CONTRACTS I OUTLINE

Fall 2005 – Professor Stone

Amber M. Whillock

Possible Exam Questions:

How do you find a contract instead of just promises?
Unconsionability in Dealership Termination?
Buyer’s and Seller’s Remedies under the UCC
UCC Warranties
Statute of Frauds
Parol Evidence Rule

Contract
Restatement § 1 defines a contract as:
A promise or set of promises for the breach of which the law gives a remedy, or the performance of which
the law in some way recognizes as a duty.

Contract law only deals with promises to do something (exchanges that relate to the future). A promise is a
commitment to future behavior.

Executory Promises
Promises that neither party has begun to perform. (Promise to buy and a promise to sell cotton after
harvest. Buyers have not yet paid and Sellers have not yet delivered)

We enforce executory promises (even when neither side has yet to rely on the promise) because if we didn’t
then it would discourage reliance. To encourage reliance, we must make it so that people don’t have to
prove that they relied.

Contract Rules are “default” Rules in that they are subject to contrary agreement by the parties, but apply by
default if the parties fail to make such an agreement.

Unilateral Contract
A promise is made on one side, performance (immediate) given on the other.
(Seller delivers apples, buyer promises to pay at the end of the month.)

Bilateral Contract
Promises are made on both sides.
(Seller promises to deliver apples at the end of the month. Buyer promises to pay for apples when they are
delivered.)

Levels of Contract Performance:

(1) Full Complete Satisfactory Performance (contract is performed and completed to satisfaction of the
parties)
(2) Substantial Performance (Main part of contract is performed, leaving incidental problems to be
completed. Remedy may consist of paying to correct problem.)
(3) Material Breach (Total breach of main contract terms)

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Something less than complete performance (less than perfect) can be considered full performance.
Example: building supposed to be 60 ft. and its 59 ½ feet. Apply a reasonable expectations standard to
determine if full performance. We generally don’t expect perfection.

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REMEDIES
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I. Purpose of Contract Remedies:

(A) To provide mandatory rules to deal with opportunism.
(B) To provide default rules for allocation of risk when the risk has
not been allocated in the contract.

II. Ways to Measure Damages for Breach of Contract

Courts may attempt to protect the injured parties in three ways:
(A) EXPECTATION INTEREST: Attempts to put the injured party in as good a position as it would
have been in had the contract been performed and there had been no breach. Attempts to give
the injured party the benefit of the bargain.
(1) Expectation interest takes into account lost profits and reliance.
(2) In order to recover damages for breach of contract, the breach must be the cause
in fact of the loss.
(3) The loss must be foreseeable and proved with reasonable certainty.
(4) The injured party is not entitled to more than the contract terms would have given.
(5) If the breaching party had the power to terminate on a stated period of notice, the
injured party’s damages are limited to that period because the breach is
considered termination

(B) RELIANCE INTEREST: Attempts to put the party back in the position in which that party would
have been had the contract not been made.

Two types of reliance interest:

(1) Essential Reliance: Reliance that consists of preparation for and performance under the
contract. It is the price that a party must pay for what it is to receive under the contract in
question.

(2) Incidental Reliance: Reliance that consists of preparations for collateral transactions that a
party plans to carry out when the contract in question is performed

Examples of Reliance:
If there is a contract to build a store and the owner repudiates then the money that the builder has
spent on architect’s drawings, labor and materials are essential reliance.

If the builder repudiates then money that the owner has spent in buying a stock of goods and
hiring employees are incidental reliance.

Reliance does not take into account lost profits, so it is generally smaller than expectation interest.

If the court finds that awarded the full expectation interest to be inappropriate, then it will award
reliance interest as a lesser included component that will give a measure of relief.
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 There are fewer causation problems in measuring damages by reliance interest than measuring
damages by the expectation interest.

(C) RESTITUTION INTEREST: Restitution prevents the party in breach from gaining unjust
enrichment from the breach. Attempts to put the party in breach back in the position in which that
party would have been had the contract not been made. Any benefit that the injured party
conferred on the party in breach must be returned.

Restitution interest is usually smaller than both the expectation interest and the reliance interest.

Restitution interest does not include lost profits or expenditures in reliance that didn’t confer a
benefit to the breaching party.

Illustration of the Three Types of Interest:

Contract to build a building for $100,000. It would cost the builder $90,000 for build the building. If the
owner repudiates before the builder has done anything at all then the builder’s only loss is the $10,000 profit
it would have made from the contract. There is no reliance interest or restitution interest.

If the owner repudiates after the builder has spent $60,000 of the $90,000 it would take to build the building,
then the builder’s expectation interest is $70,000 ($60,000 PLUS $10,000) because this is what it would take
to put the builder in as good a position as if the contract would have been performed. The reliance interest
is $60,000 because that is what it would take to put the builder in as good a position as if the contract had
not been made. If the value of the party finished building to the owner is $40,000 then the builder’s
restitution interest is $40,000 because this is the amount of unjust enrichment the owner would get from the
contract.

III. Types of Remedies

Two Main Types of Remedies:
(A) Remedy in Equity: Generally specific performance or injunction
(B) Remedy at Law: Generally the paying of money which is substitutional unless the contract called
for a sum of money to be paid then it is specific.
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Specific Performance/Injunction
(1)Specific Performance: The court orders the party in breach to render the promised performance. If the
court orders a performance that is not identical with what was promised, it may order compensation for any
deficiency.

(2) Injunction: The court orders a party to refrain from doing a specified act.
When Will Courts order Specific Performance?
 When monetary damages are inadequate
 When K deals with real property (land) because each parcel of land is unique
 Specially manufactured goods
 Sometimes for personal performance if there is not a close personal relationship to complete the task
(architects, portrait painters)
 When difficult and uncertain to place a value on the monetary damages
 Impossible to get substitute goods (shortage or a monopoly)
 When marginal benefits exceed marginal costs

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Adequacy Test: Equitable relief (specific performance or injunction) will not be granted unless the remedy
at law is inadequate to protect the injured party.

Remedy at law may be inadequate if:

(1) The loss caused by the breach cannot be estimated with sufficient certainty.
(2) The subject of the contract involves matters of taste or sentiment (works of art or heirlooms)
so its impossible to value the injured party’s expectation in money.
(3) Breach of contract to transfer shares of stock may deprive buyer of control over corporation
that cannot be accurately valued in money.
(4) If a substitute is not available or obtaining one would be unreasonably difficult, inconvenient or
impose serious financial burdens or risks on the injured party.
(5) If goods are scarce or unique, then specific performance may be available
(6) In breach of contracts for the sale of land courts generally grant specific performance because
each tract of land is “unique.” Specific performance is usually granted even if the purchaser has
made a contract to resell the land to a third person.

When specific performance will not be granted:

(1) Terms are indefinite
(2) Insecurity of agreed exchange
(3) Difficulty of enforcement or supervision
(4) Unfairness
(5) Public policy
(6) If a substitute can be readily obtained, remedy at law is generally considered adequate
(7) Remedy at law is the norm for breach of sale of goods.
(8) Specific Performance will not be granted for contracts that are personal in nature.

Parties may put in contract for the sale of goods that specific performance may be decreed.

SPECIFIC PERFORMANCE AND EMPLOYMENT:

 Generally no specific performance in employment contracts because the people wouldn’t cooperate
with each other, monitoring costs would be too high, etc.
 If the service is unique, courts may impose negative enforcement by issuing an injunction to prevent
the employee from furnishing the services to another person for the duration of the contract.

Covenant Not to Compete Clauses:

Valid if:
 Restraint is designed to further employer’s legitimate interests (REST. 187)
 Restraint is reasonable as to time. (REST. 188)
 Restraint is reasonable as to space. (REST. 188)
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General Measure of Damages= Expectancy Damages
Elements of Damages for Total Breach:
(1) Loss in Value: Difference between the value to the injured party of the performance that should
have been received and the value to the party of what actually was received, if anything.
(2) Other Loss
a. Incidental Damages: Additional costs incurred after the breach in a reasonable attempt to
avoid loss, even if the attempt is unsuccessful.
b. Consequential Damages: Injury to person or property caused by the breach.
(3) Cost Avoided: Expenditures saved by injured party not having to perform the contract.
(4) Loss Avoided: Loss avoided by salvaging and reallocating some or all of the resources that it
otherwise would have to devote to performance of the contract.

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Damages = Loss in Value + Other Loss – Cost Avoided – Loss avoided

RESTATEMENT § 347
The injured party has a right to damages based on his expectation interest as measured by
(a) the loss in value to him of the other party’s performance
caused by its failure or deficiency, PLUS
(b) any other loss caused by the breach, including incidental or consequential loss, MINUS
(c) any cost or other loss that the injured party has avoided by not having to perform

Limitations on Expectation Interest:

(1) Injured party cannot recover damages for loss that could have been avoided if that party had
taken appropriate steps to do so.
(2) Injured party cannot recover for loss that the party in breach did not have reason to foresee as a
probable result of the breach at the time the contract was made.

Diminution in Value
Used to calculate damages when using the Cost of Performance rule would result in plaintiff being put in a
BETTER position than he would be if the contract was completed.

RESTATEMENT § 348(2)
If the breach results in defective or unfinished construction and the loss in value to the injured party is not
proved with sufficient certainty, he may recover damages based on
(a) the diminution in the market price of the property caused by
the breach, OR
(b) the reasonable cost of completing performance or of
remedying the defects if that cost is not clearly disproportionate to the probable loss in value to
him.

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Uniform Commercial Code
The UCC applies only to transactions for the sale of goods, not to contracts for the sale of land or services.
Determination of whether a transaction is one for goods, services, or land is done by looking at the
“predominant factor” of the contract.

Goods

Merchant UCC 2-104(1)

If one deals in goods of the kind or otherwise holds oneself out by occupation “as having knowledge or skill
peculiar to the practices or goods involved in the transaction. Required professional status may be based
on specialized knowledge of either the goods or the practices involved.

Good Faith UCC 1-304

Unconscionabiity UCC 2-302

Seller’s Remedies
Loss in value to seller is usually the amount of money not received from the other party, if the seller fully
performed.

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UCC 2-703 Seller’s Remedies in General
Where the buyer wrongfully rejects or revokes acceptance of goods or fails to make a payment due on or
before delivery, or repudiates (part or whole) then seller may
(a) withhold delivery of such goods
(b) stop delivery by any bailee (2-705)
(c) proceed under 2-704 respecting goods still unidentified to the contract
(d) resell and recover damages (2-706)
(e) recover damages for non-acceptance (2-708)
(f) cancel.

UCC 2-704 Seller’s Right to Identify Goods to the Contract Notwithstanding Breach or to Salvage
Unfinished Goods
(1) An aggrieved seller may
(a) identify to the contract conforming goods not already identified if at the time he
learned of the breach they are in his possession or control
(b) treat as the subject of resale goods which have demonstrably been intended for
the particular contract even though those goods are unfinished.
(2) Where the goods are unfinished an aggrieved seller may in the exercise of reasonable
commercial judgment for the purposes of avoiding loss and of effective realization either complete
the manufacture and wholly identify the goods to the contract or cease manufacture and resell for
scrap and salvage value or proceed in any other reasonable manner.

UCC 2-705 Seller’s Stoppage of Delivery in Transit or Otherwise

(1) Seller may stop delivery of goods in the possession of carrier or bailee when he discovers the
buyer to be insolvent (2-702) and may stop delivery of any shipments of freight when the buyer
repudiates or fails to make a payment due before delivery or if for any other reason the seller has
a right to withhold or reclaim the goods.
(2) As against such buyer the seller may stop delivery until
(a) receipt of goods by buyer OR
(b) acknowledgement to buyer of any bailee of the goods except a carrier that the
bailee holds the goods for the buyer OR
(c) such acknowledgement to the buyer by a carrier by reshipment or as
warehouseman, OR
(d) negotiation to the buyer of any negotiable document of title covering the goods

UCC 2-706 Seller’s Resale Including Contract for Resale

(1) Seller may resell the goods or the undelivered balance thereof. Where the resale is made in good
faith and in a commercially reasonable manner the seller may recover the difference between the
resale price and the market price plus any incidental damages minus any expenses saved due to
the buyer’s breach.

UCC 2-708 Seller’s Damages for Non-acceptance or Repudiation

(1) The measure of damages for non-acceptance or repudiation by the buyer is the difference
between market price at the time and place for tender and the unpaid contract price plus incidental
damages minus expenses saved in consequence of the buyer’s breach.
(2) If those damages are inadequate to put the seller in as good a position as performance would
have done then the measure of damages is the profit (including reasonable overhead) which the
seller would have made from full performance by the buyer plus any incidental damages, due
allowance for costs reasonably incurred and due credit for payments or proceeds of resale.

UCC 2-710 Seller’s Incidental Damages

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Incidental damages to an aggrieved seller may include any commercially reasonable charges, expenses or
commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyer’s
breach, in connection with return or resale of the goods or otherwise resulting from the breach.
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Lost Profits for New Businesses
Lost profits on a new business can be calculated by:
 Bringing in Expert witnesses
 Looking at comparable businesses.

Lost profits are usually a fact question for the jury.

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Lost Volume Sellers (Goods)
A similar transaction that the plaintiff makes after the breach will not be treated as a substitute for the
broken contract if the seller can prove that he would have made the second transaction absent the
breach.

UCC 2-708
(1) Measure of damages for non-acceptance or repudiation by the buyer is the difference between the
market price at time and place for tender and the unpaid contract price together PLUS any
incidental and consequential damages MINUS any expenses saved by the breach.
(2) If the measure of goods in subsection (1) is inadequate to put the seller in as good a position as
performance would have done then the measure of damages is the profit (including reasonable
overhead) which the seller would have made from full performance by the buyer PLUS any
incidental and consequential damages.

3 Part Test for Lost Volume Sellers:

(1) Seller must have the capacity to produce both units.
(2) It must be profitable to have produced and sold both units.
(3) It must be likely that the second sale would have been made
without the breach.

If the seller is not a lost volume seller then the profits of the K 2 will reduce the damages he can recover for
breach of K1. He would only recover the difference between the two, the offset, which may be zero if he sold
it for the same price as in the K1.

To recover under 2-708(2), the seller not only has to be a lost volume seller, but the sale also has to be a
lost volume sale. If a carpet dealer contracts to sell a piece of carpet cut in the shape of a triangle, the
seller is a lost volume seller, but the sale isn’t a lost volume sale. The goods must be able to be resold in
order for the sale to be considered a lost volume sale. Custom made goods are generally not lost volume
sales.
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Quantity Discounts
When a buyer breaches a contract to buy goods, the seller cannot recover for a loss of a quantity discount
b/c it’s not a “charge” or “expense” incurred, it’s a benefit foregone.

UCC § 2-710
Incidental Damages to Aggrieved Seller may included commercially reasonable charges, expenses or
commissions incurred in stopping delivery, in transportation of goods, in care and custody of goods after
breach in connection with return of resale of the goods or otherwise resulting from the breach.

Nobs Chemical v. Koppers Co.

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Seller lost quantity discount when buyer breached. Could not recover the discount as incidental damages.

Buyer’s Remedies
Buyer may:
 RESTITUTION: Cancel and recover down payment (2-711)
 RELIANCE: Cover and get damages incurred in getting cover plus incidental and consequential
damages (2-711 and 2-712)
 RELIANCE: Not cover and get pure damages (2-713, 2-714, 2-715) as market price when learned of
breach plus incidental and consequential.
 If all or part of the goods were paid for, buyer can recover goods identified to the contract. (2-711)
 SPECIFIC PERFORMANCE: Sue under equity and get specific performance. (2-716)

UCC 2-711 Buyer’s Remedies in General; Buyer’s Security Interest in Rejected Goods
(1) Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or
justifiably revokes acceptance then the buyer may cancel and whether or not he has
canceled, can recover the price already paid
(a) “cover” and have damages under 2-712 as to all the goods affected OR
(b) recover damages for non-delivery under 2-713
(2) Where the sellers fails to deliver or repudiates the buyer may also
(a) If the goods have been identified recover them OR
(b) In a proper case obtain specific performance or replevy the goods under 2-716
(3) On rightful rejection or justifiable revocation of acceptance a buyer has a security interest in
goods in his possession or control for any payments made on their price and any expenses
reasonably incurred in their inspection, receipt, transportation, care and custody and may
hold such goods and resell them just as if he was an aggrieved seller.

UCC 2-713 Buyer’s Damages for Non-delivery or Repudiation

(1) Measure of Damages for non-delivery or repudiation by the seller is the difference between the
market price at the time when buyer learned of the breach and the contract price plus any
incidental or consequential damages minus expense saved due to the breach.
(2) Market price is to be determined as of the place for tender or, in cases of rejection after arrival or
revocation of acceptance, as of the place of arrival.

UCC 2-714 Buyer’s Damages for Breach in Regard to Accepted Goods

(1) Where the buyer has accepted goods and given notification he may recover damages for any non-
conformity of tender the loss resulting in ordinary course of events from the seller’s breach in any
manner which is reasonable.
(2) The measure of damages for breach of warranty is the difference at the time and place of
acceptance between the value of the goods accepted and the value they would have had if they
had been as warranted, unless special circumstances show proximate damages of a different
amount.
(3) In a proper case any incidental and consequential damages may also be recovered.

UCC 2-712 Cover

(1) If seller breaches, buyer may cover by making in good faith and without reasonable delay any
reasonable purchase of or contract to purchase goods in substitution for those due from seller.
(2) Buyer may recover from seller as damages difference b/w cost of cover and contract price plus
incidental/consequential minus expenses saved.

UCC 2-715 Buyer’s Incidental and Consequential Damages

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 (1) Incidental damages resulting from the seller’s breach include expenses reasonably incurred in
inspection, receipt, transportation and care and custody of goods rightfully rejected, any
commercially reasonable charges, expenses, or commissions in connection with effecting cover
and any other reasonable expense incident to the delay or other breach.
(2) Consequential damages resulting from the seller’s breach include
(a) any loss resulting from general or particular requirements and needs of which the
seller at the time of contracting had reason to know and which could not
reasonably be prevented by cover or otherwise AND
(b) injury to person or property proximately resulting from any breach or warranty.

UCC 2-716 Specific Performance or Replevin

(1) Specific performance may be decreed where the goods are unique or in other proper circumstances.
(parties can put agreement of specific performance in K except for consumer Ks)

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Perfect Tender Rule and the UCC
Perfect Tender Rule says that buyer could reject goods if they are not exactly as buyer wanted.

Under Common Law Perfect Tender Rule: Contracts had to be performed full, complete, satisfactory
performance. Substantial performance was not enough. Very strict.

UCC is less strict than the common law.

Rejection of Goods: occurs before acceptance

Revocation of Acceptance of Goods: occurs after acceptance

UCC 2-606
Acceptance of goods occurs when
 After reasonable opportunity to inspect the goods, buyer signifies to seller that the goods are conforming
or that buyer will take or retain them in spite of their non-conformity.
 Buyer fails to make an effective rejection (only after buyer has had reasonable time to inspect goods)
 Buyer does any act inconsistent with seller’s ownership (if act is ratified by seller)
 Acceptance of any part of a commercial unit is acceptance of the entire unit.

BEFORE ACCEPTANCE UCC uses the perfect tender rule if goods are rejected:
UCC 2-601: Buyer may reject goods if they fail in any respect (even minor defects) to conform to contract
before goods are accepted. (But seller has a right to cure)
UCC 2-602: Goods must rejected within a reasonable time after delivery.
UCC 2-508: If goods are rejected for noncomformity, the seller has the right to cure (correct the
nonconforming delivery of goods) within a reasonable time.

AFTER ACCEPTANCE UCC uses substantial impairment rule:

UCC 2-608: After acceptance, buyer may revoke acceptance of goods only if the nonconformity
substantially impairs the value of the goods to him.
UCC 2-607(4): After buyer accepts goods, he has the burden to prove any defect.
UCC 2-508: If goods are justifiably revoked then seller has the right to cure by making a conforming tender
of delivery within reasonable time.

Effective Revocation of acceptance UCC 2-608:

 Goods must be nonconforming
 Nonconformity substantially impairs the value of goods to the buyer
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  Buyer must have accepted goods on reasonable assumption that nonconformity would be cured.
 Nonconformity was not cured in a reasonable time.
 Buyer must notify seller of his revocation.
 Revocation must occur within a reasonable time after discovery of nonconformity
 Buyer must take reasonable care of the goods for which he has revoked acceptance.

Remedies if goods are revoked/rejected (If seller fails to cure):

1. Buyer can cancel and recover down payment and any other price he has paid. (Restitution)
2. Buyer may cover and get reliance damages. (difference between cost of cover and contract price
plus incidental/consequential damages)
3. Pure reliance damages (difference between market price at time he learned of breach and contract
price plus incidental and consequential damages. (Expectancy)
4. Sue in equity to enforce specific performance for unique goods
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Repair and Replacement Clauses
UCC 2-719 allows for contracts that limit a buyer’s remedy to return of the goods and repayment of price or
repair and replace nonconforming goods or parts. However, If this remedy “fails of its essential purpose”
then the buyer can get other remedies provided for in UCC.
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Cover
UCC 2-712
(1) After a breach the buyer may cover by making in good faith and without unreasonable delay any
reasonable purchase of or contract to purchase goods in substitution for those due from the seller.
(2) The buyer may recover from the seller as damages the difference between the cost of cover and
the contract price PLUS any incidental and consequential damages MINUS expenses saved as a
result of the breach.
(3) Failure to cover does not prevent any other remedy.

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

RESTATEMENT § 350
(1) Damages are not recoverable for loss that the injured party could have avoided without undue
risk, burden, or humiliation.
(2) If the injured party has made a reasonable but unsuccessful effort to avoid the loss, the he can still
recover damages.

Rockingham County v. Luten Bridge Co.

Bridge Co. kept building bridge after told that county didn’t want it. They should not be able to recover for all
the materials, etc in building the bridge. Should only get the lost profits plus reliance interest minus loss
avoided.
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Mitigation
The injured party cannot recover damages if they don’t try to avoid the loss. (REST. 350)

TEST FOR MITIGATION:

Injured party must use:
(1) Due Diligence to find
(2) Comparable Performance/Employment
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Hussey v. Holloway
Employer breached employment contract. Employee doesn’t have to accept offer of lesser employment and
used due diligence. Employee is entitled to expectancy interest from original contract.

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Market Price
If the injured party did not enter into a substitute transaction (cover/mitigation) then they are entitled to sue
for loss based on a hypothetical substitute valued at market price.

Market price may also be used as the basis for calculating damages when the injured party did enter into a
substitute transaction, but did so in a way that would make it inappropriate to award damages based on the
cover price b/c for example, buyer waited too long when market was rising to make substitute contract or
they chose an unreasonably expensive substitute.
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Warranties
Warranty is a promise by the seller that the goods will have certain qualities.

Types of Warranties:
 Express Warranties UCC 2-313
A warranty created by the overt words or actions of the seller.

UCC 2-313 Express warranty created by any of the following:

 Affirmation of fact or promise made by the seller to the buyer relating to the goods that becomes
basis of the bargain
 Description of the goods that becomes part of the basis for the bargain
 Sample or model made part of basis of bargain.

 Implied Warranties UCC 2-314

A warranty arising by operation of law because of the circumstances of a sale, rather than by the seller’s
express promise. Am implied warranty does not require reliance as an element of buyer’s recovery.
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Unforeseeability as a Limitation
Damages are foreseeable when, at the time of making the contract, the party who ultimately breached
reasonably should have realized that those damages would be a likely consequence of the breach.

Restatement § 351 Unforeseeability and Related Limitations on Damages

(1) Damages are not recoverable for loss that the party in breach did not have reason to
foresee as a probable result of breach when the contract was made
(2) Loss may be foreseeable as a probable result of breach because it follows from the breach
a. In the ordinary course of events (General Damages) OR
b. As a result of special circumstances beyond the ordinary course of events that the party in
breach had reason to know. (Special Damages)
(2) A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by
allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the
circumstances justice so requires in order to avoid disproportionate compensation.

Hadley v. Baxendale
Special circumstances must be known to both parties at the time the contract was made in order for the
defendant to be liable for the lost profits resulting from the breach. In Hadley, the defendant did not enter
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into a special agreement to bear all the consequences of non-delivery. D had no reason to know of the
circumstances.
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Tacit Agreement Test
TACIT AGREEMENT TEST:
Mere notice of the circumstances make the loss foreseeable is not enough. The party has to have a tacit
agreement to assume the risk of liability.
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Uncertainty as a Limitation
Restatement § 352 Uncertainty as a Limitation on Damages
Damages are not recoverable for loss beyond an amount that the evidence permits to be established with
reasonable certainty.
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Reliance as an Alternative Measure of Damages
Restatement § 349 Damages Based on Reliance Interest
As an alternative to expectancy damages the injured party has a right to damages based on his reliance
interest, including expenditures made in preparation for performance or in performance, less any loss that
the party in breach can prove with reasonably certainty the injured party would have suffered had the
contract been performed.

Security Stove v. American Railway Express Co.

No lost profits to recover, b/c Plaintiff was only displaying stove to attract customers. Plaintiff wants reliance
damages (money spent in relying that Amer. Railway would deliver), even those spent before contract was
made. Amer. Railway knew of the time constraints.

Rule of Prior Expenses:

Expense incurred prior to the contract can be claimed as damages if these damages were reasonably in the
contemplation of both the parties when contract was made. (at moment entered in contract it was
foreseeable that these losses would occur if breach happened)
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Loss Due to Emotional Disturbance
Restatement § 353 Loss Due to Emotional Disturbance
Recovery for emotional disturbance will be excluded unless the breach also caused bodily harm or the
contract or the breach is of such a kind that serious emotional disturbance was a particularly likely result.
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Punitive Damages
Punitive Damages will not be awarded for breach of contract. The purpose of contract remedies is only to
compensate the injured party, not to punish the party in breach. Punitive damages will only be awarded if
there is an underlying tort.

Restatement § 355 Punitive Damages

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

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Tort of Bad Faith Breach
Seaman’s Direct Buying Service v. Standard Oil
Tort of Bad Faith Breach of contract would occur where a party in addition to breaching the contract seeks to
shield itself from liability by denying, in bad faith and without probable cause, that the contract exists. Court

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emphasized the special relationship b/w insurer and insured characterized by elements of public interest,
adhesion, and fiduciary responsibility.

It was developed in California, only Montana followed, then California rejected it. It is unlikely that it will
spread to other states.

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Liquidated Damages/Penalties
Liquidated Damages: Damages agreed to buy the parties and put in the contract.
Penalty Clauses: Clauses that will reward the injured party more for breach than they would have earned by
full performance.

Restatement § 356 Liquidated Damages and Penalties

(1) Damages for breach by either party may be liquidated in the agreement but only at an
amount that is reasonable in the light of the anticipated OR actual loss caused by the
breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated
damages is unenforceable on grounds of public policy.
(2) A term in a bond proving for an amount of money as a penalty for non-occurrence of the
condition of the bond is unenforceable on grounds of public policy to the extent that the
amount exceeds the loss caused by such non-occurrence.

UCC 2-718 Liquidation or Limitation of Damages

Damages may be liquidated if it would be difficult to prove damages for breach or it would be inconvenient or
impossible to otherwise get an adequate remedy.
Damages may be liquidated in an amount that is:
 Reasonable in light of anticipated harm from breach OR
 Reasonable in light of actual harm from breach (Doesn’t have to meet both criteria- one or the other).

UCC 2-719(1)(b) Fails of Essential Purpose

If the essential purpose of the remedy provided for in the contract fails, UCC remedies will be used even if
they were excluded by the terms of the contract.

TEST FOR DETERMINING VALID LIQUIDATED DAMAGES OR PENALTY:

(1) Are the damages difficult to predict or assess at the moment of entering the contract?
 If yes, then liquidated damages are reasonable, not a penalty.
(2) Is the liquidated damages amount a reasonable estimate the actual damages?
 If yes, then not a penalty.

Shotgun Clauses:
 Clauses that give injured party the same amount as damages no matter when the breach occurs or
no matter how substantial the breach. (Work 1 day then quit or work 5 days then quit employer gets
same amount for breach; use wrong type of pipe same damages as not building the house at all)
 Shotgun Clauses are generally not enforced.
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Quantum Meruit
If services are rendered, the term “quantum meruit” (as much as deserved) is used to express market value.

Restatement 374 Restitution in Favor of Party in Breach

If a party justifiably refuses to perform because the other party has breached, the party in breach is entitled
to restitution for any benefit that he has conferred by way of part performance or reliance in excess of the
loss he caused by his own breach.
14
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Restitution
Restitution damages wipe the slate clean. They return any benefits conferred and return each party to the
status quo that they had prior to entering the contract so each party can go contract with others.
RESTATEMENT 370
A party is entitled to restitution only to extent that he has conferred a benefit on the other party by way of
part performance or reliance.

RESTATEMENT 373
(1) Injured party is entitled to restitution for any benefit that he has conferred on the other party.
(2) No payment if all duties are performed besides payment that is due.

Bollenback v. Continental Casualty Co.

Insurance Co. wouldn’t pay claim b/c their accounting dept. mistakenly thought that plaintiff hadn’t been
paying. Plaintiff gets restitution of all the premiums he paid after the date that insurance co. considered his
contract cancelled.
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Measuring Restitution Interest
RESTATEMENT 371
If a sum of money is awarded to protect party’s restitution interest, it may, as justice requires, be measured
by either
(a) reasonable value to the other party of what he received in terms of what it would have cost him to obtain
it from a person in the claimants position OR
(b) the extent to which the other party’s property has been increased in value or his other interests
advanced.

EXAMPLE:
A contracts to work for B for $50,000 to be paid at end of year. B fires A at end of 11 months. A can recover
restitution based on the reasonable value of his services for the 11 months.

If the reasonable value of A’s services is $60,000, can A recover that? Maybe. Courts can do this “as justice
requires”.
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Implied Contracts (Hypothetical Contracts)
Three types of contracts:
(1) Express Contract: O + A + C = K
(2) Implied in Fact: Offer and acceptance through acts and conduct
(3) Implied in Law: Offer and acceptance through knowledge (Quantum Meruit)

Hypothetical Contract allows a party to recover when otherwise they would not like when there wasn’t even
an attempt at a contract but a contract can be implied from that actions of the parties so the plaintiff should
be able to recover.

Damages for Hypothetical Contract:

 Generally restitution where the plaintiff has conferred some benefit on the defendant (doctor
performing surgery on the street after an accident)
 Reliance where the plaintiff has relied on the performance of defendant and has suffered some form
of legal detriment.

Test for Hypothetical Contract:

15
(1) Ask would the person have wanted to make a contract?
(2) Is there a high statistical probability that the person would have wanted to make a contract?
In emergency situations there is a high statistical probability that the victim would have wanted to contract
for doctor’s services.
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Good Faith and Fair Dealing
Rest. § 205
Every contract imposes on each party a duty of good faith and fair dealing in its performance and its
enforcement.
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Unconscionability
Rest. § 208 Unconscionable Contract or Term
If a contract or term is unconscionable at the time the contract is made, the court may refuse to enforce the
contract or refuse to enforce the term or may limit the application of an unconscionable term to avoid
unconscionable result.

16
------------------------------------------------------------------------------------------------------------------------------------------------
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Consideration
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O+A+C=K
C = Consideration
A promisor’s mere promise to do something (a “bare” or “naked” promise) for which the the promisee has
given nothing in exchange is not enforceable . Consideration is the price paid by a party in a contract
(money, land, forebearance, etc).

Bargain Theory of Consideration

For there to be consideration, parties must have a bargained for exchange of the promise for the detriment
so that each induces the other. The process of bargaining is what’s important to consideration.

Each party has to suffer NEW LEGAL DETRIMENT.

Legal detriment: Any legal right that is given up.
 Could be an immediate act such as doing something or giving something.
 Could be forebearance such as refraining from doing something that person has a legal right to do.

Rest. § 17 Requirement of a Bargain

Formation of a contract requires a bargain in which there is a manifestation of mutual assent to the
exchange and a consideration. (Exceptions §§ 82-94)

Rest. § 71 Bargained for Exchange

To constitute consideration, a performance or a return promise must be bargained for.
(1) A performance or return promise is bargained for if it is sought by the promisor in exchange for his
promise and is given by the promisee in exchange for that promise.
(2) The performance may consist of:
 An act other than a promise
 A forebearance (from something that the party has a legal right to)
 The creation, modification, or destruction of a legal relationship
(3) The performance or return promise may be given to the promisor or to some other person.

Rest. § 75 A promise which is bargained for is consideration if the promised performance would be
consideration.

How do you know if it’s a bargain?

(1) Purpose: The promisor’s purpose must be to induce a promise or performance in exchange for his
promise or there is not a bargain.
(2) Means: The means used by the promisor to induce the exchange is to condition the promise of
performance (threaten to withhold it unless he gets the return commitment or performance). If there’s
a condition for the promise, then its probably a bargain. (If you promise not to sue me, I will give you
$100. This is a bargain.) The condition has to be evidence of a bargain, however. (If you walk to my
office, I’ll give you $100 is not a bargain because it’s obvious that the promisor is not bargaining for
17
 the other to walk to his office. Walking to the office is a condition of receiving a gift. Walking to the
office is incidental to the promise).
(3) Its possible that the condition is implied rather than expressly stated, and it can still be a bargain.

ASK: DID THE PROMISOR DECIDE TO MAKE THE PROMISE IN THE FIRST PLACE IN ORDER TO GET
SOMETHING IN RETURN?

In business, the court doesn’t look at the promisor’s purpose. In business it is assumed that the purpose
was to bargain. This is really only an issue in family/social/gift promises.

Rest. § 79(a) If the requirement of consideration is met, there is no additional requirement of benefit to the
promisor or loss to the promisee; or
Rest § 79(b) equivalence in the values exchanged; or
Rest. § 79(c) mutuality of obligation.

Rest. § 74
Forebearance to assert or the surrender of an invalid claim or defense is consideration if
 the claim is doubtful because of uncertainty as to the facts or the law or
 the forebearing party believes that the claim may be fairly determined to be valid

Examples of Consideration:
 Performance as Consideration: Seller delivers apples in return for a buyer’s promise to pay at the end of
the month.
 Return Promise as Consideration: Seller promises to deliver apples at the end of the month in return for
a buyer’s promise to pay at that time.

The consideration doesn’t have to move from promisee to promisor, it can go to some other person as long
as it is bargained for. (Example: Bank promises the seller that the bank will pay seller the price of apples if
seller delivers them to the buyer. Seller’s performance is consideration for the bank’s promise to pay even
though the bank doesn’t get the apples, the buyer does.)

Hamer v. Sidway
Uncle promises to give nephew $5000 if he would refrain from drinking liquor, using tobacco, swearing and
playing cards or billiards for money until he turned 21. The nephew refrained and brought suit to recover the
money. Uncle’s estate there was no consideration. Court found consideration. Nephew’s performance was
given in exchange for Uncle’s promise to pay. The forebearance was bargained for because it was sought
by the uncle in exchange for the promise to pay and given by the nephew in exchange for the promise to
pay. It doesn’t matter if the nephew’s performance benefited the uncle or was a detriment to the nephew.
(This is not a requirement of bargained for consideration. Rest. § 79)
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Promises that Lack Consideration
(1) Gratuitous Promises
Gratuitous promises are not enforceable in contract law because they lack consideration. Promise to make
a gift is not enforceable because there is no bargain or exchange. There is no reciprocity.

Rest. § 86(2)(a)
Promise is not binding if the promisee conferred the benefit as a GIFT.

Promise to make gift contrasted to making a gift: A gift (transfer of an interest in property) once given may
be enforceable under the law of property and the transfer is irrevocable.
18
Kirksey v. Kirksey
Man wrote to his widowed sister-in-law “If you come down and see me, I will let you have a place to raise
your family.” Court concluded that there was no bargained for exchange. The sister coming down to see
him was incidental to the promise to make a gift. (Could probably have a remedy under the reliance
doctrine, but it wasn’t used at this time.)

(2) Past Consideration

Past consideration does not constitute consideration because the promisee has already taken the action at
the time the promise is made. Therefore the promise cannot seek to induce the action because the action
has already been taken.

Example: In return for employee’s good work during the last year, employer promises to give employee a
gold watch. The good work is not consideration for the promise because it has already been done. The
promise for the watch cannot induce the performance.

Such transactions can be restructured to find consideration. If the employee remains on the job for a stated
time or promises to remain on the job for a stated time or refrains from competing with the employer after
retirement.

Mabley & Carew Co. v. Borden

Company promised employee that when she died, if she was still working at the company then they would
pay the person of her choosing her salary for a year. After the promise, employee continued working there
and died while employed there. Company said there was no consideration b/c the promise was given in
return of her past years of work. Court said that it was consideration because she continued working there
after the promise.

(3) Moral Obligation

Moral obligation is generally not consideration for a promise. (Mills v. Wyman)
However, some courts have held that moral obligation can constitute consideration. (Webb v. McGowin)
The trend is toward using Rest. §86(1) to increase the enforceability of promises made in recognition of
moral obligation. The boundary between enforceability and unenforceability is uncertain (40 mph maybe)
because the language used is “to the extent necessary to prevent injustice”.

Mills v. Wyman
Mills cared for Wyman’s 25 year old son for several weeks when the son became ill on the way home from a
trip. Father was not liable for the son b/c the son was an adult, but the father (in gratitude) wrote Mills a
letter promising to reimburse him for the expenses he had incurred. Court said Wyman’s promise was
unenforceable because it was only a moral obligation. There was no consideration for the promise to pay.

Webb v. McGowin
Webb saved McGowin’s life by an act of heroism that left Webb badly injured for life. McGowin promised (in
gratitude) to pay Webb $15 every two weeks for the rest of Webb’s life. McGowin made the payments for
eight years, then he died and his executor refused to continue the payments. Court said the promise was
enforceable because McGowin had received a material benefit from the promisee and was morally bound to
compensate him for the services rendered.

DIFFERENCE B/W THE TWO CASES: Transaction Costs. In Mills transaction costs were low. He could
easily have gotten an actual contract. In McGowin they were high. No time to contract so a hypo contract
could be implied b/c high statistical probability that he would have wanted him to save his life.

19
Rest. § 86(1) (Allows courts to enforce promises based on moral obligation if “material benefit”)
A promise made in recognition of a benefit previously received by the promisor from the promisee is binding
to the extent necessary to prevent injustice.

Rest. § 86(2) (Not enforceable if gift, if no unjust enrichment, if disproportionate to benefit)

A promise is not binding if it was conferred as a gift or if for other reasons the promisor has not been unjustly
enriched or to the extent that its value is disproportionate to the benefit.

States can avoid this problem with legislation: Written and signed promise shall not be denied effect as a
valid contractual obligation on the ground that the consideration is past or already executed if it is proved to
have been given (stated in the writing that it was given) and would be valid consideration except for that it
occurred before the promise.

(4) Unsolicited Action

Even if the promisee takes some action after the promise is made (no problem of past consideration) that
action is not bargained for and cannot be consideration for the promise if it was unsolicited by the promisor.
Promisor’s purpose must be to solicit the action in exchange for the promise. If the promise was a gift and
the promisee acted its not enforceable (no purpose to solicit). Also, if the promise was meant to induce one
action and the action of the promisee is different than the action sought by promisor, its not enforceable.

(5) Action Not Taken in Response

Even if the promisee takes some action after the promise (no problem of past consideration) and even if the
promisor sought the action in exchange for his promise (no problem of unsolicited action) the action is not
bargained for unless it is given by the promisee in exchange for the promise. Promisee’s purpose must be
to take advantage of the proposed exchange. Occurs when the promisee takes the action sought by the
promisor without knowledge of the promise.

Example: Guy offers a $200 reward for the return of his lost watch. If someone finds it, knows of the
reward, and returns it there’s bargained for exchange and consideration. If someone finds it and returns it
without knowledge of the reward, there is no bargain and no consideration. He didn’t know of the promise
so he couldn’t perform in exchange for the promise.

Example: Employee signs an employment at will contract. Employer makes a promise not to fire employee.
Employee doesn’t quit. If the employer’s promise had no role in employee continuing to work, then its not
consideration.

(6) Illusory Promises (No Mutuality of Obligation)

MUST HAVE MUTUALITY OF OBLIGATION OR YOU DON’T HAVE CONSIDERATION.
Illusory promises may be performed or not at the will, wish, or desire of one or parties therefore are
unenforceable for lack of consideration. (I will buy your car for $10,000 if I feel like it). The condition is
within the party’s control. Both parties have to be bound for there to be consideration.

Rest. § 77
A promise is not consideration if by its terms the promisor reserves a choice of alternatives unless:
 Each of the alternative performances would have been consideration alone had it been bargained
for or
 One of the alternatives would have been consideration and there appears to the parties to be a
substantial possibility that the before the promisor exercises his choice events may eliminate the
alternatives which would not have been consideration. (Performance conditioned on an event
outside the party’s control.

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(7) Pre-Existing Duty
 There is no consideration for a contract if the obligation is already due under a pre-existing contract.
 Must have NEW legal detriment.

Rest. § 73
 Performance of a legal duty already owed to the promisor (which is not doubtful and not subject of an
honest dispute) is not consideration.
 Similar performance is consideration if it differs from what was required by the pre-existing duty in a way
which reflects more than a pretense of a bargain.

(8) Social/Family Promises

Social/Family promises are generally not enforceable because the parties do not intend for the promises to
be enforceable as contracts. They are generally gifts. If there is consideration in the form of bargained for
exchange with an intent to contract, then some family/social promises are enforceable.

Marvin v. Marvin
Common law marriage; D asked P to move out and stopped making support payments. P says she gave up
her career in order to devote herself to D (as companion, homemaker, housekeeper, and cook). She claims
that was her legal detriment. A contract could happen in a case like this if there was an express contract for
domestic services or an implied in law contract or a contract for a partnership or joint venture or some other
tacit agreement between the parties, or quantum meruit (could recover the value of services minus the
reasonable value of support if she can show that she rendered services with the expectation of monetary
reward. She can say relied on the contract, but the reliance is not justifiable. I will love you in the morning
promises. (Don’t be a dumbass)

Court found no contract, but awarded money anyway.

Argue there was a contract: Legal detriment of her giving up her career and the promise of future sevices
was consideration for D’s promise to support her monetarily. There was a meeting of the minds/ bargained
for exchange.

Argue there was no contract: No intent to contract. They may have promised each other mutual gifts.
(Even if there was a contract, there would be no remedy because she had already received the benefits of
the services rendered.

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Promises with Consideration
(1) Peppercorn Theory (Nominal Consideration)
Even a peppercorn (with no real value) can be consideration as long as it is bargained for. There is no
requirement that the consideration be “adequate,” “sufficient,” or “valuable.” Rest. 79(b) However,
imbalance in the exchange may be evidence of misrepresentation, duress, mistake, mental incompetency or
unconsionability of the bargain.

EXCEPTION: Nominal consideration is not adequate where it is false recital or past moral consideration or
intended as a gift.

Under the Restatement, Second:

21
Nominal consideration does not make a promise enforceable if the parties really don’t intend to make a
bargain. If the promise is really meant to be a gift and there is no real bargain then the nominal
consideration is not consideration.

Schnell v. Nell
Husband promised to pay wife’s family $600 in consideration of 1 cent. Court held that one cent
consideration obviously showed that there was no intent to bargain for a contract. It’s a false recital. It was
really meant as a gift so not enforceable.

(2) Forebearance from Asserting Invalid Claims

Forebearance from asserting valid claims is consideration, and forebearance from asserting invalid claims
may be consideration as long as the claim was disputed (doubtful because of uncertainty as to the facts) or
the forebearing party believes in good faith the claim may be fairly determined to be valid. (Rest. § 74)

(3) Duty of Good Faith/Reasonable Efforts in seemingly Illusory Promises

Some promises that seem illusory (performed or not at the will, wish, or desire of one of the parties) have an
implied duty of good faith that can be considered consideration. (Officer of corporation must devote to the
corporation such as “as he in his sole judgment shall deem necessary” in return for employment.) The
promise may be read by the court to include an implied promise to act in good faith so the promise is not
illusory. Similarly in marketing contracts, the person marketing another product may have an implied
promise to use “reasonable efforts” to promote the product and this will make the promise not illusory.

Problem with Good Faith and Reasonable Efforts: We don’t know what they mean. (40 mph maybe) The
court is free to place its own judgment on what is good faith or reasonable efforts.

Contract around these problems. Define in the contract what would be good faith, what would constitute
reasonable efforts. Be specific to avoid all these problems.

Wood v. Lucy, Lady Duff-Gordon

Lucy gave Wood exclusive rights to market her designs. In return she would receive half of all profits. The
agreement said nothing of Wood’s duty to market. Lucy broke the agreement by allowing others to market
as well, then said the contract was unenforceable because there was no consideration (Wood didn’t promise
to do anything). Court found consideration by implying that Wood was to use reasonable efforts to market
the designs.

In exclusive dealings contracts, the party who has agreed to exclusivity is giving up his/her right to have
other people do the job or buy/sell to others. Giving up that right constitutes consideration on that party’s
part.

UCC 2-306(2)
A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned
(unless otherwise agreed) imposes an obligation by the seller to use best efforts to supply the goods and by
the buyer to use best efforts to promote the sale.

(4) Termination at Will

Generally if either party can terminate the contract at any time with no notice, then the promise is
unenforceable for lack of consideration. If the termination is conditioned on the occurrence of an event
outside the party’s control (agreement cancelled if can’t get a loan) or within a certain period of time (before
shipment) then it is enforceable because both parties are bound in some way. (To continue if they get a loan
or to accept if they change their mind after shipment).

22
Lindner v. Mid Continental Gas
Ten days notice required to terminate was enough consideration to satisfy mutuality of obligation. They
would at least have to pay for $10 days.

Gurfein v. Werbelovsky
Ordered 5 cases of plate glass to be shipped within three months. Buyer had the option to cancel anytime
before shipment. Buyer brought suit b/c seller refused to ship. There was consideration b/c once it shipped
buyer was bound. Its not an unconditional right to cancel, its an option.

(6) Inadequate Consideration

Courts generally don’t look into the adequacy of the consideration, as long as there is consideration and
bargained for exchange. Rest. § 79(b)- no requirement of equivalence in the values exchanged.

Batsakis v. Demotsis
Greek lady at the end of war wrote letter promising to pay $2000 plus interest for loaning her the equivalent
of $25. Court upheld the contract. She knew what she was doing when she made the deal. There was a
bargained for exchange. Maybe at that time that $25 was worth a lot more because her family was starving.
Parties place the value on the consideration, not the courts.

“The law allows a man to be a fool.”

Gross Inadequacy
Although the requirement of consideration may be met despite a great difference in the values exchanged,
inadequacy that “shocks the conscience” is often said to be indicative of fraud. (What the hell is shocks the
conscience? Who’s conscience? Argue yes and Argue no.)

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Contracts that are Enforceable WITHOUT CONSIDERATION
(1) Promise to revive a debt barred by the statute of limitations.
Rest. § 82(a) A promise to pay all or part of an antecedent contractual or quasi-contractual indebtedness
owed by the promisor is binding if the indebtedness is still enforceable or would be enforceable except for
the effect of the statute of limitations.

Rest. § 82(b) These consitute a promise to repay (unless other facts indicate a different intention):
 Voluntary acknowledgement to the person the money is owed admitting the existence of the debt.
 Voluntary transfer of money, negotiable instrument, etc. to the person the money is owed made as
interest or part payment for the debt.
 Statement to the person the money is owed that the statute of limitations will not be pleaded as a
defense.

(2) Promise to pay a debt discharged by bankruptcy.

Rest. § 83 An express promise to pay all or part of a debt discharged or dischargeable in bankruptcy
proceedings begun before the promise is made is binding.

(3) Promise to make a charitable donation.

Rest. § 90(2)
A charitable subsctiption is binding under §90(1) without proof that the promise induced action or
forebearance.

(4) Modification of contracts for the sale of goods

23
UCC 2-209 An agreement modifying a contract under the UCC needs no consideration to be binding.
(Except that statute of frauds must be satisfied).
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Effect of Recitals of Consideration
A recital of consideration in a contract may say “In consideration of your payment of $100, receipt of which is
hereby acknowledged, I promise to deliver apples.”

If the consideration recited is not consideration anyway, then the recital cannot make it consideration and
therefore will not make the contract enforceable. (In consideration for your past hard work, I promise to give
you a gold watch. Past consideration is not consideration even if recited.)

If a recital states valid consideration, but the consideration has actually not been done ($100 has not been
paid) then the recital is false. If it can be shown that there was really no bargain, then the recital is a sham
and there is no consideration.
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Duress and Coercion
A contract is voidable if duress is used to get the consideration. (No bargained for exchange)

Rest. § 175
If a parties manifestation of assent is induced by an improper threat by the other party that leaves the victim
with no reasonable alternative, the contract is voidable by the victim.

Rest. § 176
A threat is improper if:
 What is threatened is a crime or a tort
 What is threatened is criminal prosecution
 What is threatened is the use of civil process
 The threat is a breach of the duty of good faith and fair dealing

Post v. Jones
Ship carrying oil grounded and three other ships came. The ships auctioned for the oil, paid $1 per barrel.
Owner of grounded ship brought suit for salvage. Auction was held to be invalid b/c the ship was in a
helpless situation where there was no market, money, or competition.

Argue that there was no duress: The ship owner had choices, he could’ve let the ship sink then sued for
salvage value, or he could have let it sink and collected insurance. Or he could have refused to sell for such
a low price.

Mitchell v. CC Sanitation
Mitchell struck by negligent driver. He signed a release not to sue company of driver. Mitchell’s boss
threatened to fire him if he didn’t sign the release. It was employment at will so boss actually had the right to
fire him at any time. Court said the contract was voidable b/c of duress (improper threat) (§175, §176).

You can argue that the threat wasn’t improper because the boss had the right to fire him at anytime and
threatening to do something that you have a legal right to do isn’t improper. Also, Mitchell had other
alternatives, he could quit. (§175)

Economic Duress

24
Financial loss and impending bankruptcy are not grounds for economic duress. Economic stress is not
automatically economic duress. For economic duress to be actual duress (and make contract voidable) it
must come from the other party.

Unconscionability
Rest. § 208
If a contract or term is unconscionable at the time the contract is made a court may refuse to enforce the
contract. Court may enforce the remainder of the contract without the unconscionable term. Court may limit
the application of the unconscionable term as to avoid any unconscionable result.

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

Promissory Estoppel
Used as a basis for recovery when there is no consideration for the promise (when injustice can be avoided
only by enforcement of the promise) Rest. § 90.

Contract will be enforced if one party relied on the promise made to his detriment.
 Reliance Theory is used if parties can’t prove bargain theory.
 Also called promissory estoppel.

Estoppel: Party who through some misrepresentation had induced another to change his position should be
precluded (estopped) in a later action from claiming that the truth is different from what he had represented it
to be.

Rest. § 90
A promise which the promisor should reasonably expect to induce action or forebearance on the part of the
promisee or a third person and which does induce such action or forebearance is binding if injustice can be
avoided only by enforcement of promise.

Reasonable detrimental reliance is needed under Restatement 90(2 nd). Under 90(1st) substantial detrimental
reliance is needed.

Four Part Test for Reliance Theory:

 Did the promise in fact induce the promisee’s action or forebearance?
 Was this inducement reasonable or justifiable?
 Did the promisee suffer some detriment or harm by relying on the promise (shown by specific and
measurable loss)?
 Can injustice only be avoided by enforcement of the contract?

Devecmon v. Shaw
Uncles says he will pay for a trip then dies. Kid took the trip and now wants money from uncle’s estate.
Estate said no, it was a gift promise. Court says that kid relied on the promise so its enforceable under § 90.

25
Feinberg v. Pfeiffer
Company promises to pay employee $200 when she retired. She worked two more years then retired. She
received the checks, then the company stopped making the payments. Court says that she relied on the
promise of the $200 so makes the company pay.

EXAM (RELIANCE DOCTRINE QUESTIONS):

Go through each of the elements of § 90 and argue yes and no on each element. (Justifiable?
Yes/no, Reasonable? Yes/no, Relied? Yes/no) Compare with § 75 bargained for exchange and
compare b/w Rest. 1st and 2nd § 90 reasonable v. substantial.
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Conditions Precedent Contracts
Two step analysis to figuring condition precedent and mutuality:
(1) Remove the condition precedent from the clause.
(2) If defendant would still be bound to next bargained for event there there is mutuality of obligation.

Scott v. Moragues Lumber Co.

Contract said: If Scott bought a ship then Scott would contract with D to carry D’s lumber to South America.
Scott bought the ship but contracted with someone else instead. D sues and Scott claims no mutuality b/c
he had the option to buy the ship or not (will, wish, or desire). Court held that there was a contract. Once
the condition precent is satisfied, then the heart of the contract is triggered.

K1 is Scott buying boat. (Condition)

K2 is Scott carrying D’s lumber in exchange for money.
If K1 is satisfied, then K2 is binding.

If the condition is never met then the contract is never binding, but once the condition is met, then the
contract becomes binding.

Rest. § 224
A condition is an event, not certain to occur, which must occur before performance under a contract
becomes due.
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Needs/Requirements and Output Contracts
Needs and Requirements Contract:
 It may suit the parties to leave the quantity of goods open-ended on the understanding that the
quantity to be supplied under the contract will be determined by the buyer’s requirements.
 The buyer makes a requirements contract with the seller under which the buyer promises to buy
and the seller to supply the buyer’s total demand for a product during a specific period.

Phosphate Case
Buyer agrees to buy all the rock they need from D for a specified time. They don’t buy any for 3 years, then
try to buy and Seller refuses to sell. Seller claims that by not buying any buyer is in breach. Court agrees.
The contract was enforceable and buyer was in breach.

Could argue that there was no consideration here. No mutuality of obligation because Buyer didn’t have to
buy anything.

Glue Factory Case

Buyer contracts to buy glue from Seller for a set price for a specified period of time. Market for glue
skyrockets and buyer tries to buy huge amount of glue at lower price. Seller refuses. Buyer sues for breach

26
of contract. Court says there was no consideration because the buyer did not agree to refrain from doing
anything or didn’t agree to take a certain amount. He didn’t agree not to buy from anyone else. No contract.

Empire Gas v. American Bakeries

Empire contracts with Bakery to sell propane conversion units for all bakeries vehicles. Bakery decides not
to convert so they don’t buy any. Empire sues bakery for breach. Bakery says it was a needs and
requirements contract and that there was no need. Court says that bakery had to use good faith to meet the
contract. They could only order none if they showed a good business for doing so. (Could argue the
promise was illusory: If there was no need then promise was illusory.) There was no good business reason
for them ordering none: they had the money to convert and propane would be cheaper.

BASICALLY IN NEEDS/REQUIREMENTS CONTRACT YOU CAN ONLY BUY NONE IF YOU HAVE A
GOOD BUSINESS REASON FOR DOING SO OTHERWISE YOU ARE IN BREACH.

Output Contract:
 The quantity is left open ended on the understanding that the seller will buy all that the buyer
produces. The buyer must sell all to the seller, not to anyone else.

UCC 2-306(1)
A term which measures the quantity by the output of the seller or the requirements of the buyer means such
actual output or requirements as may occur in good faith, except that no quantity unreasonably
disproportionate to any stated estimate (or if no estimate stated not disproportionate to any normal or
comparable prior output or requirements) may be tendered or demanded.
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Best Efforts Contracts
Bloor v. Falstaff Brewing Corp.
Plaintiff sold brewery to defendant. Contract said that plaintiff would get $.50 royalties and that defendant
had to use best efforts to keep up marketing of the beer. Court had to try to define best efforts and found
that defendant didn’t use best efforts.

Avoid this problem: Define best efforts in your contract. Be specific. If x happens then …
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Terminating Dealerships (Business Unconsionability)
Generally, a court will not find unconscionability in the termination of a dealership because both parties are
business people who knew what they were getting into.

UCC 2-309(3)
Requires that the terminator of a contract to give reasonable notice. If there is an agreement to terminate
without notice it is invalid IF its operation would be unconscionable.

Unconsionability in Dealership Termination Shown by:

 No opportunity to review the contract
 Inability to understand the contract
 Not allowed to consult a lawyer
(These are almost never found.)

Smith v. Price’s Creameries

Plaintiff claimed that a clause allowing for termination for any reason was unconscionable. Court held
summary judgment for defendant. The dealer was college educated. There was no lack of opportunity to

27
review the contract, no inability to understand the contract, and he wasn’t prevented from seeking advice of
lawyer. (THREE PART TEST).

Some courts infer in dealership contracts that the dealership was intended to last long enough to give dealer
an opportunity to recoup his investment in the business.

Schultz v. Onan
Terminated dealer may recover his unrecouped expenditures, but may not recover damages for the lost
value of his business or lost future profits.

State Statutes
A number of states now restrict a franchisor’s right to terminate ongoing dealership arrangements.
Example: Wiconsin Fair Dealership Law prevents a franchisor from canceling, failing to renew, or
substantially changing the competitive circumstances of a dealership agreement without good cause.

Federal Statutes
 Automobile Dealer’s Day in Court Act gives a cause of action to dealers for their damages sustained by
reason of failure of manufacturere to act in good faith in terminating, canceling, or not renewing the
franchise with said dealer.
 Good faith shall mean the duty of each party to act in a fair and equitable manner to prevent coercion,
intimidation, or threats of coercion or intimidation. DEALER HAS TO SHOW THAT MANUFACTURER
COERCED OR INTIMIDATED DEALER and the coercion was designed to achieve some objective which
was improper or wrongful.
 Petroleum Marketing Practices Act extends to franchised distributors and retailers of gas. It prohibits
termination or failure to renew for any grounds other than those set out in statute.
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Employment at Will
Common Law: In contracts for employment at will (for an indefinite period), the employee can quit at any
time for any reason and employer can fire at any time for any reason.

Courts and legislation are eroding the employment at will doctrine.

 State/federal statutes prohibit discharging employee for age, race, gender, handicap, union membership.
 Collective bargaining between labor unions and employers limit employer’s ability to fire workers. Can
only fire for just cause or specific offenses.
 Courts use the following to erode the employment at will
(1) Public Policy: Can’t fire employee for refusing to violate the law, for whistleblowing, for insisting on a
right granted by statute.
(2) Contract Analysis: express terms (employee handbook) or implied terms (faithful service, promotions,
etc then sudden termination)
(3) Implied covenant of good faith and fair dealing: Courts imply this in contracts to prevent employer
from exercising right to fire in such a way as to deprive employee of promised benefits of past
service.

Violation of public policy usually leads to liability in tort.

Elements of Tort of Retaliatory Discharge:
 Employee is fired
 Fired in retaliation for activities
 Firing violates a clear mandate of public policy

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Model Termination of Employment Act:
Employee who has worked for the same employer for one year or more may not be fired without good
cause. Good cause is employee’s misconduct and job performance and employer’s good faith exercise of
business judgment. Under this act, employees cannot waive job security except when agreement
guarantees severance payments. Claims for wrongful termination are to be heard by arbitrator that can
award up to three years severance pay or reinstatement of employment.

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Pre-Existing Duty as Consideration
Rule of Virginity of contract: Once something has been used as consideration for original contract, it can’t
be used again. You can only give it away once.

Rest. § 73
Perfomance of a legal duty owed to a promisor which is neither doubtful nor the subject of honest dispute is
not consideration. A similar performance is consideration if it differs from what was required by the duty in a
way which reflects more than a pretense of a bargain.

Stilk v. Myrick
Sailor was to be paid 25 pounds for services on a voyage. Two seamen deserted. Captain promised to pay
him extra if he couldn’t get extra help. Captain couldn’t find extra held and refused to pay extra money. No
consideration for the promise to give extra money b/c the sailor was already under a duty to do whatever
was necessary to ensure safe voyage of ship. Pre-existing duty § 73,

Alaska Packer’s Ass’n v. Domenico

Fisherman had contract for certain amount. They said they would stop work if they weren’t paid more.
Captain agreed to pay more, but didn’t. Court says no consideration b/c captain was under duress (§ 175, §
176).

Foakes v. Beer
Foakes owed Beer 2090 pounds. Parties entered into an agreement where Foakes would pay 500 pounds
immediately then the rest in installments. Beer later sued for the interest. Court awarded her the interest.
There was no consideration for the contract to allow Foakes to pay part of the debt then the rest later, so
Beer was free at any time to demand the full amount with interest. This is a classic case of pre-existing duty.
Foakes had a pre-existing duty to pay 2090 pounds. His promise to pay 500 then installments was without
consideration.

Sugarhouse Finance v. Anderson

Defendant was to pay a judgment of $2423 plus interests, costs, and attorneys fees. Plaintiff and defendant
settled on $2200 for full satisfaction. Defendant gave check, but plaintiff later returned the check and
disavowed a settlement. Court said that the settlement was supported by consideration. Defendant
negotiated a loan to pay off the settlement which he had no obligation to do, he could’ve just filed bankruptcy
and plaintiff would get nothing. (getting the loan was new legal detriment)

Illustration: A owes B a mature debt bearing interest. Mutual promises to extend the debt for a year at a
lower interest rate are binding. A gives up the right to terminate the running of interest by paying the debt.
(new legal detriment)

Modification of Contract
Contract modifications usually are unenforceable for lack of consideration. They usually fall under pre-
existing duty.

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Rest. § 89
A promise modifying a duty under a contract not fully performed on either side is binding
 If the modification is fair and equitable in view of circumstances not anticipated by the parties
when the contract was made OR
 To the extent provided by statute OR
 To the extent that justice requires enforcement in view of material change of position in reliance on
the promise.

Mutual discharge of K1 and substitution of K2 is enforceable without new consideration. Parties may make
a new agreement and modify the terms as they wish, but there must be clear evidence of mutual discharge.

UCC Contract Modification

UCC § 2-209
Agreement modifying a contract under UCC needs no consideration to be binding.

Crane Case
UCC 2-209 says that no new consideration is needed. They do this to add flexibility and its good for
business. It may be better to allow for a lower price this time in order to maintain a dealer/buyer in the
future.

Modification due to Commercial Impractibility

Contracts can be modified if at the time of entering contract there are unforeseen circumstances that pop up
later and force one party to charge more or renegotiate terms. )“commercial impracticability” or
“commercial frustration”)

Three part test to determine commercial impracticability:

(1) Contractor had a legitimate reason or a pressing need to make an adjustment to the contract.
(Greatly changed circumstances or a “burdensome, unforeseen change in circumstance”)
(2) Other side voluntarily agreed to make a new contract (recognized the need to change). Sometimes
there may be an economic incentive for adjustment of the contract. (no high transactions cost of
hiring new work due to breach, etc.)
(3) Promisee is not attempting to take advantage of promisor being locked into a contract.

Blakeslee v. Board of Water Commissioners

K1 to build a dam, contractor encountered unforeseen difficulties. Parties agree to a K2 for greater amount.
The new contract had consideration b/c the parties did not know of the unforeseen difficulties at the time of
entering the contract. They voluntarily made the new contract and the contractor was not attempting to take
advantage of another party.

Modification of Liquidiated v. Unliquidated Debt.

Liquidated Debts cannot be modified. Unliquidated debts can be modified (no problem with consideration).

Liquidated debts are

(1) Mature
(2) Due Now
(3) No dispute exists to the amount
(If all claims are set in concrete and sure then no modification may take place. Unless there is a mutual
discharge of old contract and new contract substituted. Have to show clear and convincing evidence, which
is a hard bargain to meet.)

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Unliquidated Debts are
(1) Disputed as to amount
(2) Unsure debt

Fisheries Case
Fish packing company made an agreement to buy excess fish. Amount went well above the estimated
agreement and packer attempted to decrease the price by giving fishery a check for lesser amount. Fishery
accepted this check for modified amount and debt was cleared. This could be done (and had consideration)
because the claim was unliquidated (not explicitly spelled out in the contract) the parties were unsure of the
debt, it was disputed as to amount.

Example: A owes B $500 on November 15. A agrees to accept $300 on Nov. 1 as payment in full. This is
supported by consideration. A suffers by having to pay sooner, B gains by getting money sooner. Time is
valuable.

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Accord and Satisfaction
Whether accord is enough or if satisfaction is also needed depends on the intent of the parties. Did they
intend to make a unilateral contract (satisfaction needed) or did they intend to make a bilateral contract
(accord w/o satisfaction is enough)?

Unilateral Contract: Parties agree to a settlement where one party has to act. (A promises to accept $300
as payment in full for a $500 debt, B has to pay $300) Satisfaction is needed for the contract to have
consideration. There is no binding contract until B party pays. But when B pays, A is bound to accept the
lesser amount.

Bilateral Contract: Each party promises to do something. (A promises to accept $300 for a $500 debt and
B promises to pay $300) Accord is enough. The promise to pay is consideration. Satisfaction is not needed
to make contract binding.

Accord suspends the creditor’s right to enforce his original claim in order to give the debtor a chance to
perform.

Novation
 Term used to describe a substituted contract that discharges a duty by adding a party who was neither
the obligor or obligee of that duty.
 Obligee must consent to the novation since its effect is to take away his right to hold the obligor liable if
the new party fails to perform.
 New promise by stranger is consideration for the new promise so does away with any problem of pre-
existing duty.

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------------------------------------------------------------------------------------------------------------------------------------------------

Statute of Frauds
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I. General Rule: Law allows for oral contracts.
 Certain types of contracts fall outside this general rule and must be written and signed in order
to be enforceable.

II. Basic Statute of Frauds Rule:

A contract within the scope of statute of frauds may not be enforced by the court unless a
memorandum of it is written and signed by the party to be charged.

III. Statute of Frauds Covers 6 Types of Contracts: MYLEGS

(1)Contracts for the Sale of Land or an Interest in Land
 Covers any agreement that contains a promise to create or transfer an interest in land
 Leases are covered, but the statute commonly accepts short-term leases

(2)Contracts that Cannot be Performed in One Year

A. In measuring the time period, the 2 points of reference are the time of making the
contract and the time when the performance is to be completed.
B. Time begins when contract is made, not when performance begins.
C. Applies only if performance is impossible, not merely difficult to complete in one year.
D. If the contract is indefinite, but the performance is possible in one year, then the
contract is not covered by the statute of frauds no matter how likely it is that it will
actually be performed in one year.
E. Contract that will be performed in the event of a death of a person is not within the one
year provision because death could occur at any time.
F. Oral employment contract for 2 years is unenforceable b/c it is not able to be fully
performed w/in one year.
G. Certain contracts do not fall w/in the statute:
 If there’s a possibility of completion in one year (even if actual performance may
extend beyond a year)
 Right to terminate w/in one year (majority says is w/in statute of frauds but
minority and restatement says not w/in statute of frauds)
 Lifetime contracts never w/in statute of frauds b/c person can die w/in a year.

(3)Contracts for the Sale of Goods worth $5000 or more

A. Statute applies if the goods combined price is $5000 or more.
B. Goods are defined as all things movable.

(4)Contracts to answer for the duty (debt or default) of another (suretyship)

A. Oral promise to act as a surety- to pay another’s debt if he does not- is unenforceable.
B. C promises to pay B $100 if A doesn’t pay.

(5)Contracts of an executor or administrator to answer for a duty of his decedent

A. If an executory agrees to pay estates debt out of his own funds, that agreement
must be in writing b/c it’s a trustee position.
32
 (6)Contracts made upon consideration of marriage
A. A promise for which the consideration is marriage or a promise of marriage is within
the statement of frauds.
B. Exception: If an oral contract consists solely of mutual promises to marry without
ancillary promises relating to property. (ordinary oral engagment)

IV. Purpose of the Statute of Frauds:

 Protection against fraud and mistake
 Assure deliberation before making a promise concerning important matters
 Specify a method by which intention may be given legal effect

V. Kind of Writing Required

A. UCC 2-201(1) imposes minimal requirements for sale of goods.
 The writing must indicate that a contract has been made
 Must name the parties (don’t have to indicate who’s buyer/seller)
 Must be signed by the party to be charged
 Must state a quantity (Maybe not needed)
 No signed writing needed for specially manufactured goods that are not suitable for sale
in the ordinary course of seller’s business.
 No signed writing needed for contracts where defendant admits there’s a contract.
 No signed writing needed if the goods have been received and accepted OR payment
has been made and accepted.

B. Restatement § 131 General Requisites of a Memorandum

(1) Memorandum satisfies if:
 Reasonably identifies the subject matter of the contract
 Names the parties charged
 Consideration is cited
 States with reasonable certainty the essential terms of the contract
 Signed by or on behalf of the party
(2) Don’t have to give actual signature.
(3) Initials, stamp, letterhead, authorized person is ok
(4) If signed writing is lost oral testimony that is existed is good enough
(5) If writing inaccurately states the terms of the contract courts permit correction by
reformation
(6) An item not intended as a memorandum (such as letter citing terms of the oral
contract) can serve as the signed writing.

VI. Oral Recission or Modification

A. Oral Recission usually doesn’t violate statute of frauds if it doesn’t result in the retransfer of property
that is the subject of the statute (goods or interest in land)
B. Oral recission of contract for the sale of goods may not be effective if B has already received the
goods.
C. UCC 2-201(3)(c) If seller still has the goods, even though title has already passed to buyer, oral
recission may be effective on the ground that by agreeing to the recission the seller has “received
and accepted” the goods.
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VII. Satisfying the Statutes of Frauds Requirements
A. Usually satisfied by writing.
 Usually done on paper, but now moving toward electronic.
 Pencil on toilet tissue will suffice.
 Even if the actual paper is lost, it can still be satisfied by oral testimony saying it once
existed.
B. Contents of the writing
 Identify the parties to the contract
 Indicate the nature of the contract and its subject matter
 If the consideration has not already been given, most courts insist that the consideration
be in the writing
 Sale of goods under UCC is less stringent.
C. Mistakes in the Writing
 Court can rewrite the contract if there is a mistake.
D. Requirement of signature
 Only has to be signed by the party against whom it is to be enforced
 Signature is any mark or symbol placed on paper with the intention of authenticating the
writing (no full signature needed, X is enough)
 Not necessary that every piece of paper be signed.

VIII. Exceptions that Permit Enforcement Despite Lack of Sufficient Signed

Writing
A. Part Performance Exception
 Following an oral contract, if the parties begin performance, it may provide reliable
evidence that the contract was made, so the failure to sign a writing will not terminate the
contract.

B. Judicial Admission Exception

 When a party admits in pleading, testimony, or otherwise in court that a contract was
made, then the contract will not be held unenforceable solely b/c of statute of frauds

IX. Impact of Non-Compliance with the Statute

A. Precludes enforcement of the agreement against that party (Invalid, Void, Unenforceable)
B. If part of contract is within statute of frauds
 Generally if one part falls w/in statute of frauds the entire contract is unenforceable
 BUT if all promises w/in statute of frauds have been performed then the rest is
enforceable
C. Remedies
 Parties can recover reasonable value of the services or part performance rendered
 May also recover restitution of benefits rendered (quantum meruit)
 Promissory Estoppel Recovery: If defendant’s conduct induces plaintiff to change
position in reliance on an oral agreement that is unenforceable under statute of frauds
plaintiff may recover under a theory of promissory estoppel.

X. Solving the Statute of Frauds Problem

34
A.Look for Oral Agreement
B.Look for MYLEGS
C. See if reliance doctrine applies
D. Not under Statute of Frauds:
 Indemnity (Health Insurance)
 Goods under $5000
 Joint debts
 Specially manufactured goods
E. ARGUE YES AND ARGUE NO- DO WE REALLY HAVE PART PERFORMANCE?

35
------------------------------------------------------------------------------------------------------------------------------------------------
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Parol Evidence Rule

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I. Effect of the Parol Evidence Rule:
A. It may bar the use of extrinsic evidence to contradict and perhaps supplement the written contract.
Oral testimony, secondary writings, or pictures cannot add to, alter, or vary a full and complete
writing.

II. Scope:
A. Includes oral negotiations before execution of final written agreement
B. Includes writings (letters, telegrams, memoranda) before execution of final written agreement
C. Includes preliminary drafts exchanged by the parties before the execution of a final written
agreement.
D. Also includes oral and secondary writings that occur after the written agreement.

III. Application:
A. Only applies to enforceable written agreements. (Evidence of prior negotiations can be entered
to show that no agreement was reached or the agreement was invalid)
B. Applies only to Integrated Agreements.

Rest. § 209(a)
An integrated agreement is a writing or writings constituting a final expression of one or more terms of
an agreement.

C. Does not apply to unintegrated agreements (Writings that the parties did not intend to be a final
or complete expression of their agreement.

Rest. § 213
(1) A binding integrated agreement discharges prior agreements to the extent that it is inconsistent
with them.
(2) A binding completely integrated agreement discharges prior agreements to the extent that they are
within its scope.
(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.

D. Partially Integrated Agreements:

Rest. § 210(b) Partially Integrated Agreements
Parties intended for the writing be a final expression of the terms it contains, but not a complete
expression of all the terms agreed upon (some terms remain unwritten)
o Evidence of prior agreements or negotiations is admissible to supplement the writing,
but not to contradict it.
o Test is whether the evidence of prior negotiation sought to be introduced would be
“consistent” with the writing and therefore only supplement. If so it is admissible.
o If the evidence would “contradict” a term of the writing, then it is NOT admissible.

36
 Rest. § 216
(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
agreed term which is
(a) agreed to for separate consideration, or
(b) such a term as in the circumstances might naturally be omitted from the writing.

E. Completely Integrated Agreements:

Rest. § 210(a) Completely Integrated Agreements
Parties intended the writing to be a complete expression of all the terms agreed upon, as well as
a final expression of the terms it contains.
o Evidence of prior agreements or negotiations is not admissible to supplement the
writing (not even evidence of a “consistent additional term”).

Rest. § 215
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 a
term of the writing. (exceptions § 214)

TEST TO DETERMINE IF PAROL EVIDENCE RULE APPLIES:

(1) Is the agreement integrated?
Did the parties intend the writing as a final expression of the terms it contains (even if the writing
was not intended as a complete and exclusive statement of all terms)?
 Doesn’t have to be signed.
 No particular form required.
 Intention of parties is determined from all the circumstances including their language,
conduct, etc.
 Evidence of prior negotiations is admissible as evidence that the writing was not intended
as a final expression of terms it contains.

(2) If so, is it partially integrated or completely integrated?

 Dispute over whether the fact that the writing appears on its face to be a complete and
exclusive statement of the term of the agreement establishes conclusively that the
agreement is completely integrated.
 Restatement and Corbin View: A writing cannot of itself prove its own completeness and
wide latitude must be allowed for inquiry into circumstances bearing on the intention of the
parties. (Majority View)
 Williston View: Courts should inspect the writing alone. If the writing appears on its face to
be completely integrated then parol evidence is not allowed.
 FOCUS IS ON THE INTENTIONS OF THE PARTICULAR PARTIES. (NOT REASONABLE
PERSON STANDARD)
 Length, detail, formality/informality of the setting are factors to consider.

F. Merger Clause (Integration Clause or Entire Agreement Clause)

 Merges prior negotiations into the writing.
 Wise to include this if the agreement is to be completely integrated to remove uncertainty.
 Typical clause includes a recital that the writing contains the entire agreement of the parties.

37
G. Collateral Agreement Rule
 Even the finding of a completely integrated agreement does not preclude a showing of a
“collateral agreement” as long as it does not contradict the main agreement.
 Agreement must collateral in form, but doesn’t have to have consideration separate from
the main agreement.
 Collateral agreement must be one that “in the circumstances might naturally be omitted
from the writing”.

Mitchell v. Lath: Written contract for sale of land. Attempted to show a prior agreement by
vendor to remove ice house from nearby tract. Parol evidence rule precluded a showing of the
prior agreement b/c all of the reciprocal obligations of the parties were fully detailed in the
contract and it the ice house were part of the agreement then it would be natural that it would
be in the contract. (Not a collateral agreement)

Could argue that the agreement to remove the icehouse was a collateral agreement therefore
the parol evidence should be allowed because it doesn’t change the existing K, it is something
that the parties would normally put in the agreement.

H. Question of Law Restatement § 209(b) and § 210(3)

 Generally whether agreement is integrated is decided by the judge as a question of law.
 Whether integrated agreement is partially or completely integrated is decided as question
of law.

I. Evidence of Prior Agreements/Negotiations Admissable (Restatement § 214)

(1) To establish that the writing is or is not integrated agreement.
 Evidence is admissible to show an oral agreement that the written agreement would not
take effect unless a stated condition occurs.
 Evidence is admissible to show that the agreement is unenforceable for lack of
consideration.

(2) To establish that the integrated agreement is completely or partially integrated

(3) To establish the meaning of the writing (whether or not integrated)
(4) To establish illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause.
(5) To establish ground for granting or denying recission, reformation, specific performance or other
remedy.

J. Reformation
(1) Reformation for Mistake
 If there is an error in the writing that does not accurately express the agreement of the
parties (mistake as to expression or mistake as to integration) then the court, at the
request of a party, may reform the writing to express the agreement actually reached.
 Reformation only used if the parties reached an agreement and failed to express it
correctly in writing. (Must have been a prior agreement)

(2) Reformation for Fraud

 Reformation is available when only one party is mistaken as to the contents or effect
of the writing IF that mistake was induced by the other party’s fraudulent
misrepresentation.
 In this case reformation may be granted even though there was no prior agreement.

38
 K. Oral Modification
 Parol evidence rule does not bar evidence of SUBSEQUENT negotiations to show
modification of a contract.
 Even a completely integrated agreement can therefore be modified or rescinded orally
(subject to doctrine of consideration and the statute of frauds)
 No-Oral-Modification Clauses: Common law said that any contract could be modified
orally even if it contained such clause. No-Oral-Modification Clauses are generally
ineffective.

L. Condition Precedent
 Oral testimony, other writings, etc can be used to prove or show a condition precedent.

Rest. § 217
Where the parties to a written agreement agree orally that performance of the agreement is subject to
the occurrence of a stated agreement, the agreement is not integrated with respect to the oral
condition.

Exceptions to the Parol Evidence Rule:

Parole evidence is allowed:
(1) To Explain or clarify vague or ambiguous terms or conflicts in the contract. (Rest. § 216)
EXAMPLE: Two ships named Peerless leaving port at different times. Parties make a contract dealing
with one of the ships but the contract doesn’t say which one. Parol evidence is allowed to clarify which
Peerless ship the parties were referring to.
(2) To attack the contract in its entirety or try to negate the entire contract. (Rest. § 214(d))
To show that the contract was illegal, or a product of duress, fraud, incapacity, misrepresentation, undue
influence or to show that there was no consideration for the contract.
(3) To prove or show a condition precedent. (Rest. § 217)
To prove that the parties agreed that a certain event had to occur in order for the contract to be enforced.
EXAMPLE: P will buy the house if he can get a mortgage. P will rent ship if he buys a ship. Team will
pay football player salary if he can pass a physical.
(4) To show subsequent modification of the original written contract. There must be a clear second contract
supported by consideration. Often the second contract will be substituted for the first. (Similar to the
Rest. §§ 275, 279 mutual discharge of contract- by clear and convincing evidence).

Parol Evidence Rule: Williston v. Corbin Debate

Williston View: Original writing is supreme unless its clear that it left the door open to future or prior parol
terms. Assume that the agreement is final and complete unless it is clear that the agreement wasn’t meant
to be final and complete.

Parol terms will be enforceable only if:

 There was a clear mutual discharge of the original writing
 There was a term that might naturally have been agreed upon but was left out (condition
precedent is an example)
 There is new consideration therefore a new contract.

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Corbin View: Unless the parties clearly indicate that the original writing is supreme, parol evidence is
allowed. Assume the agreement is not complete unless its clear that is complete.

Writing can’t cover everything. Parties may think of new terms or remember old terms that they forgot to
include. They can merge these terms into the original writing. Original writing won’t block other writings,
oral agreements if they are collateral to the original agreement.

Corbin Integrated Contract Concept:

Total Integration: Writing is (1) Final and (2) Complete. (No parol evidence allowed)
Partial Integration: Writing is Final but not complete. (Parol evidence can be allowed to supplement
writing, but not to contradict it.)

Corbin rarely finds a totally integrated agreement.

Rest. § 210 follows this view.

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