Contracts Outline

Stone—Fall 2003
By Will Waring

§ 1: Remedies Overview

I. Goals of Contract Law

A. Maximize societal welfare
1. Wealth v. Poverty
a. Will study law from the perspective of wealth
b. Will look at economics and the study of choices
c. Don’t want poverty
2. Alternatives in the law
A B
RULE RULE

a. What’s our goal? Societal wealth maximization

b. Which alternative, A or B, moves us closer to that goal?
c. Could be expressed by either a majority or minority of the court
d. “The Life of the Mind”--We will learn to think, not memorize.
e. What incentives are created from A or B?
Pie Principal

Everyone wants a bigger slice of pie.

f. Look at A and B and argue Yes or no

B. Move resources to their highest and best use by maximizing efficiency
1. R. COASE—Nobel Prize in Economic
a. Transactions cost—it’s costly to sue everyone, grief cost is even greater
b. Litigation is last resort (costly) to solving problems
c. Plan to avoid problems and minimize risks
d. When planning doesn’t work, then litigate—only 5% of lawyers do substantial
litigation
2. Cost-Benefit analysis of alternatives in the law
a. A and B have costs and benefits
b. Market Approach—the black and white reading of the contract; we aren’t all equals
c. Compassionate Approach—unconscionability; gov’t regulation
d. Flaw in reasoning to automatically go from market approach to compassionate
approach

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 e. Even though MA has costs, CA could have greater costs, i.e. frugal poor subsidizing
nonfrugal poor; people who pay bills have greater prices/interest to pay on
goods— redistribution of wealth

3. Market approach or Compassionate approach?

a. Depends on your goal
b. Want to be skeptical in all situations
c. Market approach=thinking Comp. approach=emotional
d. There’s a correlation b/t free market & amt. of wealth—respect for private property
rights, freedom
e. Nirvana Fallacy—view that the market is too tough, if you use regulation, you will
achieve Nirvana
C. Facilitate the voluntary transfer of property rights
1. Two types of rules of contract law
a. Mandatory “you must”
b. Default—if default on planning (foresee) go to court to see rules on allocating this
risk; might enforce market contract by default rule
c. Rules minimize risk to increase wealth
d. If you expand the pie, the poorest have the best opportunity.
D. Laws have consequences
1. What is the economic impact?
2. Positive economics—take a look @ both MA and CA (gov’t regulation)
3. Normative economics—a choice is made b/t the two
4. Can we reconcile these approaches?
5. Which approach makes more economic sense.

II. Levels of Contract Performance

A. Full Complete Satisfactory Performance
1. K is performed and completed to satisfaction of both parties
B. Substantial Performance
1. Main part of contract is performed, leaving incidental portions to be completed
2. Remedy may consist of paying to correct problem
C. Material Breach
1. Total breach of main K terms
Notes: People expect to get what bargained for; Remedy at law=money; Why do we attach money? Money is
way to keep score; reflects way people put value in things; Could seek remedy in equity instead; a)specific
performance (land transactions) b)injunctions c)mandamus—compel gov’t. official to do
something; In Hawkins there was material breach, so D gets nothing; Full performance would have been entitled
to contract price; Substantial performance—e.g. building is to be 60’ and it is only 59’11 ½ “; How much
incentive do you have to be accurate? Where do you draw the line?; SOMETHING LESS THAN
SATISFACTORY CAN BE FULL PERFORMANCE.; Why? Buildings aren’t expected to be perfect; scare
resources in the world; Must apply reasonable expectations standards; If party fails at F.P., is it always guilty of
material breach? No; Substantial Performance Remedy--The general rule for remedy is the contract price less the
cost of remedying the defect. Must allow the builder to cure the defect; Might be difficult to distinguish between
material breach and specific performance; Difficult to draw intermediate lines in substantial
performance; Strict view=material breach; loose view=substantial performance—is an imperfect world,
always will be flaws in performance + alternative to living with it ;could be even more costly; marginal benefits
exceed marginal costs

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 III. Three Kinds of Remedy (Presupposes legally formed K and breach)
A. Expectancy Interest
1. Focus on gains/profits prevented by breach
2. “Benefit of the Bargain” Puts injured party in a good as position as he would have been in if
K had been performed
B. Reliance Interest
1. damages recovered are those expenses that injured party incurred by relying on
K’s performance.
C. Restitution Interest
1. Damages restore the benefits that the injured party conferred upon the breaching party prior to
the breach

§ 2.1: Specific Remedies/Expectancy Interest

I. Expectancy Interest
A. Restatement §347--Injured party has right a damages based on his expectation interest as measured
by a)loss in value of other party’s performance caused by its failure/deficiency plus b)any
other loss, including incidental or consequential loss caused by breach less c)any cost or other
loss that he had avoided by not having to perform
1. Formula: Loss (K price) + incidentals or consequentials – gains from K breach (costs avoided
by P as a result of breach)
B. Hawkins v. McGee—The hairy hand. Landmark case for expectancy interest. Principle: Supreme
Court stated that the damages would be difference in the value had the surgery been
completed to terms expressed by the doctor (a perfect hand) and value that was delivered (a lesser
valued hand)
Notes: Proper measure of damages is the dollar value of injuries sustained, i.e., difference in value of hand
before and after surgery.; EXPECTANCY INTEREST—Goal is to try to make P whole—must determine
what was promised? What was delivered? Do so by bringing in witnesses to testify to value; “Fix” could
mean Dr. just tried; Pain/suffering—if awarded P’s being overcompensated; What were Dr.’s expectations? (fee)
Dr. can’t collect because he lost; has not conferred the utility of expected benefit (perfect hand); If doesn’t
confer benefit on patient, then Dr. doesn’t get benefit—strict rule material breach (not full performance); Prof.
Comment: This is contract law, not torts. When writing contracts, be specific.
C. Malpractice Insurance—Reasons why it wouldn’t cover
1. Experimental surgery maybe not covered by terms
2. Could be exclusionary clause
3. Generally covers torts, not contracts
D. The idea is to restore the injured party to the position they would have been in had the K been
performed.
1. Restores something yet to be had
2. Hardly ever, grant specific performance
3. Determines close as possible $ amount that will work

II. Cost of Performance

A. Restatement § 348(2)(b)-- The reasonable cost of completing performance of remedying defects if
cost isn’t clearly disproportionate to probable loss in value. The general rule for figuring
damages.

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 1. Damages are determined objectively, except must be what RP in her position would have
expected to have come form the deal given all circumstances.
2. Figure right to expect and what actually got
B. Also Cost of Completion, Expectancy Interest, Expectation Interest, “Benefit of the Bargain”

III. Diminution in Value

A. Restatement § 348(2)(a)-- If a breach results in defective or unfinished construction and the loss in
value to the injured party is not proved with sufficient certainty, he may recover damages
based on the diminution in the market price of the property caused by the breach.
B. Used to figure damages when using the Cost of Performance rule would result in P being a better
position than he was if K was completed. MC>MB.
Notes: Diminution is common, i.e. car wreck cost to restore would be $20,000 but value the day before wreck
would be $15,000 so $5,000 would be economic waste; Why didn’t ask for specific performance? Because
someone made a promise and didn’t fulfill it; Apply the Coase Theorem: If you keep the transaction costs low;
encourage private transactions instead of government regulation, you will move resources to their highest value and
use.; Try to put yourself in the shoes of owning both the farm and the coal company. What would make the most
economic sense?
C. Peevyhouse (landmark) D’s promise to restore land after strip mining was uncompleted. P was
entitled to cost of performance, but this would result in economic waste as land would increase in
value only by $300 and C.O.P. was to be $29k.
1. Formula: MC($29k) > MB($300) = Economic Waste ($28.7k)
2. Since this was a case of substantial performance, undone portion of K was incidental
3. In cases of “willful” breach, this remedy is generally not allowed
Notes: P wants cost of performance (348 2b); Wants his expectancy interest fulfilled; D said value of land
would have only been $300 more; Court ruled for D; Expectation interest in this case would not equal cost
of performance because cost of doing work was grossly disproportionate to the value of the land, so correct
remedy would be DIMINUTION OF VALUE (348 2a); Majority view—economic waste; don’t want to spend
$30,000 for $300 property; cost exceeds benefits; restoration was incidental, primary purpose was mining;
Minority view— person’s word is his bond; land could have other values to farmer; court doesn’t want to get
involved with that Question: How can you defraud someone if you don’t know the value of the land until after the
restoration?
Non-Economic Criteria Economic Criteria
=dissent =majority
=$25k plus =$300
=Cost of performance =Diminution of value
=Rest. 348 (2)(b) =Rest. (2)(a)
Avoid economic waste of scarce resources; Contracts are not designed to punish; Damages are about using the
price mechanism; Rest. 348 is about marginal benefit & marginal costs; Concept of Hypothetical Contract
—back up to the negotiation process, if the parties had low information costs of $25,000 v. $300 would
they have made a contract? Probably not; If they had information that would have been relevant later,
there would not have been an incentive to contract; courts don’t favor speculation; Hypothetical contract must
be confined only to the information that you have; What economic criteria should be used? price mechanism; How
do you deal with it in the future? You don’t know for sure, you must anticipate that it will go either way
so contract to avoid the risk, i.e. contract to where they can’t touch you; Examples: What if there’s an
agreement needed for restoration? A)actual dollar amount B)higher royalties on coal C)require bond
for restoration D)liquidated damages, when damages are uncertain, parties decide up front; Money in escrow;
Professor’s Comment: Peevyhouse is a classic case of using economic/non-economic approach to rule-
making. Do courts make laws in the U.S.? No, people do.
D. Jacob & Young, Inc. v. Kent (p.16)

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 1. diminution of value rule is used
2. also called forfeiture rule
2. Cardoza says if it’s intentional mistake that’s different; may be hinting at fraud

IV. Efficent Breach

A. Definition-- An intentional breach of contract and payment of damages by a party who would incur
greater economic loss by performing under the contract.

B. Goods Contract Analogy

K1 = Seller1 to Buyer1 = $200k
K2 = Seller1 to Buyer2 = $225k
K3 = Seller2 to Buyer1 = $210k
Professor’s Comments: You have a right to breach a contract as long as you’re willing to compensate the
injured party. The goal is to maximize societal welfare (syn. Efficiency).
1. In example above, S1 breaches contract with B1 and makes $25k with new contract with B2.
S1 still owes B1 his Expectancy interest. B1 contracts to buy same products from S2
for $10k more. To make B1 whole, S1 must fork over $10k. S1 still profits by
netting $15k, B1 breaks even with his product, and S2 has $210k worth of product sales.
EVERYONE PROSPERS!!
C. This proposes to maximize social welfare by theory of pareto superior (all are better off) and there is
more money and transactions to go around (assumes all thing being equal i.e. low/no
transactions costs

V. Mitigation (breach of services here, goods covered under U.C.C.)

A. Restatement § 350—1)Except in (2), damages are not recoverable for loss that the injured party
could have avoided without under risk, burden or humiliation 2)Injured party is not
precluded from recovery by (1) to the extent that he has made reasonable but unsuccessful
efforts to avoid loss
B. Rockingham Co. v. Luten Bridge Co.—Co. backed out of bridge building K and Luten completed
performance. Court held that once Luten has been notified they are required to stop and not
rack up damages. Entitled to recover (lost profits + work completed + reliance cost i.e.
architecture plans)
Notes--Concept: Mitigation of damages, Look at Restatement 250-256; 350, 347, 370,
373 and define executory –Repudiation and Anticipatory Breach, reliance and restitution damages (unjust
enrichment). Rule: After notice of repudiation of an executory contract, the innocent party
should cease completion of performance. Duty is to mitigate. Remedy: Treat the contract as broken when he receives the
notice, and sue for the recovery of such damages as he may have sustained from the breach, including any profit
which he would have realized upon performance, as well as any other losses which may have resulted him Is it
like Efficient Breach? Yes, P can not build the bridge, move on to another task, and get profits; new
wealth is created. Expectancy interest: P has lost profits
C. Hussey v. Holloway—Breach of K for employment K. Employee not obligated to accept offer of
lesser employment as mitigation and is entitled to expectancy interest from original K
Notes--D offers a different position. D would call offer for other job a mitigation (kind
of like Peevyhouse case). Alternative job would be substantial performance. Restatement 350:
Mitigation of damages. Court says it was material breach. P’s legal interest: Expectancy. Due
diligence to seek comparable job

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 2. Rule: Although mitigation of damages is encouraged, party is not obligated to accept
alternative performance as mitigation unless it is comparable to the rights and
obligations previously contracted for.
D. Reasonable efforts to mitigate
1. Review Rest. §350(2)(b)—Hussey case
2. Mandatory Rules—required to refrain from duress, fraud, and to mitigate. Default Rules—if
parties fail to plan specific terms of contract look at comparable performance
Class mitigation comments--There is a natural incentive to mitigate because you have to get on with life.
Innocent party has obligation to exercise due diligence in seeking comparableperformance. Is mitigation
inefficient? no, want to maximize societal welfare; with mitigation you get production--There is
incentive for long run, too; preservation of one’s career Are we better off leaving off mitigation
(government regulation) or the Coase Theorem? As a lawyer, it will be your responsibility to plan with your
client so you can avoid the cost of litigation. Wantto be broad with comparative employment Comparable worth
debate: jobs of equal worth should be equal pay, i.e, secretary v. truck drivers—let objective market of
contracts take care of it . Let the market set the terms: Peevyhouse Let the court set terms: Hussey

IV. Lost Profits Seller

A. Mitigation and lost profits
1. Olds v. Mapes—Reeves Construction Co.—D has K w/P to do work for owner. D breaks K1
w/P and P recontracts w/ owner to finish the job. D wants profits made from K2 and is
entitled to total profits from both if proof can be provided that he could do both
Notes—angle on possible mitigation. D says let the profit under the new contract offset the damages owed.
Rule: amount of breach of D’s damages are not reduced by P’s earnings from an independent second
contract made subsequent to the breach—gets to collect profit from both. Like Diasonics—like volume seller 2-
708(2). How do we argue that ruling doesn’t make sense? P double dipped, both contracts were from the same
job. How do we argue that the ruling makes sense? included extra work plus there was new risk in second
contract, could have lost money—risking second breach, labor costs, material costs. D would get a free ride of no
accountability for breach if P had to offset damages
2. Court holds that P took on more risks by undertaking K2 and is entitled to total profits from
both if proof can be provided that he could do both.
3. Broker’s Case distinguished because of second risk of having to seal the deal p. 25
B Lost Profits on a new business
1. Usually not awarded, but sometimes when P would recover no expectancy b/c he has lost no
economic benefit, may try to gain some potential lost profits.
2. Owner must show some facts
a. Projection of profits
b. Based on both similar business in the area and his profits since opening.
3. Argue N: Merely projections, different neighborhoods – what is to say that P would have
done any better in the origional building, also his subsequent profits could be based on
seasonal sales that will misrepresent his figures.
4. Point is court cannot make up a figure out of thin air: argue Y and N.

VII. Lost Volume Seller (of goods)

A. Covered under the UCC 2-706, 2-708(1) and 2-708(2)
1. 2-706(1) = K price – resale + Inc. damages
a. Permits aggrieved seller to choose resale or continued manuf.
b. Resale must be reasonable and in good faith
c. $500 - $300 + $50 = damages
2. 2-708(1) = K price – market price of goods + Inced. damages – costs avoided

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 a. Mkt value must be determined at the time and place the parties would have entered
substitute performance.
3. 2-708(2) is proper remedy when 708(1) would not compensate seller adequately (make
whole)
a. Remedy is for lost profits from breach of K
b. Profits – salvage resale = damages
c. Three-Part Test:
1)Did seller have capacity to make sale to both buyers?
2)Would it be profitable for seller to make both sales?
3)Show that innocent party would have made the sale absent the K1 breach?look
at past record of sales, market, high v. low statistical probability—fact
question for the jury
Notes: If P can show all 3 on remand, then he recovers lost profits. Case (Diasonics)
demonstrates the importance of statutory analysis; 2-708(2) was placed in U.C.C. to accommodate
junk sale; seller sells interior parts of custom made jet, sold as junk sale—offset sale against
profit of K1
4. R.E. Davis Chemical Corp. v. Diasonics, Inc.--How do we know if common law (services)
or UCC (goods) applies?—predominant factor test; case stands on the lost volume
seller 2-
706, 2-708-1 v. 2-708 (2)
Notes: marble case, P can’t collect twice on labor; this case going to have an offset—unlike work situation
can’t be at more than one place at a time; independent contracts in marble case and a risk analysis;
construction crews can add labor to handle many jobs; subcontractor’s time did not belong to the other party
distinction— management can be a volume seller: economic concept of risk and return ratios; Davis breaches
K1 and Diasonics contracts with a third party K2—what are damages owed in K1; Expectancy interest—
put P in as good a position as he would have been if D had not breached the contract; Remedy at law=monetary
damages; Why do we give nominal damages? moral victory or statement of principal
5. Economic Law of Diminishing Returns—as S’s volume increases, then a point will inevitably
be reached where the cost of selling each additional item diminishes the incremental return to S
and eventually makes it entirely unprofitable to conclude the next sale.

VIII. Quantity Discounts

A. Are not lost profits and cannot be recovered as incidental damages by S as provided under 2-708(2)
and 2-710
B. Nobs Chemical, USA, Inc. v. Koppers Co., Inc.—S cannot recover quantity discount which he lost
on account of breach by B.
Notes: quantity discount case, incidental damages; 2-710 = seller’s incidental damages; quantity
discount=reduction in price for high volume buying; incidental damages are listed in 2-708(2) but are
more defined in 2-710; incidental damages are consequential damages—commercially reasonable charges, expenses,
and commissions; $25,000 was an extra benefit, not one of the incidental damages; can argue that w/out
quantity discount prices for customers would be higher; language of 2- 710—charges and expenses, not foregone
benefits; law is what legislature says it is, no matter how nonsensical it is; there’s mitigation associated
w/lost quantity discount; quantity discount is a cost reasonably incurred (opportunity cost); follow what statute
says 2-710 (incidental damages—storage, not what you paid out)—strict view; even if loose view, it would
fail because of lack of certainty of the market
C. Incidental damages defined those dependent on the main part of the K. 2-710 lists these as

commercially reasonable charges, expenses or commissions incurred by the breach

D. Quantity discounts are considered an extra benefit not received

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IX. Cover (Mitigation of K for Goods)
A. Definition: attempt to substitute new performance with breach of a party
B. Buyer has remedies for breach of seller as well
1. 2-713 allows for Buyer to recover K price – Mkt price = damages (Subject to following
conditions such as + Inced. or conseq. damages).
C. Cover on part of the Buyer consists of buying substitute goods to replace those repudiated or not
delivered or delivered damaged by the seller.
1. UCC 2-712 permits buyer to cover and gives damages due for covering to buyer if costs of
cover are reasonable.
2. UCC 2-715 (2)(a) in figuring consequential damages, however, includes only losses which
could not reasonably been avoided (Bars recovery of damages that could be reasonably
avoided).
3. This means if buyer wants to recover for damages (i.e. lost profits) which could be avoided
the must make reasonable efforts to cover.
4. Buyer remedies 2-711 – 2-717
5. 2-711 allows cover OR damages for non-delivery
D. Durawood Treating Co. v. Century Forest Industries, Inc.: UCC 2-712 remedy for buyers: A
crosstie company (P) K’d w/ another (D) to buy crossties to sell to Buyer (B). D breached
causing P to make crossties internally b/c of increased market price. P asks for 1) cover for cross ties,
2) Lost profits from internal cover 3) Lost profits from K w/ B.
1. Court holds that P may recover the cover, finding that internal cover is accepted under UCC.
2. No lost profits for the sales unable to be entered into b/c of internal cover, that was P’s
choice.
3. No lost profits from K w/ B b/c P already received profits from first sale to B.
Notes: Durawood (P) in K2 supplies crossties to 3rd party; P buys from D in K1, but D breaches; makes
cross-ties himself (cover); similar to mitigation of damages (Rest. 350); P wants to sell to 3 rd party again in
the future plus he wants good reputation; P successfully reduced cost by producing himself; wants
consequential damages b/c tied up factory and lost potential profits; By covering internally, feels he has
“opportunity cost”; coverage of consequential/incidental damages 2-711, 2-712, 2-715(2); Can he get 1-
715(2)? lost K3 profits—no; speculative with regard to could have made profit off of K3 contract, maybe he
could or couldn’t; could argue not speculative if proved similar contracts had been made; effect of rule on
P = how much effort is needed for due diligence? could go out and spend exorbitant money on
cover; Will societal wealth be maximized more if P produced his own stuff? yes, overall cost of inside
cover + loss K3 profits is more expensive than outside cover; it’s better for P to be able to produce for the K3
contract; Why would it be cheaper to use outside cover? the opportunity cost of the relative
position; others can be more efficient than you are; let the experts handle it; External is where P went
in the first place because it was more effiecient.; Coercion—Does it make more sense for court to require
pay for inside cover, or have P use limited coercive law for 2 of 3 damages and use Coasean Theory for
outside contract?; want freedom to voluntarily contract
E. Cover on part of seller is a de facto duty to mitigate when goods are wrongfully rejected or
repudiated before performance.
1. Particularly those goods which are perishable
2. Seller remedies under 2-703 – 710
3. 2-704 provides for decision of continued manuf. or scrap of materials in the event of a
breaching buyer, subject to good faith business judgment.
4. 2-709 requires attempt at resale b-4 claiming price of goods from buyer.

X. Incidental and Consequential Damages

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 A. Incidental damages
1. What are they?
a. Additional costs incurred after breach in a reasonable attempt to avoid loss.
2. When are they awarded?
a. UCC
?????
b. Common Law
??????
B. Consequential Damages
1. What are they?
a. Injury to person or property caused by breach
b. Who sets value of property?
1) Fair market value of property.
2) No sentimental damage awards.
2. When are they awarded?
a. UCC
?????
b. Common Law
??????

XI. Warranties
D. What is a Warranty? A promise or guarantee by S that goods will have certain qualities.
E. Types of Warranties
1. Express Warranties (§2-313): A explicit promise by S that requires a show of reliance by B.
a. Made by description
b. A sample or model.
c. “Puffing” usually does not amount to an express warranty as long as it is Sellers
opinion.
2. Implied Warranties (§2-314): No reliance required. A warranty that goods will be suitable for
intended purpose.
a. Implied by the seller being a merchant with respect to goods of that kind.
b. Known as the “implied warranty of merchantability”
c. Always given unless disclaimed, but disclaimer rules are stringent under 2-316.
3. Warranty of fitness for a particular purpose 2-315
a. B must know of special purpose and rely on S’s skill and judgment.
F. Overstreet v. Norden Labs- A vet (P) buys new medicine from Norden (D) that is warranted to
prevent disease on account of D’s literature. Drug does not work, mares abort foals and P sues for
breach of warranty.
1. The expressed warranty was relied on by P.
2. Alternative Product Rule: Consequential damages (lost foals) are only awarded consistent w/
2-715 if:
a) An alternative product was available
b) This product would have been used.
3. Court held that APR was followed here so P can only recover for K price (cost of medicine)
and not from effects of disease.
4. Warranty in this case was expressed (stated in literature) so reliance on this was required.

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 Notes: exposes to warranties §§2-312 through 2-318; warranties are device for risk-shifting; part of the sales
environment; warranty not efficient for longer period of time b/c of outside forces; buyer/seller try to find common
point; shift ignorance and high information costs to seller; put in as example of warranties and how we read them;
warranty reliance—express warranty – the seller relied on the seller’s representations about the product as the
basis for bargain of contract; don’t have to show reliance for implied warranty; Point: There are differences in
different statutory provisions; that’s why we learn to be precise in the law, have to take jurisdiction into
consideration; Doctor’s reliance—Can’t-has responsibility b/c he has wide knowledge in the field Can-new drug
and has high information cost; Case shows importance of correct technical form –give the judge what you think
should be the proper jury instructions; Case also gives an introduction to warranty law; Case also gives example of
remedy; D says 2-714(2) is the appropriate remedy; P says 2-714(3) is the appropriate remedy; D says to look at
the ALTERNATIVE PRODUCT RULE: P must prove that equally effective product was available and doctor
would have used it had he not had used this drug; Majority rejects because 1)unique drug 2)rule would
minimize reliance issue and undermine warranty (Opportunity cost—cost suffered by not contracting with other
sellers); May be no basis on whether or not rely—must have comparative analysis ???; Hypo: drug to cure wrinkles or
baldness-maybe no basis to rely or not rely; Low information cost for comparing some things, but lack of
information is a high information cost (seller has greater access to truth); hold seller responsible

XII. Foreseeability
G. Foreseeablity acts as a limit on expectancy damages.
1. §351(1)—Damages are not recoverable for loss that the party in breach did not have reason
to forsee as a probable result of the breach when the K was made.
2. § 351(2)—Loss may be foreseeable as a probable result of a breach because it follows from
the breach (a) in the ordinary course of events, or (b) as a result of the special circumstances
beyond the ordinary course of events, that the party in breach had reason to know.
3. § 351(3)—A court may limit damages for foreseeable loss by excluding recovery for loss of
profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes
that in the circumstances justice so requires in order to avoid disproportionate compensation
4. U.C.C. 2-715 (inclusion of incidental/consequential damages)
H. Hadley v. Baxendale- landmark case from England in 1854 for determining foreseeable damages
stemming from K breach. P had a broken shaft and K’d w/ D to carry it to be repaired w/o letting D
know that P’s business was shut down until shaft came back. Shaft was delayed and P sues D for lost
profits from D’s delay.
1. D could not have foreseen the damages from this event.
2. Changed standard from proximate cause to contemplation, and gave 2 rules.
3. General (actual) damages §351 (2)a—damages that arise naturally out of the breach (price
for the delivery service) Do damages have to be actually known? no, reasonable man should
have been aware, so would be liable for them
4. Special Damages §351 (2)b—damages that are not normally contemplated out of the price ;
When will they be foreseeable? If they are known by both parties prior to the contract; really
it is D’s awareness
Notes: foreseeability issue; Restatement 351(2)(a) and 351(2)(b; English court here is a type of circuit court
rule absolute, rule nisi, rule discharge; our common law system is based on English system—query courts are
supposed to apply law to the given facts; When might English law be valid in our courts? 1)no
contradictory cases or 2)no precedent; Issue is how do you measure damages? P wants profits foregone; Did
the transport company know that the mill would be shut down? No, court works on basis that D didn’t know
anything except for the agreement; Does the case say D was negligent? Yes, didn’t deliver it on time so breach
of contract; not torts negligence; What damages are foreseeable as a matter of law?; Jurisprudence makes
this a landmark case, not the facts; Jury needs guidance as to the rule of law—law is not case by case fact
determination; Appellate court duties: 1)take care of problem of parties before it 2)clarify rule of law that citizens
may face in the future; Two possible foreseeable damages: 1)general damages 2)special damages; What
if D doesn’t know? If should have known, he could be liable; if had reason to know; How do we argue that

10
D should have known? part was essential, and without it the mill would shut down; How do we argue that D
would not have known? might have another shaft or other defective parts; What low cost Coasean planning could
P have engaged in to have gotten his damages? could have disclosed this stuff up front; Coase Theorem;
Goal: Court requlates = public ordering = special damages; Market regulates = private ordering = Hadley = no
special damages; Goal is efficiency—allocation of resources to their highest and best use; foreseeability
case; legal test is 1)general damages—light test; damages that arise naturally occur from the breach (contract
price, 5 days rental value 351(2)(a) 2)special damages 351(2)(b)— damages within contemplation of parties
when the contract was made—foreseeable; Forseeable is what a reasonable person would have seen
(general damages); D must have knowledge (special damages)—not just P telling D, if D has actual
information or reason to know the information (should have known test); Common carrier more aware—
been in contact with same businesses before, competition alone is incentive to provide for customer’s need;
Common carrier not aware—mill business has the greater incentive to provide information because it is a large
business with a lot to lose with stoppage of production; Incentive for P that damages are foreseeable—need to
disclose (plan by Coasean contract); What is D was responsible for forseeability—court ordered insurance policy,
less incentive to disclose—raise prices or put a disclaimer clause or go out of business ; HADLEY CASE IS
QUESTION OF COASE THEOREM OF DISSEMINATING INFORMATION EFFICIENTLY; contract is
about specific terms; lower cost information provider should be liable; Professor’s Comment: Some tort judges
follow the opposite from Hadley.

C. Foreseeability Hypo 1: Photograhper contracts to take elaborate pictures. Incurs expenses for travel.
Takes film to be developed and Kodak mislays film—greatest cost would be general and special

damages; least cost would be general damages or cost of film; if takes two rolls of film spread the
risks out, less probability that two rolls will be lost If photographer discloses, he may have to pay
higher price in either cost of development or cost of negotiation; could get third party insurance;
beneficial to P to go the market route; Difficulty with Kodak—if not told it’s special, how can they
tell difference b/t this and regular film MC would exceed MB (small profit with developing the
film); More efficient for law to require the holder of information responsible because he is the lower
cost provider. Nirvana fallacy—P says I have a loss; even though markets have costs there are
greater cost with gov’t regulation; would be increase in cost in every product; Even if P wins, just
b/c you can sue and win there are still high transactions costs—attorney fees, lost time, grief and
worry
D. Foreseeability Hypo 2 : Two pieces of adjacent property: A and B with ocean. A wants to build
condo on his property; B says no b/c it blocks his sunlight. Alternatives = A can build or B gets
injunction ; Coase Theorem holds that one who values property the most will benefit—if law says A
can build, B can contract with A not to build; if injunction says A can’t build, A either contracts to
buy B’s property or doesn’t build.
E. Foreseeability Hypo 3: A promises to sell land to B for $40,000. A then finds out that land is worth
$50,000. Can A cancel the contract? No, special damages are foreseeable. Should have known
standard; can argue he didn’t see it be market value is foreseeable; owner is in the best position to
know the value of his property
F. General damages: are those resulting from the usual course of things, damages which any reasonable
person should have foreseen.
1. D did not have to actually foresee these circumstances
2. As long as RP would have foreseen w/o any special knowledge of situation.
G. Special Damages: are those that arise from unusual or special circumstances
1. D must have had actual notice of the possibility of these consequences at the time the K was
actually made.
H. Parties may allocate their own risk.

11
 1. Ex. P could have probably recovered lost profits if he would have disclosed the need for the
shaft ASAP to D.
I. Tacit Agreement- Morrow v. Hot Springs Bank Arkansas court ruled that a bank did not have to pay
a coin collector for coins that were stolen b/c bank did not let collector know that safety deposit
boxes were available as agreed.
1. To recover, D must prove more than mere knowledge or forseeability, but rather D must have
tacitly agreed to assume the responsibility of the special damages/value of coins.
2. P can recover 351(a) general damages, but not market price of coins 352(b) specific damages
b/c D didn’t “tacitly” agree to the terms.
3. Yes argument: Bank was told exactly why he needed boxes at the time K was made
Notes: foreseeability case—Is mere notice enough? bank is liable for breach of contract for general
damages, but P wants more (special damages) the value of the coins; consequential damages are
foreseeable if D has knowledge and tacitly agrees to assume the loss; some ways the loss of coins is foreseeable,
wouldn’t that follow Hadley? knowledge is a two-way street Why does court see no liability for special damages?
(Hypothetical contract approach/ terms of contract); Forseeability is two part test : knowledge plus knowledge
of damages that would occur from breach of contract; D knew/contemplated what P wanted (no loss of coins) but
how do we argue that the case makes sense—but not foreseeable that bank contracted to cover the losses, until
coins come to the bank, the owner is in the best position to cover the harm (sort of like the Hadley case);
bank contracted for safe keeping, but only within the bank; use hypothetical contract, could either foresee that
contract terms would cover losses outside of the bank; bank can’t protect something not in their possession
—would be an illegal contract if tried to provide services beyond its bank ; LIABILITY IS COVERED WITH
TERMS OF CONTRACT AND LOSS MUST BE FORESEEABLE
J. Forseeability Hypo 4: Concert at Legion Field, $3mil in lost revenue potential b/c of electric

problems, Singer Ks with electrician to fix, he charges $200 but doesn’t fix. What are damages?
$3mil or $200? $3mil would be specific damages and not rewarded b/c electrician although he has
notice and knowledge, he does not contemplate and accept to cover this kind of loss. ON THE
EXAM, GIVE THE LAW!!! §351—General and Special Damages; Is there knowledge? Is there a
tacit agreement? $3,000,000 loss if not contemplated by D when he signed the K. Could argue that
breach of K caused loss, but §351(3) addresses disproportionate compensation (Marginal costs v.
Marginal benefits)
K. Kerr S.S. Co.--If special damages known to RCA and contemplated that it’s within terms of contract,
then it would be in line with Morrow decision; could also get negligence damages leads to tort
K is not a tort!! duty was defined by K so no need for tort; was a breach of duty, but the duty was
spelled out by K terms

XIII. Special Damages

A. Restatement §353 (Emotional Disturbance)—recovery for emotional disturbance will be excluded
unless the breach also caused bodily harm or the K or the breach is of such a kind that serious
emotional disturbance was a particularly likely result
B. Restatement §355 (Punitive Damages)—punitive damages are not recoverable for a breach of K
unless the conduct constituting the breach is also a tort for which punitive damages are recoverable
1. Punitives may be recovered for emotional disturbance only in K which had “the foreseeable
purpose of providing peace of mind” at the heart of the K. See Haynes v. Dodd.
I. This is defined by Stone as “contort” and described as judicial tyranny and shrinking of the pie in a
world of scarce resources.

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 J. Ainsworth ($6 mill. man) – Ins. comp. refuses to pay claim court awards punitive damages b/c of
“oppression” and a “bad faith” breach of K. Statute allowed this recovery. May create a “slippery
slope” of increased tort damages.
Notes: §205 and §35; accident policy; Why did insurance company offer to settle? to avoid court costs, cheaper
to settle than to litigate; Breach of contract??? maybe, or maybe not; If yes—legal basis is OPPRESSION (bad
faith failure to settle insurance claim); Is bad faith a tort? no, so how do you pull in §355; followed statute—
Nevada statute, if D has been guilty of fraud, malice, or oppression; Where is reasoning? Nevada defines
“oppression” court draws conclusions with its own definition; Why would you stick to rigid definition of accident?
if you do, no one will buy insurance b/c premiums would be too high????????; Are punitive damages foreseeable?
No—go back to Morrow decision; D is just disputing the contract term of disease; §351(3)—limits damages
Use a 5-part test for punitives—there is no monolithic societal value; need a road map for law—what is
oppression?—how do you advise a client about liability in the future?; Case is about whether we have a
rule of law
the more uncertain things are, the less people are apt to take risks
K. Seaman’s – breach of “covenant of good faith and fair dealing” gets one big oil company huge
punitive damages from another big oil company.
1. Point is that no clear rule of law is followed and punitive damages don’t belong in K. No
clear legal standard for determining “good faith bad faith”.
Notes: analogous to Ainsworth case; bad faith denial that contract exists;Court says:
implied covenant of good faith §205???;Could argue there was no contract, even if bad
faith breach where does it say in §205 that it arises in action of tort—Did court just make this
up?
no legal test of fairness of good faith; what incentives do tort claims have in contracts? consider
§351(3); §355—punitive damages: limited concept only if there are economic reasons
Huge transaction costs, higher prices of goods and services—excessive regulation; true tort
claims—Haynes v. Dodd (§354)-wanted emotional damages for a mistake of information
given— when it’s a foreseeability when the contract addresses it; Emotion v. Analysis;
Limitation on Damages: Punitive damages §355—get cases, but less $ to pay truly; damaged people; worry about
slippery slope; Emotional disturbance damages §353—bodily harm or serious emotional disturbance
will likely result; not generally awarded in commercial contracts b/c not foreseeable
L. Club Med. – Stone went absolutely nuts over this. The court awarded punitive damages to a family
whose vacation was ruined b/c the hotel was not what the company made it out to be. The court
found “some elements of fraud”, Stone says really an award for “almost fraud.” which is not a tort
required under § 355.
Notes: How much damages do you get? Can of worms because different folks would get different damages,
i.e. Green Beret v. Sweetie. Punitive damages are for 1)punishment 2)deterrence. Some states it’s also for
compensation to P, others the remedies should go to the state (form of taxation). Punies are usually not
awarded b/c they undercut expectancy interest. Posner—use the least amount of remedy that will do the
trick. Can use criminal law if people are so reprehensible about their conduct. Was punishment contemplated by
the parties before they entered the contract? No, the expectancy interest was. (The Death of Contract by G.
Gilmore) Almost fraud? Some elements of fraud, but not conclusive. Fraud is hard to prove. Scienter—intent to
deceive one of the toughest things to prove (lot of variables and it’s subjective) Did we rely on the
defendant, or wish what we wanted to wish and didn’t get it? Probability would be that D would not want to deceive
b/c it’s bad for business. There is a disincentive to engage in fraud. Is this really false advertising? That’s a
statutory question. Is it a form of estoppel? pattern of past conduct; prior vacation at D’s facilities that were
satisfactory There is no true application of the 5 elements of fraud. Consumer pays in higher costs,
less supply, etc.
M. Punitive damages generally were saved for the most extreme cases of breach (cf. death penalty in
criminal law)
1. Punitive damages may mean higher prices for everyone b/c corp. will externalize costs to the
consumer.

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 2. Purpose of punitive damages was to deter or punish, creeping into the equation is the theory
of compensation.
3. $5
Punies
4

3
2
1 No Punies

0 1 2 3 4 5 6 Output
a) Above chart illustrates socialization of risks: More punies: less products, higher
prices; Less punies: More products, lower prices.
4. Limiting Punies—Becker article: Legislature puts a cap on damages—been around for a
while so they probably are effective, but need to use only for extreme examples, cases are fact
sensitive so a cap might be ineffective; Single digit ratio of punies to compensatory
damages—want to deter but not kill the company
5. Patton v. Mid-Continent Systems--Efficient breach; Posner’s test: need clear and convincing
evidence of malice; high proof
H. Restatement §352 (Speculative Loss)—damages are not recoverable for loss beyond an amount that
the evidence permits to be established with reasonable certainty
I. Exceptions to Not Awarding Special Damages—Piece of mind contract
1. Lamm v. Shingleton—contracted to provide piece of mind so it was okay to recover from
emotional disturbance
2. Contracts to buy insurance—Are they piece of mind contracts?; insuring against financial risk
so they’re commercial, but it’s a fine line (Ainsworth)
3. Medical—Dr. fails to perform C-section on stillborn
J. Special Damages Hypo 1: Exam example: Are punies/emotional damages foreseeable?
§353/§355/§205 rules Hypo. appellate court finds for D (§355/§353). Write the guts of a Supreme
Court opinion reversing the decision. Draw a workable statute that takes into account cases in
§353/§355 realm.. In awarding punitive damages, consider: Incentives, cost/benefit trace-off,
economic impact. IRAC: Issue, Rule of law (citing), Analysis (Apply rules of law to facts),
Conclusion (argue yes and no)

§2.2 Specific Remedies/ Reliance Interest

I. Reliance Interest/Services/Rest. 2d/Case application

A. Restatement § 349--damages recovered are those expenses that injured party incurred in reliance of
K including expenditures made in preparation for performance or in performance, less any loss that
the party in breah can prove with reasonable certainty the injured party would have suffered had the
K been performed
B. Security Stove case: Aren’t damages of P expenses outside realm of foreseeable damages (see
Hadley)
1. In this case D knew the obligation to get equipment to show on time so damages are directly

14
 related to breach
2. These kind of expenses are foreseeable, evidence will infer the extent or degree of loss.
3. As long as the kind of expenses are foreseeable, degree or extent need not be foreseeable, the
extent can be provided for at trial (§351, 352)
4. “Should have known test” – if. D should have known from facts and circumstances that P will
incur expenses, he’s liable
Notes: Promised to deliver stove for convention, and have a breach b/c one of twenty-one packages was not
delivered. Ordinary damages would be the contract price (shipping costs) (Expectancy interest). If it were
sale goods it would be §347 damages. P wants expenses incurred before contract, reliance interest. It was a
loss to P. P relied on these expenses in entering the contract. D says P would have gone to the convention
anyway and incurred expenses, and expenses were made prior to the contract (§349). Expenses were not
caused by the breach (§351—foreseeable). Court says P put D on notice about the importance of delivery on
time (Hadley), so breach was the proximate cause of the loss. How? Look at Hypothetical K: What would the
parties had seen as the terms of the contract if they had all information up front? Mechanics of time sequence
is not important. Would they have contemplated expenses as foreseeable? Yes. If the contract would have been
performed, the expenses would have been costs instead of losses. Does the degree of expenses violate
§352? No, receipts can be provided for expenses. What about P’s failure to mitigate? He tried but couldn’t find
any parts (§350—to the extent that he has made due diligence to avoid loss). ; DO NOT USE THE TERM
REASONABLE ON THE EXAM!!!!; Can’t claim both expectancy and reliance interest; must claim one or
another. Profits = sales – costs; if you do both, you double collect
C. Anglia TV v. Reed—Expenses are granted prior to the breach. D knew or should have known that
director would be hired. That is contemplated ex ante (§351).
D. Dempsey Case--Expenses are not granted prior to the breach. There is no contemplation. It’s too
speculative. Should D have contemplated expenses? Prior expenses are incorporated into the
contract by reference. Want to be able to argue that breach is or is not the proximate cause of the
loss and use the ex ante HYPOTHETICAL K. Loss profits: Use the track record analysis. How
do you calculate profits if it’s a new business? Bring in expert testimony. Look at comparable
businesses. It will be resolved as a fact question for the jury. Can you contract around to avoid the
problem? If you fear that lost profits would be too speculative, stipulate what the profits would be.
(liquidated damages clause).
E. Sullivan v. O’Conner – Bad face lift case. P seeks to recover from Dr. who failed to deliver what he
promised. Court allows P to recover reliance interest.
1. Court could have used any three measures of recovery (McGee), Be able to argue all three.
2. Court here awards not benefits foregone, but cost incurred/relied beyond the pain expected (2
more operations).
Notes: Reliance damages case. Recognizes §349 (reliance), §370 (restitution) and expectancy interest. Goal
of reliance interest is on losses—to cover undoing of the harm. What loss/damage did she suffer had the
contract not have been breached? Should emotional disturbance fit here (§353)? She relies on experiencing no
more pain than ordinarily experienced in the operation. She relies on no pain of having two more operations
on her nose. Different from Hawkins case b/c never would have gotten a perfect hand. She only contracted for
pain on the first operation. Restitution—would be fee paid. Courts are faced with a menu of recovery to choose
from. Want to be able to show yes or no for all three damages or a combination. Reliance interest was chosen here
b/c expectancy or restitution would not adequately compensated for the wasted pain suffered. When do you give for
pain and suffering: 1) only when it’s a reliance lost, not an expectancy foregone; 2) when you’re
dealing with personal service contracts; 3) if it’s pain beyond the amount of the risk that one would expect from
the contract; There’s a loss: think about ways to limit the damages.
F. Freund v. Wash. Sq. Press - 6¢ man case – Publisher reneges on K to publish book, P seeks royalties
and other damages.
1. Academic promotion: forseeability §351 problem.
2. Royalties not allowed b/c are too speculative (§351 (2))
3. Cost of publication if P himself pursued it: not appropriate b/c would put P better off than he

15
 was b-4 K (he doesn’t spend the $ so he doesn’t get the $).
4. Court allowed nominal damages to deter future breaches and give rules of law.
5. Any restitution interest awarded, Yes, the manuscript was given back to him (specific
performance).
Case Notes: Was a breach of contract to publish a book. P asks for specific performance. Court doesn’t grant it
but gives the cost of publication. Why is the court reluctant to decree specific performance? don’t want to
interfere with freedom to contract where you need cooperation to publish a book. Ct. is mitigating by
minimizing the conflict. Why would court grant specific performance for a land transaction? would be no ongoing close
relationship; one time transaction. Appellate court reverses and awards nominal damages. P’s expectation would
have been royalties (the value of the foreseeable benefit), not the cost of publishing. Did he have a reliance
loss? Y—he’s going to have to spend $10,000 to get someone else to publish N—he didn’t spend the money to
begin with. What if he had covered? court would probably have awarded the cost of cover b/c it would have
been an actual reliance loss. It’s not foreseeable that he would incur $10,000 loss. What could a planning
attorney have done? Sue only q after cover—no, not sure what the court’s going to do. Go to a second publisher
who will bear the expenses; GOAL IS TO GET THE BOOK PUBLISHED. Nominal damages are used to demonstrate
technical breach. Court is trying to create an incentive for P’s to mitigate. Damages requested for speculative [need to be
1)foreseeable as 2)proximate cause of breach and 3)contemplated with reasonable certainty]. What could
P seek as reliance damages—i.e. costs to him? Expenses in writing the book (paper, research assistants,
postage, typing) Didn’t claim it b/c it would take away from profit + he was given an advance. Restitution
interest—the manuscript.
G. Ferrell—P agreed to lease building for cosmetology school, lessor reneges and P sues for lost profits
for 9 months spent looking for another location.
1. Yes to damages: Good track record since opening and showing profits, compare other
businesses in area that are similar for 9 months profits.
2. No to damages: Lost profits in a new business are too speculative to figure and award (not
certain § 352).
Notes: P went into business 9 months after breach and est. track record of profits. Location question? Profits
speculative? Would he have made the same at the other location? Court leaves the door open. A good
lawyer tries to est. damages through §351 and §352; New business of opening theatre on rented land and
company that contracted to provide film breached. Law: Facts about prior expenses in anticipation of
contract, rental value of theatre property (reliance interest), deposit made on films not received (restitution
interest), lost profits (expectation damages), certainty proved with expert witnesses

§2.3 Specific Remedies/ Restitution

I. Restatement Sections that apply

A. § 370-entitlement to restitution only if he has conferred a benefit on the other party by part
performance or reliance.
B. §371 – Measure of restitution interest - as justice requires by either
(a) Benefit Rendered: The reasonable value of the benefit received (if he had gotten services
elsewhere)
(b) Benefit Received: Increase in value of party’s property
C. Boone v. Coe – landowner received no benefit so he owes no restitution even though he reneged on
his agreement to lease farmland. His property was not increased either.
Case Notes:
D. §373 – paid when other party is in breach
1. Any benefit conferred on other party by part performance or reliance.
2. No payment if all duties are performed besides due payment
E. §374 – Restitution in favor of party in breach
1. Breaching party entitled to restitution for any benefit conferred by part perf. in excess of the

16
 loss that he has caused by his own breach.
2. If parties agree to terms limiting the damages, a party agrees to have their perf. retained in
case of breach, that party is not entitled to restitution if the value of the performance as liq.
damages is reasonable in light of the anticipated or actual loss and difficulties of proof of loss.
F. §376 – a party is entitled to restitution of any benefit conferred if K is breached on fraud or duress.

II. Restitution Application—Bollenback v. Continental Cas. Co.

A. Revocation of acceptance
B. Bollenback had purchased an insurance policy but the Ins. comp. would not pay when Bollenback
stated a claim based on their say that BB missed a payment in 1959. BB wants to rescind the entire
K and get all his premiums back. Court says that he can get restitution for all premiums paid up to
1959 b/c that is when Ins. Comp. stopped covering him for their purposes.
1. All premiums paid to BB would overcompensate, but under 371-1 he gets the offset of
benefits received less benefits rendered b/c Ins. would have technically covered him up until
1959.
Notes: P is denied a claim for allegedly failing to pay premiums. D repudiated contract and P sued for restitution
damages (premiums payed). Would be much more than expectancy interest ($107.33). D contends it just
suffered a mistake of fact. §373 and §374; When can P claim restitution from rescission as opposed to
expectancy interest?; P has to confer a benefit on D; Breach has to be total; P has to return to D anything he has rec’d. or
credit D with its value; Got a menu of remedies—seek from the menu and choose the best one for your client;
Restitution Restatements 370, 373, 374; Insurance company honored contract until 1959 (373/374
rules), so P can only recover after the repudiation. Purpose of restitution is to return parties into their pre-
contract positions; P can elect for restitution when: 1) P conferred benefit on D 2) Breach has to be total 3) P
has to return to D anything he has rec’d or credit D w/ its value; Pg. 96 Illustration—There is a split of
authority.; Add p. 93 to outline

III. Restitution under the U.C.C.

A. The Perfect Tender Rule
1. Sellers remedies 2-703-10
2. Buyer’s remedies 2-711-17
3. Perfect tender rule stated that sellers must deliver goods as the K calls for.
4. Incentives:
a. Holds promisor and promisee to terms of K
b. Causes parties to read and honor K
5. Continued in UCC under rule 711 allowing buyer to reject for any non-conformity pursuant to
2-601.
a. The rights of parties vary according to before or after acceptance, rejection is made.
B. Point of Acceptance Rules
1. U.C.C. 2-606 –What constitutes acceptance of goods
a. after reasonable opportunity to inspect the goods signifies to S that the goods are
conforming or that B will take or retain them in spite of their nonconformity
b. fails to make an effective rejection 2-602(1), but such acceptance does not occur until
B has had a reasonable opportunity to inspect them
c. except as otherwise provided in 2-608(4), does any act inconsistent with S’s
ownership if the act is ratified by S
d. Acceptance of a part of any commercial unit is acceptance of the entire unit.
2. U.C.C. 2-601(Buyer’s Rights on Improper Delivery/ Before Acceptance) – Perfect tender is
watered down under 2-508 (Cure by Seller) which allows seller to correct non conformity in

17
 goods during K time of performance.
3. U.C.C. 2-608(1) (After Acceptance)—After acceptance of goods buyer can reject only if non-
conforming performance substantially impairs the value of the goods.
4. Ramirez v. Autosport people trade camper and one they receive is non-conforming so they
allow correction but still is not. P gets full market value of their camper.
Notes: Does U.C.C. stuff differ from Restatement (common law)? On exam, explain which approach is better.
U.C.C. is sale of goods, common law is other contracts. P got a bad van on his trade-in, so there’s a
breach. Historically it’s the common law tender rule (goods would be exactly as all terms of agreement called for;
no nonconformity performance). As close to perfect as you can get. Has to be #1; 1) Full, complete,
satisfactory performance; 2) Substantial Performance; 3) Material Breach; What about substantial
performance? It’s not okay. Common law perfect tender rule is strict. U.C.C. backed off of it. 2-601 (Buyer’s
Rights on Improper Delivery). Before acceptance of goods, may reject the goods for any nonconformity even
for minor defects (perfect tender rule). When do we have acceptance of goods by B? 2-606 (What Constitutes
Acceptance?) 1) Possession 2) Intent to keep the goods. Perfect tender is watered down by 2-508 (Cure
Provision). Allows substantial performance. After acceptance (2-608—Revocation of acceptance),
only can revoke if nonconforming performance substantially impairs the value of goods (substantial
performance). Code uses terms like cancellation, rightful rejection which is synonymous with rescission. What
are the U.C.C. remedies for buyer? Only apply with failure to cure 1) B can cancel and recover down payment on price he
has paid(restitution) 2) B may cover and have damages(reliance) = 2-712 diff. b/t cost of cover and contract
price + inc./cons. damages of 2-715 3) pure damages 2-711, 2-713—2-715 = diff. b/t market price at the
time B learned of the breach and K price + inc./cons. damages(expectancy) 4) sue in equity to enforce
specific performance (not for land), if unique goods (hand-made tools) 2-716,2-711(2)(b); Outline Buyer’s
Remedies, and outline Seller’s Remedies, and read the Farnsworth treatise. Go back and outline the warranties
provisions 311-314.

C. When can B sue for breach?

1. If B accepts
a. 2-606, 2-608. Can revoke only if goods are substantially impaird
2. B’s remedies for S’s breach of goods
a. B may cancel and recover for down payment of price paid (restitution damages)
b. B may cover and have damages too [2-711(1)(a) using 2-712 cover provision]
3. Total breach by S
a. 2-713: Mkt. Price – K price + Inc./Cons. Damages
b. Equity would enforce specific performance buy remedy at law (money) is preferred.
c. When will buyer seek equitable performance?
1. Exchance of unique property (ex. Hand tooled machine parts or other specialty
good
2. Use 2-716 (Specific Performance) prefaced by 2-711(2)(b) (B’s remedies).
4. What do people do to get around perfect tender? 2-719—Contractual Modification or
Limitation of Remedy
D. Substantial Impairment--Durfee v. Rod Baxter Imports, Inc.—Substantial impairment-Does the
effect interfere with the use of the product? On exam, draw a statute that would be a test for
substantial impairment Why no substantial impairment? not serious enough is a series of minor
defects. Taken individually it’s minor, but if you add them up it becomes major. D had a
replacement-repair clause in warranty. Buyer seeks revocation of acceptance of goods, return of
money and other expenses (restitution). Not good for courts to interfere with explicit language of
contracts. Dealer couldn’t repair car after several attempts; car could not be used as much (deprived
owner of benefit of bargain) so 2-719(2) would apply. Wants incidental/consequential 2-715, but has
to prove them

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IV. Implied in K Concept (Hypothetical K)
A. Three vehicles to recover in K law
1. Express K (O+A+C=K)—offer and acceptance through words
2. Implied in Fact—offer and acceptance through acts and conduct
3. Implied in Law (Quantum meruit)—offer and acceptance through knowledge
B. Hypo K allows a party to recover where he would not otherwise, most often when there wasn’t even
an attempt at a K but it can be implied from the actions of the parties and P is entitled to some
recovery
C. Damages awarded can be any of the three, but usually restitution or reliance
1. Restitution where P has conferred some benefit on D in their relationship
2. Reliance where P has relied on the performance of D and has suffered some form of legal
detriment to that effect.
D. Reasons to Imply a K
1. See if have high information costs in the facts (person unconscious)
2. Go to the statistical probability question (most people in society would want a K)
E. A logical doctrine?
1. Does not make sense
a. Freedom to make and break K is impaired
b. Parties should set terms, not courts
c. D is forced into a contractual agreement
d. Slippery slope of forced agreements
e. K law should leave business judgment and value judgment to parties
2. Makes sense
a. Not making party pay offers unjust enrichment, free lunch
b. Incentives for Drs. To come to the aid of those in need
c. High statistical probability that parties would enter into K anyway if info. costs were
low.
F. Cotnam v. Wisdom [371(a)—Reasonable Value of Benefit Rendered]—Implied Contract. Dr. gives
service to unconscious man who eventually dies, and Dr. sues for cost of surgery. No contract was
made; what he rendered was a gift.
Notes: Where was the offer? Not the witness as an agent of the unconscious b/c he was not an agent & didn’t have
authority. The doctor’s conduct could be an offer, but there’ no acceptance. Legal vehicle thru the implied
contract (passive K, quasi K, constructive K, quantum meruit)—look at D and acts or conduct indicate intent for there to be
K (implied in fact); Implied in law—quantum meruit-knowledge that benefits are being conferred and are
not a gift. How do you argue no that it is illogical? no voluntary transactions; don’t want to interfere w/ parties’
freedom; courts should stay out, may think it’s wise but law leaves business judgment to the parties. How
do you argue yes for default rule of implied K? trying to prevent unjust enrichment, benefits received and services
rendered, high probability that they would have K’d anyway (Hypo. K), want to give incentives for Dr.’s to
respond in emergency situations.
G. Implied K Hypo 1: Violin player plays outside your home, you listen and enjoy it, and then hen
knocks on the door to recover the fee; Quantum Meruit? Knowledge of benefits rec’d, but look at
the two-part analysis only use implied K when there is no use for express K
H. Implied K Hypo 2: Hypo K: Are transactions cost for a voluntary K high or low? If low, then
courts will say, no implied K b/c parties could make their own K. If high, then triggers second
question: What would be the statistical probability if the parties had all the information, if yes then
implied K, if no then no implied K. Example: Sent CD’s by mail: Implied in Fact K b/c your
conduct constitutes acceptance—Rst. § 69 Acceptance by Silence or Exercise of Dominion;

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 39 U.S.C.A. § 3009—Merchandise mailed without the prior expressed request or consent of the
recipient may be treated as a gift by the recipient (politicians trying to interfere w/ K—businesses
fraud, tricking people into K, and need to protect)—statute undermines the trust of K; An ordinary
reasonable and prudent person would see it as a K
I. Michigan R.R. v. State [371(b)—Benefits Received by D i.e. > property value]-- mistaken delivery of
coal that was 2 x price of the coal that was ordered under the K. Use of the coal = implied K;
damages should be the benefit rec’d (market value of coal); Why does court give 371(b) over
371(a)? As justice requires: Indiana public policy—regulatory; statute on bids says state
can’t
legally pay more than bid price, can be analogous to U.S.C.A. statute example.
J. Summary of Remedies for These Cases
1. Restatement § 371—If a sum of money is awarded to protect a party’s restitution interest, it
may as justice requires be measured by either:
a. reasonable value to the other party of what he rec’d in terms of what it would have
cost him to obtain it form a person in the claimant’s position (benefits rendered by P)
[Cotnam v. Wisdom]
b. extent to which the other party’s property has been increased in value or his other
interests advanced (benefits received by D) [Michigan R.R.]

§3 Specific Performance
I. Remedy in Equity
A. Restatement §359—Effect of Adequacy of Damages & Restatement §360—Factors Affecting
Adequacy of Damages
B. Three main kinds of relief for remedy in equity
1. Specific Performance – Require parities to perform their respective ends of K.
2. Injunctions – stop a party from doing a certain action
3. Mandamus – an order by court to an official ordering a specific action.
C. Remedy at law (dollar amount) is favored
1. Substitute goods – keep transaction impersonal by using $ to let parties find substitute goods.
2. Fairly easy to evaluated damages in remedy at law $.
D. Remedy in equity is favored when
1. Uniqueness (i.e. land)
2. one shot personal K (i.e. portrait painting)
3. $$ damages are difficult or uncertain to set as a value, or impossible to get sub. goods
E. Remedy in equity only used when remedy at law not available
1. Laclede Gas Co. v. Amoco Oil Co.—Amoco breached its K with Laclede promising to
provide Laclede propane for sale to its customers; court says substitute performance is not
possible; difficult to figure dollar amount of supplying long-term propane (2-716)
Notes: Problem is that there will always be trouble to find substitute, discouraging someone
from at least trying [2-712]—then damages would be cost of cover + expenses; What if P
uses reasonable diligence (§350) and fails? K price + incidentals. Do give big damages if
disproportionate (2-726), no so maybe would want SP. RULE: Hold down the
losses; would not be mitigating if give dollar damages Parties can better assess the markets for
substitutes— preferred remedy is still remedy at law (§350 is about the injured party doing the
mitigating) High probability of SP as a remedy will discourage parties from looking for

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alternatives; if judge worries about economic waste, can grant a continuance to give
party the opportunity to cover—even give the opportunity to settle (Coasean K)
a. Three part test for using remedy in equity (from Amoco v. Laclede)
1) Part (service) is not readily obtainable elsewhere
2) Except at considerable expense, trouble or loss (No real legal test here)
3) Cannot be estimated in advance
F. Equitable approach may be approaching a slippery slope of ambiguity and uncertainty, Rest. 2d
provides for doubts to be resolved in favor of the granting of spec. perf or injunction.
G. Incentives created by specific performance
1. Forcing two parties who may have animosity towards each other to perform creates incentive

for disharmony.
2. High monitoring costs and continued court management
3. Externalized behavior costs of forcing parties together

II. Extent of Specific Performance

A. Not usually to employment K.
1. Cooperation is not likely.
2. 13th amendment forced slavery issue.
3. Monitoring costs.
4. ABC v. Wolf—D breached a good faith negotiation provision of an expired K with P. K had
a clause known as good-faith negotiation and first refusal provision.
Notes: General rule: In employment K, SP is not granted. Need cooperation among parties.
Restatement §205 (bad faith); dissent remedy would be 90-day equitable remedy of
injunction stopping D from working w/ competitor. Rules: 1)Personal service K get no SP
2)Negative remedy of injunction could be granted—prevent unfair trade practices or injury
from unfair competition (non-competition clauses); What if have K not to compete for life?
No, taking away one’s livelihood
5. Non-Compete Clauses: Legal Test for Reasonability
a. Is the restraint ancillary to the interests of a legal, valid K? protect market share
b. Is the restraint reasonable as to time?
c. Is the restraint reasonable as to space? 75 miles may be ok but SE may not.
B. Court will sometimes grant negative enforcement
1. Prevents unfair competition
2. Rest 187, 188 – K w/ an Anti-competition clause after K ends for a specified period.
C. Injunction is sort of like negative specific performance (used where remedy at law would not be
adequate)

§ 4 Stipulated Damages

I. Liquidated damages
A. Agreed to damages found in the K as a way to limit damages b/w parties.
1. Good for avoiding foreseeability issues that would come up for breach
2. The point is to plan to avoid damages or place limits on them (Coasean K).
3. Good lawyers always stipulated damage B-4 K.

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 4. Stipulating damages removes from the subjectivity of the court the decision of remedies.
5. UCC 2-718—Liquidation or Limitation of Damages & Rest. §356—Liquidated Damages and
Penalties
B. Shotgun clauses
1. Courts will not enforce clauses covering major and minor breaches
2. These types of clauses award a single damage amount regardless of severity of breach and
will be ruled as penalties.
C. Are limits to stipulated damages
1. Courts will generally not enforce a penalty clause.

II. Penalty Clauses

A. Definition--clauses included in a K that will reward the breached upon party more than they would
have earned by full performance in the event of a breach.
1. K law is not about penalties or punishing parties
2. Don’t want to overcompensate anyone.
B. Arguments For PC
1. Preserves freedom of parties to enter into voluntary K—low risk of provoking breach
2. Maintains credibility of parties
3. Provides insurance of good faith and compensation for high risk of fault
4. Allows promisor to always insist on price sufficient to cover the risks
5. Other damages will under-compensate
6. Clauses save both time and money
C. Ballpark Rule—Two-part Test for Determining Valid LQD or Determining if PC
1. Assessment must be a reasonable estimation ex ante or the likely damages of breach
2. Estimation must be difficult to determine at the point of entering K
D. Arguments Against PC
1. Deters efficient/inefficient breaches
2. Incentive for P to provoke a breach by D
3. Makes contracting too risky
4. Economic waste/ damage to societal welfare
E. Restatement §356—Liquidated Damages Provision
1. Damages must be reasonable in light of anticipated loss OR actual harm (must be harm from
breach).

III. Liquidated Damages/Penalty Clauses and the UCC

A. UCC 2-718—Liquidated Damages Provision
1. Asks “when are liquidated damages reasonable
a. An amount reasonable in light of the anticipated OR actual harm caused by breach.
b. Loss is difficult to prove
c. Obtaining alternate remedy is not feasible.
B. Important because UCC provides for reasonableness of measurement before OR after time of
performance
1. See 2-718(1)
D. 2-718(2)—provides a built in liquidated damages clause for sellers
1. If seller justifiably withholds delivery of goods b/c of the buyers’s breach, seller may keep all
payments made by the buyer up to $500 or 20% of the full K price, whichever is less.

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 2. Seller may also recover actual damages for breach
E. 2-719 (K Modification or Limitation of Remedy)
1. 2-719(2) – says that if a liq. damages clause is in a K and causes K to fail its essential purpose
then remedy may be had as otherwise provided for in UCC.
2. 2-719(3) – says that consequential damages may be limited unless limitation is
“unconscionable” (drives Stone nuts).
F. Kearney v. Master (UCC Case)—Kearney (P) Kd w/ Masters (D) to sell P some equip. to make some
parts. P claims that equip is bad and caused P to lose profits and sales. P sues to recover all losses
(Conseq. damages of 2-714 and 2-715). D had a R, R and R clause (2-719 limitation of damages
clause) in their K w/ P. P contends that R clause rendered K to fail its essential purpose, court
disagreed and held for D. D had repaired machine on numerous occasions and P had never attempted
to take advantage of replacement clause.
1. Demonstrates that risks of inestimable damages inherent in lost profits are burdensome risks
to seller and court will not uphold.
2. Argue for buyer: Having full service of machine denies profits which were heart of K
3. Argue for seller: The trade off of a low price reflects seller not having to jack his costs to
compensate for insuring lost profits to everyone.

IV. Unenforced Clauses

A. Lake River Corp. v. Carborundum Co.—D breached a K with P to provide a minimum amount of
Ferro Carbo for P to bag over a three-year period. A liquidated damages clause can be a penalty.

Notes: A minimum-guarantee clause; P still gets actual damages—unpaid K price – cost P saved by not
having to complete the K. When planning, try liquidated damages clause, if you fail you can still get
actual damages. Does Posner think penalty clauses should be allowed in some situations? Yes Posner
as a judge is using a bigger classroom to give lessons on economics.

V. Enforced Clauses
A. Cal. & Haw. Sugar Co. v. Sun Ship, Inc.—K1 on barge to be delivered 6-30-81 but wasn’t
delivered until 3-16-82. K2 on tug to be delivered 6-30-81 but wasn’t delivered until 7-15-82.
Liquidated damages provided for $17,000 per day late.
Notes: D claims damage is penalty b/c would be paying for useless barge. Court says both companies
are at fault. If took separately, if tug would have been late, the barge still would have been late. Apply
liquidated damages rule: Would damages be difficult to determine? Yes—string of losses (employee
costs, lost profits, cover) §351, §352 Is the stipulated amount a reasonable estimate (grossly
disproportionate to actual damages)?actual damages were $368,000; liquidated damages are
$4,400,000—test with legal rule (hindsight v. foresight)—only has to be reasonable as to
ANTICIPATED LOSSES [2-718(1)] & [Rest. § 356]; It’s okay to award this b/c business judgment was
used + it preserves the freedom of parties to allocate risks. There were high information costs ex ante,
and they did the best they could with the information they had; Stone loves it b/c “whose K is it
anyway?”
1. How do we argue it’s good business judgment? trading off the risk off too high or too low in
their estimates to guarantee certainty.
2. Courts can also go with actual damages too—I t’s humane and equitable; using information
that parties got later instead of when they entered into the K
B. Mahoney v. Tingley—S Seller of house had buyers put earnest money down on house. Buyers

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 backed out and seller had to sell for subst. less than original price. S sues for lost profits of house
sell, court holds that if seller incorporates an earnest money agreement in K as a liq. damages clause
then they cannot avoid that agreement and the $200 in earnest money is what they get.
C. Cal. & Haw. Sugar Co. v. Sun Ship, Inc.—K1 on barge to be delivered 6-30-81 but wasn’t
delivered until 3-16-82. K2 on tug to be delivered 6-30-81 but wasn’t delivered until 7-15-82.
Liquidated damages provided for $17,000 per day late. Court holds that two sophisticated
parties with equal bargaining parity cannot be said to not know what they are getting into so the
damages are upheld. (Stone loves b/c “whose K is it anyway.”)
Notes: D claims damage is penalty b/c would be paying for useless barge. Court says both companies are at fault. If took
separately, if tug would have been late, the barge still would have been late. Apply liquidated damages rule: Would
damages be difficult to determine? Yes—string of losses (employee costs, lost profits, cover) §351, §352 Is the stipulated
amount a reasonable estimate (grossly disproportionate to actual damages)?actual damages were $368,000; liquidated
damages are $4,400,000—test with legal rule (hindsight v. foresight)—only has to be reasonable as to
ANTICIPATED LOSSES [2-718(1)] & [Rest. § 356]; It’s okay to award this b/c business judgment was used + it preserves the
freedom of parties to allocate risks. There were high information costs ex ante, and they did the best they could with the
information they had. How do we argue it’s good business judgment? trading off the risk off too high or too low in their
estimates to guarantee certainty. Courts can also go with actual damages too—I t’s humane and equitable; using information
that parties got later instead of when they entered into the K
D. S.W. Engineering Co. v. United States—Gov’t withheld agreed upon damages for P being late in
building airfields.
Notes: Although there were no actual damages, both parties took a calculated risk (Law—look at the time entered into the
K). Reasonable forecast of just compensation based on the information you have up front.
1. Example: Ex--Savings and Loans case had a late payment charge of 2%. Do we strike that
down as a penalty.
2. Example: Blockbuster Video is labeled as a penalty charge for late fees—This can be seen as
a penalty, but it can also be seen as okay b/c there is no way ex ante to predict a single
person’s actual cost to the company. It’s the best they can do with the information
they had. What if BB charged $20? Unreliable contracting parties
E. Mahony v. Tingley—earnest money (good faith money) case, buyer backed out of sale and forfeited
$200. Actual damages to seller was $3,000. Court says private K prevails. This could go
either way, actual amount could be less. Does not meet the penalty test. Hard to estimate the loss
b/c don’t know what the transactions cost would be to find another buyer. 2-718(1)—either reasonably
anticipated loss or actual damages
F. Lefemine v. Baron—stipulated damages was a penalty clause b/c liquidated damages would be
useless 2-718(3)—offset; buyer can’t have it both ways, that’s not risk taking; almost always
the predicted amount will be different from actual amount
Notes: People want a trade-off—want the certainty of the liquidated damages amount over transactions costs of a trial (too
risky)
G. Kearney & Trecker Corp. v. Master Engraving Co., Inc.—P wants consequential damages and
foreseeable damges for computer-controlled machine; Seller’s defense [2-719] is limitation on
damages clause—boilerplate language; limited to Repair, Replace, Return of the product
(RRR clause); clause that excludes consequential damages (lost profits, expenses) etc.; seller
wouldn’t want consequentials b/c they would be difficult to estimate
Notes: Does the exclusion of cons. clause remedy to fail in its essential purpose [2-719(2)]? or is it unconscionable [2-
719(3)]?—Point here is that buyer needs to read the fine print of the K; How do we argue that clause fails essential purpose?
machine was bought for the essential purpose of the business—PROFITS!! This is only remedy that would compensate buyer
for true loss; boilerplate language would be a penalty clause; How would you argue no? freedom; parties are free to choice
rights/ responsibilities they choose to have; lost profits may be biggest loss to buyer, but it is also the biggest risk to the
seller; that’s why S plan to eliminate risk (351/352—foresaw the problem), if B were allowed profits, price of the machines
would increase, if court upholds clauses, price will lower b/c risk to S will be lower. K terms are in there b/c trying to

24
 allocate risks, don’t want penalty against S—negating clause for B while allowing B to have the benefit of the lower cost of
the product; B got a remedy, i.e., the lower price; in most cases courts will uphold boiler plate language for the reasons
stated; if lower price is in K is there for a reason—no free lunch—can’t collect for lost profits; if court upholds, it’s an
incentive for parties to negotiate in the future (be careful instead of be sloppy); B still has 2-714 and 2-715 damages
available to him under negotiation; Can Buyer cover as a remedy (2-712)—not if it’s a reasonable delay; once B accepts
goods, it’s too late to cover ON EXAM HANDLE CASE AS A BUYER
H. Britton v. Turner (K for Employment Case )—quantum merit; P has part performance of labor K
and breaches; can’t recover under express K; court allows recovery under quantum merit;
breaching party gets the value of services rendered if value was received and accepted by other
party;
Notes: Does it make sense? Yes, b/c B received benefit of the work (avoid profit windfall), but it could be argued that it
could be an incentive to breach (No, the more you perform, the more you receive); People don’t like rule b/c becomes
penalty to injured party; remedy is limited b/c only covers restitution (§374), but there’s an offset provision for losses that
innocent party has incurred—transactions costs (interest on loan, finding a new person, increased price to pay for other
services)—case is an anomaly
1. Rules apply: D must pay if:
a. He receives an actual benefit from services
b. above the damages caused by the breach
c. worth of services are reasonable to D
2. If D may reject entirely the whole of P’s performance, then D may restore to P what P has
given or done for D and it will be settled, in the case of services rendered only remedy
at law ($$) will suffice.
3. Restatement 2d § 374 follows this reasoning
I. Freedman v. Rector—P says retention of deposit being a penalty, is it windfall to the S?; should be
upheld
Notes: Posner said should consider allowing even penalty clauses as L.D. In almost all cases LD in these cases were
penalties. Point is you leave it to the parties.

§ 5 Consideration

§5.1 Enforcing Promises

I Formation of K
A. O+A+C=K; C= Consideration
1. Consideration is the price paid by a party in a K (Money, land, forbearance etc.)
2. Not all promises amount to C
B. Not all promises are enforceable K
1. Some are not significant to the court
2. Not all failures are regulatable (ex. family problems)
C. Formalities are a big part of K law. Why?
1. Evidentiary function: Need evidence of actual K existence
2. Cautionary function: Show that parties are serious a/b K, statute of frauds (evidenced by
writing)
3. Channeling function: Maximization of societal welfare, diverting scarce resources to their
highest and best use.
D. Formalities give ordered liberty to K, reducing transaction cost.
1. One example of formality is a seal
a. Common law used seals which accomplished above functions.

25
 b. Seals used to elevate a promise to a K.
c. Not so anymore
E. Linder v. Commisioner—use of a seal; is a tax court case; K question is a state law question; D
makes transfer of sealed bonds to his sister and paid her interest and wants to deduct interest
on fed. forms; Issue is did Mr. Linder enter into K with his sister? No, it’s just a gift which is
not an enforceable K; the seal doesn’t elevate it to K; what it takes to make it a K is
consideration—need a bargain and exchange; decide what’s a gift by value society places on
it; In any claim upon a sealed instrument, a party may plead and set up, in defense thereto,
fraud in the consideration of the K upon which recovery is sought, or want or failure of
consideration, as if the instrument were not sealed (presumption); Courts don’t uphold gratuitous
promises for the most part (see below).
Notes: Consideration is new legal detriment to the promise; Promisor = Linder; Promisee = Sister;
Promisee did not suffer any new legal detriment; she was already cleaning the house as a gift; no exchange/no
consideration; How did tax court overrule N.J. precedent? violated federalism by making K law for N.J.; it’s up to
legislature to change the law of seal under separation of powers; U.C.C. 2-203 says seals are inoperative; Restatement §17
& 71—K is for bargain exchange and not gift; Could Mr. Linder have made this a clear K? give new duties to his sister (new
legal detriment), could have used property law to make transfer, could have put it in a trust or will

§ 5.2 Bargain Theory of Consideration, Restatement 2d §§ 75, 71, & 17

I. Expert Analysis
Notes: K is a two-way street—both parties give and both parties receive. If it’s a gift, handle it under gift law—property
A. Posner—Promisor derives some utility in promise; Enforce promises under other law, ie property,
estate; But not for K law—for organized, orderly society where bargain/exchange are
important; Low utility; Legal error costs are high; Have limited amount of scarce resources,
cannot afford this
1. Example: Husband promises to walk the dog and he refrains. Should we enforce as K? No,
wife will refrain from her performance.
B. Atiyah—Does self-interest aid or hinder promises? Aids—want to get something out of K have to
give something, so K are voluntarily performed; Trust drives K, so self-interest is important;
Trust is what polices K, we want law to police trust
C. Adam Smith—three keys to get trust in contracts
1. The Golden Rule—voluntariness for return
2. Competition—if X doesn’t perform K with Y, Y will go to Z later
3. Idea of the respect of the concept of the rule of law—more respect for rule of law if people
follow voluntariness, for the cheaters, we have K law to police them
D. Leff—Swindling and Selling; Not all exchanges are exploitative; When you have exploitation or
duress, then you regulate to correct behavior; In competition if you get, you’ve got to give—
bargain theory; Things we exchange are called consideration; K maximizes societal welfare—
it’s good competition
1. Hypo: A has two pizzas no beer. B has two beers no pizza. Should they K? B ends up with
$10 for beer, and A ends up with $.50 for pizza. So what, both are better off b/c they
value the exchange, both in their own perception value the items
Notes: K is the intent to make a voluntary exchange according to what the parties value. What if they don’t they get
the value? won’t go through with the transaction or go another party
E. Atiyah—Essays on Contract—trying to protect parties’ reasonable expectations; enforcing bargains
enhances trustso parties can voluntarily allocate their own risk

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 F. Blau—Don’t enforce social and gratuitous promises
1. Hypo: Husband has a lot of work at law office and cancels dinner with his wife. Do we
litigate? No, there may be an understanding or wife will withhold a benefit to the
husband, or realization of a trade-off for big salary and big house
2. Balfour v. Balfour—The common law does not regulate the form of agreements between
spouses. The consideration that really obtains for them is that natural love and
affection which counts for so little in these cold Courts; have to have status quo, not
elevated to level of business K
Notes: Try to enforce this type promise under family law or gift law
3. Jones v. Padavatton—property case—A family arrangement which depends on the good faith
of the promises which are made are not intended to be rigid, binding agreements; mother
ejected daughter from a house that she had bought for her; Why no K? There was no
intent to K
Notes: Could use the reliance theory here; prove certain elements though; How do we determine intent of K? look
at evidence; empirical observations; ALL K HAVE PROMISES, BUT NOT ALL PROMISES ARE K. ALL K
HAVE AGREEMENTS, BUT NOT ALL AGREEMENTS ARE K.
4. Marvin v. Marvin—Common law marriage; D asked P to move out, and he stopped making
support payments; P says she gave up career (legal detriment §71) and agreement to
combine all earnings; P sues under K law (palimony case); Cal says that K could happen
when 1) Express K for domestic services (§21 illus. 5) 2) Implied in law K 3)
Partnership or joint venture 4) Tacit understanding b/t parties—gift environment under
property law, reliance b/c she gave up career for his promise; No justifiable reliance-I will
love you in the morning theory 5) Quantum meruit—value of household services
rendered less the reasonable value of support received if he can show that he rendered
services with the expectation of monetary reward
Note: P awarded money even though court found there was no K. What was the legal vehicle? not sure b/c it
wasn’t clear; rehabilitative services; How do you argue there is a K? legal detriment of giving up her
career and promise of future services + meeting of the minds to bargain exchange/ How do you argue for the
court? even though she had legal vehicle, no remedy b/c she received benefits from the services rendered ; may
have promised mutual gifts but no intent to K; How do you find K instead of just promises? That’s
an exam question!!!
G. Hobbes, Leviatihan (1928)—“The value of things contracted for, is measured in the Appetite of the
Contractors: and therefore the just value, is that which they be contented to give.”
H. Von Mises (1966)
1. People buy and sell only b/c they appraise the things given up less than those received. Thus
the notion of a measurement of value is vain.
2. There is no measurement of the value of commodities. Example: If a man exchanges two
pounds of butter for a shirt, all we can assert with regard to this transaction is that he—
at the instant of the transaction and under the conditions which this instant offers to him—
prefers one shirt to two pounds of butter.
Notes: Seek the opposite of equality in K b/c the whole point is that one party values something more than the
other; parties won’t exchange unless they see some benefit; How can both parties be better off if there’s a
difference in value given up? It’s the individual value placed on the exchange
I. P. Atiyah, The Rise and Fall of Freedom of Contract (1979)
1. The market model of contract theory has the following principles:
a. No man is his brother’s keeper. Rely on your own skill and judgment.
b. Parties bargain and negotiate.
c. No duty to volunteer information or rely on the other except under narrow situations.

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 d. Parties freely agree—must not conflict with the rule of the market place
e. Content is settled by the parties
2. It’s not the Court’s business to ensure that the bargain is fair, or to see that one party does not
take undue advantage of another, or impose unreasonable terms by virtue of superior
bargaining power.
Notes: Parties K for the risks that they can succeed or fail. What can the court’s question? The procedural realm;
fraud in inducement, mistake, incapacity, duress; K is voluntary arrangement; no yardstick by which
courts can substitute their judgment; it would be coercive if they did so; Citizens have incentive to use gov’t
to alter prices in their favor (rent seeking), look to coercive power when they can’t do anything about price,
politicians willing to buy votes; can avoid the risk of losing in the market EVEN THOUGH MARKET HAS
COSTS, WILL REGULATION OF MARKET HAVE GREATER COSTS?

II. Elements to Consideration

A. Bargain and exchange for consideration
1. §17 – manifestation of mutual assent to exchange
2. §75 – promise for a promise = C
3. §71 – C must be sought for by promisor and given by promisee.
B. New Legal Detriment

III. Bargain element prevents honoring of gift promises

A. Detriment is bargained for if promisor seeks it and promisee gives it §71
B. Gift Cases (Why not K enforceable?)
1. No detriment suffered by one side so no C, also no bargain or exchange.
2. Two types of gifts, one may be a K the other isn’t.
a. Conditional = promisee must meet certain conditions in order to get gift.
1) Kirksey v. Kirksey—After convincing his sister-in-law to abandon her
property and move to his place, D kicked her out. He had allowed her
to cultivate the land for two years. Court ruled that it was a gift b/c no
consideration
Notes: Does it sound like part performance of Boone v. Coe? Yes; D says it was a gift, there’s no
K b/c there’s no consideration; can promise people things, breach, and still not be liable
— promise of gift is not a bargained for element of consideration; Argue there is legal
detriment: gave up her land and moved b/c D requested, but no b/c it wasn’t bargained for
—just say come here isn’t a bargain; really focusing on intent or motive—K detriment or gift
detriment; she could go after reliance maybe, sometimes the court can say yes; danger—
proof element, it’s not a risk- free world, if had a lot of reliance cases in court, it would be
high transactions cost; would be appropriate to use Reliance Doctrine here, but wasn’t used in
1845; benefit to promisor would be limited to woman working the land; emotional satisfaction?
courts won’t mess with that even if detriment is found on the other side; Outline Tip: Things
that would be considered no consideration
b. Bargain for gift – look for benefit to promisor
1) Hamer v. Sidway—P sued the executor of his uncle’s will after he refused to
make good on a promise that the deceased had made to his nephew that
he would pay P $5,000 if he quit using tobacco and refrain from drinking.
Notes: P says he has a legal K. Is this one of those family gift deals. Court says it’s a K; the law says P
exercised forbearance of a legal right (§ 71(3)(b)). Legal right to drink and smoke—gave up his
right to K for those things. In the family environment, you can still have a K. New legal detriment
to promisee or benefit to promisor bargained for and given in exchange for a promise—bargain theory
of consideration (§17 and §71). Danger of benefit to promisor is that we are back to worrying about it
being a gift (really talking a/b benefit on each side or detriment on each side)—a gift is no mutual

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benefit; In K law, don’t give it away…sell it; Farnsworth Treatise—other consideration would be money,
exchange of goods, land, intangibles like patents & copyrights, promising to sue on valid claim, extension
of time to pay a legal claim (due on 1st but extend to the 15th), acts of parties, i.e. work
a) goes to say that benefit need not be economic only
C. Nominal C as a false recital to make a gift and turn it into a K
1. $1 is usually nominal consideration and court won’t enforce it
2. More later in Inadequacy of Consideration.
3. Nominal consideration is usually indicative of NO BARGAIN.
D. False Recital = no consideration
1. Underlying issue always – Was there a bargain? – even if recital was not paid.
2. More later

IV. Forbearance as Consideration Detriment

A. Forbearance of an existing legal right is C.
1. See Hamer above.
2. Courts have held that a person has no legal right to whine so any forbearance of that right is
not C
3. Duncan v. Black—D sold land he had inherited to P promising P a 65-acre cotton allotment
along with it. The county had only set the allotment at 50-acres, so D made up the
difference out of his unsold land for the first year. When P came back for the difference
allotment the next year, D said no. In order to avoid suit, D asked P to settle on a $1,500
note.
Note: Can’t give up something that don’t have legal rights; forbearance in giving up a legal claim—but claim
wasn’t legal; gov’t has allotted max. amount of cotton that could be planted: K1 = land with over-
allotment; want to correct it, K2 = note for $1,500 for value of excess of allotment to try to correct; P sues for the
value of the note; P says consideration was when P gave up rescinding on first K in creating the note; D
said could not rescind b/c it was an illegal K; FORBEARANCE FOR RESCISSION OF A K; court says no
b/c; P didn’t have anything to give up b/c didn’t have legal right to anything;
4. Rule: party who tries to give up something he does not own or possess has not suffered the
legal detriment of K contract consideration = property rights; to forbear or give up
something as consideration, it must be something a person had a legal property right to in
the first place
a. Restatement § 74(1)
1(a)—claim or defense in in fact doubtful b/c of uncertainty as to the facts or the
law
(b)—forbearing or surrendering party believes that the claim or defense may be
fairly determined to be valid
Notes: Is about the allocation of risk—good example would be settle of tort through K; What would you do
if you want property transferred? mutually discharge K1 and start over, do the right amount of property
according to gov’t mandates; Look at Hypos on 188-89
B. Detriment is basically: “promisee must do something he does not have to do, or refrain from
something that he had a right to do.
C. This detriment may be a promise (§75) or a performance (§ 71).
1. Kirksey – in Kirksey sis didn’t suffer any new legal detriment for taking on the new situation.
D. May also be the forbearance of legal right to sue.
1. Duncan – P did not give up any legal right b/c the claim he was asserting to have given up
was an invalid claim
2. If one gives up the right to a valid claim then that is C for sure.

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V. Inadequacy of Detriment (consideration) (Intentional infliction of reality).
A. Courts will not consider the adequacy of consideration as long as it exists b/w two parties.
B. Batsakis v. Demotsis—D wrote a letter promising P to pay him $2,000 + interest for loaning her
some money.
Note: “A man is by law allowed to be a fool.” –Bennet v. Bennet; P said consideration was inadequate; exorbitant,
unconscionable; parties control the K exchange; Restatement § 79(b)—If the requirement of consideration is met there is no
additional requirement of equivalence in the values exchanged; Holding: mere inadequacy of consideration will not void a
contract. Judgment affirmed, but with the entire principal balance + interest; Is what freedom of K is all about; What if each
promise $25 to each other, do you have consideration? No because it’s a zero exchange; Response to P on concern of fair
value—hold grown-ups to their bargain, look out after your own self-interests; there are costs to being poor; Restatements §
74, § 79, § 175, § 176, § 208
1. Court said: Tough. She knew what she was doing when she made the deal and it is up to
private parties to structure their K’s the way that they want to.
2. Von Mises says that people attach different values to things. Argue that Greek lady got
adequate C
a. She got what she needed when she needed it. There are costs to being poor and the
just value of C is what people will give.
b. The law allows man to be a fool, Trump could trade his tower for a peppercorn if he
wished.
C. What about $25 for $25?
1. K law does not recognize this.
2. May be enforceable under another body of law but K law operates in a world where people
don’t function for 0.
D. What about jacked up prices in devastated areas?
1. Resources go to their highest and best use
2. Provides incentives for those who want to provide services
Notes: Hurricane Hugo handout—Did Greek lady benefit more from $25? Yes, end of war, poverty, starvation,
feed kids (value of life would be even more than $2,000); lender can also argue that the money was
pittance as to actual value the other party received; SC passed anti-price gouging statute—Cost of regulation =
supply will decrease (tree cutter goes to SC and incurs expense, but price control will discourage); If market
allows higher prices = producers will go, supply will increase, price will go up temporarily, and then it will
quickly go back down; if want tree off the house going to have to pay for it; Why would they go even if there were price
controls? People would still disobey the law b/c it can’t be enforced, or even for charity; Is it efficient to get
Federal Disaster Relief? No, someone has to pay for it (poor people); Student loans, student and professor gets
the benefit, but tuition rises along with professor salaries; farmers, manufacturers, etc. You get one loan,
but you are paying for thousands of loans; economics through regulation of crises—overpower the risk-
taking that people would otherwise ensue; What’s the problem of courts questioning adequacy of consideration?
They’re substituting their business judgment for that of the K parties. Don’t have any basis for judgment other than
emotion and politics; Third party intervention is not good b/c he/she doesn’t have to bear the cost

VI. Duress and Coercion

A. § 175 makes a K voidable if duress is used to get C.
B. Post v. Jones (U.S. 1856). 196—A ship was grounded and three other ships came. The ship had oil
the others needed, so they decided to do an auction for the oil. Price ended up as $1 per barrel.
Owners of the grounded ship brought suit against the others later for salvage (saved property).
Auction was held to be invalid because the ship was in a helpless situation where there was no
market, money, or competition.
Notes: Courts will not enforce K for salvage if salvor takes advantage of the situation in the interests of general commerce.
LAW = INADEQUACY OF CONSIDERATION; court does not say it’s fraud or duress; instead they say it’s not a bargained

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 for exchange which is one of the elements for consideration; Should we reward a ship captain who runs his boat around?
Compare to person who doesn’t pay property tax on $150,000 home, home is auctioned off for $25,000; court wouldn’t
negate the sale, so why do it here? Captain had choices (Look at § 175) Greek lady had choices as well—she could have
bargained, sought other lenders, could have sought clarity on exchange rate
1. Unparity of bargaining power b/w parties.
2. Court uses hindsight instead of foresight.
3. No coercion really, could not Capt. have made the choice to sell higher or not at all for that
matter?
4. Example—Price in the ghetto is $30 and price is $25 in Vestavia—security costs, higher
default rate; if is too high you could regulate, but sellers would move out; if let market
regulate others will enter and offer lower prices.
C. Mitchell v. C.C. Sanitation Co. (Tex. Ct. App. 1968). 198—Economic Duress Case ; P was struck
by a negligent driver causing injuries to him. P signed a release not to sue the company of the
driver. The release was the product of negotiation between an appointee of P’s company and an
insurance agent of D. P brought action for damages later.
Notes: 1) This wasn’t a case of I was wrong, I was hurt 2) Employment at-will K—employee can quit at will, employer can
fire at will; No breach of K or right to sue; Issue: Was there an improper threat by another party that invalidated the K
release forms? Holding: Yes, at least as a matter of fact to go to the jury because Herrin was satisfying an economic interest
in its threat to P;PRINCIPLE: Although an employer, acting singly, has the undoubted right to discharge an employee or
one of his family, the coercion arising form a threat to do so, when employed as a means to force the employee to sign a
release which he has instituted against him or another employer is unlawful, and, under circumstances showing that such
means in fact overcame the employee’s resistance and will, may constitute duress. RULE: Restatement §§ 175 (When
Duress by Threat Makes a K Voidable)-176 (When a Threat is Improper) How do you protect yourself? get a K for terms
instead of at-will, unions, legislature, courts (which is the case here); contrast with the whale oil case (not bargained for
consideration); wants to play the tort lottery; Why does he think he can rescind? no consideration b/c it was not a bargained
for exchange (§71) (always compare to Greek lady case); also says it’s duress (§175); Is there really duress here? Argue
yes—wouldn’t have signed the release if he wasn’t pressured by adjuster and employer, employer gets the gain; Argue no—
didn’t have to sign the release §175(1)-induced by improper threat with no reasonable alternative, employer had right to
discharge; employee didn’t have legal rights in job; he new he was an at-will employee; alternatives—could have taken the
chance of no exercise of firing; try to bargain; might not have liked them but put himself in that position when agreed to be
employee at will; what incentives for employers in future cases-put something in K about settlements of suits, or get the word
out to play ball or get fired (don’t create evidence, create culture); Is it §79, §205, §208? Apply to whale oil case—
captain had choices there; Apply to Greek lady—had choices, but was held to them
1. Hypo 1: Family corp. made profit, then have cash flow problems. Two shareholder brothers
don’t get along, one offers to buy other’s interest for 1/8 assessed value. The two sign
a K. Brother sues. Court says no economic duress: financial loss and impending
bankruptcy are not grounds for economic duress; rough world out there; not
attributable to party offering to buy (§175); Economic stress is not automatically
economic duress. Even if duress may be the basis, it must come from the other party
2. Hypo 2: Person graduates from business school in tight market. Accepts $20,000 for
Birmingham job when counterparts earn $40,000 in Atlanta. Duress? No, costs to
being poor, low information costs
3. Restatements: 71, 79, 175, 176, 208
4. Stone raises the questions: What is unconscionability? Whose conscience? What is unfair?
What is the legal test or standard?
5. § 79 Adequacy of C; if req. of C is met there is no additional req. of gain to promisor, loss to
promisee, equivalence of values exchanged, or “mutuality of obligation” (later).
a. Stone says this is a “hard bargain provision” and what Mitchell should have been
subject to.

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 D. Selmer(Posner Case) – just because P had to accept settlement agreement b/c he was on “hard times”
doesn’t mean he can recover amount he settled away. P (building subcontractor) had a choice; settle
or don’t settle.
E. Berger v. Berger (Fla. App. 1985). 207—Husband threatened to turn his wife in to the IRS for
illegally activity if she did not sign a hefty settlement. Court ruled that although D has a legal
right to turn her into the IRS, and thus a claim of coercion can’t be predicated on a threat to do
an act that a person has a lawful right to do, he does not have the right to do it by breaking the law
(for his own pecuniary advantage).
Notes: Court says it’s economic duress b/c it’s extortion (§176(1)(b))
F. Blackmail
1. Argue blackmail is not duress.
a. One can’t threaten what one already has the legal right to do. Ex. when one seller
wishes not to sell to buyer unless buyer pays more. Seller should have legal
right to do with his resources what he wants.
2. Business settings are ok for threats such as above.
3. Criminal extortion: Not enforceable even if the legal right, b/c threatener can’t do it for own
pecuniary benefits.

VII. Nominal Consideration

A. Normally adequate, but not where false recital or past moral consideration or intended gift.
B. Schnell v. Nell (No false recitals) – Nell sued Schnell for not following through on agreement to give
Nell $600. Reason for money was that Schnell’s late wife wished it in her will. Since decedent did
not have any funds (she belonged to her husband) hubby said that he would give the money to
the parties (Nell and 2 others). Knowing that courts wouldn’t honor a gift Nell provided that “for
consideration of 1cent, Schnell would give up the $”. Court holds that 1 cent was
obviously a nominal consideration and there was never an intent of the parties to bargain
and K. If penny had been rare or something of value other than intrinsic then court may have
allowed.
Notes: Consideration as bargained for and new legal detriment (elements in this case); 1 cent is inadequate as
consideration b/c it’s a false recital (gift consideration); under § 71 it’s not bargained for b/c parties didn’t intend to pay it; why is
forbearance (giving up right to sue) not valid—Nell did not have legal claim to begin with b/c will wasn’t legal (§ 74 and
71(3)(b)); also husband’s love is a moral obligation, not quite enough for a K (§86(2)(a) = gift consideration); remember
social, family, gratuitous promises; it’s a suit in equity for specific performance, it’s important b/c if it’s suit a law courts will
generally not look at adequacy of consideration, but if suit in equity court may look at adequacy of consideration to see if it’s
fair, reasonable just (equivalency of things given up) Might be appropriate in the area of family law, but can’t do it on a
monetary basis; Questions raised: Do we have K if courts keep intervening
1. Rest § 86 (2)(a) – Grat. promises not consideration, and Schnell’s promise was a grat.
promise.
2. HAS to be a BARGAIN FOR EXCHANGE
C. Newman and Snell’s Bank (Non-existent consideration)– Another dead spouse case. Hubby dies
and wife attempts to renew loans at bank by signing over old note on business (which is
insolvent). Court holds that no C b/c no C on bank’s side. She gave her promise to pay note, legal
detriment. Bank gives up claim on old note and right to sue on old note. Bank didn’t give up
anything b/c stock in company and note which neither hubby nor wife could pay were worthless
and amounted to a false recital of non-existent C.Bank bargained away nothing b/c it had
nothing to begin with.
Notes: No new legal detriment; inadequate as nonexistent consideration; Is there consideration for the K2 note;
unilateral/bilateral K, bilateral so both parties should suffer new legal detriment; D promises to take on new note obligation

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 (the other was the husband’s responsibility) P promises to give up right to claim on the other note (forebearance); court says
no consideration b/c bank suffered no new legal detriment b/c the note was worthless; go back to Mitchell and it’s the same
thing, but different results; in order to be adequate for consideration both parties must give up legal detriment (of value)
non-existent consideration is inadequate consideration; must be something of value; court looked at §71(3)(b) valid claim
for the bank, but went further b/c consideration still fails b/c there’s no utility in suing (economic waste); bank didn’t have
anything to give up
D. Seyferth v. Groves (Options to buy K are OK)– Farmer k’s w/ landowner to sell passage through his
property for RR. RR is to give farmer $1 and pay later for land $40/acre. Farmer refuses
acceptance of $1 and cites that K is invalid b/c of inadequacy by way of no C. Court holds that C
was recited in K so that is enough to hold the K valid. Option K.
Note: Related option K; give $1 for an option; don’t really intend to transfer; no intent to bargain/exchange; weight of
authority is where do you find giving up on both sides (time); court §87—payment is not necessary
1. Courts are split as to whether nominal must be paid or unpaid.
2. § 87 (1)(a) Says that if K cites C in an option K then that is sufficient.(minority).
E. Lewis – P’s Kd to buy a 40-acre tract of land in an option K. D backed out b-4 performance and P’s
sued. Clause called for $20 consideration to be paid. Since $20 not paid then no K. This is
majority view that nominal C must be paid to make a valid K.
Notes: How do you avoid the problem of the court deciding the $1 thing? Pay it, 2-205 call it a firm offer and not revocable
for lack of consideration and also 2-209; Does it really matter if you pay it? No, the substance is that property, goods will be
transferred; courts won’t worry a/t consideration b/c market moves
F. UCC and Firm Offers (option K)
1. An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance
that it will be held open is not revocable for lack of consideration.
2. During time stated or reasonable time not longer than 3 months.

VIII. Rules for Legal Analysis

A. Don’t assume anything
B. Can’t always say always
C. Use thinking and not emotion
1. Ex--Federal Trade Commission Report—Landlords adding $600 security deposit to $200 rent
for first month; Public Ordering (administrative agency) v. Private Marketing
Notes: How do you argue to set it aside? Emotional--tenants are the weaker parties; coercion; unequal bargaining;
security deposit is too high compared with the actual rent—inadequacy of consideration; How do you argue to keep
it? tenant has a choice thru competition; will get perverse results if you don’t; might be high premium amount b/c
it’s reflective of high risk (i.e. damages due to drunken college brawls); market will regulate thru
competition; if not allowed the prices of rent will increase
D. Never say never
E. Don’t worry a/b result/conclusions; think a/b why and argue yes and no

§ 6 Reliance As A Basis For Recovery

I. The Reliance of Consideration Theory

A. Used if can’t prove bargain theory
1. Also called promissory estoppel— Says it is C if one relied on promise made (basically) and D
can’t raise objection.
B. § 90(1) provides that if a promisor reasonably expects to induce action or forbearance on the part of
the Promisee or a third party and that promise does induce such action, promise is binding IF

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injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be
limited, as justice requires.
1. Elements of § 90: 1.Justifiable 2.Induced 3.Detrimental 4.Reliance
C. This doctrine is in direct opposition to the § 75 Bargain Exchange Theory. Put in Rest. by Corbin
over objection of Williston. Two doctrines compete.

II. Reliance Doctrine Cases

A. Devecom v. Shaw—Uncle says that he will pay for trip and then dies. Kid has already taken trip and
wants money from the estate, estate says no, it was a gift. Court says OK kid you relied on
unc’s promise so here’s some money for you to have your fun.
Notes: Estate argues that it’s a gift under the bargain theory so it’s not enforceable, no bargained for legal detriment b/c he
benefited from the trip (look at illustration p. 222); court finds consideration—nephew relied on promise by spending money
and going through the expense of travel; most say reliance doctrine is used in lieu of consideration, but in this one the court
actually finds consideration; How do we argue no consideration? no bargain or new legal detriment (It’s a gift!), it’s
nephew’s social response to a gift offer from the uncle, flies in the face of Posner, How do we argue yes? uncle induced
nephew to rely and change his position to incur expenses of the trip, Where was the benefit to the uncle? pleasure of seeing
nephew going to Europe, but court shoots it down (Kirksey v. Kirksey), but don’t need to find it in this cases, instead looking
for detriment on the other side
1. Exact way to say it is: Induced and Detrimental Just Reliance
2. Argue that trip amounts to no new legal detriment
a. This was only a gift, a promise to give to someone and unc wouldn’t incur any benefit
from the transaction.
b. There was no exchange and certainly no bargain.
c. What did boy give up, a trip to Europe?
3. Argue for court
a. Reasonable person would be induced to rely on promise and induce on themselves the
detriment of time.
B. Feinberg v. Pfeiffer—Reliance doctrine in the modern era. Woman worked for company for years.
Company passed resolution to pay her $200 for life when she retired. Company did not say
she had to retire any certain time before they would pay only that they would. She worked on about two
more years and then retired. Kicked back drawing her check and the company decides to stop
payments. She’s upset and sues to enforce K. Court holds that she relied on the promise of the
$200 and makes the company pay her.
1. Company argues gift status of payments.
2. Argue Y and N for new legal detriment on her part.
a. Y: She quit working – forbearance of a right to continued employment.
b. N: She was an employee at will, whether she had a job tomorrow or not no one knows,
so she couldn’t give up anything.
3. Bargain for exchange if she wanted money
C. Hayes—Promise “to take care of you when you retire” not enforceable b/c no mention of money, P
retired at own will, not relying on K
D. Ricketts v. Scothorn (Neb. 1898)—By gave his granddaughter a $2,000 promissory noting saying she
wouldn’t have to work anymore, and P quit her job. Granddad died after a year of paying interest on
the note, and P sued the executor.
Notes: Held—Even though the note was given in gratuity, having intentionally influenced P to quit her paying job on the
faith of the note being paid when due would be grossly inequitable to resist payment based on no consideration (executor
was estopped by P’s change of position to claim the absence of consideration). Hypo: Stone wants to reward S for working hard.
Offers to reimburse S for a trip to Lake Tahoe. Does she rely? No, it’s a gift. Stone says this is “sucker law.” Ordinary

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 reasonable person knows that this would be gratuitous (Restatement § 75); task as a lawyer is to argue both ways (§75 and
§90); Why is the court protecting P? a harm induced, or protecting them from failure to look out for their own economic self-
interest, all P’s had a clear chance for a bargained-for exchange but took the risk of the naked promise; Should P be
protected by K law, or family law or tort law? Could make an argument for P under Restatement 2d Torts §323—but it’s
limited to physical harm, but it is a harm of labor to garner money
E. Cases in reliance theory are all over the place
1. When P’s reliance has led to harm, the courts have seized upon trivial and technical conducts
of D to find that he has commenced performance of his promise by: receipt of a
document, writing a letter, appearing on the first day of a long employment, or accepting a
general agency. Such acts themselves have played no part in inducing P’s reliance or in
causing the harm to him.
2. Reliance is low probability legal vehicle for your client, but have to be prepared to defend
against it. Courts will enforce charitable contributions and marriage promises as K
even if there is no consideration
F. There is no consensus and that is what Williston feared would happen to the system

III. Esotppel:
A. Reliance Doctrine – means D is estopped from entering evidence of his non-contractual relations
because of P’s reliance. The principle that a promise made w/out consideration may
nonetheless be enforced to prevent injustice if the promisor should have reasonably expected
the promise to rely on the promise and if the promise did actually rely on the promise to his or
her detriment
B. Comparing the Theories:
1. 75 Bargain and Exchange Theory: Consideration for a promise is an act, forbearance, creation
or modification of legal detriment and returned promise bargained for and given in exchange
for the promises.
st
2. 90(1 ) Promise which the promisor should reasonably expect to induce action or forbearance
of a definite and substantial character on the part of the promisee and which does
induce such action is binding if injustice can be avoided only by enforcement of the promise
3. 90(2nd) -- … injustice can be avoided only by enforcement of the promise. The remedy
granted for breach may be limited a justice requires.
a. Gives false sense of security. (2nd) leaves out “definite and substantial character”.
b. Difference b/t 1st and 2nd Restatement § 90—1st “definite and substantial character”,
2nd requires “reasonable basic detrimental reliance”, eases burden of proof for
one to prove reliance, more ambiguous than 1st—Research your state’s law and
practice
c. Restatement does not necessarily limit remedy—limit to reliance damages or give
expectancy interest
C. Walters v. Marathon Oil Co.—In reliance of D’s promise to supply gasoline supplies to them, P
purchased a station and made improvements, but D later revoked its promise. Held: Trial
court found for P on promissory estoppel. and awarded P damages for lost profits. Higher court
affirmed saying that lost profits was appropriate to do complete justice. It would be
unreasonable to assume that P did not anticipate a return of profits from their investment of
time and funds, since in reliance upon D’s promise, they had foregone the opportunity to make
the investment elsewhere.
This is a reliance K, not expectancy, but § 90 says justifiably reasonable. Run into problems with § 351 and § 352—
anticipated profits on new business, no certainty or forseeability

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 D. Feinberg v. Pfeiffer Co.—P worked for a company faithfully for several years, and in recognition of
her service the majority stockholders promised to pay her $200 a month for the rest of her life
upon her retirement. P hung on for about two more years and retired (she had been employed at-
will). She was paid the money until Mr. Lippman died. His son-in-law consulted his accounting
firm that advised him that the promise was a gift and not a real K. P was then sent a check for
$100 and she sued.
Notes: Court agrees that there was no valid consideration because she was not required to work for D, but agree with P on
the second contention according to Restatement § 90. An illustration of the Restatement is used as part of an
analogy. P’s illness was not the forbearance induced by the promise, instead it was her retirement from her position in reliance
upon D’s promise to pay her an annuity or pension; The “I will love you in the morning” example. This was just a gift.
Reliance— wouldn’t have quit working if didn’t have pension to look to. Remember to go thru the elements. She wasn’t forced
to retire. Pensions are usually begun when you start working b/c you have time to build money in it and draw interest; she is
violating the whole concept of pensions; feel sorry for her but voluntarily took the risk of retiring; was being offered $200 for
past services (§ 86); consideration must be new legal detriment; past work was already used once for salary and other benefits
she already rec’d; forbearance on future? well she says she gave up opportunity to continue to work—but was employed at-
will
E. Hayes v. Plantation Steel Company—court refused to apply reliance doctrine, Williston approach,
Hayes’ decision to retire was on his own initiative; employed at-will; § 90 no reasonable or
justifiable reliance maybe a gift; § 75 applies instead
Was Feinberg’s situation different? Board of Directors wanted her to continue to work there; maybe creating a K for term,
so maybe not employment at-will; usually more precise in K though (wish?), and for how long? Could just be preliminary
negotiations
F. Hypo: Can you rely on a promisor saying you cannot rely (can you K around)? Only was to get
around is to get court to say implied reliance. K has this clause, does the express clause
control or court find reliance? Tuberville, Dubose take job as recruiters after coaching career.
Attract a plant that has great wages, owned by feel good exercise equipment co. In K of employment,
if exercise market declines will have to close, if at end of 2nd year economy is booming and
expands, employees take out loans for homes company adds tennis courts pool etc. in first year, next
year feel better exercise company comes in with better equipment and liability suits against
_____, next year feel best comes in and more liability suits ensue, not as rosy, In order to cut costs, move
the company to Mexico where labor is cheaper making more profit, but employees in AL are
unhappy. What result and why, discuss?
G. On exam don’t just put so and so relied, go through the elements of § 90 and
argue yes and no; apply promissory estoppel, show common law view
Williston v. Corbin (§75 v. § 90); reasonable reliance view or the §90 lst
Restatement view

§7 Mutuality Of Consideration
I. General rule
A. No one sided deals – not one party bound and the other free to do as he will
B. Both sides have to be bound by mutual exchanges of detriment
1. Not equivalent, just mutual
C. § 79(b): inadequacy of mutuality doesn’t matter as long as the parties agree to give up something.

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 D. Essence of mutuality is D is saying “Because you never bound yourself to do anything, I shouldn’t be
bound, either.”
E. § 77: To constitute consideration both parties must be bound; not bound at will, wish, or desire
(illusory); Both parties must be bound to perform a least something for mutuality
F. MUST HAVE MUTUALITY OR YOU DON’T HAVE CONSIDERATION
a. Promises are illusory, no consideration
b. No will, wish, or desire promise
c. Court engages in gap fillers—translate best efforts
d. PLAN AROUND IT—Opportunistic Breakdown; Sequential Breakdown—No perfect
forecasting

II. Mutuality Cases

A. Great northern railway v. Witham—Needs and req. K for D to supply P with all the iron P may order
from time to time. When it comes time for D to perform, D says no. P sues and D claims that
P never suffered any legal detriment b/c they were never under any obligation to buy anything.
This case wouldn’t be a valid K but for the court finding a needs and req. K discussed infra.
Notes: R.R. promises nothing unless chooses to perform or not, no mutuality, court says valid consideration in S’s promise
to supply, needs and requirements K—presumption that ongoing business will have high probability that company will have
needs and requirements; the first order of goods b/c consideration for any future order; option K (§ 87); Analysis: D had
given notice of ending the agreement before an order was made, then he may have been justified. But he cancelled after the
order was given (the order being consideration for the promise to deliver). Brett, J.—the contract was found in the tender
and the letter accepting it. Here, the company having given D an order at his request, his acceptance of the order would
bind him. U.C.C. 2-205; would be one-sided no mutuality case, but court finds exception in needs and requirements K;
general rule is consideration exception is don’t have it w/out mutuality exception is needs/requirements K; this is reflection
of reality; business people need assurance of supply of goods, sellers willing to risk uncertainty of amount to get certainty of
business, if buyer’s are willing to risk uncertainty of amount for certainty of supp; have K for a kind of thing, no need to
quibble over the amount b/c kind=some consideration; might say not enough consideration on each side (one side bound but
buyer may not buy=inequality of consideration) but don’t quibble over inadequacy of consideration; Each side has at least
some obligation, doesn’t matter if it’s a good or bad deal; Restatement §77 and § 79; Each side to a K must promise to give
up at least something. No one side deals. No illusory (wishy washy promises) Difference from above—use many
transport companies so may never need this one; only one iron company was used in R.R. case
1. This case would be a one sided K.
2. Where is seller’s (D) detriment? – promised to fill order
3. Where is Buyer’s (P) detriment?
B. Lindner v. Mid Continental Gas—P owned a service station and had a K to lease said station to D w/
D having a right to terminate w/ ten days notice. D terminated its sublease to P’s husband (a separate
K) after P2 started buying gas from a competing company. P terminated her lease w/ D b/c D
terminated sublease w/ p2. D sued to recover possession of the station. P claimed that
D gave no consideration by the option to terminate. Held: The ten days notice required by K was
enough consideration to satisfy mutuality of K, not necessarily the time but the payments that
would have to be paid on the lease during said time.
C. Gurfein v. Werbelovsky—S wrote B that it had accepted and entered an order for 5 cases of plate
glass to be shipped within 3 months. S gave B the option to cancel before the shipment. B
brought suit against S for its continued refusal to ship. Court said that even for the shortest
space of time, it is enough to bring the K into existence.; No time for shipment is specified other
than “to be shipped within three months.” A shipment made before B’s notice would put an end to
B’s option. S could have shipped at the time of acceptance preventing B from exercising his option.
If D voluntarily limited his absolute opportunity of enforcing the K to the shortest possible
time, the K may have been wasteful, but it was not void for want of consideration.

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 Notes: Not an unconditional right to cancel; option under § 87; where is B bound? he’s bound by quick shipmen; Voluntary
allocation risks by the parties; undisciplined mind looks at unequal degree of consideration; looks at inadequacy; need to
observe kind, not degree; could call this an adequacy of mutuality case, but not worried about that either

III. Conditions precedent K

A. Scott v. Moragues Lumber Co—K qas made under the condition that if Scott were to buy a ship then
Scott would K w/ D to carry D’s lumber to South America. Scott bought the ship but K’d w/
another party and not w/ D. D sues for performance and Scott claims no mutuality of C b/c his
promise was based on his purchase of the ship. Held: Scott breached his promise by not meeting
conditions of his promise, fact that purchase was a condition precedent to the promise is not
matter b/c cond. triggers the heart of the K.
Notes: Conditional K (trigger or precedent); alternative promises; something must occur in order to bind parties (§ 224);
Factually K1—if D buys a ship then K2—lease the ship to P, but K3—buys the ship but K’s with a 3 rd party; D argues no
consideration b/c unilateral choice is a whim, do as he pleases b/c he had a choice to buy boat in the first place (illusory);
K2 is conditioned upon K1, but if K1 occurs, then K2 is binding (consideration = ship and money); works even if depends on
will of one of the parties (§76(2) p. 242 and §77(b)); Test: 1) If remove condition 2) if parties had bargained for next event
would they be mutually bound; What if he said if I buy the boat I may rent it to you? Look at the language “may”; that’s lack
of equivocation in the promise; § 77; if remove condition of buying the boat, he’s still not binding himself; Incentives: Can
still not buy the boat; Is incentive for Scott to jerk the guy around; hold him to his business judgment; incentive is not for D
to not get the ship; would be high probability to go ahead and get the ship and do the K
B. Two step analysis to figuring condition precedent and satisfaction of mutuality.
1. Remove the condition precedent from the clause.
2. If D would still be bound to next bargained for event then mutuality is satisfied.
3. Here, if Scott says that he will rent to Lumber Co. straight out then no question as to mutuality
and C. Take away “If I buy the ship” and you get the same result.
C. Hypo: K w/ law firm, If I pass bar exam, employ for $100k/year.
1. Is there mutuality?
2. Yes, b/c passing the bar is only a cond. precedent to the ultimate K. Firm suffers detriment by
agreeing to employ and test taker suffers by agreeing to take test.
3. Not an illusory promise b/c of no incentives for taker to fail the bar and has a “good faith”
requirement to pass the bar.
D. K that is unenforceable based on condition precedent
1. If A offers to sell widgets to B for X amount each and B says “OK, I will probably need some
next week.” Result?
a. A is not required to sell widgets to B and B is not required to buy widgets from A b/c
there is a lack of mutuality b/w the promises. B has made the condition based
on his sole will, wish, whim or desire so that he may not choose to perform at all.
b. Any promise that is completely at one party’s discretion is not enforceable.

IV. Needs and Requirements K

A. Loudenback Fert. v. Tenn. Phosphate—P agrees to buy “all the rock they need” for a specified time.
They don’t buy any for about three years b/c of a change in the mkt. They try to buy and D breaches.
D claims that b/c P didn’t buy any rock from them choosing to got to another supplier for a finished
product that P is in breach. Court says that all needs should be filled by K w/ rock company so
P was in material breach.

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 Notes: Needs/requirements K? Phosphate rock v.crushed phosphate are two different needs; could argue no mutuality
beyond the rock needs; Stone finds it illusory; Do we have lack of consideration for zero requirements for purchase? Buyer
promised to by at least some phosphate (consideration); K AROUND—DEFINE WHAT YOU MEAN BY ROCK
1. Court here blocks efficient K by finding mutuality of C and forcing P to perform.
2. Seller of rock should have defined “rock” to avoid problems.
B. Glue factory case—P K’s w/ D to buy glue from D for a set price over an extended period of time.
The mkt for glue skyrockets and P wants to buy from D an huge amount of glue at the reduced
price to sell on the mkt for the increased price. D says no and P sues for performance. Court holds
that any promise relating to needs, amount, price are illusory and refuses to uphold K.
1. Court did not find mutuality in this case b/c they scrutinized adequacy of C instead of looking
at mutuality like they should have.
2. Directly contradicts rock case above.
C. Empire Gas – “The Genius of Posner?”--Empire (P) K’s w/ Bakery(D) to sell to D propane
conversion units for all D’s vehicles. D decides that they don’t need to convert so they don’t
buy anything from P. P sues for breach of K and D claims that they had no needs so therefore no
requirements from P. Court holds that D must make a “good faith effort” to meet their
K absent any showing of good business judgment for their decision not to buy the units.
Notes: How does Posner turn this into planning case; does he legislate from the bench; needs and requirements K; Empire
took the risk that D would have no need for propane Illusory argument—Can buyer say has no needs/requirements w/out
making this an illusory promise? Posner, says “good faith” test should be used; Phosphate = bad faith in not buying rock;
Glue case = good faith reasons not to buy and take zero supply; U.C.C. 2-306(1); Restatement §205; has a statute that
requires him to apply “good faith” test; 2-103(1)(b); If buyer had bought from competitor that would have been a breach
(might explain phosphate case, railway, sugar beet case); zero could be “disproportionate to normal usage;”If B is free to
buy zero, he’s not really bound, it’s illusory (S would be bound); Bad faith not to buy at least some; presume B has some
need and S will fulfill those needs; How can K around? (If see rock/propane/glue in terms of price where market substitutes
are better then go there)—conditions don’t destroy mutuality; Bad Faith = 1) did not convert to propane, 2) had financial
ability to do it, 3) propane use would be ½ the expense of gas—evidence shows no economic reasons (incentives) to back out
of K; good faith would buy at least some propane; Criticism=Bakery might have had reasons that weren’t Posner’s
judgment—gas prices might come back down; bakery was exercising long-run business judgment; Posner didn’t say it was
bad judgment—EVIDENCE = zero purchases, but no evidence response (burden of proof is on D); K AROUND IT—CITE
CIRCUMSTANCES IN WHICH YOU WOULD BUY ZERO AND WHEN YOU WOULD BUY CERTAIN AMOUNTS;
CONDITION PRECEDENT; REASONS WHY WOULD BE EXCUSED FROM BUYING PROPANE Posner has done 1)
recognize a separation of powers 2) respects federalism 3) restrained limited gov’t approach of handling case through
evidence rule 4) gives incentive message that there’s another forum efficient for handling these cases (private Coasean K);
Recap on Posner Case: The Life of the Mind—What is good faith? Use Coase theorem; market K will move resources to
best and highest use; creates incentives for future parties to use K and not litigation to define good faith; these type cases are
not clear cut when going to trial; plan your client’s contract
1. Mutuality is present b/c of implied good faith requirement to at least purchase something is
implied when parties actually K’d to do something.
2. Posner enforces “good faith” because that is what statute made him use (advancing separation
of powers and following rule of law). No road map to figuring “good faith” so Posner
looks at as an evidence problem. Bakery presented no evidence that they made a “good faith”
effort to meet the terms of their K and presented no evidence that they should not have
to in the spirit of good business judgment.
D. Torncello v. U.S.—Navy pest control case--P had a K w/ Navy to supply their pest control needs,
Navy had a clause in K allowing for “termination of convenience.” That clause is illusory and
court cuts it out by method of “divisibility of K”, and keeps the rest of the K b/c Navy did have pest
control needs and the exterminator Kd to supply those needs = mutual consideration.
Notes: One-sided illusory K with this clause; gov’t can perform at its whim; got to have specific economic language in the
K; that’s why we have 30 page K; is mutuality in that gov’t has some pest control needs; court gives divisibility of K
approach (look at Farnsworth); strike out illusory clause and save the rest

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 1. “Divisibility of K” see Farnsworth §8.13
E. UCC §2-306
1. UCC explicitly validates requirements and output Ks.
2. Provides a K that measures by a term the quantity needed or quantity to be produced is valid
provided good faith on either party except that no unreasonably disproportionate
quantities to quantities stated will be enforced.
3. 2-306(2)—Best Efforts Contracts; requires exclusivity b/w parties before this is enforceable.

V. Implied Promises and “Best efforts”

A. Sometimes the court will substitute an implied promise for one that seems illusory on its face thereby
satisfying the mutuality of C and saving the K.
1. See above Empire where Posner found that Bakery had an implied promise to make their best
efforts to either buy some stuff or show why they couldn’t.
2. Some promise is enough for mutuality and some implied intent to do something can come
from a K.
B. Wood v. Lucy, Lady Duff-Gordon—P K’d w/ D for exclusive rights to D’s line of clothing. D
breached by selling her name to another distributor. D argues the classic “you did not promise
anything so you can’t hold me to my promise.” Court holds that P is entitled to recovery for
breach b/c mutuality existed in an implied promise by P to make his “best efforts” to market the line
of clothing even if the K did not explicitly say how much or when.
Notes: Does the court rewrite the K? Sounds like breach of K; D’s claim was no mutuality (no legal consideration); P did
not give express promise to do anything; K was illusory; Cardozo says that there was an implied promise to make his best
effort; the parties didn’t say best efforts (slippery slope); Implied promise is logical if you reason that both sides want to
make a profit; 1-203, §205, 2-306(2); What is best effort? It’s an illusory term; What if he had 5 accounts and spent 1/5
amount of his time on each? Could argue that best efforts allocates all risks to one side
1. Was Cardozo substituting his business judgment for that of the parties? No b/c the utility was
inherent in Wood’s promise that he would do something, why else would he K.
2. Some promise is enough for mutuality Rest2d §205 and UCC 2-306(2).
3. Problem arises in that Cardozo may have recognized the need for an implied promise but did
not supply a roadmap of law to determining “best efforts”.
C. Bloor v. Falstaff Brewing Corp.—P K’d to sell their brewery (B) to D w/ the agreement that D
would continue to market P’s brand of beer for a continued amount of time and pay P .50 cents
per barrel or liquidated damages if they discontinued the brand. The royalty was based on the
“best efforts” of D to market the beer. P felt that D did not do their best to market the beer and sued
for breach. Issue is whether D’s best efforts amounted to mutuality for P’s promise to sell. Court
has to define bestefforts by looking at different factors used in marketing the beer as opposed to D’s
other brands. Court holds that D did not make their best efforts to promote the beer and therefore
breached that part of the K but that didn’t necessarily entail D having to pay liquidated damages.
So P won on the law but lost on the damages.
Notes: Didn’t push Ballentine b/c of $.50 royalties, and the beer wasn’t as profitable as Falstaff beer; empirical evidence—
spent less money, shut down distribution centers, etc.; How much effort would be enough? this court doesn’t define here
either; incentives—business goal of two companies make a profit together; How do you know how much beer to sell?
whatever the demand is; merged b/c wanted stable relationship that produced profit; remedy is odd; basis for not failure to
use best efforts was that all sales of beer declined, market was not being receptive; Falstaff used business judgment not to
market as much; court substitutes its judgment; This could be adequacy of consideration issue. LESSON: BE SPECIFIC
ABOUT BEST EFFORTS; too many variables though to give an exact number; could recommend (goal is to sell both
Falstaff and Ballentine)1)royalties on all beer sales; 2) renegotiate after every six months; 3) clause requiring certain market
data; 4) make a precise 6-yr. long term K; COSTS—monitoring, transactions, and not absolutely certain, but it’s a tradeoff
for more certainty; This is a marriage; Three elements for harmony: 1)Be nice to each other but expect disputes 2) If other

40
 side is not cooperating, the offended side must be able to express its feelings to the other side 3) The angry party and the
other party must be able to negotiate and make up
1. Court has trouble defining remedy to pay to P.
2. Why is this mutuality? B/c D’s promise to make best efforts constituted consideration and
was able to be breached when D didn’t perform.

VI. Terminating Dealerships (Business Unconsionability)

A. Look at 2-309(3)—Terminator must give reasonable notice and no bad faith 1-203, §205
1. Argue Yes—Dealer is at mercy of manufacturer
2. Argue No—Parties are obligated to perform at least something
B. Attempts by dealers to invoke unconscionability in order to prevent termination of their dealerships
have generally been rebuffed.
1. Smith v. Price’s Creameries—court held that P was educated and that no evidence was given
to show lack of opportunity to review the fine print of the K.
2. Consider three things:
a. Lack of adequate opportunity for dealer to fairly review K
b. Inability for dealer to understand the terms of K
c. Lack of opportunity for dealer to seek lawyer’s advice
C. Some courts infer in the absence of any express provision in the agreement that the dealership was
intended to last long enough to give dealer an opportunity to “recoup his investment” in the
business.
1. Schultz v. Onan Corp.—terminated dealer may recover his unrecouped expenditures, but he
may not recover damages for the lost value of his business or for lost future profits
D. A number of states now restrict a franchisor’s right to terminate ongoing dealership arrangements.
1. Ex. Wisconsin Fair Dealership Law—prevents franchisor from canceling, failing to renew, or
substantially changing the competitive circumstances of a dealership agreement w/out
good cause
E. Federal level you have the Automobile Dealers’ Day in Court Act
1. Argue Yes—2-306
2. Argue No—Best effort is the problem not the solution, proof is a subjective area, termination
is always for a good cause
3. Gives dealers cause of action for damages by reason of the failure of the manufacturer to act in
good faith in terminating, canceling, or not renewing the franchise with said dealer
4. Good faith is an issue
a. Must show coercion or intimidation
5. Petroleum Marketing Practices Act of 1978
a. protection extended to franchised distributors and retailers of gas
b. prohibits termination or failure to renew for any grounds other than those set out in the
statute

VII. Mutuality in Employment at Will K

A.General common law rule—employment K of indefinite duration is considered terminable at-will, so
employers/employees can terminate at any time w/outlegal action.
B. State/federal statutes prohibit employer from discharging employee for certain for: race, age, gender,
handicap, union membership

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 C. Collective bargaining limits employers’ ability to fire
1. Provisions not to fire w/out just cause or for specific offenses
D. Courts have played an active role in limiting at-will doctrine.
1. Public policy
a. for refusal to violate the law
b. for whistleblowing
c. for insisting on a right granted by statute
d. distinguish b/t public policy concerns and private, individual grievances
e. Belline v. K-Mart – P was a manager at K-mart, he blew the whistle on his manager
and was fired. His only K was an employment at will K. Court held that it was
not proper to have fired P, citing public policy concerns of protection of whistle
blowers. Dissent finds that ignoring employ at will K is inefficient and P could
have done things differently and saved his job.
Notes: Are there cases of “retaliatory quitting”? Think a/b that. P had a K for employment, but it was at-
will; 2-309(3); Elements of retaliatory discharge--1) Prove discharge 2) Prove discharge was in
retaliation for activities 3) Show that discharge violates a clear mandate of public policy;
the costs outweigh the benefits according to Easterbrook for a whistleblower to be able to sue for
retaliatory discharge; look at the Marginal Benefit/Marginal Cost; cost of litigation is eflected in
price of goods, bad publicity; Easterbrook questions whether it is it more efficient to publicly or
privately monitor a suspicious activity; How could P have gotten around this? more investigation,
anonymous note left on manager’s desk; okay to blow the whistle after trying the discreet, low cost
approach; as long as employment at will is eroded, temporary employment will rise
2. Contract Analysis (Really an Estoppel Analysis)
a. Express terms—written statements in the employee handbook
b. Implied terms—faithful service, commendations, promotions over years then sudden
termination
1) Probationary hiring—employee that survives probation period has been
implied promise of job security
3. Implied covenant of good faith and fair dealing (2-203) (2-302) (§ 208)
a. construction—to prevent employer from exercising right to fire in such a way as to
deprive an employee of promised benefits
b. rarely used to prevent employer from firing w/out cause
E. Liability imposed on ground of tort
1. opens the door to punies and emotional damages
F. Model Termination of Employment Act—if an employee has worked w/ the same employer for one
year, can’t be fired without good cause
1. employee misconduct
2. poor job performance
a. assistant manager had poor job performance as snitch and high cost bearer
G. Epstein’s Employment At-Will Arguments
1. Freedom of K
2. Limits employer’s abuse of power—increased demands worker can quit, capricious discharge
people won’t want to come and work there
3. Inspection of job before acceptance is not likely to guarantee quality—provides wait-and-see
attitude (Ex. living together b/4 getting married)
4. Cheap to administer
5. If inequality existed, you’d see it in the labor market
H. Courts find mutuality of C in that employee has held job and employer has paid him.

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 I. Exam Hypo: You and mom are shopping during busy season. She’s looking at jewelry and puts a
piece in her coat pocket, but she never takes it out of her pocket. To be consistent with K-
Mart, would you call security on your mom? Answer: Don’t resort to public ordering, result to
private ordering (remind her in quiet way); a lower cost way to handle w/out wasting society’s
resources and still get the situation cleared up

§7.1 Pre-existing Duty(Obligation) as Consideration

I. Pre-existing duty as consideration

A. Rule is that there is no consideration for K2 if cited consideration is same consideration for preceding
K1.
1. Debt is a pre-existing obligation
2. Consideration is a one time use thing
B. Two lines of cases, two ways to argue Y and argue N.
1. First situation: Pre-existing obligation (Rest. §73) – No C for purported K2 obligation if C is
from pre-existing K1 obligation.
a. Ex. – K1 = A owes B $500, K2 = B to Tx a lawnmower to A if A promises to pay B
the K1 $500.
1) K2 is not valid b/c there is no C for it
2) No new legal detriment incurred by A under K2.
3) Reason: O+A+C = K, and there is no C here even if O and A are present.
4) Side point: Economic duress; what is to stop B from exerting extra $ out of A
for same duty already owed.
b. If A agrees to take on additional duties pursuant to the modification this may be seen
as evidence of a new detriment and therefore new C.
c. Ex. 2: $500 for K1 = okay $300 for K2 = C?
1) Creditor can sue for full price for K1; no consideration b/c creditor has given
up $200 and debtor has given up nothing, ways around it
d. Cases
1) Stilk v. Myrick—P was to be paid 25 pounds in wages from the captain in return for overseas
services. During the voyage, two seamen deserted, so the captain promised to pay P
the wages of the deserted divided among the crew if he could not secure additional help.
The captain could not find the help, but he refused to pay the extra money.
Notes: Can argue captain under duress, unequal bargaining, but court says lack of
consideration; U.C.C. 2-209 doesn’t apply here b/c that is for goods; §73 applies; doesn’t
matter that two crew members deserted, so there are different duties (§73) but court focuses on
emergency situation beyond parties’ control; parties carry risk that job would be
easier or harder; hypo—Dean offers Stone $500 for better class. Dean can back out of
deal b/c of pre- existing duty.
2) Alaska Packers’ Ass’n v. Domencio—D promised to pay P $50 + 2 cents per red salmon to do
any work on a fishing vessel designated by D’s captain during the fishing season of 1900.
Later they signed shipping articles with a vessel chartered by D in which they bound
themselves to do the same work for $60 and 2 cents per red salmon. While
out to sea, P demanded $100 or they would stop work. After failing to get P to do their
work, the super gave into their demands. When they got back to sure, D refused to honor the
new agreement.
Notes: No consideration for K2, court plays §175/§176 (duress) game; life has difficult moments;
court says not a voluntary modification that’s what makes mutual charge difficult;
Lingenfelder case—brewery and refrigeration

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 3) Glamorgan Cty. Council v. Glasbrook Bros.—Striking miners threatened safety men if they
worked at the mine. The company agreed to pay the police for extra protection at the
mine. Gov’t brought suit to enforce the promise, and court ruled in favor of P. Unless it is
shown that the granting of the request deprives others of reasonable police protection.
Dissent said that this was contrary to the general interest of the public.
Notes: Court says not pre-existing duty b/c is new duty beyond normal duties (§73 allows for
that); can you disagree w/ court, yes modern times: broad duty is to protect and serve;
numerous times no: when police due extra duty and receive extra pay
4) Foakes v. Beer—Dr. Foakes owed Mrs. Beer 2090 pounds. The parties entered an agreement
where the Dr. would pay 500 pounds immediately and then spread the remaining
payments out over five years. Mrs. Beers later claimed that she was owed the interest. Trial court
said she was entitled b/c D was bound to pay the judgment debt immediately, and it was a debt
bearing interest. Although P agreed to give time, she might at any time have changed her
mind, and was not bound by the agreement b/c there was no consideration for it.
Notes: Classic case of pre-existing duty: partial payment of sum of K1 even if agreed to in K2 is
not valid without consideration; could be criticized b/c person’s word is his bond;
5) Sugarhouse Finance v. Anderson—P got judgment from D for 2423.00 + interest and costs.
D told P he was contemplating bankruptcy, so P settled on 2200.00. P later ret’d the
check and demanded full amount. Court said there was consideration. D had no legal obligation
to negotiate a loan to enable him to pay off the substitute obligation. P could not legally
require D to incur other obligations to satisfy judgment. D deliberately incurred detriment of
surrendering his right to limit P’s ability to obtain satisfaction of the
underlying judgment.
Notes: Restatement § 73 Illustration: A owes B a matured liquidated debt bearing interest.
Mutual promises to extend the debt for a year even at a lower rate of interest are binding.
By such an agreement, A gives up the right to terminate the running of interest by paying the
debt.
2. Second situation: Modification of K1 w/out consideration
a. UCC 2-209 says that modification may be made w/o new consideration.
1. 2-209 allows scaling down of claims
b. Mutual discharge and substitution of K2 is another area that allows for modification, if
both parties agree to abandon K1 and go w/ K2 then its okay. (§74,§89,)
1. have to have clear evidence (Stone will give hazy facts and argue yes and no),
don’t assume just b/c parties agree
c. Parties may make a new agreement and modify terms if they so wish.
d. Crane Case—violates pre-existing duty rule, but goes under 2-209 b/c sale of goods, if
it was real estate or services, would have to revert to common law; U.C.C. does it b/c
says believes in controversy; would want this flexibility in long term K b/c
information costs are high for these K (Bloor v. Fallstaff)
C. Commercial impractibility modification
1. At the time of entering K there are unforeseen circumstances that pop up later and force one
party to charge more for their performance or renegotiate terms.
a. Blakeslee v. Board of Water Commissioners—K1 = $250k to build dam and
contractor encountered unforeseen difficulties, parties agree to a new K2 for
$300k. Held, affirmed, parties did not know of unforeseen difficulties at the
time of entering K and there was an effort to renegotiate.
Notes: Did other side provide more consideration, more money but it was precisely the same work the
builder agreed to do b/4; Stilk view would apply pre-existing duty rule (you took the risk); special
situation here confronted with non-contemplated circumstances; high information costs, though;
court comes up with doctrine of commercial impracticability: Burdernsome unforeseen unanticipated
change of circumstances (§89 approach); building of the dam was not impossible; only

44
thing that changed was the price; but find equitable approach under §89; how do you know when
circumstances are extreme enough-- 1)K has to have legitimate reason to seek adjustment of
obligation 2) other side must voluntarily agree to K2 out of fairness 3) promisee not attempting to
take advantage of other side being locked in to K1 (use on the exam!!!); gauge the circumstances ex
ante (were not contemplated); Criticize doctrine: how difficult is difficult enough, can’t structure a
test; someone violates Coasean theory b/c failed to plan in K; how could builder’s lawyer plan? K the
alternative Different amount if find unexpected, unforeseen circumstances, then recognizing possibility
of change ex ante; How do you argue for the doctrine? If parties had known all the facts would they
have gone to K1 or would they have gone to K2; did parties not take the risk of the work being
harder/easier when they undertook K (what’s the incentive for people to say I don’t like what I agreed
to with K1
2. Three part test for commercial impractibility.
a. Contractor had legitimate reason or pressing need for change.
b. K2 attempt is present.
c. Examine to see that no party is taking advantage of other party as economic duress.
3. Modern courts have carved out this theory of commercial impractibility.
4. Solutions to the problem: Plan with a Coasean K device in the original K terms to
speak in the alternative.
D. K Where C is Not Needed
1. Some statutes that make consideration unnecessary U.C.C. 2-209 (consideration is
unnecessary…)
2. Debt §82/§83—(No consideration needed) debt discharged by SOL, old debtors revives debt
and says owed the creditor, no consideration; but debt discharged by SOL, public
policy says attempts to revive debts discharged by SOL won’t die due to lack of
consideration, Rationale—want to encourage people to pay debts; same works w/
bankruptcy in §83
3. Charitable contributions

II. Liquidated v. Unliquidated damages

A. Liquidated Debt – debt that is mature, due and no dispute exists as to its amount.
1. Only unliquidated debts can be modified.
2. The seller may take an offer to settle debt an that acceptance will be enforced only in the case
of liquidated debt.
3. A check sent for a liquidated claim, even if marked “full payment”, will not be enforceable as
a settlement for debt.
4. Ex. Paying rent on an apartment.
B. Unliquidated debt – debt that is unsure, i.e. amount is in dispute
1. If all claims are set in concrete and debt is sure then no modification may take place.
2. Fisheries case (Payment in Full Case)–a fish packing company made an agreement to buy
excess fish from a fishery. When the amount went well above the estimated agreement
the packer attempted to decrease price by giving fishery a check for a lesser amount.
When Fishery accepted this modified amount the debt was cleared. Why, b/c debt was
unliquidated, i.e. it was not explicitly spelled out in the K. Also an intro to accord and
satisfaction.
Restatement §73 and §74(1)(a)—where is consideration element Can debtor always mark
payment in full and have satisfaction, no only if an unliquidated claim (Rule on 305);
2- 306(1)—estimates were disproportionate

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 Notes: What if debt is not in dispute, and buyer sends payment in full (rent check) no consideration of K2 b/c was
liquidated claim so not payment in full (violating pre-existing duty rule—a mere scaling down of a
liquidated claim fails for no consideration); How do you modify liquidated claim for a lesser/greater amount? §89, §275—
clear discharge of K1 and substitution of K2; RULE: Where the amount of a debt or obligation is unliquidated or
in dispute, then the tender by the debtor of a certain sum in full payment of the debt, followed by acceptance
and retention of the amount tendered, establishes an accord and satisfaction
C. Only way that a payment for a liquidated debt can be enforced is if B can show that the old K was
mutually discharged and K2 was substituted
1. This is a hard burden to meet
2. Clear and convincing evidence of discharge and new K required.
D. Change of tenor in agreement
1. If A owes B $500 by Dec. 15. B agrees to accept $300 as full payment if A agrees to pay
before Nov. 15.
2. That is a promise supported by consideration b/c of time value of money detriment.
3. Same as change in duties as above.
E. Analyzing a liquidation problem
1. Ask first if K1 is liquidated debt—one presently due for which there is no legitimate dispute
(All terms are agreed upon); How do you find new consideration? (Illustration on 289);
key in this area is if a creditor is merely releasing a clear claim, there is no consideration,
debtor looks for consideration

III. Accord and Satisfaction

A. A agrees to pay B $300 for the $500 debt that A owes to B, A gives B the money, that is accord. B
accepts the money that is satisfaction and we have a new K w/ new consideration.
B. Based on mutual discharge of existing duties for each party
1. Promise of substitute performance.
2. Usually accompanied by a time agreement also.
C. Executory Accord—performance yet to be performed
1. Parties agree to a settlement that requires one to act.
2. Promisor gets cold feet and doesn’t perform
3. Result: No accord and satisfaction, so mere accord is not enough, must have satisfaction to be
enforceable.
4. K when this happens is still in executory stage
5. Court decisions—Intent Test (mutual promise vs. promise for an act)
a. Bilateral K approach (promise for a promise)= If accord (Agreement) but no
Satisfaction (performance) = consideration; Say that a bilateral K exists and all
that is necessary is an agreement. (§279)
b. Unilateral K approach (promise for an act) = Accord but no Satisfaction
(performance) = no consideration; Say that there is a need for payment as well,
courts treat these as unilateral K. Both parties need to promise and perform.
c. Distinguish: unilateral K doesn’t come into existence until performance; bilateral K
exists when mutual promises are made
D. Accord suspends the creditor’s right to enforce his orginal claim in order to give the debtor the
chance to perform
E. Breach by Parties
1. Creditor—debtor can have claim for damages or even obtain specific performance of the
accord

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 2. Debtor—the accord does not restrict creditor’s rights, may enforce original claim or the accord

IV. Novation
A. Term used to describe a substituted K that discharges a duty by adding a party who was neither the
obligor nor the Obligee of that duty.
B. 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.
C. New promise by stranger is consideration for the new promise so does away w/ any problem of pre-
existing duty.

§ 7.2 “Past” Consideration and Moral Obligations

I. “Past” Consideration
A. Past consideration or moral obligation alone w/o legal C is insufficient for new K.
1. Rest 86(2)(a) – if a promisor can show performance given to him was a gift then the K
is invalid.
2. This is a matter for gift law not K law.
B. Arises in cases of past care for someone
1. Mills v. Wyman – Promise for past care not C for present promise
a. Mills did nothing new for promise, so there is no new legal detriment
b. Mills took care of D’s 25-year old son who had fallen sick in a foreign country. D
wrote a letter to P promising to pay him boarding and nursing expenses. D
reneged on the promise.
c. The general position, is that moral obligation is not sufficient consideration for a K
d. Problems if find a moral obligation to enforce K: co-mingling w/ K and property law;
who’s definition of morality do you use; no new legal detriment
C. Material benefits conferred on others
1. McGowin – A saves B’s life but in the process causes great injury to himself. B agrees to pay
A $15/wk for the remainder of A’s life in return for saving his life. B dies and A sues
estate to continue recovery of $15/wk. Held, for A.
2. Why here but not in Mills? Argue Y and N:
a. Y: B obviously intended to pay A, he paid out for 8 yrs before he died, B received a
material benefit from A’s act. Maybe a Hypothetical K situation – A did not
have time to work out a K w/ B as did the parties in Mills if they had wanted to establish
some form of payment. Here time did not allow bargain. See Cotnam v. Wisdom.
b. N: D may only have intended to make a gift. Benefit was “past” consideration. B’s
obligation to pay was merely moral obligation. 86(2)(a)
3. Difference b/w Mills and McGowin is the transaction costs involved, in Mills they were low
(could have K’d for the care of the son) and in McGowin high (didn’t have time to K,
but high probability that parties would have agreed)

§ 8 Statute of Frauds
Notes: Are K not in writing in those areas illegal? No, court just won’t enforce them; it’s okay for parties to voluntarily perform; to
minimize squabbles over terms in important K, King said they had to be in writing; today trying to provide clear evidence of
agreement; “best evidence” rule—writings are best evidence as opposed to other means

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I. Importance
A. Oral K is enforceable unless special statute requires that particular kind of K be in writing and signed
by the person sought to be held liable on the K.
B. Some K’s are unenforceable if they are not in writing.
1. W/in SOF means subject to rules of SOF, so a writing is required
a. part performance can take a K out of SOF
2. Not Within or W/out SOF means not subject to SOF, so a writing is not required.
3. Most K are not required to be in writing
C. Imposes additional legal requirement on enforceability of agreements
1. May make unenforceable an agreement that otherwise meets requirements of binding K
2. May prevent enforcement of K even though evidence is overwhelming that it’s an otherwise
enforceable agreement
D. Hypos: A enters K with B on March 17 A to work for 9 months for B, work to begin the following July 1; do
need writing yes, b/c 12 months from the date of entry (12 ½ months) A agrees to work w/ B for life; N—if
performance is contingent on something that can take place within a year (life is the term); If terms call
for more than one year but terms can be completed w/in a year; Y—b/c terms call for more than one year

II. Purpose of SOF

A. First imposed as a protection against fraud and mistake
B. To assure deliberation b/4 making a promise concerning important matters
C. To specify a method by which intention may be given legal effect
D. If SOF are literally applied
1. Have a significant capacity for mischief b/c people may rely on oral promises w/out realizing
the further legal requirements
2. May give rise to inequitable results when agreement is signed by only one party
a. courts enforce against the party who signed even though SOF would prevent
enforcement against non-signing party

III. Pervasive Problems

A. Avoiding Injustice
1. Reliance—Restatement § 139 Enforcement by Virtue of Action in Reliance
a. some kinds of reliance have been widely recognized as subs for a signed writing
b. some kinds of reliance are codified in the statute as sufficient to make an oral promise
enforceable
c. reliance that benefits D may result in recovery on an unjust enrichment theory even if
the oral agreement isn’t enforceable, but in some states courts will reach further
than others to find benefit
d. Restatement and some states find any reliance sufficient to overcome a SOF objection
to the extent necessary to avoid injustice
2. Restitution—Restatement § 375 Restitution When K is Within SOF
a. Party seeking restitution is subject to any defense or counterclaim resulting from
claimant’s failure to perform his part of K
3. Sometimes a signed writing is so essential to the purpose of the SOF that there’s no recovery
for reliance on the oral promise. Ex. Statute requiring that a promise to pay
commission to a real estate broker be in writing and signed
B. Overlapping Provisions

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 1. Two questions
a. If K is enforceable b/c of a specific exemption in one provision, is it nevertheless
unenforceable under the other provision?
1) Ex. Oral K to lease Blackacre for 1yr. beginning a month from now is both a K
for interest in land and K not to be performed w/in 1yr. Held: Once out
of land provision, K is also out of the 1yr. provision
b. Are acts that are sufficient to take K out of one provision also sufficient to take it out
of the other?
1) Ex. K for sale of goods over 2yr period. Are all SOF removed by 2-201(3)(b)
or does 1yr provision prevent enforcement? Courts are divided
C. The Kind of Writing Required
1. UCC 2-201(1) imposes minimal requirements for sale of goods
2. Restatement 131—General Requisites of a Memorandum
a. Memorandums – a memorandum of an oral agreement may sometimes pass as a
writing of a K. Memorandum satisfies if it meets all of the following:
1) Reasonably identifies the subject of the K
2) Names parties charged
3) Consideration is cited
4) States w/ reasonably certainty the essential terms of the K.
5) It is signed by or on behalf of the party to be charged.
3. No requirement that memo be delivered to P or anyone else; discovery in D’s files is okay
4. Don’t have to give actual signature
a. Initials, stamp, letterhead, authorized person
5. If signed writing is lost can prove by oral evidence
6. If writing inaccurately states the terms of K, courts permit correction by reformation
7. An item not intended as a memorandum, such as a letter citing the terms of the oral K may be
made enforceable.
a. Several writings are okay—letters, faxes; just have to have evidence of agreement
b. Single piece of paper is okay
8. Doesn’t need to come into existence at time of agreement
D. Oral Recission or Modification
1. Oral rescission doesn’t usually violate SOF if it doesn’t result in the retransfer of property that
is the subject of the statute (eg. goods or interest in land).
a. Ex. Oral rescission of K for the sale of goods may not be effective if B has already
received the goods. If S still has the goods, even though title may have passed
to B the oral rescission may be effective on the ground that by agreeing to the rescission
S has “received and accepted” the goods (UCC 2-201(3)(c)).

IV. Five general categories MYLEGS

A. M = Marriage, Y= Year (One), L = Land, E = Executor, G = Goods for over $500, S =
Suretyship (Promises to pay debt).
1. Marriage – A promise for which the consideration is marriage or a promise of marriage is
w/in the SOF. Ex. prenuptials, antenuptials
a. Exception: If an oral K consists solely of mutual promises to marry w/o ancillary
promises relating to property transfer. i.e. ordinary oral engagement.

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 2. Year – Means promises contained in a K incapable of being fully performed w/in one year
after the making of the K, must be in writing. §130
a. Ex. An employment K for 2 years (oral agreement) commencing immediately is
unenforceable b/c it is not able to be fully performed w/in one year.
b. TIME IS MEASURED FROM MAKING OF K, not the time it takes parties to
perform.
c. Applies only if performance is IMPOSSIBLE not merely difficult
d. Certain K’s do not fall w/in the statute.
1) Possibility of completion w/in a year: not w/in SOF even if actual performance
may extend beyond a year.
2) Right to terminate w/in a year: Majority – K is w/in SOF, Minority – K is not
w/in SOF (Rest. 2d view)
3) LIFETIME K: Never included in SOF b/c a person can die w/in a year even if
the greater probability is that they will live.
3. Land – means that any promise to buy any interest in land is w/in SOF and a writing is
required, only applies to K itself not transfer. §125-§129
a. Includes leases for more than a year, easements for more than a year, fixtures,
resources and mortgages relating to land.
b. May become enforceable in two situations:
1) If seller makes the contracted for conveyance then the K is enforceable and
seller may recover the K price.
2) If the vendee significantly relies on the promise of the vendor. Some
requirements in different jrd include payment (in whole or in part),
possession and /or valuable improvement.
c. If K is enforceable, it is enforceable by specific performance.
4. Executor – if an executor agrees to pay an estate’s debt out of his own funds that agreement
must be in writing b/c it’s a trustee position
5. Goods – A promise for the sale of goods for more than $500 must be in writing (w/in the
SOF). ON THE EXAM!!!!
a. UCC § 2-201(1) Kind of Writing Required
1) Writing must indicate K made, name parties, be signed by party to be charged,
and state quantity
b. UCC § 2-201(2) Written Confirmation
c. UCC § 2-201(3) Enforceability W/out Signed Writing—Subject to three exceptions
1) (a) Specially manufactured goods – if goods are tailor made for one buyer and
not suitable for another, oral K may be enforced.
2) (b) Admissions in pleadings or in court that a K was entered into may make an
oral agreement enforceable (stmt made by one charged against)
3) (c) Payment – If goods have been accepted and paid for
a) Part performance of K would also take it out (payment).
6. Surety ship is the guarantee of one party to pay another’s debts and a writing is required for
that. §112-§117--original K (don’t have to be writing) v. collateral K (have to be in
writing)
a. Must be collateral to another’s promise to pay, three elements.
1) Three parties
2) Two promises

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 3) Second promise is to perform only if first is not performed.
b. Promise must be made to creditor not to debtor, if made to debtor may be enforceable
c. Main purpose of promisor #2 must not be for his own pecuniary interest, if so no need
for writing and may be enforced.
d. Example:
A-------------------Promise B $100 for goods = original K
C-------------------Promises to pay B $100 for goods if A does not Pay = collateral agreement K
A------------------Promises to pay B for B sending goods to C = original K
C bound only if it’s in writing (promises to answer for the debt of another)
A’s promises to B and C are original promises so don’t have to be in writing

V. Effect of Non-Compliance
A. If D does not assert the SOF frauds (in most states) that makes the K voidable i.e. has legal effect
unless properly asserted.
1. Void on the other hand is no legal effect at all.
2. Means that SOF is an affirmative defense in states that use voidable language.
B. Part of K w/in SOF
1. General rule: No part of K is enforceable if one part fails to satisfy SOF
2. Exception: If all promises that were w/in SOF have been performed, then promise is
enforceable.
C. Remedies
1. Parties can recover reasonable value of the services or part performance rendered
2. May also recover restitution of benefits rendered. (quantum meruit)
3. Promissory estoppel recovery: if D’s conduct induces P to change her position in reliance on
the oral agreement which is unenforceable under the SOF, P may recover under a
theory of promissory estoppel.
a. If D has intentionally and falsely told P that the K is not w/in the Statute or that a
writing will be subsequently executed or that the defense of SOF will not be
used.
b. Inducement of detrimental reliance also allows recovery

VI. Solving the SOF Problem

A. Look for an ORAL AGREEMENT
B. Look for MYLEGS
1. Think about elements
2. Look for small abnormalities that require exclusion
C. See if reliance doctrine applies.
D. Stuff not under SOF: Indemnity (Health Insurance), Goods under $500, joint debts—considered
original promise b/c both individually responsible, specially manufactured goods (operator of
purple night club orders 5000 yards of purple carpet; refuses to pay; 2-201(3)(a) out of SOF so don’t
need a writing; Argue Y or N: Do we really have part performance

§ 9 Parol Evidence Rule

I. Parol Evidence Rule (PER)

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 A. General Rule: an original writing prevails over oral agreement or 2d writings or other extrinsic
evidence.
1. This is a “best evidence” type of rule
a. Requires court to assess the “best evidence” offered by parties.
b. Determined by certain rules
c. Is not admissible to add to, alter, or vary the original written document
2. Purpose is to give legal effect to whatever intention the parties may have had to make their
writing at least a final and perhaps also a complete expression of their agreement.
a. PER prevents evidence that may add to, alter, or vary terms of the K
3. Why be concerned w/ oral testimony being inadmissible here?
a. Maybe b/c writings are generally more accurate than oral
b. Higher statistical probability that the true terms are found in the writing.
c. More incentive to be careful with things you pay higher costs for (writing)
4. PER v. SOF
a. PER is much broader than the SOF
b. Any K is considered under PER if there are disputed terms outside of a fully integrated
writing
5. Doesn’t automatically bind parties when PE is allowed.
6. Not a rule on believability; a rule on admissibility

II. Integrated Agreements (§209, §215)

A. Partial v. Complete Integrated
1. Partial Integration
a. Document is not intended to include all details of the agreement
b. Prior evidence may be admitted as long as it does not contradict a term of the writing
in a partial integration
c. Corbin view—favored
2. Complete Integration
a. Document is intended by the parties to include all details of the agreement.
b. Prior evidence may NOT be admitted to add to the terms and especially not to
contradict the terms.
c. Basically for a complete integration, no admission of extrinsic evidence unless one of
four above exists.
d. Williston view.
3. Focus is on the intention of the parties, not the integration practices of reasonable persons
acting reasonably and naturally
4. Factors in determining complete integration
a. length of agreement
b. detail of provisions
c. formality of setting
d. elaborate agreements signed by both parties
e. confirmations sent at the close of a deal
5. Factors in determining partial integration
a. informal memoranda
b. exploratory letters and telegrams
c. documents that embody one-sided obligations (deeds/promissory notes)

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III. Williston v. Corbin
A. Williston view (Rest. 209-210/ 2-202 also 2-316(1))
1. Williston holds that a written K is supreme to outside writings or other evidence
K is final and complete—ORIGINAL WRITING SUPREME UNLESS
2. Writing is supreme unless the written K left the intention unclear as to whether the
parties intended for the K to be the final agreement.
a. clear mutual discharge of 1st agreement
b. terms in K2 that might mutually be agreed upon but were left out
c. new consideration for 2d promise
B. Corbin View (Rest. 214, 216)
1. More liberal: Loose and admissible theory—ALLOW PAROL UNLESS
2. Account should always be taken of all circumstances, including evidence of prior
negotiations, since the completeness and exclusivity of the writing can’t be determined
except in light of those circumstances; the K is “final but not complete”
3. Admit oral unless a writing showed clear intent to the contrary.
4. Trend favors Corbin’s view
C. Stone asks “Has Corbin ever met a 2d agreement that he didn’t like?”
D. General rule: The more complete, detailed and complex a formal writing is, the more likely
that it will be final and complete – unless, it is evident from the K that it was not the intent to
be final.
1. Corbin’s rule: Admit evidence b/c a written agreement couldn’t possibly cover all bases.
2. Use the statutes, don’t leave out any language.

IV. Exceptions to the General PER

i. Does not exclude evidence of negotiations after the written agreement was made
ii. Does not exclude evidence to show there was no agreement or that the agreement was invalid
iii. Does not exclude evidence offered to help interpret the language of the writing
A. Attacking the K in Its Entirety (Rest 2d 214 (d))
1. PER does not bar evidence if it goes to show illegality, fraud, duress, mistake, lack of C or
other voidability. (Show no valid K exists)
2. Specific Disclaimers and Merger Clauses are okay as long as they are specific and outside
evidence won’t be allowed in to refute them.
a. Merger clause is a recital that the writing contains the entire agreement of the parties
1) courts typically accept clauses as showing intention that agreement be
completely integrated. (209/210)
2) is a tendency to deny such clauses conclusive effect
b. Jordan v. Doonan Truck– P buys truck after dealer says it’ll run okay for a few
months. P signs a contract for purchase of the truck that states “As is,” Truck is
junk and P sues for breach of K, relying on sellers oral guarantees. Held for D, If P
would have wanted a 3 or 4 month warranty on the vehicle he could have bargained
for it. 2- 202(b) and §209—Williston view P: 2-316(1) intent of both oral/writing
as consistent; how do you argue partial integration—anytime you have language like
in 2-316 (unreasonable) then you can argue that it would be unreasonable not to
allow oral evidence
3. This exception attacks the K in its entirety (i.e. attempts to make it void, or at least voidable)

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 B. Explain or Clarify Ambiguities (Rest 216)
1. Courts will allow PER to explain or clarify ambiguities, vagueness or conflicts in the writing.
Rest. 2d 216 CANNOT ALTER TERMS
2. Argue Y and N to negation of “best evidence” by this exception.
a. Y: Allows agreements not included in the terms.
b. N: Doesn’t add to, alter, or vary; merely explains rules of K not changes any terms.
3. Reformation
a. Mistake – Goode v. Riley – Allow parol evidence in to clarify a clerical error on the
face of an executed deed that awarded too much land to D after sale. Doesn’t
contradict essential terms of K. (214(d)(e)) D says final writing
(209/210)
Notes: Does S get windfall. Maybe b/c he gets to convey less land. But if actual meeting of minds was to
convey less land, then it’s a mutual mistake; purpose is to seek the true intent of the parties; was
the court wrong in Mitchell then? can argue yes and no; if fraud or duress then can rescind
instead of reform
b. In case of mistake, at the request of a party, a court may reform the writing to express
the agreement actually reached
c. For P to obtain reformation, he must show
1) there was an antecedent valid agreement that is
2) incorrectly reflected in the writing, or
3) if that mistake was induced by the other party’s fraudulent misrepresentation
4. Old test was to show “plain meaning”
5. Collateral Agreement Rule
a. Even the finding of a completely integrated agreement doesn’t preclude a showing of a
collateral agreement
b. Can show an entirely separate and distinct agreement b/t the same parties
c. Is enough if the collateral agreement is one that in the circumstances might naturally be
omitted from the writing
1) Mitchill v. Lath—P buys a house from D w/ the terms stipulated orally that D
is to remove an ice house from his neighboring property if P is to buy
the house. D agrees but never puts the terms in writing and never removes
the house and P sues for specific performance. Held: for D. Court finds
that the writing was the complete agreement and any term such as the
one requested by P would alter the terms of the K therefore inadmissible.
P says oral agreement should be integrated into written agreement (§209); D
says violates PER b/c will add to, alter, or vary terms of written K (213(1));
How do you argue as equity point to argue for oral argument? (P relied on the
promise/ estoppel)
d. §216(2) is the collateral agreement rule even though it doesn’t state the term
6. Three requirements that must be present before an oral agreement will be allowed.
a. Agreement must be a collateral one.
b. 2nd agreement must not contradict express or implied provision of the written K.
c. Must be one where parties would not ordinarily be expected to embody the wanted
terms in the K writing (Hypothetical K analysis).
1) If P wanted icehouse removed should have included in writing; low
transactions costs
C. To Prove/Show a Condition Precedent (Rest 217)

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 1. If parties agree that a K will not come into existence until a particular event occurs, evidence
of that condition precedent will be admissible to establish said condition.
a. Ex. Football contracts for employment on condition of health precedent
b. Ex. Obtaining financing before sale is final on a home
2. Courts will sometimes imply condition precedent
3. Luther Williams, Jr., Inc. v. Johnson—P sought to recover $670 in liquidated damages from
D for breach. D claims that K was void b/c of unfulfilled condition precedent. Issue
was whether the admission of testimony concerning the oral condition precedent violated
the PER. Two questions: 1) Can evidence be admitted to show that the parties did not intend the
writing to be a complete statement of their transaction? Ans. To determine intent of
parties, look at the written instrument and the circumstances surrounding its execution.
2) Can it be said that the testimony regarding the condition precedent doesn’t contradict the
writing when the K states there are no agreements other than those contained in the writing?
Ans. The oral agreement is operative if there’s nothing in the writing inconsistent therewith.
It’s clear from the illustration that an exclusion only if the parol condition contradicts some
other specific term of the written agreement. In the instant case, no provision was made
regarding financing; therefore, the parol condition would not contradict the terms of the writing.
D. Subsequent Modifications (§275/§89/§214(e)/§216)
1. Courts will invariably allow into evidence of a new K when old one was mutually discharged.
2. Generally talking about a 2nd oral agreement achieved via mutual discharge and re-K.
3. PER only affects agreements made before or contemporaneous w/ the execution of the K.
4. Could argue that it alters, adds to, or varies K, but is clear 2d K supported by consideration
5. Ex. Pro football K1 600mill and management tears up writing at player’s request; new K2 for
800mill; have a substitution (got to get over pre-existing duty problem and SOF
hurdles)
6. Dennison v. Harden—P’s entered into K with D to purchase for $12,000 a parcel of land that
included fruit trees, tools, tractors, trucks, fertilizers, etc. P claimed that an oral
agreement was given that there were 276 peach trees and that there was breach of warranty
b/c the trees were worthless. Trial: PER applicable b/c it varied and added to terms of the
written K. P said evidence clarified the subject matter. Supreme Court: No ambiguity in
fruit trees; only ambiguous word is etc. (214(c)); P only trying to question the adequacy
of the fruit trees
Notes: Written term called for fruit trees, so could argue breach (failure for performance); breach of warranty;
PER is not the only way to get relief the party wants

VI. UCC 2-202

A. Provision in the UCC for Parol Evidence Concerning K for Goods.
1. Allows for explanation or supplementation of terms only by: course of dealing or usage of
trade or by course of performance.
a. Course of dealing – Past conduct of parties in previous contracts not w/ respect to K in
question. 1-205
b. Usage of trade – any practice or method of dealing having such regularity of
observance in a place vocation or trade as to justify an expectation that it will
be observed w/ respect to the transaction in general. 1-205
c. Course of performance – the way parties have conducted themselves in performing the
particular conduct at hand. 2-208
B. All the above may be used to interpret even if K is a complete integration.

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 1. Exception: If these sources are “carefully negated” in the writing.
C. Fraud can be shown through UCC 2-202 via 1-103 although 2-202 does not address fraud

VII. Solving the Parol Evidence Problem

A. Is there a written contract?
1. Yes – is it a partial or completely integrated writing?
a. Good way to tell is merger clause
b. Look for express statements of intent.
c. Judge makes decision, Argue Y and N.
B. Is the K in litigation?
1. Yes – has to be before parol evidence will arise.
2. No – probably not a parol evidence problem.
C. Is one of the parties trying to enter evidence of an extrinsic nature?
1. Yes – If a completely integrated writing NO EXTRINSIC EVIDENCE ALLOWED
a. Exceptions: Fraud, explains/ clarifies ambiguity, collateral agreement, subsequent
mod., or condition precedent.
2. Yes – if a partial integration, only evidence allowed won’t contradict terms already there.
3. No – no parol evidence problem
D. What is the nature of the evidence?
1. If contemporaneous of or prior to agreement court will not allow evidence unless meets
exception rules.
2. If subsequent agreement PER doesn’t apply.
E. If PER applies, go on to further considerations.
1. Either evidence is allowable or isn’t.
2. Judge makes determination.
3. Has nothing to do w/ believability of evidence only admissibility.

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