contained a provision stating: I agree that any
and all disputes or controversies arising under this Agreement . . . shall
be resolved by binding arbitration. One of the homeowners gave the
siblings copies of the agreement and instructed them to flip through the pages
and sign and initial the document where it contained a signature line or box.
Within a matter of minutes, the siblings signed and returned their copies.
2) After the episode was broadcast, the homeowners allegedly forced the Higgins to
leave the newly renovated home.
C) P's claims: The Higgins sued producers for intentional and negligent
misrepresentation, and breach of K. Their complaint alleged that the producers
exploited them, portrayed them in a false light, and breached promises to provide
them with a home.
D) Procedure: trial court enforced the parties arbitration agreement (thus helping D).
1) Ps/Higgins appealed, arguing that the arbitration provision was

unenforceable because it was procedurally and substantively
unconscionable.
E) holding: the arbitration provision was substantively unconscionable. Trial court was
wrong to interpret P's claims as challenging enforceability of entire agreement-
they're just challenging enforceability of release.
F) Rules:
1) arbitration is a two-way street that requires both parties to use arbitration

equally to resolve legal disputes. - in most cases one party cannot have the
other sign an agreement binding only that other party to arbitrate- this gives
non-arbitrating an unfair advantage
2) substantive Unconscionability: "The harsh, one-sided nature of the

arbitration provision- the provision required only the Higgins to submit to
arbitration because it repeatedly used the phrase I agree and used the phrase
the parties agree only in referring to the producers right to seek injunctive
relief.- take-it-or-leave-it style: said they had to agree or they couldn't
participate in program (given to them only 2 weeks before the home renovation)-
i) under the provision the Ds could compel the Ps to arbitrate but Ds could still
go to court against them
ii) provision barred Ps from seeking appellate review of arbitors decision
3) procedural Unconscionability ... focuses on facotrs of surprise and oppression

with surprise being a function of the disappointed reasonable expectations of the
weaker party
i) the terms were complex legal terms that many people wouldn't understand--
the Ds knew the Ps were young, unsophisticated, and vulnerable
ii) the arbitration portion of the agreement was located under a heading labeled
"miscellaneous" and had no bolded words or special font there like it did in
many other sections in the 24-page document
G) rationales: arbitration provision was substantively unconscionable b/c it was a

standard form K that was unreasonably 1-sided in that it required the Higgins but not
the producers to submit their claims to arbitration; arbitration costs would be
prohibitive for the Higgins
H) notes:
1) some courts (not this CA court) say fact that K is adhesive is enough to make it
proced. unconsc.
Adler v. Fred Lind Manor, S. Ct. Wash. 2004

A) facts:P/employee, a Polish immigrant, was fired after he was injured on the job. He
had signed an arbitration agreement upon his employment. Pallegesdisability,age,and
nationalorigindiscriminationundertheWashingtonLawAgainstDiscrimination(WLAD);andalleges
unlawfuldischargeforpursuingindustrialinsurancebenefitsinviolationofTitle51RCW;
B) Pclaims:wrongfuldischargeinviolationofpublicpolicy;intentionalinflictionofemotionaldistress;and
unlawfulhostileworkenvironmentdiscrimination.
C) Dsmove:tocompelarbitrationandstayproceedingsunderanarbitrationagreementthattheplaintiffhad
signedasaconditionofemployment.
D) Procedure: trial court which granted D/employer's motion to compel arbitration in

the employee's case that alleged that the employer violated the Washington Law
Against Discrimination (WLAD); discharged him for pursuing workers' benefits;
committed wrongful discharge and intentional infliction of emotional distress; and
created a hostile work environment. P/employee appealed.
E) holding: reversed and remanded: (1) the WLAD claim did not entitle the
employee to a judicial forum; (2) substantive unconscionability alone could support a
finding of unconscionability; (3) the arbitration agreement was an adhesion contract
because the employees were not free to negotiate the terms; (4) there was evidence
that the employer explained the terms of the agreement, and the terms were not in a
maze of fine print; (5) remand was necessary for additional factual findings on the
circumstances surrounding the agreement; (6) the agreement did not apply
unilaterally; (7) the fee-splitting provision of might be substantively
unconscionable (though Adler failed to meet his burden to show the costs to him
would be prohibitive) (8) the attorney fees provision was substantively
unconscionable because in stating that the parties shall bear their own respective
costs and attorneys fees, it undermined a P's right to attorney fees under state
statute and helps the party with the better bargaining position and resources (8) the
180-day limitations provision in the agreement unreasonably favored D and
thus was substantively unconscionable; (9) the unconscionable portions of the
agreement were severable.
F) rules:
1) Substantive unconscionability alone can support a finding of
unconscionability.
i) WA.: 2 categories of unconscionability: substantive and procedural.
(1) Substantive unconscionability involves those cases where a clause or term
in the contract is alleged to be one-sided or overly harsh. "Shocking to the
conscience," "monstrously harsh," and "exceedingly calloused" are terms
sometimes used to define substantive unconscionability.
(2) Procedural unconscionability is the lack of a meaningful choice,
considering all the circumstances surrounding the transaction including
the manner in which the contract was entered, whether the party had a
reasonable opportunity to understand the terms of the contract, and
whether the important terms were hidden in a maze of fine print. We have
cautioned that these three factors [should] not be applied mechanically
without regard to whether in truth a meaningful choice existed.
2) Adhesion K factors/Procedural Unconscionability:
i) whether the contract is a standard form printed contract
ii) whether it was prepared by one party and submitted to the other on a take it
or leave it basis, and
iii) whether there was no true equality of bargaining power between the parties.
(1) While unequal bargaining power may exist between parties, the mere
existence of unequal bargaining power will not, standing alone, justify a
finding of procedural Unconscionability
iv) adhesion K inquiry only valuable in finding possible procedural
unconscionability. However, the fact that an agreement is an adhesion
contract does not necessarily render it procedurally unconscionable.
3) Remedies for Unconscionability
i) 3 options if Unconscionability is found. Court may:
(1) refuse to enforce the K at all
(2) enforce the remainder of the contract without the unconscionable term
(3) so limit the application of any unconscionable term as to avoid any
unconscionable result
ii) In cases where Ks concerning leases, sales, real property, and retail
installments are found to contain an unconscionable provision, courts may
enforce the remainder of the contract without the unconscionable clause.
iii) Whether a contract is entire or divisible depends very largely on its terms and
on the intention of the parties disclosed by its terms. As a general rule a
contract is entire when by its terms, nature and purpose, it contemplates and
intends that each and all of its parts are interdependent and common to one
another and to the consideration
iv) In instances where an employer engages in an "insidious pattern" of seeking
to tip the scales in its favor in employment disputes by inserting numerous
unconscionable provisions in an arbitration agreement, courts may decline to
sever the unconscionable provisions.
4) Interpreting meaning of K's terms
i) context rule. = requires that we determine the intent of the parties by
viewing the contract as a whole, which includes the subject matter and intent
of the contract, examination of the circumstances surrounding its formation,
subsequent acts and conduct of the parties, the reasonableness of the
respective interpretations advanced by the parties, and statements made by
the parties during preliminary negotiations, trade usage, and/or course of
dealing.
ii) Where a party seeks to invalidate an arbitration agreement on grounds that it
would be prohibitively expensive, that party bears the burden of showing
the likelihood of incurring such costs.
iii) specific terms and exact terms are given greater weight than general
language.
5) Statute of limitations: a K's statute of limitations provision will prevail over
general statutes of limitations unless prohibited by statute or public policy, or
unless they are unreasonable.
6) 3 factors to determine whether a party waives his right to compel
arbitration under the FAA:
i) knowledge of an existing right to compel arbitration,
ii) acts inconsistent with that right,
iii) and prejudice.
7) The Federal Arbitration Act (FAA), applies to all employment Ks except for
employment Ks of certain transportation workers.
8) Section 2 of (FAA) provides that written arbitration agreements shall be valid,
irrevocable, and enforceable, save upon such grounds as exist at law or in equity
for the revocation of any K
i) SCOTUS stated that a congressional declaration of a liberal federal
policy favoring arbitration agreements, notwithstanding any state
substantive or procedural policies to the contrary. The effect of the section is
to create a body of federal substantive law of arbitrability applicable to any
arbitration agreement within the coverage of the Act. Both state and federal
courts must enforce this body of substantive arbitrability law.
9) PRESUMPTION IN FAVOR OF ARBITRATION: federal and state courts must
presume arbitrability, whether the problem at hand is the construction of the K
language itself or an allegation of waiver, delay, or a like defense to arbitrability.
10) DEFENSES: BUT generally applicable K defenses, such as fraud, duress, or
Unconscionability, may be applied to invalidate arbitration agreements without
contravening of the (FAA). However, courts may not refuse to enforce arbitration
agreements under state laws which apply only to such agreements, or by relying
on the uniqueness of an agreement to arbitrate.
11) party opposing arbitration bears the burden of showing that the
agreement is not enforceable.
i) In instances where a valid individual employee-employer arbitration
agreement exists, the Federal Arbitration Act (FAA), requires that employees
arbitrate federal and state law discrimination claims. Moreover, the FAA
clearly preempts any state law to the contrary
12) It is black letter law of Ks that the parties to a K shall be bound by its terms.
G) Rationales:
1) not procedurally unconscionable b/c: Adler had a meaningful choice- he had a
rxnable opportunity to consider the terms (1 week) and couldve presumably
contacted a laywer or someone to help him understand terms
i) "arbitration agreement" was written in bold type
2) substantive Unconscionability:
i) unilateral?-- no, b/c said claims brought by "Either employee or employer" had
to be arbitrated
ii) attorney fees provision- YES unconscionable b/c provision requiring each party
to pay for own attorney favors richer party AND this is a case (discrimination)
when the D would pay if it lost)
iii) 180 days- YES unconscionable bc it could mean that P/employee couldn't do
anything if the first incident of wrongdoing occurred more than 180 days
before, even if he was suing on something else
H) notes:
1) other substantively unconscionable provisions: confidentiality clause (hampers
employees ability to show pattern of wrongdoing by D)
2) in commercial settings: unconsc. rarely found here- merchants expected to
know bargaining process and generally subject to higher duty to read UNLESS
there was clear disparity in power and sketchy behavior by one party (e.g. failing
to point out clause on back of paper)
Public Policy
Problem 7-2
A) facts: Ellen Erikson has been employed as genetic researcher by Neogenetics Inc-
corp engaged in genetic research and commercial sale of products developed by
research. Erickson has been considering leaving comp and starting her own business.
But part of her employment K states:
1) covenant not to compete: during her employment and for 2 years thereafter
she will not "Engage either directly or indirectly nor will she have any interest,
whether as shareholder, creditor, or otherwise, in any business engaged in
genetic research or in marketing of products generated by such research"
B) Q: Ellen asks me about enforceability of clause.
C) Answer: note: answer this based on Valley Medical case
Valley Medical Specialists v. Farber, AZ. S. Ct. 1999

A) facts/story: Valley Med/a medical group hired Farber/a pulmonologist. 3 years later,
he became a shareholder in the group, and signed an agreement not to compete in
the event of his departure. Specifically, he agreed that for three years after his
separation, he would not compete in the practice of medicine or treat any of the
group's patients within a five-mile radius of any of the group's offices. In 1994, he left
the group, and commenced a pulmonology practice within the five-mile restrictive
area. The group sued, claiming that he was in violation of his non-compete
agreement.
B) procedure:
1) trial court: for D- ruled that the restrictions were unenforceable. -- either b/c it
violated public policy or b/c it was too broad- any covenant over 6 months would
be unreasonable- 5 mile radius from each of the 3 offices was unreasonable b/c it
covered 235 square miles and didn't provide exception for emergency medical aid
and wasn't limited to pulmonology
2) Court of Appeals: reversed for P = holding that the agreement was
enforceable b/c there were 8 hospitals outside radius that Dr. could practice in
and his patients could just travel there if they wanted him to treat them- court
would require it to be modified to exclude emergency treatment
3) D/physician then appealed to the Supreme Court.
C) holding: the agreement was not enforceable.
D) rule:
1) a restriction is unreasonable if:
i) the restraint is greater than necessary to protect employers legitimate
interest
ii) OR that interest is outweighed by the hardship to the employee
2) this relationship was more like an employee-employer not that of 2 competing
businesses -in cases involving the professions, public policy concerns must
outweigh any protectable interest the remaining firm members may have
3) court strictly construes restrictive covenants in way most favorable to
professional mobility and access to med. care and facilities
4) its immaterial that Dr. might've have = bargaining power- the hardship to him
isnt the key issue, but rather the hardship to his patients.
5) The balance between restraint and interest is determined by the scope of the
covenant (time period, geographical reach, scope of prohibited activities
i) employers interest in customer base must be balanced against employee's
right to its customers
ii) Public interest includes a patients preference to keep the same doctor or
other professional sensitive of client privilege or confidentiality
6) severance power, but not power to rewrite!: AZ courts will only "blue
pencil"/sever grammatically severable, unreasonable provisions of restrictive
covenants-- but Court does not have the power to modify the agreement
and enforce it to an extent that would be reasonable, even though the parties had
agreed in the contract that a court could do so.
E) public policy rationale/rule:
1) VMS did have legitimate protectable interest, BUT it took it too far w. this
covenant
2) respect for the physician/patient relationship, and for the patient's right to select
his or her doctor, required that it construe non-compete agreements very
narrowly in the medical context.
3) 3-year restriction was unreasonable.
4) 5-mile radius was too broad. - the agreement prohibited the physician from
practicing medicine at all within the restrictive area, while his actual practice had
been limited to pulmonology
5) did leave open the possibility of enforcing limited restrictions on physicians, it has
made it clear that because of the patient choice issues involved, non-
compete agreements will be scrutinized very carefully before they will
be enforced in the medical profession.
F) notes:
1) many courts say non-compete clauses by law firms might are unreasonable and
unenforceable b/c of strong public interest in right to chosen counsel
R.2d 187 Non-Ancillary Restraints on Competition

-A promise to refrain from competition that imposes a restraint that is not
ancillary to an otherwise valid transaction or relationship is unreasonably in
restraint of trade.
R.2d 188 Ancillary Restraints on Competition

(1) A promise to refrain from competition that imposes a restraint that is ancillary to an
otherwise valid transaction or relationship is unreasonably in restraint of trade if
(a) the restraint is greater than is 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:
(a) a promise by the seller of a business not to compete with the buyer in such a
way as to injure the value of the business sold;
(b) a promise by an employee or other agent not to compete with his employer
or other principal;
(c) a promise by a partner not to compete with the partnership.
R.R. v. M.H., S. Ct. Mass, 1998

A) facts: infertile wife- husband contracts with another woman (mother of 2 and
married) to be a surrogate mother - he is to pay $10K total- $500 initially and then
$3500 upon pregnancy, then other amounts, then a final amount of $3500K at birth.
Mother consented in agreement to give up parental rights though she might visit at
some times. After getting about $550 in initial payments, the mother got pregnant
and decided she wanted to keep kid so she got rid of $3500 check by Dad. He sued
to see what his rights were and to get himself parental rights.
1) detailed story: The father and surrogate mother entered into the agreement
before the surrogate mother's pregnancy. Pursuant to the terms of the
agreement, the father would pay $10,000, in periodic installments, to the
surrogate mother. The father would be considered the natural father of the child,
and would have the right to take the newborn home from the hospital. The
surrogate mother, however, retained her parental rights to the child. Furthermore,
under the agreement, if the surrogate mother sought custody of the child, she
would be required to reimburse the father for all fees and expenses paid to her.
During the sixth month of the surrogate mother's pregnancy, she changed her
mind and decided to keep the child. She returned the third installment payment
to the father uncashed. The father instituted this legal action to establish his
paternity, and to seek a declaration of his rights under the surrogacy agreement.
B) trial court: for P- he has parental rights because she freely consented and b/c of
"best interests of child"- so she ordered the mother to specifically perform by giving
kid to dad upon kid's birth
C) issue: did the K b/w the biological father and surrogate mother violate public policy
in that it made her sign-off her parental rights ahead of time?
D) answer: YES- the same standards as used in adoption apply here- they say that
mother cannot be taken to have "freely consented" except after a four-day period
after the child's birth -
E) holding: the surrogacy agreement between a surrogate mother and a biological
father was NOT enforceable.
F) rationale: refused to accord validity to the surrogacy agreement. Although this case
did not involve adoption, the court looked to Massachusetts adoption statutes for
guidance.
G) rules: a surrogate mother cannot relinquish her custodial rights until the fourth day
following the child's birth.
i) -the payment of money "to influence the mother's custody decision" rendered
the entire agreement void.
ii) -In order for a surrogacy agreement to be enforceable, a father cannot pay
any expenses beyond pregnancy-related costs, and the surrogate mother
must be given a period of time following the child's birth to reflect upon
whether she wishes to relinquish custody.
H) other factors that should be considered when considering the validity of a
surrogacy agreement include: whether the parties have received mental health
evaluations, advice of respective counsel, the capability of the father's wife to bear a
child, and consent by a surrogate mother's husband to the agreement.
I) notes:
1) other cases:
i) Johnson v. Calvert (Cal)
(1) majority: both surrogate and non-surrogate mother have = right to baby,
but the terms of the K break the tie
(2) dissent: both have = right to baby, but the best interests of the child
should break the tie
ii) Baby M. (Mass.)= surrogacy agreements allowing payment going beyond
that of payment for carrying child and requiring mother to sign away her
parental rights beforehand are antithetical to Mass. pub policy and laws b/c
they effectively disregard the child's interest, mother's interest, and fitness of
mother (non-fitness sometimes a requirement for adoption)
2) scholarly theories:
i) Posner- surrogacy Ks should be enforceable for same economic reasons as
other Ks should be.
ii) Martha Field-- they should be legal but NOT enforceable against the mother.
3) in pari delicto= both parties are equally culpable - courts usually leave parties
where they found them and give no remedy
Problem 7-3 - no notes
Problem 7-4
4) Park 100-- duty to read suspended when 1 uses misrepresentation to induce
party's obligation under a K
5) Odorizzi-
i) over-persuasion-- place or time
ii) unusual player
iii) insisist that biz. be finished at once
iv) emphasis on consequences of delay
v) multiple persuaders
vi) no 3rd party advisers
vii) no time to consult attorney
viii) FRAUD- non-disclosure of material fact; construction
ix) UNDUE INFLUENCE- pressure which works on weaknesses- oppressive and
plays on necessities or distress
Chapter 8 - Justification for Non-Performance: Mistake,
changed circumstances, and K modifications
categories of rxns for non-performance
1) mistake
2) impossibility
3) impracticability
4) frustration
Mistake
A) mutual mistake -- no K Peerless case (Raffles v. Wickelhaus)
B) mutual mistake-- least knowledgeable party wins Frigaliment
C) unilateral mistake-- only one party made the mistake
Lenawee Co. Board of Health v. Messerly (Mich. 1982) MUTUAL

mistake- "as is" clause
A) takeaway: yes mutual mistake but one party assumed the risk of this by signing an
"As is" clause so that party not entitled to recession Rescission is an equitable
remedy granted at the discretion of the court-- Parties are not equally innocent
here - one party said they would take the land "as is"
1) others Js have also decided not to allow recission when "As is" clause
2) Court's have greater discretion w/ equitable relief remedies- this is the
usual remedy for mutual mistake (plus any necessary compensation for lost
earnings in prop. value etc.)- so courts can fashion who gets what or what K
should say b/c of greater discretion
B) Facts:
1) Pickles/appellees buy from Messerlys/appellants a 3-unit apt. building on a
600-sq.-ft piece of land
2) turns out that a previous owner (Bloom) had illegally installed a septic tank in
home in 1971 without a permit, and in violation of a health code. - Messerlys had
a working one in there and Bloom replaced it w/ smaller one- w/o enough
drainage field space-
3) Pickles didn't know this- had never asked Ms about the septic tank- but messerlys
told them they had indeed cleaned it once w.o incident- Messerlys didn't live
there ever and rarely visited
4) Pickleses inspected property and signed $25,500 K with Messerlys for 600 yrd
property/apts with a clause that says, "Purchaser has examined this property and
agrees to accept same in present condition. there are no other/additional written
or oral understandings"
5) 5-6 days after the K, Pickles went to introduce selves to tenants and saw raw
sewage seeping out og ground
6) Lenawee Co. obtained a permanent injunction and condemned the property as
uninhabitable by humans until the defective sewage system is fixed.
C) Procedure:
1) injunction granted and Lenawee co. permitted to withdraw from suit by stipulation
of parties
2) Pickles didn't pay so Messerlys filed cross-complaint- Pickles counterclaimed for
rescission
3) trial court: Pickles had no cx of action- b/c no fraud or misrepresentation
4) court of Appeals: for Pickles for contract rescission - b/c parties were mistaken
as to income-producing capacity of property
D) CLAIMS
1) appellees/Pickles claim it was mistake in value of property - this is NOT usually
grounds for equitable relief
i) relief sought: P/appellees, the Pickles want to avoid the K on the basis of
mutual mistake.
2) appellants claim it was a mistake in nature and character of CNS and pervasive
and essential quality of property- AND no mistake b/c defect in sewage system
was learned by both parties after K was made
E) Issue: Can a K be rescinded due to a mutual mistake as to the nature of the
property, when the K included an "as is" clause.
F) Answer: No.
G) Holding: Judgment for Pickles reversed - Pickles not entitled to K rescission.
H) RULES:
1) A K mistake= a material belief that is not in accord with the facts in existence at
the time the contract is made, with no distinction between the nature and
value of the subject of the contract
2) usual remedy for mutual mistake: court may rescind a K made in mutual
mistake (if mistake is material) at its discretion, based on who should bear the
loss (R.2d 152 (1))
3) exception to usual remedy: this remedy is not available when one of the
parties has assumed the risk, as here with the clause in the K that says the buyer
has examined the property and agrees to accept it in the present condition ("as
is" clause).
i) A party bears the risk of a mistake when: (R.2d 154)
(1) the agreement allocates to him the risk,
(2) he is aware when the contract is made that he has limited knowledge
regarding the facts, or
(3) the court allocates to him the risk on the ground that it is reasonable to do
so.
(a) În applying #i above ( 154 (a)), a contract for sale allocates a risk to
the paying party when it includes a provision that the party purchases
as is
I) Rationale:
i) court argues for CASE-BY-CASE factual analysis- so doesn't rely on
Sherwood or A&M precedents
(1) Sherwood- famous barren cow case - no one knew cow was pregnant-
when seller discovered it after sale, tried to get K recission and
(a) HELD: court allowed recission
(b) rationale: cow worth only $80 if barren; $750 if pregnant- parties never
wouldve made this K if not for the mistaken belief that she was
incapable of breeding and of no use as a cow= no mistake as to
identity of the cow (Same cow they bought) but mistake in very nature
of the thing- mistake affected character of cow for all time-- she was
NOT a barren cow
ii) Yes a mutual mistake-- no one knew of problem w/ septic tanks - and its about
nature not just value
iii) Yes very material!- P's cant remedy it themselves b/c they need 750 sq. ft for
proper septic system and they only have 600 ft
J) Notes
1) court doesn't use A&M or Sherwood as a precedent.
i) Distinction btwn substance and quality is very hard here (as in Sherwood) -
Court substitutes this distinction btwn substance v. quality for essence v.
collateral
ii) Court adopts R.2d 152 (b/c not a statute, by adopting it, it becomes a law in
that state) -
2) definitely inconsistent rulings re: mutual mistake throughout and even within
diff. Js
3) conscious ignorance exception: if one party e.g. fails to have paintings
appraised before selling them and later learns they were made by Van Gogh not
Joe Shmoe, court may refuse to apply mutual mistake theory b/c its assumed that
parties knew they shouldve had appraisals done and consciously decided not to
4) mistake in written expression: If K simply fails to describe what parol
evidence etc. shows that the parties intended, then usual remedy is to just have
that part of K redrafted
Wil-Fred Inc. v. Metropolitan Sanitary District (Ill. App. 1978)

A) facts: P/GC, Wil-Fred relied on SC/Ciaglo's bid for excavation in a bid for a job from D/Metro;
S
1) C underestimated his bid and consequently, Ps bid was more than 20% lower than next-
lowest bid -
2) Jan 6- P's bid was $882,600 +100K non-refundable deposit IF it withdraws its bid before
Metro has chosen or if metro chooses it and then it withdraws
i) the actual K that gc had to sign to submit its bid also said that the GC had examined
the site and the K and couldn't cancel or withdraw its bid
ii) the ad soliciting the bids said that Metro San. Dept had estimated the job at 1.26
million!
3) Jan 8- SC discovers mistake (thought they could use heavy equipment to excavate, even
though it was dealing with plastic pipes!) after Ps inquiry and SC withdraws his estimate-
so P writes to Metro saying it cant follow through b/c SC's bid was substantially wrong- but
says it had rxn to trust SC b/c it had done good work in past
4) Pres. Luxion of GC Win-Fred says: didn't force SC to hold to its bid b/c Ciaglo couldn't
withstand $150K loss/ that GC does 12-13 mil biz/year, and has been in biz for 18 yrs, has
never revoked a bid before-
i) *says he was aware of metro's estimate (1.2 million)- but thought that the cheaper
part substituted by Metro in the bid could account for a $200K difference
B) claims: P sues for rescission under mutual mistake theory -but D accepts bid and keeps P's
deposit.
C) holding: obviously they cant get back their deposit, but GC/P does not have to
perform K b/c of unilateral mistake - a mixed mistake of judgment AND FACT
1) is sufficient because it related to a material feature of the K; exercised
reasonable care in relying on sub-contractors quotation; the consequences for
would be grave; and the suffered no change in position, since it was able to
award the K to the next-lowest bidder.
D) rules:
1) Wil-Fred's must show by clear & positive proof:
i) mistake relates to material aspect of K
ii) occurred notwithstanding exercise of reasonable care
iii) of such grave consequence that enforcement would be unconscionable, provided that
iv) other party can be placed in status quo
2) 2-153: allow avoidance of K b/c of mistake of one party if:
i) mistake makes enforcement of K unconscionable, OR
ii) other party knew or had reason to know of mistake
(1) THIS court says rxn to know if mistake was obvious
3) P must also NOT bear the risk under R.2d 153
4) If there is clear and positive evidence to the effect that {(P) the mistake relates to a
material feature of the contract and (Q) the mistake occurred notwithstanding the
exercise of reasonable care and (R) the mistake is of such grave consequence that
enforcement of the contract would be unconscionable and (S) the non-mistaken party
can be put in as good a position as it would have been prior to the promise on which the
mistake was based}, then (VOIDABLE) there can be rescission on the ground of
unilateral mistake.
a. Williston Rule: If there is material mistake and such mistake is so palpable
that the party not in error will be put on notice of its existence, then unilateral
mistake may afford ground for rescission. ** Similar 161 if other party
actually knows of others mistake must disclose
E) rationales:
1) YES unilateral mistake but D couldn't have relied on bid too much b/c aware of mistake
immediately and impact was so severe.
i) Also discrepancy so great and obvious that Sanitary District should have known that
there was a mistake.
ii) SC was in biz for 8 yrs- in good standing- checked with other SCs to confirm its bid
was OK- so GC wasn't wrong to rely - GC did exercise due care in preparing its bid
(1) court takes into account experience & prep. of SC, its course of dealings w. GC and
past performance in finding that GC was justified to rely
(2) GC made 2 separate reviews of its bid
(3) **Metro's ad said "std construction equip." could be used
iii) SC cant sustain loss of 150K or it goes bankrupt- so GC lets them off, but if GC
sustains that loss, they lose 2-3 million in bonding capacity
iv) District had suffered no change in position- rehabilitation K had NOT been
awarded yet!!
2) Basic fairness should dictate when relief is granted
3) Ct willing to reallocate risk that a mistake would be made in bid to
F) Notes
1) "palpable nature" or unconscionable effect of mistake: early cases required mistake
to be palpable- so obvious that other party KOSHK of error- see R.2d 152
2) mistake of fact VS. mistake of judgment: usually only mistake of fact is allowed as a
mistake in GC/SC setting Cts often will rescind for mistake of fact or clerical error, but not
mistake of judgment
i) Wil-Freds not so insistent on this^
3) must mistake be non-negligent? - seems like yes in most cases b/c you need to have
exercised due care most courts say
Changed Circumstances: Impossibility, Impracticability, and

Frustration
Impracticability (261, 2-615)
(1) Increased cost alone does not excuse performance unless the rise in cost alters the
essential nature of the performance.
(2) Rise or collapse in the market is not sufficient (though if the market collapses
completely there will usually be an impossibility defense)
(3) Severe shortage of raw materials or supplies due to a contigency such as war,
embargo, local crop failure, or unforeseen shutdown of major sources of supply,
which either causes a marked increase in cost or altogether prevents seller from
securing supplies necessary to his performance will usually constitute
impracticability.
(4) Where the K provides for an exclusive means of performance, the impracticability of
that means may release the promisor from his duty. Where the performance is set
out in unqualifed terms, the promisor may be required to perform by alternate
means even though more expensive.
1) The claimed impracticability must have arisen from an UNFORESEEN contingency
and without the fault of the party seeking to avoid the contract.
2) The non-occurrence of the contingency must be a basic assumption of the K
3) The parties must not have explicitly or implicitly allocated the risk that the
contingency might occur.
(1) Assumption of risk may be determined by examining:
(a) the extent to which the parties allocated other risks.
(b) the circumstances surrounding the contract, including trade usage.
(c) the purpose of the K
(2) FORCE MAJEURE clauses may make a determination of impractibility easier
by pointing to who bears the risk.
(3)Impracticability may only be used to AVOID enforcement
(RESCIND) of the K
(4)Impracticability involves a case where change of circumstances is not
specifically provided for in the agreement after agreement is made.
(5) literal impossibility= objective impossibility- no one could do it- not just subjective
"I cant do it"
Karl Wendt Farm Equipment v. Int'l Harvestor Co. (6th Cir. 1991)-
Impracticabiity
A) takeaway: change in market conditions not sufficient "supervening event" to find
impracticability b/c shift in market is assumed risk when enter into long-term K for
supplies (majority approach but not always followed)
B) Facts-
1) P had a franchise that he obtained from D; Due to a massive market downturn
(not in D's control), the D sold all its assets in farm equipment to a third-party (in
D's control- court later says on p 690 that it had alternative); Third-party did not
acquire Ds franchise network, only access to Ds dealers; Ps franchise was in a
disputed area, and third-party awarded franchise to other dealer
2) P sues D for breach of K; raises defense of impracticality
C) Holding-
1) No rescission, remanded only on the decision of damages for IH's breach of its
Dealer agreement w Wendt
2) The supervening event in an impracticability defense cannot arise from a change
in market circumstances or from the beneficiary of the doctrines financial
inability
3) The principal purpose was to establish a dealership, not be mutually profitable
D) Rule-
1) Impracticality (261): Where, after a contract is made, a partys performance is
made impractical 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 to the contrary.
2) Necessary Condition for impracticability extracted from comments:
i) Supervening event cannot:
(1) be a change in market circumstances
(2) OR be the benefiting partys financial inability per Groseth interp of , P
659
3) 3 Jointly Sufficient Necessary Conditions for frustration of purpose from
Groseth
i) the partys principal purpose is frustrated by the supervening event
(1) not enough that he wouldn't have made K if he'd known this- has to be
that the mistake was relevant to the major purpose of the K!
ii) and that frustration is substantial
(1) so grave as to be not within the risks that one assumed through the K-
(2) not enough that its become economically burdensome or not profitable
iii) and the frustrating event was to a basic assumption of K.
(1) not usually a basic assumption that market is totally stably
(2) mutual profitability not implied, or it would need to be implied in every K
4) Frustration of Purpose (265): Where, after a contract is made, a partys
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 to the contrary.
5) Court says NO TERM IS IMPLIED AS TO K duration when K itself specifies
termination process!
i) this is in response to IH argument that it was Implied term that k was
for limited duration: implied that dealership would last til manufacturer
goes out of biz-
E) Rationale-
1) no impracticability b/c HAD ALTERNATIVE - didn't have to sell farm equip, ould
have terminated dealer agreements through the termination provisions through
mutual assent and then shared proceeds of sale of Case/Tenneco w its dealter
2) principal purpose was establishing a dealership NOT mutual
profitability: if they allow mutual profit. to be implied purpose, then mutual
profitability will be basically implied in all Ks and none that don't profit will be
practicable or enforceable
3) Section 2 allowed IH to change its product lines and discontinue prod. lines but it
was NOT meant to function as another way for them to terminate K
4) Impracticality and Frustration of Purpose are equitable doctrine[s] which [are]
meant to fairly apportion risks between the parties in light of unforeseen
circumstances. [They are] essentially implied term[s] which [are] meant to
apportion risk as the parties would had the necessity occurred to them
5) Classical idea of party autonomy and that ct will not reallocate risk for parties
F) Dissent
1) not duty of appeals court to make determination as to possible alternatives if trial
didn't find any!
G) Notes-
1) Common rationale for impracticability and frustration/impossibility: Frustration
and impracticability doctrines in Restatement (Second) have basically same
elements; suggest common denominator of all the foregrounding-of-risk
defeater doctrines, namely, the value of the transaction turns out to be
significantly different than the complaining party believed or expected.
i) compare R.2d 261 (impracticability) vs. 265 frustration of purpose
2) Impracticability based on natural disaster (exam?)
3) impracticability based on terrorism (Exam?)
i) bush- guy couldn't call to change travel b/c of sept. 11- P won and D travel
companies who tried to say p was simply skiddish to travel after sept. 11 lost!
4) death= somewhat more likely ability to claim impracticability
5) majority rule on FOS: NOT required that it wasn't foreseen or was
unforeseeable to have impracticability based on supervening event
6) Posner= impractic. and frustration should be applied to assess riskiness of
SUPERIOR RISK BEARER's behavior- so when K allocates risk, it allocates it to
superior risk bearer
R. 2d 261 Discharge by Supervening Impracticability

Where, after a contract is made, a party's performance is made
impracticable without his fault by the occurrence of an event the non-
occurrence of which was a basic assumption on which the contract was
made, his duty to render that performance is discharged, unless the
language or the circumstances indicate the contrary.
R. 2d 265 Discharge by Supervening Frustration
Parties' remaining duties to render performance are discharged WHERE:
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 K was made
--unless the language or the circumstances indicate the contrary.
Mel Frank Tool & Supply v. Di-Chem Co. (Iowa S. Ct. 1998)
A) brief summary: P/Lessor brings axn for breach of lease and prop. damage by
D/chemical distributor, who vacated P's premises after city officials informed D that it
could not store all of its materials on the leased premises.
B) takeaway= a K can only be avoided, under the idea of frustration of purpose, when
an obligees entire purpose for entering into a K is frustrated
C) Facts=
1) Di-Chem entered into a 3-yr lease K with Mel Frank to lease a storage and
distribution facility.
i) LEASE:
(1) requires Di-Chem to "make no unlawful use of the premises
and . . . to comply with all . . . City Ordinances."
(2) also a destruction-of-premises provision that allows either
party to terminate the lease under certain circumstances.
2) Roughly 1 year into the lease, the fire chief, for the City of Council Bluffs,
inspected the property and informed Di-Chem that it was in violation of a city
ordinance (enacted AFTER signing of lease) prohibiting the storage of hazardous
materials.
3) Because Di-Chem was a chemical company, Di-Chem felt the ordinance frustrated
its business needs for the facility, and vacated the premises.
4) P/Frank knew that D wanted to sell chemicals, but didn't know chemicals were
hazardous
D) claims:
1) P/Mel Frank = breach of lease and property damage,
2) Di-Chem = mutual mistake, impossibility, illegal K, failure to mitigate
damages, fraud in inducement
E) procedure = TRIAL for P/Mel Frank- b/c P could not have known that the chemicals
were classified as hazardous
1) P made no representations to D that warehouse was suitable for any specific
purpose, nor were any discussions or representations made concerning the
character of the products to be stored by D.
F) Issue= Is a K subject to rescission, under the rationality of frustration of purpose,
when only part of the contractual performance is made unlikely by a supervening
cause?
G) answer= No.
H) holding= for P Affirmed.
I) rules:
1) 3 grounds for no duty on obligor:
i) some circumstance has made Oblig's own performance impracticable.
ii) obligor may claim that some circumstance has so destroyed the value to him
of the other party's performance as to frustrate his own purpose in making the
K
iii) obligor may claim that he will not receive the agreed exchange for the
obligee's duty to render that agreed exchange, on the ground of either
impracticability or frustration.
2) doctrines of impracticability and frustration based on whether the nonoccurrence
of the circumstance was a basic assumption on which the contract was made. The
parties need not have been conscious of alternatives for them to have had a
"basic assumption."
3) general rule = obligor assumes risk that k will be less profitable- K liability is
strict liability. -one is liable in damages for breach even if without fault and even if
circumstances made the K more burdensome or less desirable than he had
anticipated. -
i) if he doesn't want this obligation, should've put a clause in K reserving a right
to cancel it.
4) extraordinary circumstances= Q of law for court= extraordinary
circumstance may make performance so vitally different from what was
reasonably to be expected as to alter the essential nature of that performance. In
these circumstances, the court must determine whether justice requires a
departure from the general rule that the obligor bear the risk that the K may
become more burdensome or less desirable.
5) if a "gap" in the K- Ordinarily, obligor's duty is discharged in the case of
changed circumstances, or his duty has never arisen, in the case of existing
circumstances-- risk shifts to obligee.
6) 3 parts- substantially frustrated purpose= after a K is made, and
i) not because of fault of complaining party
ii) an event occurs- the nonoccurrence of which was a basic assumption on
which K was made
(1) FOS of the event is a factor in that determination, but it's not
determinative
iii) and the purpose that is frustrated was a principal purpose of that party in
making the K.
(1) purpose/object must be so completely the basis of the K that, as both
parties understand, without it the transaction would make little sense.
(2) the frustration must be substantial. It is not enough that the transaction
has become less profitable for the affected party or even that he will
sustain a loss. The frustration must be so severe that it is not fairly to be
regarded as within the risks that he assumed under the contract.
(a) if there is a serviceable use for which the property is still available
consistent with the limitations of the demise, the tenant is not in a
position to assert that it is totally deprived of the benefit of the
tenancy.
(b) tenant is not relieved from the obligation to pay rent if there is a
serviceable use still available consistent with the use provision in the
lease. The fact that the use is less valuable or less profitable or even
unprofitable does not mean the tenant's use has been substantially
frustrated.
iv) ^this analysis doesn't apply if language or the circumstances of the K indicate
the contrary.
7) specifically w/ regard to police regulations= -parties may stipulate that they
can rescind if cant use property for particular purpose- BUT in the absence of any
such stipulation, a valid police regulation which forbids the use of rented
property for certain purposes, but leaves the tenant free to devote the property to
other legal uses not forbidden or restricted by the terms of the lease, does not
invalidate the lease or affect the rights and liabilities of the parties to the lease.
J) rationales:
1) DI-CHEM did NOT meet burden of proof:
i) non-hazardous chemicals could still be stored on the premises - so
entire purpose NOT frustrated
ii) no evidence as to the nature of its inventory and what percentage of the
inventory consisted of hazardous chemicals. = failed to show what its lost
profits, if any, would be without the hazardous chemicals.
2) clause 13 argument: Di-argues: b/c it was not able to store and distribute
hazardous chemicals, it was "not able to conduct its business on the premises," as
specified in clause 13(b).
i) clause 13 simply does not apply to the facts of this case. Clause 13 must be
read in its entirety and construed in context clause 13 deals w/ "Fire and
Casualty, Partial Destruction of Premises,"
3) .here- lease was made for the storage of chemicals; however, the purpose to
store hazardous chemicals was never discussed between the parties.
4) frustration of purpose meant to deal w/ when a change in circumstances makes
one party's performance virtually worthless to the other, not just less valuable
K) notes
1) govt axn much more likely to be deemed sufficient superceding for frustrated
purpose defense than is natural disaster, war, or market change
2) force majeure clauses generally just protect what R.2d and UCC frustrated
purpose articles already protect- but those clauses make it certain that K
obligations can be postponed or revoked
Problem 8-1, p. 711

A) facts: I am attorney in Garrett's Landing- small city in southern state. have been
consulted by Aurthur Barlow- owner of florist shop in city-
1) several years ago Arthur went to work as clerk for florist shop owned by Sam and
Martha Stewart
2) he was few yrs out of high school- no real skills- had only had odd jobs- took this
job thinking he could learn from them and that they might then take him on as
partner in business
3) profits good- he made good salary
4) Martha suddenly died before he could ask them to take him on as partner- so he
did most of work b/c sam was sad
5) offer- March:
i) Sam comes back saying he wants to sell his house and move to another city
to be w his daughter so he offers Arthur the chance to buy the business-
A says he will so long as price was right
ii) S tells 8 there are 8 yrs to go on his building lease w/ Mrs. Duval- says he is
sue she will let him assign lease to A- says he'll sell A business for $100K
($80K for fixtures, office equip., and inventory- GOODS!!) and $20K good will
iii) A accepts- provided that he can pay 20K now and for next 4 years so he
could pay him out w earnings from business
iv) S makes K just like one he signed when he bought shop 30 years earlier-
back THEN a lawyer had helped draft it, but here S drafted it
v) A raised 20K from uncle and took over shop-
6) Hospital has been there for 80 years- shop is called "Good Samaritan flower shop"
7) hospital is merging with another in another part of town- shop is near the hospital
that's being torn down-
i) A says it is in an old part of town and "best part of business" is from ppl who
come to visit sick ppl at hospital- also says that new shopping centers in town
(2) have florists and he cant compete with them for suburban trade, "never
dreamed hospital wouldn't be there forever" "mistake"
ii) also says S must have known about the sale- NOT mutual? - S's cousin is
doctor and member of governing board at the hospital -- A says they must
have been considering shutting hospital "As long ago as last march"
8) K says: "seller makes no other representations (beyond that he owns business)
or warranties with respect to this property"- promise by A to pay 20K/yr for 4 yrs
is not qualified in any way and makes no reference to earnings
B) my approach to help Arthur:
1) A vs. S on misrep? (duty to disclose)
2) mistake
3) frustrated purpose very unlikely- it's not like he cant sell flowers there
4) fraud?? unlikely
5) impracticability?? cannot perform the K? he can't pay, that is true presumably-
but has he any other alternatives?
Contract Modifications - CNS/Duress Issues

Alaska Packers Assn v. Domenico (9th cir 1902)- CNS to modify K
(common law)- Pre-existing duty
A) Facts-
1) Alaska Packers hired workers (including Domenico) from San Francisco to go up to
Alaska and work on salmon fishing and canning. The workers first signed an
agreement to get $50 each for the season (plus 2 cents per fish). Before they left,
they asked for more money and signed another agreement with Alaska Packers
giving them $60 each. Then when they got up to Alaska, they refused to work
unless they were promised $100 each. It was impossible for company to get other
men, so they yielded to demands. Upon return, company refused to pay other
than what was in the original K ($60).
2) Company sues to get out of K by pre-existing duty.
3) Fishermen argue that the nets were defective, which is why they asked for
more $$$
i) jury did not find that nets were faulty - conflicting testimony on this
B) Holding-
1) no CNS for fishers' demand- the D's forced to assent in exchange for P's
rendering the exact services, and none other, that they were already under K to
render
C) Rule-
1) The fishermen had a preexisting duty to perform the work, they couldn't
negotiate a second, better deal to do the same work.
2) If party A agrees to give additional consideration to party B for Bs performance
of the exact services, and none other, that they were already under contract to
render, then party As consent is without consideration, UNLESS there is
voluntary rescission or modification supported by addtl CNS..
i) Defeater of defeater inferred from King v. Railway, which is quoted at length in
Alaska Packers.
ii) But, the voluntary rescission must be assented to on both parts
D) Rationale-
1) For pre-existing duty rule: Quoting King It would be a travesty of justice to
allow one party to coerce the other into more pay and then use that as grounds to
estopp the other from claiming promise was w/o CNS.
2) dispute about nets: D's interest required that P's should be provided with every
facility necessary to their success as fishermen- so it is highly improbable that the
defendant gave libelants rotten and unserviceable nets with which to fish.
3) For allowing mutual rescission: Pre-existing duty rule does not mandate that
they go thru w/ that. K law has no indpndt interest in enforcing where parties
voluntarily rescind. Rationale based on agency and autonomy of parties. Would
be helpful to have formality in rescission.
E) Notes-
1) Very close to Restatement 73- in family of rules of CNS, but intersects w/
allocation of risk (wkrs made mistake of judgment about how hard work would
be).
2) Addtl CNS can be very small, e.g. paying rent one day early
3) Selmer by Posner: Undermined the institution of K to allow a threat of breach to
force the other party to incur costs for which eh has no legal remedy. If K
protections are illusory, people will be hesitant to enter Ks. Affording protection
enter K and resources allocated efficiently.
4) Other exceptions to pre-existing duty rule:
(1) R 89(a)- unforeseen circumstances; ex solid rock makes excavation 9x
more expensive; promise to pay higher price binding
(2) R 89(c)- reliance on promised modification
(3) 2-209(1)- largely dismisses pre-existing duty rule
5) editors say we ought to uphold modifications in many situations. However, the
doctrine of consideration and the preexisting legal duty rule can cause a lot of
problems. The doctrine is highly technical and often gets in the way of good
results. but thats not to say that theres nothing to it. When someone promises
a benefit and gets nothing in exchange for it, that ought to make you sensitive to
whether something rotten is going on. Sometimes youll conclude that there isnt
and the modification ought to be upheld as a matter of policy. But the CNS
doctrine, while it has its technicalities and shortcomings and wont do justice in
every case, it is powerful in suggesting that this is a situation that calls for close
scrutiny.
6) How should the fishermen have been advised? If the fishermen had done
anything that was bargained for that they didnt have a preexisting legal duty to
do, they would have made out okay. The preexisting legal duty rule is an
academic doctrine, if you think like a lawyer its easy to avoid it.
7) What is a better way to do justice in this case?
i) The court should have thought about it as a duress case. This wouldnt have
gotten the court into all these technicalities. Was there an improper threat
here? Yes! The workers threatened to break their promise to work. Would the
threat have caused actual harm? Sure! They wouldnt have been able to get
replacement workers. They would have lost out and they wouldnt have had a
very good remedy against the workers since theres so many of them and
they may not have much money.
ii) Duress, whether there is consideration or not, makes a better way to get at
whats going on in this case. So the packers can argue that they were coerced
into making this bonus promise.
8) bargaining power: When you have K formation in San Francisco when the
people are hired, Alaska Packers have strong bargaining power and they wont
have to pay more than the market rate for fishermen. The bargaining power
situation is changed enormously by the time they get to Pyramid Harbor. The
fishermen are the only ones available there to do work during that season.
Kelsey-Hayes Co. v. Galtaco Redlaw Castings Corp. (E.D. Mich 1990) -

Economic Duress- Do K Modifications require new CNS?
A) overview: P sold K metal tire parts. Formed K with set price in 1987, 1989 decided
to discontinue manufacturing that part. Agreed to keep manufacturing them for
several months in exchange for 30% price increase. Month later raised requirement
to another 30%. At some point, P stopped paying for castings, amt equivalent to
price increases. Modification was under duress.
1) Later K supercedes earlier K unless there is duress.
(1) Duress: manifestation of assent is induced by an improper threat by

another party that leaves victim no reasonable alternative.
(2) K-H had no choice but to accept modification.
(a) Couldnt sue b/c G would have stopped supplying.
B) Facts
1) Kelsey-Hayes makes brake assemblies that it sells to auto manufacturers.
2) Galtaco supplied castings to Kelsey-Hayes which incorporated them into the brake
assemblies.
3) In 1987, Galtaco and Kelsey-Hayes signed 3-yr "requirements" contract.
i) Under the K, Galtaco was to be the sole source to Kelsey-Hayes of certain
types of castings through April 1990.
ii) In return, Galtaco was to charge fixed prices for 1987, and scheduled price
reductions for 1988 and 1989.
iii) On June 9, 1989, Galtaco informed Kelsey-Hayes it required an additional 30
percent price increase in order to keep its foundry operations going. Since
Kelsey-Hayes had not yet found another source for castings, it accepted
Galtaco's offer to continue providing castings for an additional 30 percent
price increase.
iv) Before Galtaco's foundries closed down, Kelsey-Hayes failed to pay Galtaco for
84 of the remaining 85 casting shipments. The price for the 84 shipments for
which Kelsey-Hayes has not paid approximates the $2 million price increase to
which Kelsey-Hayes agreed under the 1989 agreements.
C) Rule
1) In order to state a claim of economic duress, a buyer coerced into executing a
modification to an existing agreement must at least display some protest against
the higher price in order to put the seller on notice that the modification is not
freely entered into.
D) Issue(s): Whether the superseding agreements were executed under economic
duress.
E) Answer: Yes.
F) Rationale: The manufacturer did present issues of economic duress. Kelsey-Hayes
might reasonably have feared that if it shunned the 1989 agreements and instead
sued for breach of the 1987 contract, then Galtaco would have stopped supplying it
with castings. The record strongly suggests Kelsey-Hayes would not have been able
to locate an alternate supply of castings. As a result, Kelsey-Hayes' business
reputation may have suffered and its major customers may have been forced to shut
down its automobile production lines.
G) Brief Fact Summary. This case involves a requirements contract where the supplier
threatened to stop production if the buyer did not agree to pay a higher price for the
product.
H) Takeaway:. A contract is voidable if made under economic duress.
I) Facts. The Plaintiff, Kelsey-Hayes (Plaintiff), entered into a requirements contract for
the purchase of castings, with the Defendant, Galtaco Redlaw Castings Corp.
(Defendant). The contract was for a three-year term and it included fixed price terms.
The Defendant then began to suffer financial difficulties and made an offer to its
customers that it would keep operating in exchange for a price increase of thirty
percent. The Plaintiff was not able to find an alternative source of casings so it
accepted Defendants offer, although it protested that this offer amounted to a
breach of contract. Defendants other customers did find alternate supplies of
castings. Therefore, Defendant offered Plaintiff an additional thirty percent increase
in exchange for its remaining in operation solely for Plaintiffs benefit. Again, Plaintiff
felt it had no choice but to accept, as it still had not found a reasonable alternate
source for castings. Plaintiff also feared that if it did not accept, it w
ould cause its major client, Ford Motor Co., to stop production and destroy Plaintiffs
business reputation. Plaintiff sued for breach of contract, asking for a declaratory
judgment releasing it from paying the increased prices. Defendant moved for
summary judgment, contending that the price modification invalidated the previous
contract.
J) Issue: Must a person be subjected to an unlawful act such as threat of a tort or crime
in order to make a claim of duress?
K) Answer/holding: No. Motion for summary judgment denied. Declaratory judgment
granted in favor of Plaintiff
L) Rule: Michigan courts recognize the doctrine of economic duress and Defendants
offer to Plaintiff amounted to economic duress.
Economic duress can exist even in the absence of criminal or tortuous activity, so
long as assent is induced by an improper threat and the victim is left with no
reasonable alternative.
M) Rationale/Discussion. The court looked to Michigan law to define economic duress.
In the instant case, it seemed clear that Plaintiff was left with no reasonable
alternative and had no choice, but to assent to Defendants offer. Although
Plaintiff assented, it also vigorously complained that it viewed Defendants offer
to be a breach of contract, giving Defendant notice that Plaintiff did not freely enter
into the modification. The court noted that it would have been inadequate for Plaintiff
to accept the breach and then sue for damages, as Plaintiff would have then been
forced to stop production and risk damaging its business reputation. Finally, the court
examined the UCC and found that its language supported the economic duress
doctrine.
1) just b/c other companies could find alternative providers doesn't mean that KH
could!!
N) NOTES:
1) NOT a pre-existing duty case- looks more like mutual recession- but it was
mutually rescinded b/c of economic duress
2) UCC 2-209 governs= modification (when mutual) "needs no consideration to be
binding"
i) but court notes that UCC does not trump the idea of economic duress- UCC
does NOT preclude application of duress doctrine to sales of goods
(Kelsey-Hayes)
3) good faith as limitation on modification under Art 2:
i) LIMIT: comment 2 to 2-209: obligation of good faith bars "extortion" of
modifying agreement without legitimate commercial reason
ii) Roth test for good faith:
(1) was modification procured b/c of unforeseen economic exigency which
would prompt ordinary merchant to seek modification to avoid loss on K
(2) êven if above is met, cannot coerce the modification
Brookside Farms v. Mama Rizzo's, Inc. - Must K modification be in

Writing? -NOM
A) TAKEAWAY: Where Seller and Buyer had written K for sale of goods, which included
no oral modification (NOM) clause, subsequent oral modification under which
Seller promised to change goods, and Buyer agreed to pay more, is enforceable by
Seller in suit to collect payment for goods delivered, (as long as Buyer promised to
record oral agreement in writing, even if he failed to do so ACTUAL PERFORMANCE
CAN OVERCOME A No Oral-Modification Clause
1) Buyer estopped to assert Statute of Frauds defense (see 2-209(3)), under 2-201
2) No oral modification clauses can be waived by conduct (2-209(4), 2-209(5)),
especially given reliance by Seller
B) Overview: P sells D basil. There are some oral price modifications, even tho both
parties knew there was a no oral modifications clause in KD asks P to remove stems from
basil, price is increased. D said that they would change the written K, never did. P stopped payment at
some point. K enforceable despite no oral modifications statute.
1) K falls within dispute of statute of frauds, UCC 2-201:
(1) K for sale of goods for price of $500 or more is not enforceable by way of action or defense
unless there is some writing sufficient to indivate that K has been made and signed by party
against whom enforcement is sought.
(a) General rule: oral modifications not enforceable
(2) EXCEPTIONS to written requirement:
(a) When they do not materially alter underlying obligations
(b) Where one party reasonably relies on oral promise of another to reduce oral agreement to
writing
(c) Where payment has been made and accepted (This is a TX law, though)
ii) There was also a No Waiver clause that says that failure to demand full performance doesnt give
rise to waiver
(1) However, even if there is no waiver, K still falls within rules (and exceptions) of statute of
frauds
C) Facts: October 13, 1993, P/Brookside Farms and D/Mama Rizzo's Inc (MRI) entered
into a requirements K for the sale of fresh basil leaves from Brookside to MRI.
Under the contract, MRI agreed to buy a minimum of 91,000 pounds of fresh
basil leaves for a one-year term.
1) K itself: Delivery was to be made daily, five days per week, in lots ranging from a
minimum of 350 pounds to a maximum of 800 pounds. MRI agreed to pay for the
basil it accepted within fifteen days of delivery date.
i) K contained a clause forbidding oral modifications of the contract's terms.
2) MRI tries to modify: A vice president at MRI requested to Brookside to remove
additional parts of the stems of the basil leaves, a task not specifically required
under the original K.
3) Brookside agreed to do this work in exchange for a $0.50 per pound increase
for the remainder of the K term.
4) claims:
i) P/Brookside claimed MRI breached the executory portion of the contract by
refusing to accept the minimum amount of basil it agreed to and that it was
also liable for the 3,041 pounds of basil it accepted but did not pay for.
ii) D/MRI contended that no payment was due because the seller itself breached
the K by raising prices in violation of the contract's express language.
D) Rules: Oral agreements that materially modify a written agreement within the
Statute of Frauds are not enforceable. However, not all modifications are prohibited. If
the oral changes do not materially alter the underlying obligations, for example, they
are not barred. Promissory estoppel is used to forbid reliance on the Statute of frauds
as a defense to the validity of oral agreements.
E) Issue: Did a valid oral modification of the contract occur even though there was a
no-oral modification clause?
F) Answer: YES- The oral modification was valid.
G) holding: A valid oral modification of the contract between MRI and Brookside
occurred on both estoppel and statutory grounds. MRI cannot invoke the no-oral-
modification clause of the contract to bar P's claim that a valid modification occurred
in this case.
H) rationale:
1) During each price alteration, MRI issued separate purchase orders and Brookside
filled each order and invoiced MRI on the price. In each case, MRI paid the
invoiced price without protest.
i) It is undisputed that MRI's VP assured Brookside that he would make a
notation of price changes on MRI's copy of the K and that this notation would
be sufficient.
2) Under the estoppels theory, the promised notation would have constituted a
valid written modification of the contract's terms because a valid writing under
the Statute of Frauds requires only "some writing" signed by the party
against whom it is enforced, namely MRI.
3) The modification was valid on statutory grounds as well. MRI is liable to
Brookside for $ 20,526.75 in payment for the 3,041 pounds of basil accepted but
not paid for.
4) agreements to settle a liquidated, undisputed claim for less than full amt have
traditionally not been binding on the creditor-- (basically an extension of
preexisting duty rule)-- today UCC 1-207(2) says creditor's cashing of debtor's
FULL pmt check even w. reservation of right to sue still constitutes accord and
satisfaction and bars creditor from collecting the unpaid balance unless creditor
can show other circumstance like duress
Chapter 11- Expectation Damages: Principles and

limitations
Expectation Damages Overview

A) What remedies should be available for K breach?
1) lawsuits not usually brought just to recover nominal dxs
2) RESTATEMENT 2d FORMULA for Damages:
i) claim for total breach (e.g. P has terminated K and refused to render
performance)
(1) May have 4 elements b/c could affect party in 4 ways:
(a) LOSS IN VALUE = if deprived of some performance expected
under K
(i) value should've received under K [-] value actually
received (if any) = loss in value
(ii) aka
(iii) value of expected performance [-] what was
received = DAMAGES
1. ex. nonconforming goods-- value goods were to have -
value of goods actually delivered
2. ex. real estate -- K price [-] market price at time of breach
3. ex. construction= expected net profit on entire K +
builder's unreimbursed expenses at the time of breach
(b) + OTHER LOSS= "incidental," "consequential damages"
(i) INCIDENTAL= additional costs after the breach in a rxnable
attempt to avoid loss, even if attempt is unsuccessful
(ii) CONSEQUENTIAL= injury to person or property
(c) COST AVOIDED= e.g. builder stops building b.c of breach by
other party- builder avoids cost of whatever he would have
spent - This is claim for breach when someone wants to get out
of having to perform further b/c other side hasn't performed
(d) LOSS AVOIDED= if the injured party terminates and claims dxs
for total breach, breach may have a further beneficial effect by
allowing party to avoid some loss by salvaging and relocating
some or all of the resources it wouldve had to devote if
performance were required
ii) claim for partial breach (P has part-performed already)
Roesch v. Bray, Ohio 1988

A) facts= Roesches/Ps/appellants/sellers entered into written K w.
Brays/buyers/appellees/Ds (Mr. Bray is Mrs. R's father) to sell the R's home-
then 5 days later the Brays say they cant fulfill it- cant pay. Prior to breach, Rs
entered into K to purchase another home in Huron. Bray encouraged them to
buy the other place. (so rxnable reliance)- in order to pay for other place, the
Ps had to take out loan of 65$K + interest
B) procedure: trial court gives them $9,163 and 10% interest on the $45,000K
that was payable to sellers at closing -(Actual K rate was 16%)- the 9K value
is what referee recommended- included utilities, insurance, real estate,
advertising, taxes etc that was payable to Ps at closing date
C) issues: what should damages for sellers be? usually its based on K price -
market value of real estate at time of breach -- but no evidence to show
market value at time!
D) Rules: When a buyer does not perform its contract for purchasing real estate,
the seller may recover the difference between the K price and the market
value of the property at the time of breach. Market value (if no evidence of it)
may be reasonably deemed to be whatever the K price was - so if in a
subsequent K they get less then the formula is: K price [-] actual resale
price
E) generally damages of breach of K are limited to losses that are
rxnably to be expected as probable result of breach - court finds that
the damages for utility and maintenance costs for several months could rise
incrimientally and was too speculative- if sellers didn't sell their home for a
long time after breach think about how high and unknown this could get- so
court gets rid of the award for maintenance and utility of the home between
breached K and actual resale
1) -formula for an injured sellers loss in value:
i) K price - market value of property at the time of breach = damages.
ii) (The seller only recovers when the K price is higher than the market
value)
2) Formula for an injured buyer
i) Market value contract price = damages
ii) (The buyer only recovers when the contract price was lower than the
market value.- aka he wouldve made a profit or gotten a "Steal")
F) holding: appellees win- Ps/appellants only get $1500 plus 10% interest b/c
the court got rid of the part of the award that included utility and
maintenance of home etc. b/w breach and resale
G) notes:
1) limits on consequential/incidental damages:
i) damages must be rxnably FOS (breaching party had rxn to FOS harm
as probable result at time of K)
ii) prohibition on speculative damages (dxs must be proved w rxnable
certainty)
iii) duty to mitigate damages (e.g. buyer can't go sell the home to his
friend for half off and then go recover the rest from the breaching
party!)
2) courts usually allow owners to testify about market value of home if cant
get a real estate appraiser - obviously owners may inflate it though!
3) English rule vs. American rule
i) English= real estate buyers can only recover restitution (e.g. get back
any pmts made) unless seller breached in bad faith
ii) American= expectation damages awarded (so not just restitution) to
buyer if seller breached, regardless of whether it was good or bad faith
breach
4) UCC damage rules
i) K price [-] market value at time of learning of breach + incidental and
consequential damages
ii) seller's resale= allows seller to recover from breaching buyer K price
[-] seller's resale price
5) interest: prejudgment interest hard to get, but does happen sometimes
so long as it is not "usury"- postjudgment interest accrues from date of
judgment or verdict
American Standard, Inc. v. Schectman, (N.Y. 1981). - cost of completion

A) Facts: American Standard, Inc. (P) operated a pig iron manufacturing plant
on 26 acres of land abutting the Niagara River in Tonawanda. On the property
were several buildings, a 60-ton blast furnace, railroad tracks and
locomotives, and other heavy machinery. American Standard decided to close
the plant and contracted with Schectman (D) to convey the buildings and
equipment, in exchange for $275,000 and his promise to remove everything.
Schectman promised to remove all foundations etc., including those beneath
the surface and not visible, and grade the property as specified. D failed to
perform and P brought suit and was awarded $90,000. D appealed.
B) Issue: What is the measure of damages for breach of a construction
contract?
C) rules:
1) here the court applies cost of completion (cost-to-complete) of job
(aka what the guy didn't perform- what the value of his work was, NOT
loss in value to property that resulted)
2) general rule of damages for breach of a construction K= injured
party may recover those damages which are the direct, natural, and
immediate consequence of the breach and which can reasonably be said
to have been in the contemplation of the parties when the K was made.
3) diminution in value measure of damages is only applied when the
defects are irremediable or may not be repaired without
substantial tearing down; applied when the cost of completion measure
would be unjustifiably economically wasteful, and grossly out of proportion
to loss suffered by P and good faith defect/mistake by D caused the
breach
i) the diminution of value measure may be applied if the breach is only
incidental to the main purpose of the K, and completion would be
disproportionately costly.
ii) ***contractor asking for application of diminution of value
measure must not have breached the contract intentionally,
and must show substantial performance made in good faith.
D) rationale: no good faith- Ds completed performance would not have
involved undoing what in good faith was done improperly, but only doing
what was promised and left undone. D, instead of attempting in good faith to
complete the removal of the underground structures, contended that he was
not obliged by the K to do so and, thus, cannot claim to be a transgressor
whose default is unintentional and trivial.
1) That the fulfillment of Ds promise would add little or nothing to the sale
value of the property does not excuse the default. The rule that the
measure of Ps damage is the cost of completion is not altered by the
mere fact that the burden of performance was heavier than anticipated,
and the cost of completion disproportionate to the end to be obtained.
E) holding: Affirmed.
F) Notes: One of the key features of this case that distinguishes it from other
construction contracts cases is that the court deemed that Ds breach was
intentional.
1) justification for cost-to-complete: sometimes idiosynchratic value to P
(market value doesn't show personal value to seller), also b/c the
2) Posner says= cost-to-complete overcompensates owner- if owner
wanted it completed he'd sue for specific performance
3) restatement 2d: damages may be a) diminuition in value OR b) rxnable
cost of completing performance if this cost "is not clearly disproportionate
to value lost" (clearly rather than American std. "grossly" disproportionate
std.
4) ordinary defective or unfinished construction work- usually courts
use cost-to-complete damages
Restrictions on Recovery of Expectation Damages: FOS, Certainty,

and Causation
Hadley v. Baxendale, Court of Exchequer, Eng. (1854)
A) Facts: A shaft in Hadleys (P) mill broke rendering the mill inoperable. Hadley
hired Baxendale (D) to transport the broken mill shaft to an engineer in
Greenwich so that he could make a duplicate. Hadleys servant told
Baxendales clerk that the shaft must be sent immediately and Baxendale
promised to deliver it the next day. Baxendale did not know that the mill
would be inoperable until the new shaft arrived. Baxendale was negligent and
did not transport the shaft as promised, causing the mill to remain shut down
for an additional five days. Hadley had paid 2l 4s to ship the shaft and sued
for 300 pounds in damages due to lost profits and wages. The jury awarded
Hadley 25l beyond the amount already paid to the court and Baxendale
appealed.
1) more facts detailed- Ps were the owners of a mill whose operation was
stopped due to the breakage of a crank shaft. The shaft had to be sent to
engineers of the manufacturer [Joyce & Co] as a pattern for a new one. Ps
used Pickford & Company as carriers. The clerk advised them that the
shaft must be sent immediately, as the mill was stopped. The clerk was
promised delivery in one day and paid 2 pounds 4 shillings for the
delivery. However, Pickford failed to perform as promised and delivery
was delayed for several days. As a result, P lost several days profits from
the mill that otherwise would have been made if the shaft had been
delivered on time. P sues D for lost profits.
B) history: In the trial case, the jury returned a verdict for the Plaintiffs for 25
pounds, plus the amount paid into Court. Defendant appeals and a new trial
is ordered. Appellate court reverses.
C) Issue: can an injured party recover lost profits in this case? What is the
amount of damages to which an injured party is entitled for breach of
contract?
D) Rules: NO; An injured party may recover those damages reasonably
considered to arise naturally from a breach of K, or those damages within the
reasonable contemplation of the parties at the time of contracting.
1) LIMITATION ON DAMAGES P WOULD NORMALLY BE ABLE TO
RECOVER UNDER "EXPECATION RULE": an aggrieved buyer of
services will be unable to recover consequential losses resulting
from breach unless the losses are:
i) a natural consequence of breach; OR
ii) the buyer brings the circumstances which would generate the losses
expressly to the sellers attention.
2) the usual rule was that the amount which would have been received if the
K had been kept is the measure of damages if the contract is
broken. -
3) Damages for special circumstances are assessed against a party only
when they were reasonably within the contemplation of both
parties as a probable consequence of a breach and would naturally
flow
E) rationale: Although the fact that the mill was closed was communicated, it
wasnt made completely clear to the Ds that the mill was closed because of
the broken shaft and couldnt re-open again until it was fixed. For all the Ds
knew, the mill was closed for another reason.
1) Baxendale did not know that the mill was shut down and would remain
closed until the new shaft arrived. Loss of profits could not fairly or
reasonably have been contemplated by both parties in case of a breach of
this contract without Hadley having communicated the special
circumstances to Baxendale. = the jury should not have taken the
loss of profits into consideration.
F) Disposition: Vacated and remanded for new trial.
G) Notes:
1) General damages= naturally flowing, direct/ vs. / Special damages=
"consequential"= e.g. lost profits from collateral Ks
2) FOS= only type of loss (not manner) needs to be FOS- std. of fos is at
least part objective- breaching party is liable for things it had rxn rto know
and loss must be fos as "probable" resul of breach- so doesn't require that
losses be inevitable but doesn't extend to remote losses
3) tacit liability test= even stricter than Hadley- requires not only that the
breaching party knew of possible loss but that they "assumed consciously"
the liability in question- MODERN REJECTION OF THIS-
4) Epstein says amt of damages should be viewed as K interpretation -
should be amt that parties would've agreed on if they did put the amt in K
(aka if they had put in K an amt that they'd pay for breach)- but isnt
putting that in the K itself valuable?? -> this is Eisenberg's point- he
opposes Epstein and says that costs of Hadley rule are likely to exceed its
benefits- he advocates rule that would aloe recovery of all proximately
caused losses (basically a tort std.) subject to K allocation of risks and
principles of fair disclosure subject to K limits on liability (POLICY
ARGUMENT- EXAM)
Florafax International, Inc. v. GTE Market Resources, Inc. (Okla. 1997)-

when lost profits are recoverable
A) takeaway= When GTE screwed up the call center and Florafax lost a big K
because of it, court found that there was certainty that there would be lost
profits- up to the jury to determine the amount. Too speculative: refers to
whether there will be profits, not the exact number- New Business rule
B) Facts: axn = P, Florafax International, Inc. (Plaintiff) entered into a K with
Bellerose Floral, Inc. -parties agreed that P would handle a certain amount of
floral orders for Bellerose Floral. This K contained a clause stating that either
party could terminate the K upon 60 days written notice.
1) Shortly thereafter, P entered into another K w/ D, GTE Market Resources,

stating that the D was to operate a call answering center on behalf of the
P. This K contained a provision stating in the event GTE ceases to perform
its duties
C) rule: Lost profits are recoverable so long as they are
1) foreseeable when the contract was made;
2) they directly or proximately result from the breach and
3) they are capable of accurate estimation.
Rockingham County v. Luten Bridge Co., (4th Cir. 1929) - P's duty to
Mitigate
A) Facts: Rockingham County, North Carolina (D) contracted with Luten (P) to
construct a bridge. Luten had completed very little work on the bridge when
Rockingham County provided a notice of cancellation of the K. The P
proceeded to complete the bridge b/c they thought the and brought suit
against the D for breach of K.
1) At trial, the judge instructed a verdict for the full amount of the claim in
Lutens favor
2) Rockingham County appealed.
B) Issue: What damages are appropriate where one party gives notice of breach
of contract and the other party completes their performance anyway?
C) answer/rule:
1) Ps remedy is limited to the amount that it would have been able to
recover as of the time notice of repudiation was given.
2) Luten is entitled to expenses incurred up until notice was given, plus
expected profit from completion of the K, plus any other losses incurred up
until the time of breach.
3) A party who receives express notice of breach has a duty to
mitigate damages.
D) Reasoning: It is wasteful to complete a bridge when changed circumstances
have rendered it worthless to the party who K'ed for its construction. The law
seeks to avoid creating disincentives for efficient breach.
Havill v. Woodstock Soapstone Co., Inc. (VT, 2004)

A) facts: The employee had worked for the employer for many years, off and
on, but developed problems working with an employee hired specifically to
handle a reorganization. Nonetheless, when she was fired, she was told it was
for economic reasons, not given the formal warnings required under company
personnel policies for disciplinary firings, and given a laudatory reference.
The company hired people who did what she had been doing, and she was
never able to find a job with the same pay and benefits.
B) procedure: axn= D employer appealed and P former employee cross-
appealed from a judgment of the trial ct. finding in favor of the employee on
her claim of breach. D challenged that finding, as well as certain aspects of
the award of front and back pay. The employee also challenged certain
aspects of the damages award.
C) holding: affirmed in part (on liability issue), reversed in part (Reversed and
remanded on damages- ordering further findings and recalculation of
damages)
D) rationales: strong evidence to support trial court's findings that the
employer bound itself to an implied K that firing would be only for just cause,
and that the employee's termination was pretextual.
1) Despite the considerable discretion of the trial court in determining
damages for that breach, certain issues required reconsideration. The fact
that the employee might well not have been allowed to continue working
as long past age 65 as she had hoped was one factor. It was error not to
take into account the fact that the employee chose to work fewer hours
after her termination, but it was not error not to include future pay
increases in the award.
E) rules: the rule that employment Ks for indefinite terms are at will is one of
construction, not one of substantive law. Thus, parties can modify the at will
relationship according to the usual rules of contract.
1) DISCRETION re: reward: trial court's only responsibility = front pay
award must be limited to a reasonable time and that is not too
speculative when viewing all the evidence in the light most favorable to
P.
i) Trial courts have considerable discretion in calculating awards for lost
future income, because such awards are inherently speculative and are
intrinsically insusceptible of being calculated with mathematical
certainty.
ii) BUT trial court's findings must sufficiently demonstrate how it
exercised its discretion in light of the evidence.
iii) factors court must consider for it not to be "too speculative"=
evidence that P would not have remained at job until retirement;
length of employment prior to termination
2) a front pay award extending beyond the normal retirement age may be
reasonable in a particular case if it is supported by evidence that the P
planned to work beyond the retirement age, but the law does not
compel a trial court to award damages that are co-extensive with
the period that a P intends to work.
3) An employee claiming wrongful discharge has a general duty to mitigate
damages.
i) Mitigation requires that the employee make a good faith effort to find
suitable alternative employment. When an employer is claiming that
the employee did not properly attempt to mitigate damages, the
burden of proof is on the employer to show such failure. (must show:
(1) suitable work existed
(2) employee did not make reasonable efforts to obtain it
ii) Suitable employment = substantially equivalent to the position lost
and suitable to a person's background and experience.
4) An employer must clearly state its intent not to be bound by its
promulgated policies in order to avoid creating contractual liability.
-employer may bind itself to continue to employ employee despite that
employer is not making a profit, but such a promise must be clearly &
specifically stated.
5) economic circumstances requiring layoffs may constitute good cause for
termination. but an employer cannot use the defense of economic
necessity as a pretext for discharges which would otherwise be subject to
a just cause attack by the employee.
i) -For purposes of an action for breach of an employment contract,
"pretext" is a false or weak reason or motive advanced to hide
the actual or strong reason or motive.
ii) Pretext is a determination of credibility. Indicia of untruthfulness
appear more readily in person than they do in the cold appellate
record; thus, the fact-finder's credibility determination is due great
deference because it is based on the trial court's observation of the
witnesses as they testified.
Jetz Service Co. v. Salina Properties, Kan. 1993- loss volume sellers
A) Facts: Jetz Service supplies and maintains coin-operated laundry equipment.
In May of 1987, Salina Properties' predecessor in title leased 175 square feet
of an apartment complex to Jetz Service for use as a coin-operated laundry
facility for a six-year term. In July of 1992, with 16 months remaining on the
term of the lease, Salina Properties disconnected all of Jetz Service's
equipment and replaced it with its own laundry equipment. Jetz Service sued
Salina Properties to recover its lost profits for the remaining 16 months of the
lease. Salina Properties claimed Jetz Services had failed to mitigate its
damages and should only recover the cost of moving its equipment.
B) Rule: The mere fact that an injured party can make arrangements for the
disposition of the goods or services that he was to supply under the contract
does not necessarily mean that by doing so he will avoid loss. If he would
have entered into both transactions but for the breach, he has 'lost volume'
as a result of the breach.
C) Issue(s): Whether Jetz Service should be treated as a "lost volume" lessee
and is entitled to recover its expected gross receipts for the remaining term
of the lease.
D) Holding/rationale: Jetz Service is a "lost volume" lessee because, here, the
evidence showed that Jetz Service is in the business of supplying coin-
operated laundry equipment; it has several warehouses in which it has
available for lease about 1,500 used washers and dryers; it continually looks
for new locations in which to install laundry equipment; it would have been
able to fulfill the Kansas City lease without using the machines from Salina
Properties; and it is uncontroverted Jetz Service would have been able to
enter into both transactions irrespective of the breach by Salina Properties.
Jetz Service was not required to mitigate damages by using the equipment in
another lease and Salina Properties is not relieved of the liability to pay
damages even though Jetz Service did utilize four of the five sets of laundry
equipment six months after Salina Properties' breach.
Prob 11-1
see classnotes
Tues. Mar. 23 pp. 965-988 (23 pages)
Chapter 12: Alternatives to expectation damages:

reliance & Restitutionary damages, specific
performance, and agreed remedies
Wartzman v. Hightower (Md. App. 1983)- Reliance Damages

(development costs)
A) facts: hightower productions (appellees and cross-appellants) created in
1974 as promo. venture by Adler, Billing, and Quinn- they wanted to employ
singer entertainer who would live in mobile flagpole perch from April '75 til
New years- wanted new world record for flagpole sitting-- in Nov 74 they went
to Wartzman's law firm to try to incorporate venture. - said they needed to
sell stock publicly to raise 250K. - got incorped in Nov. -
1) reliance?- said could sell one million shares at par value of 10/share- for
total of 100K. sold stock, used own 20K to open corporate acct at Md
bank- and an office in a plaza. then began searching for "woody
hightower". - found 23 yr old john Jordan. - sought and obtained company
to construct "perch" w/ bed, toilet, water, fridge, heat. needed hydraulic
lift system on tractor trailer. employed 2 PR people - got proclamation
from mayor of b'more and then he went up. got a few small tv spots,
raised 43K thru stock, scheduled stockholder mtgs
2) problem- w/in few weeks of woody's ascension, Wartzman said couldn't
sell any more stock b/c corp was "Structured wrong" (firm failed to prepare
offering memo and to assure corp made required disclosures to
prospective investors per MD Securities Act) and needed 10K-20K
securities attny to correct - hightower had to tell shareholders that its corp
wasn't in compliance w securities laws. woody couldn't go across state
lines and no stock could be collected til problem fixed, so they disabled
the venture.
3) jury instructions-damages allowed to consider: economic loss
occasioned by increased costs of construction/financing, atty fees to
establish property, capital gains taxes paid for failure to purchase another
property within the time limits prescribed by law, amt of earned hazard
insurance premium appellees were required to purchase
i) summary: Hightower/appellees hired P to help them sell stock in a
company eager to set "world flagpole sitting" record. P law firm
screwed up the legal requirements, and Hightower was out a great
deal of money. Court held that where anticipated profits are too
speculative to be determined, P can recover for reliance damages.
ii) Reliance Damages: Damages that plaintiff suffered in reliance on the
contract.
B) holding: affirmed (damages stay the same- yes reliance but no prejudgment
interest)
C) takeaway rule: if anticipated profits (expectation damages) are too
speculative to be determined, and where breach has prevented anticipated
gain and made proof of loss difficult to ascertain THEN injured party has a
right to damages based on reliance interest including what it spent preparing
for performance or part-performing, LESS any loss the breaching party can
show with reasonable certainty that the injured party would have suffered
anyway had K been performed. (p. 968 middle)
1) but limits: P cant escape bad bargain thru reliance damages- where its
shown p wouldve had net loss if K was completed, where it's shown
venture was doomed to fail anyway cant just blame breach
2) only liable for risks rxnably FOS'able to contracting party at time
made K (and you take into account the skill of the professional, here-
lawyer- test= what rxnable lawyer should have known)
3) **cant instruct jury that P must prove it would've succeeded absent
breach- burden on D to show it would not have succeeded- and plus,
nature of reliance dxs is you CANT calculate w/ rxnable certainty the
future gain they wouldve experienced
4) duty to mitigate: this didn't require hightower to hire a securities
specialist at additional 10-20K at its own expense which it couldn't afford!-
AND both parties had same ability to mitigate- firm couldve paid the
securities specialist themselves (and should have! - exam). no evidence
hightower had enough funds to keep its biz open
5) prejudgment interest: MD law says where claim is for unliquidated
damages, they can run from date of judgment but not before=
D) rationale: when it couldn't sell stock any more, project failed, and "no
greater nexus need be shown"- once this was shown, burden on appellant
firm to show otherwise- here, appellants failed to show that venture was
"doomed to fail" before this issue arose-
E) issues: was trial judge right to permit jury to consider "reliance dgs" and to
not permit jury to consider prejudgment interest? answer: yes
F) notes:
1) need for reliance dgs when expectation dgs are too speculative: e.g.
contractor allowed to recover ependitures in part performance where lost
profits too speculative b/c cost of completion not provable with
2) K price as limit on reliance dgs?: should they be "not recoverable in excess
of full K price promised by D"?- R.2d 333- some say distinction should be
drawn b/w "essential reliance" (costs of performance of k) and
"incidental reliance" (costs in collateral transactions related to K)- and
that K price should only limit recovery for essential reliance damages- b/c
if you award more than that then you are showing that K would've been
losing one and rewarding party for making a bad deal
3) limitations on recovery for reliance damages: FOS, Causation,
certainty, and mitigation also apply here (as w/ expectation) - need to
prove reliance/breach caused the harm with certainty. "equal opportunity"
exception to mitigation applied by some but not all courts (employed in
Wartzman)-
4) losing Ks: D has burden of showing P would've lost anyway if K had been
performed
5) precontract reliance: NOT RECOVERABLE!!
6) foregone opportunities as reliance damages; sometimes ct considers gains
P wouldve made if not relied on promises of D. e.g. P permitted to recover
franchise fee and amount of lost salary as a result of quitting his initial
job; P could recover overhead expenses that would've collected had
alternative Ks been entered into instead)
Walser v. Toyota Motor Sales (8th cir. 1994)- takeaway

A) facts: 1987 toyota conducted market surveys throughout us to find best
market for new lexus cars. market indicated Twin Cities as 2-dealership
market and recommended 2 suburban areas. April 1988 toyota sent letters
of intent to prospective dealerships in 2 locations- dealer in one area said no,
so Toyota (D) searched found Wasler and his co-owner Mclaughlin (Ps) who
owned BMW/Mercury dealership- said they'd be interested in obtaining lexus
dealership.
1) Toyota has 3-step process for est. dealerships 1) formal application,
plan submitted to Toyota from dealer. 2) letter of intent signed by head of
lexus division and prospective dealer containing final conditions. 3) former
dealership approved by Toyota and again signed by parties
2) Haag (Toyota division head) told Ps in Oct 1989 that letter of intent
was forthcoming, in Dec. 1989 said "you're our dealer" and that letter had
been formally approved. few days later called Ps and said it had not been
formally approved- finally in March told Ps that lexus wouldn't issue letter
of intent
3) P's reliance: in meantime b/w October and December? Wasler's father
had agreed to purchase property for proposed dealership
B) P's claims: 1) breach of statute (thrown out by court) 2) breach of K, 3)
Prom. Estop. 4) joint venture (thrown out by court) 5) fraud, 6) intentional
interference with K relations, 7) int'l interference with prospective business
advantage. (thrown out by stipulation)
C) trial court: jury= for Ds on fraud, breach of K. but for Ps on promissory
estoppel. -limited damages to out-of-pocket expenses per judge's instruction
D) P/appellants' claims on appeal: appellants=Wasler and McLaughlin (jury
verdict gave them $232K) on their promissory estoppel claims against Toyota:
dist ct erred in instructing jury that their PE recovery limited to out-of-pocket
expenses. they want recovery for lost profits of up to 7.6 million. and
spending in attempting to obtain dealership (claimed this totaled over 1
million- including $677K for land and maintaining it)
E) Rules:
1) R.2d 90: "promise which p'sor should rxnable expect to induce axn or
forbearance on part of p'see or 3rd person which does introduce such axn
is binging if injustice can only be avoided by enforcement. judgment
granted for breach may be limited as justice requires.
i) Minn courts have interpreted it to mean may be limited to damages
measured by reliance or out-of-pocket expenses- great discretion
given to court b/c it's a policy decision!
2) calculation for land bought in reliance = amount paid for property [-]
actual value so here, they paid 677K but it was still useful and worth at
least 550K
F) rationales: D gave evidence that dealership was far from a certainty- only
relied on getting dealership, but were still tons of other hoops to go through-
only short period b/w when told they would get it and when Haag backed out.
- and no demonstration of lost opportunity by Ps.
G) holding: affirmed for P in same amount (of $232K)- dist court did NOT err in
limiting PE recovery to out-of-pocket expenses and refusing to consider
potential lost profits of venture and unamortized capital investments made in
attempting to obtain dealership
H) takeaway: Where appropriate, measure is difference between purchase and
resale prices of things bought in reliance.
I) summary: P approached D with offer to open a dealership. D led P to believe
there was a deal, relying on which the P bought land. P was only able to
recover difference in what he paid and what land was worth. Court held that
damages in promissory estoppel actions can be limited as justice requires.
J) notes:
1) should parties asserting PE claim be able to recover expectation damages
that they can prove w rxnable degree of certainty (would be recoverable
under K theory), or only reliance (b/c this is "only" a PE claim)? (policy
question- exam)- Williston says they should be able to recover
expectation b/c 90 says that it is enforceable binding promise- and if
promise is binding it needs to be enforced as made
2) should damages in PE be limited to actual reliance??
3) judge has discretion whether to award expectation or only reliance
damages
4) majority approach: allows lost profits and other forms of expectation
damages- but only if expectation damages were rxnably foreseeable to
breaching party and can be assessed with rxnable degree of certainty! (bc
those are always the 2 requirements for expectation damages)
Restitutionary Damages
A) aka: quantum meruit/unjust enrichment/quasi-K
B) 3 applications of restitutionary damages
1) non-breaching party may get restitution rather than expectartion dgs for
breach of K-
2) even breaching party may be entitled to restitution b/c of benefit
conferred on other party by performance
3) if performance obliges have been "discharged" for some reason
(incapacity, impracticability- SOF, mistake) either/both parties may get
restitution
i) *restitution premised on axn for rescission (not breach) of K
US v. Algernon Blair (4th cir. 1973)- restitution, Quantum meruit

C) Issue: Can a subcontractor, who justifiably ceases work on a K b/c of prime
contractor's breach, recover in quantum meruit the value of labor and
equipment already furnished pursuant to the K irrespective of whether he
would have been able to recover in a suit on the K?
D) answer/holding: Yes. reversed and remanded. Quantam meruit damages
are permitted regardless as to whether performing the contract would have
resulted in a loss.
E) Procedural History:
1) Trial court finds for but won't allow quantum meruit
2) this court- reversed and remanded
F) Facts: P/subcontractor, Coastal, starting doing work for D/primary contractor,
Blair. D/Blair refused to make certain payments and P/Coastal stopped work.
P/SC brought suit against the D/primary contractor to recover for the services
rendered.
1) shorter version: P contracted to provide steel work for the construction
of a naval hospital for D; P began performance, but ceased when D
refused to pay for crane rental
G) Rule: If expectation damages are insufficient to cover Ps losses, P may
substitute reliance damages. damages should be measured by the
replacement value of the labor and equipment provided by Coastal.
(remanded to find out exactly what that amt is)
1) Stating reliance damages in the complaint is not required, can be joined
later
2) calculating: K price may be evidence of what recovery should be, but is
not a limit on recovery. True measure is how much the services could have
been purchased for by P at the time and place services were rendered
H) rationale: Coastal is entitled to damages for services rendered b/c Blair has
benefited from Coastals loss.
1) Susi Contracting Co. case -court allowed the option of forgoing recovery
on the K in favor of the rxnsble value of his performance
2) Unjust enrichment strengthened by the idea that the purpose of justice is
the maintenance of an equilibrium of goods among members of a society
3) Recovery is undiminished by any loss which would have been incurred by
complete performance Williston
I) notes:
1) limit on restitution: usually party had right to choose restitution
damages over expectation damages, but not when nonbreaching party
has fully performed his obligations under the K and the breaching
party's only remaining duty of performance is the payment of a sum of
money. in this case the nonbreaching party may not elect a restitutionary
recovery but is limited to expectation damages. Restatement (Second)
373(2).
2) market-value restitution rule: policy rationales for allowing recovery
for reliance even when the profit of K wouldn't have been as great as the $
spent on part performance -b/c if p elects to take restitution damages, the
K no longer legally exists so need not consider further losses P wouldve
incurred. but some say its unfair to give P more than P would've gotten if
K went through (and remember no punitive dgs in K law supposedly)
Ventura v. Titan Sports, Inc. (8th cir. 1995) - Quantum Meruit/Unjust

Enrichment & Restitution
A) takeaway: Jesse Ventura sued for video tape royalties. Court held that he
waived rights to royalties as a wrestler; not as a commentator- second K that
waived all rights to royalties was unenforceable because it was entered by
fraud
B) facts: Pre-Bloom K- P/Ventura worked as wrestler and commentator without
Bloom as his agent at this time- entered into 1st K with D, but videotape sales
never mentioned. Post-bloom K: After P came back to Titan to be
commentator with Bloom as his agent, Ds told P about the videotape but told
him th
C) issue: may Ventura/P avoid the express K waiving royalties for commentary
and recover those royalties under quantum meruit (unjust enrichment or
restitution)?
D) answer: yes- reversed
E) rules: unjust enrichment does not lie wherever one party benefits from
another- only where the benefitting party benefits "unjustly" (meaning
unlawfully or illegally)-
1) elements of fraud= materiality, inducement, justifiable reliance,
causation, damages
2) expert witness role/calculation: Expert testimony was admitted to
determine the value of the royalties that should have been paid for using
his image and voice in the videos. - in considering whether expert
testimony is reliable, must consider methodology/principles underlying
testimony, not the conclusions they generate- main dispute over royalty
rate- EW says range of royalties is 3.5-7.5%- jury awards about 5%- EW
testimony reliable court says- it is reasonable to determine value of an
article (here a videotape license) by looking at other "substantially similar"
licenses- so EW's look at thousands of licensing agreements for
sports/entertainment figures was a reliable method
F) rationale:
1) fraud= Titan told P he was only employed to be commentator in live
performance- didn't tell him it would be on video and never mentioned
anything about royalties- so when he made the commentator K he didn't
even consider videotape sales, then when he heard about it they told him
it was impossible to get royalties for it b/c of "company policy".
2) misrep= Titan told P its policy was to pay royalties only to feature
performers, when in fact they were paying some other high-profile
commentators like Hulk Hogan etc.). Restitution for unjust
enrichment/quantum meruit is the only proper theory for recovery.-Bloom
over and over asked whether the company policy had changed and co.
kept lying about it
3) note: no royalties for wrestling performances b/c WBA agreement
governed and precluded royalties
4) district court did not clearly err in finding that ventura's pre-bloom Ks
did not address videotape royalties and did not err when finding it
could award QM and not enforce waiver provision to compensate P for
post-Bloom period
G) procedure: trial ct for P. P not entitled to Quantum meruit/un b/c express K
covers subject matter.
H) holding: jury award affirmed- Jesse Ventura gets a portion of profits received
by Ds fraudulent conduct in inducing Ventura to waive royalties for videos
featuring him. IP rights to commentary CAN be basis for unjust enrichment
action-- court discusses only videotape issue for simplicity, but notes that this
analysis applies to other merchandise too
I) dissent: agrees about pre-Bloom K compensation for P, but says P should
NOT get post-bloom compensation and court should enforce the royalty
waiver -there was NO unjust enrichment here. lots of policy arguments-- says
not shown to be inequitable violation of natural justice- his commentary was
compensated for- he did NOT perform any additional duties or services- there
is no right to publicity in Minn. in Dissent's view- titan took risks in making
these videos, it should get the benefits -- Ventura made a bad deal in waiving
this right, court shouldn't compensate him for his regret -- even if there were
a right to publicity, ambiguity
J) notes:
1) pre-Bloom oral K: all agree this was fraud for not telling P about this and
thus that P should be compensated/ post-bloom written K: dispute over
whether there's a right to publicity and whether there was unjust
enrichment of the Ds here
2) restitution damages/interest: may be calculated based on "benefit
theory" (value of the actual extra goods/services) or by the "Enrichment
theory" (how much P actually made off of it)
3) restitutionary reliance? = very little support for this- courts appear
to be allowed to engage in loss-sharing in roundabout way- by measuring
damages "as justice requires"- so some courts may allow reliance
damages when a K is discharged for reasons like impracticability- e.g.
Hart v. Arnold Pa. 2005- seller of parcel of land entitled to restitution +
reliance after govt regulations made performance by buyer to build lake
impracticable but buyer failed timely to inform seller of changed
circumstances
4) proving restitutionary damages: problem of "certainty"- trial court
should invite parties to offer exert witnesses to show reasonable value of
services- should make effort to give relief to nonbreaching party-
"equitable considerations may predominate over a parochial approach"
Prob. 12-1 class notes

Facts: Big Burger: corp that franchises burger restaurants throughout country
6/04, Michaels approached BB for franchise
o reviewed literature, visited several BBs and hired lawyer- spent

$15K in travel and legal fees
8/04, parties signed K in which BB granted Michaels franchise and would

construct and lease restaurant to her
o michaels would pay franchise fee of $100K to lease rest for 10-year
term at fixed rental plus % of sales
resigned job as manager of local rest ($40K a year) and started

purchasing equip from approved suppliers - cost $50K
1/05, rest ready for operation
6 months later, disputes
o michaels objected to quality of products BB sent and to honor

commitment to run ad campaign
o complained income did not meet company's projections
avg net prof: $75K, avg salary: $50K
only paid $20K and broke even
late 2006, michaels gave up rest and tried to negotiate but failed, brought
suit
Assume michaels can establish BB committed material breach of franchise K.

Damages?
only choose 1 -- expectation damages: $30K for 2 years OR reliance damages:
$15K travel, $100K franchise fee, $50K equip,
Michaels' claim includes count seeking recission and restitution, must elect
between claim for recission or breach of K: which way: recission or damages?
Recission can get more here but not usually proposed jury instruction for
damages?
Expectation damages
extra $10K salary plus profits
only really getting $20K and no profits
interest
10 year K term
only did for 2 years
2x$30K =$60K
total damages minus $40K
argument against
no guarantee that there would be a profit
Reliance damages
$100K franchise fee
$20K (actual salary v. old salary)x 2 years
interest
$50K for supplies
argument against: unreasonableness
Restitution damages
$100K franchise fee
K price with market value
maybe fraud
Notes
Expectation damages
o $125K x 10?
o for 2 years, she made $40K ($20K x 2)
o $50K for equip, she had to spend that to make $125K
can maybe sell the equip

equip will not come in
o arguments against
avg profile doesnt mean that it will be the salary
hard to calculate
speculative
must calculate present value (opposite of interest)
get money 10 years out, will get less today
reasonable expectation of profits and salary
mitigation
EXAM: duty to mitigate will complicate

calculation
may not be able to find comparable job
how long it takes
would have to find a job for the next 8

years
amount would have to be subtracted out
o counter
she entered into agreement based on this
Reliance damages
o $100K franchise fee (maybe only entitled to $80K cause worked for
2 years
o $50K equip (change if she sold it)
o $40K x 2 (- $20K x 2)=$40K
can she get more?
no, too speculative
maybe not entitled for full 2 years bc didn't know that she
would have kept job for 2 years and she could not have found
another job
tough to get additional years
try to ask though

o interest
o hadley consequential damages applies to all theories
Restitution damages
o $100K franchise fee (should get all that back)
o may have claim to profits earned while working
o arg why she would not get
portion of sales and rental were part of $20K earned
no unjust enrichment because paid $20K to generate profit
o equipment and mitigation
prob just give them the equip
o interest
want to pursue expectations
Reier Broadcasting v. Kramer (Mont. 2003) -Specific perform.-

enforcement of negative covenant
A) takeaway: court will not grant an injunction to prohibit a person's breach of
a K where the performance of the K otself would not be specifically enforced-
generally personal service Ks are not specifically enforceable, and this one to
be a commentator for Reier and not to engage in any other performance
without approval/consent from Reier was not specifically enforceable, so
court would not grant injunction (actually removed temporary restraining
order) to restrain D from violating the K by doing other commentary of sorts-
this was NOT enforceable (not in Montana or in CA. and AZ. where they get
precedent) - underlying K IS valid, BUT the K cannot be specifically
enforced by means of an injunction
B) rationale: to grant the injunction to prohibit him from doing other
commentary would amount to forcing him to do commentary only for this one
station which is "indirect specific enforcement of the K" the majority claims
C) facts: P/broadcast company owned several radio stations and had exclusive
rights to broadcast athletic events at the local university. The head football
coach at the university entered into an employment contract, whereby the
broadcast company agreed to pay the football coach $ 10,020 per year in
exchange for exclusive broadcast rights with the coach. A breach of K issue
arose.
D) issue: (raised by P/broadcast co.) - within the context of a personal services
K, did Mont. statute prohibit the use of injunctive relief to prevent one of the
contracting parties from performing services elsewhere during the life of the
contract?
E) held: statute prohibited the use of injunctive relief to enforce negative
covenants contained in personal services Ks. -so broadcast company not
entitled to enjoin the football coach from performing services elsewhere
during the life of the K
F) rules:
1) Injunctions rarely used to enforce K rights or prevent breaches, and
applicable court decisions concerning the propriety of this tactic are
scarce. but legislature has set forth statutory guidelines for the use of
injunctions. An applicable guideline is found in Mont. code. an injunction
cannot be obtained to prevent breach of a K, the performance of which
would not be specifically enforced. A list of obligations which cannot be
specifically enforced is found in Code.
2) In light of the unambiguous language of the statute, a court cannot
interfere by injunction to prevent the violation of an agreement of which,
from the nature of the contract, there could be no decree of specific
enforcement
3) Montana statute, like its California and Arizona counterparts, prohibits the
use of injunctive relief to prevent a party to a personal services contract
from performing services elsewhere during the life of the contract.
G) dissent: preventing someone from doing something is very different than
making them do it- P didn't have to be commentator for anyone- its way diff
saying he cant do it for other ppl and that if he does choose to do it he must
do it for Reier than it is saying he MUST do it and do it for reier and giving him
no choice to abstain- the former, which is what we have here, gives him
choice, the dissent says
H) notes:
1) Lumley v. Wagner (1872 eng.)- Lumley/P was an opera house owner who
contracted with Wagner/D to get her to appear in several operas in his
theater- she promised not to appear in any other opera during that time-
but she later agreed to work for higher salary for competitor and thus
breached- P sought injunction restraining Wagner from singing for his
competitor - COURT allows injunction- DOES ENFORCE NEGATIVE
COVENANT- despite that court would not have required her to sing for P
thru specific performance.
2) unique services requirement: personal services must be unique for
courts to consider granting specific performance- unique= "special,
unusual, or unique character of services which give a particular value"-
e.g. athletes, artists, media personalities is where specific perfomance
may be granted
3) court may require specific performance in employment context
only where employee was wrongfully discharged under statutory
provision preventing discrimination (e.g. Title VII)
Agreed Damages- Liquidated damages clauses

A) high deference to parties in settlements: absent claim of fraud, duress,
mistake, settlements are final-
B) much less deference in liq. dx provisions: not favored as much- subject to
judicial scrutiny and traditional tests- term aimed at compensation usually
OK- if aimed at penalizing party- NOT OK
Westhaven Assoc. v. C.C. of Madison (Wisc. 2002)- liquidated/stipulated

damages- failure to do business provision
C) takeaway:
D) facts: lease issue- -LO (mall) and tenant (store) had K lease- lease rate per
day was $50 at time D breached by closing its store in Oct. 1999- before the
lease the occupancy rate was 71%- after parties signed lease, it fluctuated
b/w 50% and 72%-- after Feb 1, 2000, CC did not pay rent. P attempted to
fing new tenant to lease the space- space remained vacant til Dec. 1 2000
when West found a subletter- so P/shopping center wants attorneys fees (cant
get this), rent, and K damages for 13 months when it wasn't occupied. In the
K, there was stipulated damage provision (called "Default by Tenant")-
said (1) if Tenant/CC defaults in performance of any of its K obligations and
doesn't remedy them within 10 days, that LL/Westhaven can reenter and
recover any rent leading up to date or reentry and liquidated damages- or
(2) LL can choose not to terminate lease and attempt to relet in its own name
for remainder of term and then recover from CC any deficiency b.w amount of
lease and new lease, less any expense of reletting, including all necessary
repairs and alterations and rxnable attn fees and rent provided hereunder. P
exercised option 2- no dispute that P entitled to rent at 50$/day b/w October
1999 when D vacated and subletting in Dec 2000 -- key stipulated
provision in dispute = CC must pay it $20/day if CC fails to keep its
premises open for business during "normal biz hours"- aka a failure to do
business clause- store vacates premises- shopping center wants to enforce
this.
E) issue: were the stipulated damages provisions in the parties' K reasonable
and thus enforceable liquidated damages provisions or unreasonable and
thus unenforceable penalty provisions? (this court deems "stipulate
damages" as damages mentioned in lease and "liquidated' as meaning
reasonable and enforceable) - Westhaven wants to enforce stipulated
provisions against D (Costcutters) -
F) answer: yes- reasonable- Reversed and remanded (trial court found they
were unreasonable penalty provisions)
G) rules:
1) burden on D here b/c no unequal bargaining power: general
assumption is that bargains are enforceable so party asking court to
invalidate bargain bears burden of production and persuasion- must
demonstrate justice of his position- especially where neither party
complains of inequitable bargaining power
2) stipulated damages provisions enforced if rxnable under totality of
the circumstances. -court's considers 3 things, great discretion to
judge as to how to weigh each:
i) did parties intend to provide for damages or for a penalty?
(1)provisions don't become penalties just b/c 2 of them address same
conduct- 2 form provisions prohibiting same conduct NOT punitive
necessarily-
(2)probably rxnable if damages amt is set at amount tied to base rent,
as here
(3)neither provision required LL to mitigate- court says this doesn't
matter b/c elsewhere in lease LL's duty to mitigate existed
ii) rxnableness test 1= retrospective: were damages ascertainable at time
of K?- or is injury caused by breach one that is difficult or incapable of
accurate estimation at the time of the K?
(1)
iii) rxnableness test 2= prospective= and, are stipulated damages a
reasonable forecast of actual harm caused by breach?
3) minor breach cannot automatically trigger the stipulated damages-
breaching party must have opportunity to cure minor breach- court says
10 day provision and requirement of written notice by LL to Tenant made
sure that minor breach would NOT trigger the provisions- in Mayfield court
objected to provision that "even a minor default" entitled the lessor to
declare breach-- b/c this goes against rules of K law! -must be material
breach
H) rationale: Altho rent not tied to CC's sales, West did have an interest in their
being open b/c it upped foot traffic- even CC's president acknowledged that
when nearby stores close it hurts business. Just b/c occupancy rate of mall
went up after CC left does NOT mean that LL/mall suffered no harm as a
result of breach- court says loss of significant tenant still may cause harm b/c
not only may fewer customers come but also other tenants lose faith in the
mall
I) notes: may be upheld as rxnable forecast of uncertain damages- seems
counterintuitive, but actually the harder it is to calculate what damages
should be, the more reasonable the stipulated damages may seem. many
courts have also put burden on party seeking not to enforce stipulated
provisions where the parties had equal bargaining power. note: equal is
pretty relative- need not be exactly equal, but if both are businesses then
that should be enough. -
1) not enforced if: damages clause appears to have no relationship to
anticipated harm - "grossly disproportionate to actual harm"- this may
occur even if the agreed upon damages were reasonable at the time the K
was made. courts usually deny enforcement of them b/c of their
"in-terrorem" effect- may force a party to perform instead of breaching
2) but note: even if they have punitive aspect, may be upheld- liquidated
dg in employment K or covenant not to compete wont preclude court from
granting injunctive relief IF FACTS WARRANT
3) late fees=usually NOT upheld- b/c they look punitive
4) earnest fees= parts of real estate Ks requiring purchasers to make
earnest $ deposits- may require rentention of deposit if party breaches-
courts divided on whether to uphold these or not- some allow them and
say breaching party cant recover any portion of amt paid, others
scrutinize them as liquidated dgs provisions
5) courts divided as to whether liquidated dgs clause prevents ct
from granting specific performance- again its based on facts and
intent of parties- also issue as to whether mitigation recovery should be
deducted from stipulated amount- Posner said it shouldn't
6) under-liquidated damages: what ab rare case where it seems liq d
undercompensates the P?- r.2d says "limitation-of-damages" clause may
be unenforceable as "unconscionable" but does NOT specifically talk about
low liquidated damages amounts - courts may not subject these to
reasonableness std. b/c maybe this reallocation of risks was bargained for-
freedom of K idea
7) some argue that penalty effect of liquidated damages should be
OK- b/c parties are often undercompensated (no atty fees, emotional
distress, etc.- so why not let them contract to get compensation for that
on their own w/o needing courts- b/c courts wont allow punitive/pain and
suffering damages for breach)
see problems 12-2 and 12-3 on page 1045
Chapter 10: Consequences of Nonperformance: Express

conditions, material breach, and anticipated repudiation
Express Conditions (Consequences of Breach)
A) parties=
1) party who must perform condition= obligor
2) party for whom it must be performed= obligee
B) goal: to protect a party from having to perform if one or more specified
events do/do not occur
C) examples: B will buy real estate conditioned upon ability to obtain a
favorable zoning variance, w/o which the property is less useful to it-
insurance Ks often involve condition that one party must provide notice to
another of info in particular form or by stated times
Oppenheimer & Co. v. Oppenheim (NY 1995)

A) Summary: Parties entered into a letter agreement setting forth certain
conditions precedent to the formation and existence of a sublease between
them. The agreement provided that there would be no sublease between the
parties unless and until P delivered to D the prime landlords written
consent to certain tenant work on or before a specified deadline. If the
condition did not occur, the sublease would be null and void. P provided only
oral notice on the specified date. Therefore substantial performance does not
apply to this case.
B) Facts: In 1986 P moved to WFC in NYC with 3 years remaining on current
lease. O&Y (constructor of bldg) had agreed to make the rental payments If P
was unable to sublease current space, as an incentive to get P to move
there. In Dec. 1986, P entered into a conditional letter agreement with D that
D would sublease current space of P. Proposed sublease was attached to the
letter agreement. The letter agreement provided that the proposed sublease
would be executed only upon the satisfaction of certain conditions:
1) P was required to obtain the Prime Landlords written notice of
confirmation, substantially to the effect that D is a subtenant of the
premises reasonably acceptable to Landlord. Without the written notice
received by or on, Dec. 30, 1986, then this letter agreement and sublease
shall be deemed null and void.
2) With satisfaction of the condition, D was required to submit to P on or
before Jan 2, 1987, its plans for tenant work for phone linkage between
their two floors.
3) Then written consent was needed of the landlord for the tenant work on or
before Jan 30, 1987, without which, both the agreement and sublease
were to be null and voided.
4) Parties extended the letter agreements deadlines in writing and
P timely satisfied the first condition, but did not deliver the
second condition. Ps attorney phoned D and informed them that the
landlords consent had not been secured. The next day, D informed P that
the agreement and sublease were invalid for failure to deliver the prime
LLs written consent and that it would not agree to an extension of time. P
eventually received LLs consent.
C) P: D waived and/or was estopped by virtue of its conduct from insisting on
physical delivery of the landlords written consent by the deadline. Also
alleges in its complaint that it had substantially performed the conditions set
forth in the agreement.
D) D: no sublease or contractual relationship ever arose because P failed to
satisfy the conditions.
E) Procedure: The trial court barred reference to substantial performance of
the terms of the letter agreement, but then let the jury consider the theory
anyway. Jury answered that yes the P did substantially perform the
conditions set forth in the letter and awarded 1.2 million. D moved for
judgment notwithstanding the verdict. Supreme Court granted the motion,
ruling as a matter of law, the doctrine did not apply. Appellate court
reversed, and reinstated the jury verdict. This court reverses.
F) Issue: (1) does the doctrine of substantial performance apply to the facts of
this case?
G) Holding: (1) No. Furthermore, the issue of substantial performance is not
for the jury to decided, but rather by the judges of the law.
H) Rule: A condition precedent is an act or event, other than a lapse of time,
which, unless the condition is excused, must occur before a duty to perform a
promise in the agreement arises.
1) express vs. implied conditions:
i) Express conditions =those agreed to and imposed by the parties
themselves. must be literally performed,
ii) Implied or constructive conditions are those imposed by the law to
do justice. - ordinarily arise from language of promise-- are subject to
the precept that substantial compliance is sufficient. When doubtful,
and the language is not clear, a court will interpret language as a
promise or constructive condition.
I) Rationale: Given the language of the first condition, it is obvious that it is
an actual condition give the language. This court sees no justifiable basis for
applying the doctrine of substantial performance to the facts of this case.
The requirements of s/p are strict. And because the critical concern of
forfeiture or unjust enrichment (O&Y agreed to indemnify P for damages
resulting from failure to sublease) is simply not present in this case, we are
not presented with an occasion to consider whether s/p is applicable.
Furthermore, there is no reason to relieve them of their bargaining. If they
are dissatisfied with the consequences of their agreement, the time to say
so was at the bargaining table.-- court does NOT want to frustrate intent of
parties
J) notes:
1) language sufficient to create express K: in this case language was
unambiguous- "if" "unless and until" "no further force and effect" etc.
2) express conditions vs. promises: no principled rxn why K term cant be
interpreted as BOTH a condition and a promise- if an event is a
"promissory condition" then failure of the event to occur justifies obligor in
treating her obligations as discharged and subjects obligee to damages -
e.g. Internatio-Rotterdam, 2d 1958- buyer's promise to give shipping
instructions to seller at least 2 wks prior to shipment was promissory
condition.
3) #6: majority modern rule= classical rule of strict interpretation of
express conditions- they MUST be performed fully, absent risk of
forfeiture or injustice
4) technical conditions (not related in substance to real rxn for the D's
nonperformance but asserted solely to defeat P's attempt to enforce the
K) are often excused by courts
5) waiver or estoppel= effective without either cns or reliance, ONLY IF the
condition waived wasn't either a material part of performance that obligor
was to receive in exchange or a material part of the risk assumed
6) prevention of condition: obligor may be under an obligation to
cooperate with obligee in causing the condition to occur, or at very least
cannot frustrate it- meaning obligor cant just say, oh I couldn't get it done
when it could have, just to get out of the k
J.N.A. Realty Corp. v. Cross Bay Chelsea, Inc. (NY 1977)
A) Summary:Jcommencedthisproceedingtorecoverpossessionofthepremisesclaimingthattheleasehas
expired.Theleasegrantsthetenantanoptiontorenewandalthoughthenoticewassent,itwasnotsent
withinthetimeprescribedinthelease.
B) Facts:Joriginallyleasedtheproperty,havinga10yearleaseagreement,toForo,arestaurant.The
agreementprovidedthatTenant/Fororestaurantshallnotifythelandlord/JNAinwritingbyregisteredor
certifiedmail6monthspriortothelastdayofthetermoftheleasethattenantdesiresrenewal.After
leasingfrom19641968,Forocloseditdownandofferedifforsaleorlease.
1) InMarch,1968ForoenteredintoaKwithChelsea,toselltherestaurantandassignthelease.Asa
conditionofthesale,ForowasrequiredtoobtainamodificationoftheoptiontorenewsothatChelsea
wouldhavetherighttorenewtheleaseforanadditiontermof24years.Theclosingtookplacein
Juneof68.FirstJNAmodifiedtheoptionandconsentedtotheassignment.
2) Themodification,states:thetenantshallhavearighttorenewthisleaseforfurtherperiodof24
years,insteadof10,fromtheexpirationoftheoriginaltermofthelease.Allotherprovisionsinthe
leaseshallremaininfullforceandeffect(Includingthe6monthrequirementforrenewal).Foro
thenassignedtheleaseandsolditsinterestintherestauranttoChelseafor155k.Atthetimeofthe
sale,5yearsremainedonthelease.
3) JregularlyinteractedwithChelseaaboutvariousissuesregardingtheproperty.Oneinteraction
occurred,twoweekspriortotheexpirationofthelease,inregardstothepropertytaxes,however,J
failedtomentiontherenewalconditioninthelease.Arena,Jspresident,admittedthatthroughoutthe
timeofthetenancyhewasmostassuredlyawareofthetimelimitationsontheoption.(NOTE:there
isevidencethatJhasusedthistechniquetoattempttoevictpriortenants.)Finally,inNov73J
tookactiontoinformthetenantthattheoptionhadlapsed,thattheoptionwastoruninJan74.
ChelsearespondedwithaletterdatedNov73andJrefusedtohonorit.
C) D/Chelsea:Claimedthattheywerenotawareofthetimelimitationbecausetheyhadneverreceivedacopy
ofit.However,itwaslaterrevealedthatChelseadidhaveknowledgeAlsoclaimstheyspenda15kon
improvementsrecently,and40katthebeginningofthelease.
D) Procedure:trialcttenantwasentitledtoequitablerelief.Appellateaffirmed,appellatedivisions,after
grantingleave,reversedandgrantedthepetition.Tenantappeals.
E) Issue:(1)willthetenantsufferaforfeitureifthelandlordispermittedtoenforcetheletterofthe
agreement?(2)iftherewillbeaforfeiture,mayacourtofequitygrantthetenantreliefwhentheforfeiture
wouldresultfromthetenantsownneglectorinadvertence
F) Holding:Yesthetenantwillsufferaforfeiturebecauseoftheinvestmentsmadeontheproperty.And
Tenantisentitledtoequitablerelief.
G) Rule:Noticeexercisinganoptionisineffectiveifitisnotgivenwithinthetimespecified.Thetenantis
entitledtothebenefitofequity,whichrelievesagainstsuchforfeiturescontractofvaluableleaseterms
whendefaultinnoticehasnotprejudicedthelandlord,andhasresultedfromanhonestmistake,orsimilar
excusablefault.Fountain
1) Atenantshouldnotbedeniedequitablerelieffromtheconsequencesofhisownneglector
inadvertenceifaforfeiturewouldresult.
Theruleapplieseventhoughthetenant,byhisinadvertence,
hasneglectedtoperformanaffirmativedutyandthusbreachedacovenantintheagreement.(Unless
thereiswillfulorgrossnegligence.)
H) Rationale:courtnotesthatDefaultonanoptionusuallydoesNOTresultinaforfeiture.Becausethe
optionitselfdoesntcreateanyinterestintheproperty(lessorhasnopropertyinterests),andnorights
accrueuntiltheconditionprecedenthasbeenmetbygivingnoticewithinthetimespecified.Butwhena
tenantinpossessionunderanexistingleasehasneglectedtoexerciseanoptiontorenew,hemightsuffera
forfeitureifhehasmadevaluableimprovementsontheproperty(becausenowhehasaninterestinthe
property,hisimprovements).Becausethetenantmadeaconsiderableinvestmentinimprovements(55k
total)andwouldlossaseriousamountofbusinessduetolocationchange,anddespitethefailuretorenew
wasatthetenantsfault(althoughnotculpable)thetenantwouldbeentitledtoequitablereliefifthereisno
prejudicetothelandlord(sobreachnonmaterial).However,thatissuewasnotsubmittedattrial(dueto
thetrialcourtnotallowingJtosubmitsuchevidence),therefore,thismattermustberesolvedatanewtrial.
I) dissent:saystenantshouldhavetoshowfraud,mistake,accident,orothernofaultexcusetogetoutofa
conditionprecedentfactthattenanthasmadeinvestmentisnotalonesufficienttowarrantequitablerelief
concernedwithissuesoffraudbythetenant!howdoweknowtheyjustforgotmaybetheywerewaitingto
seewhatwouldhappendidn'twanttogivenoticethatthey'dstaynotpersuasivetosaytenantcouldn'tget
copyofleaseagreementwhentenantHADalawyer!
J) Note:229,theRestatement(2nd)statesasageneralpropositionthatacourtmayexcusethe
nonoccurrenceofaconditionwhereforfeiturewouldotherwiseresult,unlesstheconditioningeventwasa
matterofthepartiesexchange.
1) nobrightlinerulebecomesamoraldecisionbyindividualjudge
Anticipatory Repudiation (Retraction; Rxnable

Uncertainty/Assurances)
Truman L. Flatt & Sons Co. v. Schupf (Ill. App. 1995) - anticipatory
repudiation & retraction
A) Synopsis of Rule of Law. A party may retract their repudiation unless the
other party materially changed position in reliance on this repudiation or the
other party indicates that he considers the repudiation to be final.
B) Facts. Truman L. Flatt & Sons Co. (P/buyer), entered into a K to purchase
land from Lee Schupf (D) for $160,000. K provided that it was contingent
upon the buyer/P obtaining zoning permission from the City Counsel to
construct and operate an asphalt plant. May 21P's lawyer sent a letter to
the D stating that it was withdrawing its zoning request because it seemed
clear that the City Counsel would not approve it. Letter said "bottom line is
we are still interested in the property" but that Ps felt it was worth less w/ diff.
zoning (and were certain it was "virtually impossible" for anyone to secure
plant-building zoning) so offered $142,500 and asked if "that revision in the K
is acceptable." June 9 D rejected this offer. June 14 P responded that it
planned to proceed with the purchase in accordance with the original terms
of the K (aka would pay the $160K). Sale was originally supposed to close by
June 30, so Ps lawyer asked D about its status and if it was ready to sell at
end of June and early July. On July 8 D finally replied, arguing that P's
failure to waive the zoning requirement and to elect to proceed under the K
when the rezoning was denied, along with P's modified offer, voided the
contract.
C) trial ct: P/buyer sued for specific performance. D moved for summary
judgment, which was granted on the ground that the Plaintiff effectively
repudiated the contract.
D) Issues: Did the buyer repudiate the K? If so, did buyer have a right to
"timely retract" the repudiation and did buyer do so?
E) Answers: no, not clearly repudiation, and yes, even if repudiated, was
timely retracted- buyer DID have a right to and DID timely retract its potential
repudiation by retracting it before D/seller had notified P of any intent to treat
P's actions as a final repudiation and termination of K and before D/seller had
changed position or brought suit.
F) Held: reversed and remanded
G) Rules:
1) totality of language test: look at all the language and see if it looks like
repudiation-
2) usually repudiation must be written/orally communicated- mere
conduct can ONLY constitute repudiation if it indicates that performance
is a practical impossibility (so mere insolvency not enough, but filing
for bankruptcy might be)
3) Illinois C/L: repudiation must be a clear, definite, and unequivocal threat
of nonperformance or other manifestation of intent not to perform.
4) UCC/R.2d: a bit lower std. - if "Fair reading of language" shows "intent not
to perform except on conditions that go beyond the contract."
5) by all standards, ambiguous, doubtful, unclear statements/actions
requests are insufficient to constitute repudiation. Seeking to modify a
price term in the K is NOT usually treated as repudiation.
6) R.2d, UCC, commentators, and Ill. law all allow retraction of repudiation
before the aggrieved party gave notice that it would treat K as rescinded
or before party materially changed position (or sued) in reliance on the
repudiation.
7) exam pointer If it's at all ambiguous whether the other party's action
amounted to repudiation, ask you client if they want to treat it that way,
and if they do, have your (aggrieved-party) client give notice to that other
party that it's been considered a repudiation (K is expired, other party will
be sued for breach) - -this prevents retraction by other party and assures
that if client does something else (E.g. finds new buyer), he wont be sued
for breach.
H) Rationale: language of P's offer to pay $142.5K did not amount to
repudiation because the offer did not clearly threaten nonperformance. (see
facts). Even if P had repudiated the K, P successfully retracted that
repudiation because it did so prior to the aggrieved partys changing position
in reliance on the repudiation and prior to aggrieved party's indication to
repudiating party that it considered the repudiation to be final.
I) Policy: repudiation exists to allow non-repudiating party to not have to wait
to collect damages and more importantly to not have to perform or wait and
see if it will have to perform its end of deal, where it is clear that other party
cant perform. Right to timely retract the repudiation exists to preserve the K--
we don't want any party getting out too easily.
J) notes:
1) not repudiation: request to alter price term (e.g. Truman Flatt, case of
employee asking for more severance pay (was not repudiation of
severance K with employer))
2) yes repudiation: when contractor tells developer he's broke and cant work
without advance payments but developer declines advance payments b/c
werent in the K and decides to find someone else-- the developer is NOT
liable for breach, b/c the contractor is seen to have repudiated
Hornell Brewing Co. v. Spry (NY 1997) -anticip. repud. & rxnable
insecurity (demand for assurance)
A) facts: P Hornell Brewing Co. is a supplier and marketer of alcoholic and
nonalcoholic beverages. D Stephen Spry approached Hornell about becoming
a distributor of Hornell's Arizona beverages in Canada. Hornell in early 1993
granted Spry the exclusive right to purchase Arizona products for distribution
in Canada, and Spry formed a Canadian corporation, Arizona Iced Tea Ltd., for
that express purpose. Between November and December 1993, and February
1994, Ds' unpaid invoices grew from $20,000 to over $100,000. In May 1994,
after an increasingly problematic course of business dealings, Hornell de
facto terminated its relationship with Ds and permanently ceased selling its
products to them. Hornell learned from several sources that Spry's warehouse
was empty, that he had no managerial, sales or office staff, and he had no
trucks. P seeks declaratory J that D has no further rights to sell its
products in Canada and that the agreement b/w them has been
terminated by D's failure to respond to P's request for a documented
line of credit.
B) rules: UCC 2-609 authorizes one party upon reasonable grounds for
insecurity to demand adequate assurance of due performance and until he
receives such assurance, if commercially reasonable, suspend any
performance for which he has not already received the agreed return.
C) issues: 1) did P have reasonable grounds for insecurity based on the facts?
2) If so, was P's demand for assurance a reasonable demand? 3) did D
comply with request by paying outstanding sum and having creditor call the P
and having P send creditor a letter?
D) answers: 1) YES- rxnable grounds for insecurity b/c D had no financing in
place before, had bounced checks and failed to $100K and failed to sell even
a small fraction of the product he originally projected to sell. 2) YES- the
request(s) were rxnable b/c of D's course of performance. 3) NO- D didn't
satisfy the demand for adequate assurance b/c actually P made 2 requests,
and had a right to do so (one before the repayment of the outstanding
amount, and one after it)
E) rules:
1) commercial reasonableness (Fact-dependent) test factors for
considering if a party's uncertainty is rxnable: 1) look to buyer's
exact words or conduct; 2) course of dealing or performance b/w them.
3) nature of sales K and industry overall.
2) when a party has rxnable uncertainty about other party's ability to
perform, the concerned party may demand an adequate assurance
(commercial rxnableness test) of due performance from the other party. If
the other party does not comply, the party demanding the assurance may
suspend its performance until it gets its assurance. (thinking ab this
with the anticipatory repudiation doctrine- so if P knew D couldn't
get the assurance it needed- knew D had no way of obtaining secure line
of credit for that amount, could it consider the K repudiated, based on
above doctrine?)
3) rxnable uncertainty can arise from other party's failure to stay up to date
in payments, even if those payments are for another K, b/c this "impairs
seller's expectation of due performance" (?? for Selmi- is this true
even if the K wasn't b/w the same parties?)
4) -usually parties must look to statements/conduct by other party- rarely but
sometimes market fluctuations MAY be sufficient, but "unreliable rumors
of insignificant risks" are never enough
5) uncertainty must be based on circumstances that arose after the K was
formed- not on anything known when it was formed (that's just bad deal-
making)
6) adequate assurances that may be demanded: "facts &
circumstances" test of reasonableness- ct. found it unrxnable when seller
refused to deliver windows b/c buyer said she'd withhold some of
purchase price b/c of late delivery - UCC & R.2d require that demand be
made in good faith
7) rule is generally that demands must be in writing, though this is
sometimes eased
8) whether demand is permissive or compulsory?- in some
circumstances, demand is compulsory- party cant just get out of K b/c it
says other party made it uncertain-
9) time period: UCC says parties making demand must wait a reasonable
time not to exceed 30 days to see it completed before other party can is
in "total breach"- sometimes less than 30 days - party can specify how
long other party has to comply
F) rationale:
1) -D had no financing in place before, had bounced checks and failed to
$100K and failed to sell even a small fraction of the product he originally
projected to sell.
2) -D was untruthful, had failed to pay tons of creditors, used
improper/deceptive business practices
3) -P had authorized a $300K amount of product to be sold to D w/ payment
at 14-day periods so as to check that D was in fact capable of making
payments- so when D immediately ordered 390-450K of products, this
caused concern for P and didn't allow them to assess the situation as they
wanted to court construes this limit on purchasing only $300K
as a trial period of sorts, amounting to another "assurance
demand"
4) -letter from Metro at best was vague
5) -D failed to respond to request for a documented line of credit
Problem 10-2

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Contracts II, Knapp Book Notes 1 of 86

CONTRACTS II, Prof. Selmi- Knapp BOOK NOTE

THE PAROL EVIDENCE RULE................................................................ 3

CHAPTER 6 - SUPPLEMENTING THE AGREEMENT: IMPLIED TERMS, THE

CHAPTER 7 - AVOIDANCE OF THE K - DURESS..................................... 21

CHAPTER 8 - JUSTIFICATION FOR NON-PERFORMANCE: MISTAKE,

CHAPTER 11- EXPECTATION DAMAGES: PRINCIPLES AND LIMITATIONS. 48

CHAPTER 12: ALTERNATIVES TO EXPECTATION DAMAGES: RELIANCE &

The Parol Evidence Rule

Two Views -Corbin & Williston on Parol Evidence Rule

R.2d 209 Integrated Agreements

(2) a binding completely integrated agreement discharges prior agreements to the

2. Negative rule to keep evidence out

3. Expressed in case law

Thompson v. Libby, Minn. S. Ct., (1885) -Parole evidence- 4 corners

admission of parol evidence, the evidence must relate to a subject distinct

Taylor v. State Farm

Sherrod, Inc. v. Morrison-Knudsen Co., S. Ct. Montana (1991)

COP claims to have only offered to assist Plaintiff with another

(1) Includes non-members of an industry when actually knew or the

o Talks occurred contemporaneously

- Parol evidence rules does not apply and evidence should be

o Reserves right to adjust percentages provision in the manual,

Adjust seems ambiguousconversation said that the

Reasonably susceptible to the interpretation that

o Falls under the conditional exception

o Also possibly try a promissory estoppel argument

o The fraud doesnt relate to the subject of the Kit was

o Why would they punish you for being successful?

Chapter 6 - Supplementing the Agreement: Implied

Wood v. Lucy Duff-Gordon, Cardozo- NY Ct. of App., 1917

Notes After Leibel v. Raynor (p. 445)

Implied Obligation of Good Faith

4. hiring broker/deliberately preventing his consummation of deal acting

5. conscious lack of diligence in mitigating other partys damages acting diligently

7. adopting overarching interpretation of K interpreting K language fairly

8. harassing other party for repeated assurances of performance adopting adequate

Seidenberg v. Summit Bank, Superior Ct. NJ (2002) -fruits of the

2) Ps allegations of bad faith and ill motives are sufficient to survive

H) Holding: Reversed and remanded

Comment: Requirement & Output Ks

b. *requirement Ks: buyer's agreement to buy exclusively from seller.

c. criticisms early on: held invalid initially as lacking CNS or mutuality, or

a. sometimes courts will find implied promise of exclusivity

f. Where contractual limitations are not expressed, UCC 2-306(1) which

a. reduction in buyer's demand usually deemed in good faith IF

Locke v. Warner bros., Inc. (CA. Ct. of App., 1997)

Donahue v. FedEx Corp., Superior Court of PA., 2000 -fire-at-will

Implied Terms and UCC

Warranties (Express & Implied)

2-313. Express Warranties by Affirmation, Promise, Description,

An IMPLIED WARRANTY of merchantability exists for a product if

o implied warranties often made in non-UCC transactions

ex. warranty of habitability in leases of dwellings

most states now recognize implied warranties of

Uniform Residential Landlord Tenant Act (p 499)

2-314. Implied Warranty: Merchantability; Usage of Trade.

(e) are adequately contained, packaged, and labeled as the agreement

(f) conform to the promise or affirmations of fact made on the container or

2-315. Implied Warranty: Fitness for Particular Purpose.

Bayliner Marine Corp. v. Crow, S. Ct. of VA. 1999- warranties (implied v.

2-316. Exclusion or Modification of Warranties.

(c) an implied warranty can also be excluded or modified by course of