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Law 506: Contracts II

Course Outline
J. Reif

I. Intention, Interpretation, and Implication

A. Intention
1. In order for a contract to be binding, the parties must act with a present intent to contract. The classical
view of this requirement is that there must be a “meeting of the minds” as to the terms and specifications
of the contract. But, as Cohen notes, this classical view has run against criticism and faces innate
difficulties due to its subjectivity and the impossibility of knowing the “actual” or “secret” intentions of
parties to a contract. The question of intention asks whether the parties to a contract intended to contract.
It is most often raised to challenge or prove a party’s assent to an offer to contract.
2. The Subjective View
a. The subjective view of contractual intent is related to the classical view—the requirement of an
actual “meeting of the minds.” This view looks to the actual, subjective intentions of the parties to
determine the parameters of the legal relationship created by their contract. That is, the subjective
looks to what each party might have intended in their own mind (whether spoken or unspoken) to
be the requirements under the contract.
b. According to Farnsworth, the subjectivists did not go so far as to advocate that subjective assent
alone was sufficient to make a contract. Even under a strict subjectivist view there had to be some
manifestation of assent but actual (i.e. subjective) assent to the agreement on the part of both
parties was necessary.
3. The Objective View
a. The objective view of contractual intent regarded “actual” assent as irrelevant and looked instead at
the outward words and actions of the parties to determine intent. According to Farnsworth, “the
objectivists . . . looked to the external or objective appearance of the parties’ intentions as
manifested by their [words or] actions.”
b. According to the objectivists, a party’s mental assent was not necessary to make a contract. After all,
was not contract law intended to protect reasonable expectations? If one party’s actions, judged by a
standard of reasonableness, manifested to the other party an intention to agree, the real but
unexpressed state of the first party’s mind was irrelevant.
c. Practically, the objectivist “test” borrowed the “reasonable person” standard from tort law and asked
whether party A’s reliance on party B’s alleged indication of assent was objectively “reasonable.” If
so, then the parties are bound by a contract that did, in fact, exist; if not, then there was no contract.
i. Clearly, the “objective test” turns on potentially convoluted questions of fact likely in “he said
she said” situations with little or no proof as to what either party said, heard, or observed.
ii. Thus, the trier of fact must first determine what was actually said or done that led party A to
rely on party B’s alleged manifestation of intent.
d. By the end of the nineteenth century, the objective theory had become ascendant and courts
universally accept it today: intent does not invite a tour through plaintiff’s cranium with plaintiff as
a guide. One may still avoid liability by showing lack of intent to engage in the actions by which
assent was apparently manifested but as long as one intended to engage in those actions, there is no
further requirement that the actions were done with a subjective intent to assent to a legal
agreement.
4. Restatement (2d) Contracts § 19(2): The conduct of a party is not effective as a manifestation of his
assent unless he (1) intends to engage in the conduct and (2) knows or has reason to know that the other
party may infer from his conduct that he assents.
a. This is a two-part objective intent test.
b. Additionally, Restatement § 19(3) indicates “a party may manifest assent [through words and deeds]
even though he does in fact assent [subjectively].”
5. Restatement (2d) Contracts § 21: Neither real nor apparent intention that a promise be legally
binding is essential to the formation of a contract, but a manifestation of intention that a promise shall not
affect legal relations may prevent the formation of a contract.
a. This is the converse to § 19 supra. Where a manifestation of intent is sufficient to warrant the
creation of a contract it is also sufficient to indicate the non-existence of a contract.
6. Embry v. Hargadine, McKittrick Dry Goods Co.: Where P, an employee of D, was seeking to renew his
employment contract, met with D’s president to discuss the issue, informed him that he came to the office
to secure a renewal or would quit then and there, and, the trial court determined, D’s president said “Go
ahead, you’re all right,” the court held that such a manifestation of intent was reasonably relied upon and
warranted the creation of a contract.
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7. Tolmie v. UPS, Inc.: Similar to the above case, P was promoted from union labor to non-union
management and noticed that his new position would not carry the “good cause” protection attached to
his previous position. Upon inquiring of this fact, the supervisor stated words to the effect that P had
nothing to worry about because it was harder to fire management than labor. Some few months later, P
was fired and sued under the theory that his supervisor’s words amounted to an employment contract
guaranteeing the “good cause” protection. Contrary to Embry (which diverged factually), the court held
that the supervisor’s were not sufficiently definite to constitute the creation of an employment contract
and, thus, no contract existed.
B. Interpretation
1. Interpretation is the process by which a court ascertains the meaning that it will give to the language used
by the parties in determining the legal effect of the contract. The concept is sometimes defined more
narrowly to refer to the process by which a court determines the meaning that the parties themselves
attached to their language.
2. Vagueness and Ambiguity: It is a rare contract that needs no interpretation. Vagueness is the extent to
which a word has no clear, unique, or individual meaning (e.g. “green”) while ambiguity is the extent to
which a word is subject to multiple legitimate interpretations (e.g. light as an indication of color or light as
an indication of weight).
3. Choice of Meaning: In a dispute over contract interpretation, each party claims that the language
should be given the meaning that that party attaches to it at the time of the dispute (ex post facto to the
formation of the contract). However, the resolution of the dispute begins, not with these meanings, but
with the meanings attached by each party at the time the contract was made (ex ante). But since a
contract involves two parties, the search for meaning begins with the meaning attached by both parties to
the contract language; each needs the others assent.
a. Restatement (2d) Contracts § 20 (the Peerless rule)
i. (1) There is no manifestation of mutual assent to an exchange if the parties attached
materially different meanings to their manifestations and
1. (a) neither party knows or has reason to know the meaning attached by the other; or
2. (b) each party knows or each party has reason to know the meaning attached by the
other.
ii. (2) The manifestations of the parties are operative in accordance with the meaning attached by
one of the parties if
1. (a) that party does not know of any different meaning attached by the other, and the
other knows the meaning attached by the first party; or
2. (b) that party has no reason to know of any different meaning attached by the other,
and the other has reason to know the meaning attached by the first party.
b. It must be emphasized that § 20 holds that, in short, a party is not bound by a meaning unless that
party either knows o has reason to know of it. Even though the parties manifested assent to the same
language, their misunderstanding may prevent the formation of a contract.
c. Konic International v. Spokane Computer Services, Inc: D’s agent entered into a contract with P’s
salesperson for the sale of a specialized surge protector. Upon inquiring of the item’s price, P’s
salesperson quoted D’s agent “fifty-six twenty” meaning $5,620 but taken by D’s agent to mean
$56.20. The error was not immediately discovered and P sued for recovery of its sales price. The
court cited Restatement § 20 and held that, due to the parties vastly unique conceptions of “fifty-six
twenty,” the parties attached materially different meanings to the crucial term of the contract and,
thus, no contract was ever formed.
d. Frigaliment Importing Co. v. B.N.S. International Sales Corp.: Where P, a Swiss importer,
contracted with D, an American chicken supplier, for the delivery of a certain quantity of “chicken,”
and P associated the term “chicken” with young animals suitable for broiling or frying and D took
the term in its generic sense, the court undertook a comprehensive evaluation of the term’s use in
the poultry industry and held that the meaning P attached to it was not materially different and,
thus, was not entitled to recovery.
e. The Objective/Subjective Debate
i. Similar to their position on intent, objectivists will argue that the meaning of the disputed
term should be determined based on an outward, objective manifestation of the party’s
intended meaning.
ii. Conversely, the subjectivists would argue that the parties’ subjective intended meaning should
be ascertained to resolve the dispute. If such meanings can be ascertained, the Peerless rule
will apply as there was no actual meeting of the minds.
f. Restatement (2d) Contracts § 201(2): Where the parties have attached different meanings to a
promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached
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by one of them if at the time the agreement was made (a) that party did not know of any different
meaning attached by the other, and the other knew the meaning attached by the first party; or (b)
that party had no reason to know of any different meaning attached by the other, and the other had
reason to know the meaning attached by the first party.
4. Trade Usage as Source of Interpretation: Contract law has grown to recognize that certain terms
carry specialized meanings within certain industries and trade groups. When such a term exists and has a
generally recognized “trade usage” (see, e.g., Firgaliment), the trade meaning of the term will be used to
clarify latent ambiguities.
a. U.S. Naval Institute v. Charter Communications: Where P was a specialized publisher who
undertook to publish a Tom Clancy bestseller, licensed the paperback rights to D specifying the
publication date to be “the following October,” and D actually shipped the books the following
September, the court held in favor of D by adhering to the publishing industry’s trade usage of the
term “publication date” which insinuates that printing and shipping of the books will actually
predate that date in order that the books can be at retail outlets by the publication date.
i. Though P insisted it should not be bound by the trade usage since it was new to the bestseller
industry, the court held that by entering an industry, you subject yourself to the trade language
common in the industry.
ii. Hence, the case’s rule: “A party is bound by trade usage if it knows or has reason to know of
the usage.” By entering the major publishing industry, P was held to have had reason to know
of the trade usage of the term “publication date.”
b. See also, Frigaliment re: the trade/industry definition of “chicken.”
c. Restatement (2d) Contracts § 202. Rules in Aid of Interpretation
i. (1) Words and other conduct are interpreted in the light of all the circumstances, and if the
principal purpose of the parties is ascertainable it is given great weight.
ii. (2) A writing is interpreted as a whole, and all writings that are part of the same transaction
are interpreted together
iii. (3) Unless a different intention is manifested,
1. (a) where language has a generally prevailing meaning it is interpreted in accordance
with that meaning;
2. (b) technical terms and words of art are given their technical meaning when used in a
transaction within their technical field.
d. Restatement § 203 specifies the weight of authority granted certain terms in vague or ambiguous
contracts.
5. Contra Proferentem: Common law rule used in connection with the construction of written documents
to the effect that an ambiguous provision is construed most strongly against the person who selected the
language. The rule is rationalized in economic terms in that the person who selected the language has the
lower cost to supply meaning to the term and, thus, is given greater incentive to spell out the term
accurately. The rule is embodied in Restatement § 206.
6. Four Part Test (see Rest. § 202)
a. Terms of the agreement: expressed, clear language of the parties in the contract govern if they are
intact.
b. General meaning: if not expressed in the contract, the generally accepted meaning using an objective
approach will be used. What would a reasonable person believe the term meant?
c. Special meaning: if not expressed in the contract and one party would like to use a meaning other
than the general meaning the party must prove with evidence that the parties intended for the
special meaning to be used. If the party does not prove that they intended for the special meaning to
be used then the general meaning will govern.
d. Industry custom/Trade Usaage/Course of Dealing.
C. Implication
1. Implication refers to the process by which courts supply missing or omitted terms in a vague or
ambiguous contract. The above two sections show how courts resolve disputes over expression—that is,
interpret vague or ambiguous terms already written into a contract. Implication, however, seeks to resolve
disputes that have arisen because there is no contract language that is relevant to the situation that has
arisen. Courts must resolve such disputes arising from omission by some process other than
interpretation.
2. Restatement (2d) Contracts § 204: When the parties to a bargain sufficiently defined to be a contract
have not agreed with respect to a term which is essential to a determination of their rights and duties, a
term which is reasonable in the circumstances is applied by the court.
3. The Process of Implication
a. Interpretation: a court will supply a term only after it has determined that the language of the
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agreement does not cover the case at hand. It follows that any term that a court would supply can be
derogated from by agreement of the parties, either explicitly or by necessary inference. This is a
default rule.
b. Supplying the Omitted Term: the second step, implication, comes only after the court has
interpreted the contract. Once it has determined, through interpretation, that it is faced with an
omitted case, the court must supply a term to deal with that case. There are two bases upon which a
court will base its “implication” of a term in the parties’ contract.
i. The actual expectations of the parties: if the court is persuaded that the parties shared a
common expectation with respect to the omitted case, the court will give effect to that
expectation, even though the parties did not reduce it to words. However, if the parties’
expectations were significantly different or if one party had no expectation, the court will
substitute for the subjective test of shared expectation an objective test of whether one party
should reasonably have known of the other’s expectation.
1. Expectation can sometimes be gleaned from the agreement itself. Thus a recital or a
provision dealing with a related case may suggest the parties’ intention with respect to
the omitted case.
2. Intention may also be deduced from a course of performance, course of dealing, or
usage, or from the negotiations that led up to the agreement if the parol evidence rule
permits.
3. In many cases no intentions or expectations can be found and the court must
implement another means of implication for the omitted case.
ii. Basic principles of “justice”: Where the parties’ intentions regarding the omitted case cannot
be surmised from either the written instrument or the parties’ course of dealing, the court is
left to apply basic principles of “justice” to the issue in question. To do so in an at least
nominally objective manner, the courts look to the idea of “fairness in exchange” or a
reasonable person test. A court may, for example, justify the term it supplies on the ground
that the term prevents one party from being in a position of “economic servility” and
“completely at the mercy” of the other.
c. In some cases, it seems, the court is reluctant to imply an omitted term and, instead, holds that there
insufficient information to rule on “issues of breach of contract, damages, or duty to mitigate
damages.”
i. Action Ads, Inc. v. Judes: P/Respondent sued D/Petitioner, his former employer, for breach of
contract stemming from an agreement in P’s employment contract, which stated that D would
provide P a medical insurance program. P was subsequently severely burned in an incident
involving a gas explosion and sued for the insurance benefits he would have received had D
lived up to its end of the bargain. The appellate court held that the term “medical insurance”
was too vague to define D’s legal relationship to P. As such, the court reasoned that it could not
affirm a judgment for breach of contract.
1. “Where the terms of a contract are not sufficiently definite to permit [an initial
determination re: the definiteness of the legal relationship defined], the court lacks the
information necessary to rule on the issues of breach of contract, damages, or duty to
mitigate damages.”
2. “In a suit on a contract to procure insurance, the plaintiff has the burden of proving the
elements of the insurance policy with sufficient certainty to enable the court to establish
damages in the event of breach.”
ii. See also Oglebay Norton Co. v. Armco, Inc. re: an interesting application of the court’s power
to imply omitted cases.
4. Course of Dealing as a Source of Implication
a. Understand the concept, application, and effects of preliminary negotiations.
b. Restatement (2d) Contracts § 223: (1) A course of dealing is a sequence of previous conduct
between the parties to an agreement which is fairly to be regarded as establishing a common basis of
understanding for interpreting their expressions and other conduct. (2) Unless otherwise agreed, a
course of dealing between the parties gives meaning to or supplements or qualified their agreement.
c. As noted above, the course of dealing between parties can give meaning to otherwise vague or
ambiguous terms in a contract. But, it can also aid the court in filling in gaps in the contract. The
parties’ course of dealing might indicate the means the court should implement to fill in gaps in the
parties’ contract.
d. Joseph Martin Delicatessen, Inc. v. Schumacher: Where parties to a lease had agreed to give the
lessee an option to renew the lease at the end of the initial lease-period but provided that the rent
amount would be established upon “further negotiation” and at the end of the initial lease-period
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the lessor sought to raise rent significantly, the court held that “a mere agreement to agree is
unenforceable” and, thus, there was no contract. Had the lease agreement been more definite as to
rent (even if it was short of dictating a specific amount), it would likely have been found enforceable.
Though the parties’ course of dealing indicated a certain pattern re: the rent amount, this was
insufficient to establish a definite amount pursuant to the contract.
5. Interway, Inc. v. Alagna: P and D entered into negotiations regarding the sale of D’s company. After a
series of negotiations, the parties executed a letter of intent, which contained a number of the issues the
parties had reached agreement on as well as language that indicated the agreement was “subject to”
further negotiation and a final sales contract. After execution of the letter of intent, D notified P the next
business day that he did not intend to sell his company. P sued for specific performance pursuant to the
letter of intent. The court held that the “subject to” language of the letter of intent was sufficient to render
the final sales contract a condition precedent for existence of a binding contract. No condition precedent
was mentioned, per se, in the contract; the court used the “subject to” language to imply the condition.
6. Pennzoil v. Texaco . . . crazy case similar to the above but the court held opposite and awarded Pennzoil
over $10B.
II. Offer and Acceptance
A. The “Black Letter” Law of Offer and Acceptance: a Summary
1. Terminology
a. The person making the offer is referred to as the offeror and the person to whom the offer is
addressed is the offeree.
b. If the offeror withdraws his offer before it is accepted, he is said to revoke his offer. In contrast, if
the offeree refuses to enter into the deal, he has rejected the offer.
c. A counteroffer is a statement by the offeree suggesting substitute terms. Functionally, it serves as a
rejection of the offeror’s offer and makes the former offeree the offeror of a different offer.
2. Duration of an Offer
a. Colloquially, an offer is said “to remain open” during the period the offeree has a power of
acceptance, i.e., the power to complete the formation of a contract by an unqualified acceptance or
assent to the terms.
b. An unequivocal rejection terminates the offeree’s power of acceptance.
c. § 38 states that a manifestation of intention not to accept an offer is a rejection unless the offeree
manifests an intention to take it under further advisement.
d. A counteroffer is a rejection of the offer, and thus has the same effect as a rejection on the duration
of the offer. The difference, however, is that while an outright rejection is a statement of a lack of
interest; the counteroffer is a rejection that states an interest in the offer but on different terms.
Usually, it carries forward negotiations rather than breaking them off.
i. See § 39 regarding counteroffers in general.
ii. A communication that is intended to be an acceptance but adds qualifications or conditions is
a counteroffer and a rejection rather than an acceptance. This includes the addition of any
new terms – substantive or procedural, major or minor. See §§ 59 and 61.
e. “Lapse of time” terminates the power of acceptance. When an offer specifically states a period of
time that the offer will remain open, the conclusion of that time terminates the power of acceptance;
when no time period has been stated, the lapse of a “reasonable” period of time will terminate the
power of acceptance. See § 41.
i. Where the parties bargain face to face or through instantaneous electronic means, a
“reasonable time” usually does not extend beyond the termination of the discussion or
communication. Where the parties elect to use a slower means of communication (snail mail),
the “reasonable time” period is extended accordingly.
ii. Where contracts involve the purchase or sale of commodities, securities, or goods that
fluctuate rapidly in price, a reasonable time is normally very short, particularly when the
contemplated transaction involves a fixed price.
f. Death or incapacity of the offeror terminates the offeree’s power of acceptance unless the “offer” was
actually an option contract.
3. To Whom an Offer is Addressed
a. The offeror may exclusively determine the person or persons in whom a power of acceptance is
created. The offeror is the master of his offer. See § 52.
b. An offeror may make an offer to the world in general; in that case, the offer will provide a method of
selection so that the first acceptance extinguishes the power of all other persons to form a contract
(e.g., the words “first come, first served”).
4. What Constitutes a Revocation?
a. A revocation must be a clear manifestation of unwillingness to enter into the proposed bargain.
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Magic words are not required.
b. See § 42 re: “direct” revocations; see § 43 re: “indirect” revocations.
5. Manner of Signifying Acceptance
a. An acceptance must comply with the precise requirements of the offer, since the offeror is the
master of his offer and can specify what actions constitute an effective acceptance.
b. See § 30.
6. When is a Communication Effective? The Mailbox Rule
a. Acceptance
i. In the absence of an express specification by the offeror, an acceptance is effective when it is
put into the mail (or put out of the offeree’s possession) while all other communications are
effective only when received.
ii. This “mailbox” rule is applied to the situation where a revocation crosses the mailed
acceptance. After mailing the acceptance the offeree is likely to change position in reliance on
the existence of a contract since he or she will assume the offeror still desires the transaction;
the mailbox rule protects this reliance.
iii. The mailbox rule is likewise applied even in the case of the lost or delayed acceptance though
the justification for such an application is less clear. Perhaps the best justification is that there
must be a hard and fast rule as to the effectiveness of acceptance and someone has to bear the
risk; since the offeror, in theory, initiated the bargain, it seems just as well that it is he who
should bear the risk.
iv. Last, the mailbox rule applies in the case of an “overtaking rejection” where a rejection was
sent by instantaneous communication and acceptance (unbeknownst to the offeror) was sent
via a slower means. The application of the mailbox rule here prevents the offeree from
speculating at the cost of the offeror in fast moving markets.
b. Unlike an acceptance, however, all other communications are only effective when they are
communicated (i.e., received) by the other party. Hence, a rejection is effective only when it is
received. However, if the offeree first mails a rejection and then mails an acceptance, the
Restatement abandons the mailbox rule and holds that whichever arrive first is effective.
7. When is a Communication Effective? Part Deux.
a. The mailbox rule may be varied or rejected by the offeror’s specification of the manner of
acceptance. It should be noted that the mailbox rule is only a default, not a mandatory, rule.
Shrewd planners are allowed to easily contract around the mailbox rule.
b. The mailbox rule is only applicable if the offeree uses a reasonable means of communication (U.S.
Mail, FedEx, etc). This usually means adopting at least as rapid and reliable a means of
communication as that chosen by the offeror.
c. The mailbox rule is not applicable to acceptances that are “inappropriately dispatched” –
acceptances that are incorrectly addressed, lack postage, etc. Their mere presence in the mailbox
does not invoke the rule.
d. Messages dispatched by an agent of the sender are effective only when received.
8. Crossing Communications
a. When two offers cross in the mail, one can argue that neither offer was intended to manifest assent
to the offer of the other; no contract is formed.
b. A more realistic example arises, however, when negotiations are underway and the parties exchange
crossing communications which, taken together, indicate agreement on all terms. In such a case, a
contract will be found.
B. The Offer
1. According to the traditional analysis, an offer is the penultimate communication in the making of a
contract. It is the manifestation of assent that empowers another to enter into a contract by manifesting
assent in return. No formalities are generally required for an offer; it may be made by spoken words,
written words, or other conduct.
2. Whether a particular proposal amounts to an offer is a question of intention. The question most
commonly arises when the maker of the proposal denies having had an intention to make an offer, while
the one to whom the proposal was made claims to have believed that it was intended as an offer. Under
the objective theory, the issue then becomes whether the one to whom the proposal was made had reason
to believe that it was intended as an offer.
3. Most judicial decisions indicate a reluctance, in doubtful cases, to characterize a proposal as an offer and
to hold its maker to a contract. Judge Posner has said that “the degree to which the reasonable recipient
will think a vague offer intended to empower him to create by acceptance a legally enforceable contract
depends on the courts’ attitudes toward vague offers” and “the more willing the courts are to interpolate
missing terms, the more difficult it is for the recipient of a vague offer to interpret the intentions behind
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the offer.
4. Elements of Offer
a. Intent (communication must contain “words of offer” not just words of preliminary negotiation). See
Restatement §§ 24, 26.
b. Certainty of Terms, Rest. §§ 33, 34.
i. Nebraska Seed Co. v. Harsh: Where P received a letter from D advertising millet seed for sale
and P sought to accept what it believed to be an offer and sued for performance, the court held
that the correspondence did not make a complete contract. “To so hold where a party sends
out letters to a number of dealers would subject him to a suit by each on receiving a letter, or
invitations to bid, even though his supply of seed were exhausted.” In other words, the court
held the terms of the purported offer to be insufficiently certain.
ii. In many cases that conclude that the language used did not constitute an offer, the court has
stressed the indefiniteness or incompleteness of the communication. This is seen in the above
case in that D’s purported offer was incomplete and indefinite.
iii. A proposal will not usually be interpreted as an offer if such an interpretation would expose its
maker to the risk of liability for performance far beyond the maker’s means. Such a case
existed above.
c. Communication, Rest. §§ 50, 52
5. Fairmount Glass Works v. Grunden-Martin Woodenware Co.: Where P sought a price quote for a
quantity of mason jars, D responded with a price quote and words of offer, P accepted the offer, and D
ultimately refused performance, the court held that an offer was manifested and that a contract existed.
The words used in this offer were sufficiently complete and definite to warrant the creation of an offer.
a. The more terms the parties leave open, the less likely it is that they have intended to conclude a
binding agreement . . . However, a proposal that would be insufficient by itself may be fleshed out by
the incorporation of terms from prior communications.
b. Here, the proposal was held to be an offer because it contained a clause providing “that we make all
quotations and contracts subject to . . . delays or accidents beyond our control” and that the prices
were quoted for “immediate acceptance.”
c. By viewing the proposal in the context of all correspondence, the court was able to ascertain that an
offer existed under the objective theory.
6. Advertisements and Offers
a. Generally, advertisements are not construed to be offers—though in some cases they might
constitute offers to the world—but as invitations to offer. Advertisements are generally understood
to be too vague and incomplete to constitute an offer to contract and serve primarily as alerts that
certain merchandise exists at certain locations.
b. Lefkowitz v. Great Minneapolis Surplus Store, Inc.: Where P was in receipt of an advertisement
made by D purporting to offer great deals on expensive clothing items, P showed up to purchase the
items, and D refused to comply, the court held that the advertisement constituted an offer to the
world due to its definite and complete language related to the quantity available, the specific price,
and specific descriptions of the item.
i. The test of whether a binding obligation may originate in advertisements addressed to the
general public is whether the facts show that some performance was promised in positive
terms in return for something requested.
ii. Whether in any individual instance a newspaper advertisement is an offer rather than an
invitation to make an offer depends on the legal intention of the parties and the surrounding
circumstances.
iii. According to Farnsworth, “if the very nature of a proposal restricts its maker’s potential
liability to a reasonable number of people there is no reason why it cannot be an offer. The
nature of the proposal may be such that only a limited number of people can accept.” By
including the words “first come, first served” in its ad, D fulfilled this requirement of certainty.
c. Izadi v. Machado (Gus) Ford: Where P sought to take advantage of an advertisement promising a
$3000 minimum trade in allowance, failed to read the fine print governing the conditions under
which D would accept a trade in, and D refused to offer the trade in allowance, the court held that
due to the small size of the fine print conditions, D would be bound by the larger print words due to
the court’s characterization of the advertisement as a bait and switch tactic under consumer
protection laws.
7. Who Can Accept an Offer?
a. The offeror, it is often said, is the master of the offer. The offeror may invite acceptance by one or
more offerees acting separately or together. But the offer can only be accepted by one that the
offeror has invited to accept. “It is a rule of law, that if a person intends to contract with A, B cannot
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give himself any right under it.”
i. Absent express provision to the contrary in the offer itself, an offer is not transferable (the
offeree may not transfer the offeror’s offer to another party, granting the second party the
power to accept the offeror’s offer).
ii. If the seller dies or loses the legal capacity to make a contract, the offer is terminate because it
can no longer be accepted.
b. Restatement (2d) Contracts § 52: “An offer can be accepted only by a person whom it invites to
furnish the consideration.”
8. Auctions and Offers
a. When an auctioneer puts property up for sale to the highest bidder, the auctioneer is taken, in the
absence of a contrary understanding or usage, to be interested in entertaining offers in the form of
bids, not making an offer. That is, the auctioneer’s proposal is not an offer, but each bid is an offer
that the auctioneer may accept or reject.
i. See UCC § 2-328 re: the sale of goods via auction
ii. The Hammer Rule is codified in § 2-328(2).
b. Once the auctioneer slams the hammer and accepts an offer, a contract is immediately formed for
the bid price offered by the bidder. This is the “hammer rule.”
c. A typical auction is said to be with “reserve.” That is, the auctioneer reserves the right to accept or
reject any bid – whether or not it’s the highest. When an auction is said to be without reserve, then
the item must be sold to the highest bidder. Under the UCC, a sale is with reserve unless the goods
are in explicit terms put up without reserve. UCC § 2-328(3).
d. Well v. Schoeneweis: P bought certain real property at an auction. Subsequent to the fall of the
hammer at the auction, the parties sought to renegotiate certain terms related to the sale of the
property. Those negotiations broke down and D purported to “revoke” its offer. P brought suit for
specific performance. Held, a contract for the sale of the land existed at the fall of the hammer; the
purported negotiations subsequent to the entering of this contract were meaningless – both parties
were bound.
e. Specialty Maintenance and Construction, Inc. v. Rosen Systems, Inc.: P brought action under
consumer protection law averring that D purported to conduct an auction “without reserve” but
conducted it with reserve by refusing to accept P’s high bid. D testified that the auction was with
reserve and, thus, he could withdraw any bid at any time. Held, although brochure containing
outline of terms of sale was potentially highly misleading, the jury could have found it was not
intended to mislead “this particular plaintiff.” Affirmed.
9. General Contractors and Sub-Contractors
a. Traditionally, there has been a reluctance to protect contract offerees from revocation-before-
acceptance by application of the § 90 reliance doctrine due in part to the language of the provision
that allows the awarding of reliance-type damages to situations in which “injustice can be avoided
only be enforcement of the promise.”
b. The most significant change in this reluctance has been in connection with bids on construction
contracts. A general contractor, planning to bid on a potential construction job, solicits bids from
sub-contractors regarding the performance of specific work. The general then uses these bids in
tabulating his own bid for the construction contract. A problem arises if the contractor is awarded
the contract but, before the contractor has a chance to notify the subcontractor whose bid has been
used, the subcontractor attempts to revoke or substantially modify its bid. There are three potential
solutions to the problem.
i. Treat the subcontractor’s offer as one that invites acceptance by the general contractor’s
promise after the award of the main contract and is revocable until such acceptance.
ii. Treat the subcontractor’s offer as one that invites the general contractor’s promise after the
award of the main contract but is, in contrast to the first solution, irrevocable until the general
contractor has had a reasonable time to make that promise following the award.
iii. Treat the sub-contractor’s offer as one that invites acceptance by the general contractor’s
promise at the time it makes its own bid, rather than after the award as in the first two
solutions.
c. When a sub-contractor submits a bid to a general contractor who then uses that sub-bid in
tabulating his general bid to submit to the granting authority, is the sub-contractor bound to the
general? Is the general bound to the sub? Should this be viewed in the context of auctions and
offers?
d. Drennan v. Star Paving Co.: P, general contractor, was contacted by D to bid for paving work
associated with an upcoming bid. P used D’s sub-bid to tabulate his overall bid to submit to the
granting authority. P was awarded the contract. Subsequently, D informed P that it had made an
 9
error in tabulating its expenses and would have to raise its bid. Held, the sub-contractor was bound
to the general contractor because of the general’s reliance on D’s bid.
i. Traynor reasoned that the general “relied on D’s promise to his detriment.” Hence, under § 90,
there was a contract pursuant to the reliance theory of contract.
ii. Compare with the common law view in Gimbel Brothers.
iii. What about §§ 52 and 87(2)?
iv. Seems to have viewed the sub’s bid as a unilateral contract ratified by some performance – or ,
perhaps, effort on the part of the general to secure the job. Still, an inconsistent result.
e. James Baird Co. v. Gimbel Brothers, Inc.: D contacted P regarding a sub-bid to supply and install
linoleum in a project P was bidding for. P was awarded the contract. Subsequently, D informed P
that it had made a mistake and had to increase its bid. Held, D’s bid was not binding on either P or
D. Just as D was still free to seek other subs for the job, the sub was free to revoke its bid and offer
another. The bid was seen as an offer, not a unilateral contract, and, thus, was not binding on either
party until accepted by the general. This is the traditional common law view.
i. An offer for an exchange is not meant to become a promise (i.e. contract) until a consideration
has been received, either a counter-promise or whatever else is stipulated. To extend it would
be to hold the offeror regardless of the stipulated condition of his offer.
ii. Ever since Gimbel Bros, the courts have almost uniformly refused to treat the general’s use of
the sub’s bid as acceptance which would bind the general contractor. Instead, the sub’s bid is
treated as an offer to form a bilateral contract, and the general is bound only if he accepts by a
return promise.
f. The point: plan to avoid the problem. Contingency clauses dependent upon the awarding of the
contract; creation of options contracts; specification of the means of acceptance are all methods by
which an ounce of planning can prevent a pound of cure.
g. Note, Another Look at Construction Bidding and Contracts at Formation
i. Even when the promissory estoppel doctrine is properly applied, its value and adequacy are limited
because it protects only the general contractor. Although the sub is bound once the general uses
the bid, the general has the choice of reopening negotiations with other subs. This allows him to
use the low bid as a lever to deflate bids from other subs and encourages other subs to undercut the
low bidder after the prime contract has been awarded. The general can thus enforce the bid against
the sub, or, at his option, give up the bid made firm by promissory estoppel and shop for lower
bids. Subs will begin to puff their initial bids to leave room for later negotiations.
ii. Moreover, when a sub accepts a lower price to avoid losing a contract, he may be tempted to cut
corners, producing a less satisfactory job. Do we always take the lowest bid? No, we take into
consideration the reputation of marketplace, quality of work, reliance of the subcontractor.
1. No intent to contract if initial bid is not held to be “final.”
2. Notes to cases show bid shopping is common practice in the business. We have a problem
upfront of businessmen saying and acting accordingly that they use the beginning bids as
beginning number for negotiation. It argues no intent to rely on subs bid if he in fact is
going to use someone else’s bid. How sincere are these “I will love you in the morning
promises?”
C. Revocation, Rejection, and Counteroffer
1. An offeror may revoke his offer, terminating the offeree’s power of acceptance; the offeree may terminate
his own power of acceptance by rejecting the offeror’s offer; and the offeree may reject the offeror’s offer
and make his own offer via counteroffer.
2. Ways of Termination
a. Revocation of the offer by the offeror
b. Death or incapacity of the offeror prior to acceptance by the offeree
c. Lapse of the offer
d. Rejection of the offer by the offeree
3. Revocation by the Offeror
a. Distinguished from Withdrawal: An offer can be “withdrawn” if notice of withdrawal reaches the
offeree no later than the offer does. This is a corollary of the principle that an offer is not effective
until it has been communicated to the offeree. In contrast, revocation of an offer takes place after it
has become effective.
b. It is a fundamental tenet of the common law that an offer is generally freely revocable and can be
countermanded by the offeror at any time before it has been accepted by the offeree. This is
consistent with the idea that the offeror is the master of the offer.
i. A consequence of the aversion to allowing one person to speculate at the expense of the other.
ii. Also linked to the doctrine of consideration—an offer is a nudum pactus and, by definition,
 10
cannot be binding sans consideration.
c. Just as the offeror need not say the word “offer” to have made a valid offer, he need not utter the
word “revoke” in order to legally revoke an offer. It is enough that the offeror indicate an intention
not to make the proposed contract. A subsequent offer, inconsistent with the original offer may
suffice to revoke the original offer. Additionally, selling or contracting to sell goods offered to
another can serve as a manifestation of intent to revoke the offer.
d. Restatement (2d) Contracts § 42: “An offeree’s power of acceptance is terminated when the
offeree receives from the offeror a manifestation of an intention not to enter into the proposed
contract.”
i. Note that revocation is not effective until it reaches the offeree. In keeping with the objective
theory, which requires an outward manifestation of intention, mere change of mind, un-
communicated to the offeree, does not suffice.
ii. A person who received the offer on behalf of the offeree is usually regarded as having the
authority to receive a revocation of that offer.
e. Restatement (2d) Contracts § 43: “An offeree’s power of acceptance is terminated when the
offeror takes definite action inconsistent with an intention to enter into the proposed contract and
the offeree acquires reliable information to that effect.”
i. Note the two-part requirement in § 43 regarding indirect notification; see Dickinson v.
Dodds.
ii. Acquisition of reliable information is notably left undefined, perhaps hinting at a broad
interpretation of “reliable.”
iii. Also note the second requirement, that the offeree acquire “reliable information” – this seems
to work to satisfy the communication requirement for effectiveness of revocation
f. Dickinson v. Dodds: D had offered to sell P a certain tract of land and stated that the offer would be
left open until a certain date. Prior to that date and prior to any indication of acceptance by P, D
contracted to sell the land to a third party; P learned of this transaction through word of mouth and
promptly sought to bind D by delivering a written acceptance to D’s mother in law. P then sued for
specific performance. The court held that the offer was revocable and that P’s receipt of reliable
information (through word of mouth) that D intended to sell the land to another party effectively
terminated P’s power of acceptance.
i. Rest. § 43 is based on this landmark decision: P had received reliable information of D’s taking
definite action inconsistent with an intention to enter into the proposed contract and, hence,
P’s power of acceptance was terminated.
ii. Dickinson could serve as a useful rubric for determining what might constitute the offeree’s
acquisition of “reliable information” under § 43.
g. Rejection/Revocation of an Option Contract
i. As a binding contract, an option contract is not revocable or rejectable like an offer.
ii. Humble Oil v. Westside Investment Grp.: Parties entered into an option contract granting P
the option to purchase a certain piece of real estate. The parties then entered into subsequent
negotiations where D manifested an intent to “revoke” the option. Held, options contracts are
not offers that may be revoked.
iii. See § 37.
4. Death or Incapacity of the Offeror
a. It is generally accepted that the offeree’s power of acceptance is terminated if the offeror dies before
the offer has been accepted, regardless of whether the offeree has notice of the death. The offeror’s
supervening incapacity, as by adjudication or the appointment of a guardian, has the same effect as
the offeror’s death.
b. This rule is embodied in Restatement 2d Contracts § 48: “An offeree’s power of acceptance is
terminated when the offeree or offeror dies or is deprived of legal capacity to enter into the proposed
contract.”
5. Lapse of the Offer
a. After some period of time an offer lapses, and the power to accept it thereby expires, if it has not
already been terminated in some other way.
b. As the master of the offer, the offeror may limit the period during which the offer is effective simply
by so providing.
i. Newman v. Schiff: Where an offer “to anyone who calls this show” was made during a
nighttime television talk show, it was held that the offeror “limited his offer in time to remain
only until the conclusion of the live broadcast.”
c. If the offer fails to specify a period, it lapses after a “reasonable” time.” What time is reasonable
depends on the circumstances and involves balancing the offeree’s interest in having time to make
 11
an informed decision against the offeror’s interest in avoiding the risks of change during that time.
It may be affected by a course of dealing between the parties or usage.
d. Restatement (2d) Contracts § 41
i. An offeree’s power of acceptance is terminated at the time specified in the offer, or, if no time
is specified, at the end of a reasonable time.
ii. What is a reasonable time is a question of fact, depending on all the circumstances existing
when the offer an attempted acceptance are made.
iii. Unless otherwise indicated by the language or the circumstances, and subject to the rule stated
in § 49, an offer sent by mail is seasonably accepted if an acceptance is mailed at any time
before midnight on the day on which the offer is received.
6. Rejection by the Offeree
a. Rejection by the offeree terminates the power of acceptance. If a seller offer to deliver goods to a
buyer for $10,000, and the buyer replied, “I don’t want your good,” the buyer’s power of acceptance
is terminated—the buyer cannot later accept. If the buyer tried to later accept, the purported
acceptance might itself be an offer to the seller.
b. Rejection terminates the offeree’s power of acceptance even if rejection occurs prior to the lapse of
the offer.
c. Restatement (2d) Contracts § 38
i. An offeree’s power of acceptance is terminated by his rejection of the offer, unless the offeror
has manifested a contrary intention.
ii. A manifestation of intention not to accept an offer is a rejection unless the offeree manifests an
intention to take it under further advisement.
D. Acceptance by Performance or Promise—Unilateral/Bilateral Contracts
1. The offeror is often said to be the master of the offer in the sense that, since the offeror confers the power
of acceptance on the offeree, the offeror has control over the scope of that power and over how it can be
exercised. Among the ways an offeror may limit the scope of the offeree’s power of acceptance is by
performance or by promise. In order for an offeree to effect acceptance, the acceptance must be in the
form the offer sought—if the offer sought acceptance by performance, the agreement is a unilateral
contract; if the offer sought acceptance by promise, the agreement is a bilateral contract.
2. Petterson v. Pattberg: Where a mortgagee offered to discharge the entire mortgage debt if the mortgagor
paid a smaller lump sum by a stated date, the mortgagor raised the money and made a contract to sell the
land free of the mortgage, and when the mortgagor presented the sum to the mortgagee only to have the
mortgagee explain that the offer was no longer open, the court held that the mortgagee was not bound by
his promise to discharge the mortgage debt because his offer had not been accepted when he revoked it.
Since the offer demanded acceptance by performance, only the completion of performance (actual tender
of the money, which was not completed) could bind the offeror. Performance was not completed prior to
revocation, therefore there was no contract.
a. By its terms, the offer sought performance, not a promise. Hence, even if the offeree had
reciprocated a promise to pay, the offeror was still not bound since the offer clearly sought
performance. In such a case, only the completion of performance will bind the offeror by contract.
b. Had the offer sought a promise, the mortgagee would have risked being bound before receiving
performance, and conversely, the mortgagor could have bound him without performing. But since
the offer sought performance and not a promise, the mortgagee did not risk being bound before
receiving performance, and conversely, the mortgagor could not bind the mortgagee without
performing.
3. The Brooklyn Bridge Hypothetical and the Common Law Rules of Unilateral Contract
a. Suppose A says to B, “I will give you $100 if you walk across the Brooklyn Bridge,” and B walks—is
there a contract? It is clear that A is not asking B for B’s promise to walk across the bridge. What A
wants from B is the act of walking across the bridge. When B has walked across the bridge there is a
contract, and A is then bound to pay B $100. At that moment there arises a unilateral contract. A
has bartered away his volition for B’s act of walking across the Brooklyn Bridge.
i. In the case of this clear unilateral contract, there is no mutuality of obligation or consideration
until B walks across the bridge. Absent consideration, there is no binding contract. Hence,
there can be no contract until B completes performance.
ii. If B is in the midst of completing performance—walking across the bridge—and A overtakes
him and says he revokes the offer, A will not be bound even if B continues to cross the bridge.
Apart from the issue of mitigation (see Luten Bridge), the offeror is free to revoke an offer at
any time prior to acceptance. Since the contract is not accepted until completion of
performance, the offeror (A) may revoke the offer at any point prior to the offeree’s completion
of performance.
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iii. Conversely, just as A may revoke the offer while B is in the midst of performance, B is free to
discontinue performance even after he has started to cross the bridge. Neither A nor B are
bound until completion of performance. Hence, the common law does not favor one party
over another, leaving the doctrine of unilateral contract has just and equitable as it is logical.
b. On the other hand, in bilateral contracts, A barters away his volition in return for another promise;
that is to say, there is an exchange of promises or assurances. In the case of the bilateral contract
both parties, A and B, are bound from the moment that their promises are exchanged. The
conception of the bilateral contract, while presenting various theoretical difficulties, has in the main
been developed by the courts with a reasonable degree of precision; but the unilateral contract has
proven a stumbling block to nearly every court which has had occasion to consider the question. In
no domain of the law are the opinions marked by such lack of clear thinking.
4. Brackenbury v. Hodgkin: Where offeror offered to leave her home/land to offerees if they would pack up
and move there to care for her in her old age and the offer was subsequently revoked, the court held that
the offerees’ act of packing up and moving constituted acceptance, binding the offeror.
a. This case represents a balancing of interests: the interest of the offeror, as master of the offer, in not
being bound until completion of the performance bargained for with the interest of the offerees in
some assurance of compensation for undertaking expensive and burdensome performance.
b. Though a balancing of legitimate interests, this case is a perversion of the common law doctrine of
unilateral contract. The offeror sought completion of performance in exchange for compensation.
By awarding compensation for part performance, the court substituted its own business judgment
for that of the parties by fundamentally altering the bargain entered into by the parties.
5. “Irrevocable Offers”
a. A says to B: “I have had enough of your promises in the past and want no promise from you, but if
you will put my sugar-house machinery in good repair I will pay you $100 for the job, and if you will
begin immediately I will give you a reasonable time to complete the work.”
b. With such a contract, the offeror is able to receive the benefit of his bargain and it protected from
having to tender payment prior to complete performance while, at the same time, the offeree is
protected from untimely revocation of the offer prior to completion of performance.
6. Restatement (2d) Contracts § 45
a. Where an offer invites an offeree to accept by rendering a performance and does not invite a
promissory acceptance, an option contract is created when the offeree tenders or begins the invited
performance or tenders a beginning of it (performance).
b. The offeror’s duty of performance under any option contract so created is conditional on completion
or tender of the invited performance in accordance with the terms of the offer.
7. Preparing to Perform vs. Beginning of Performance
a. Under the Restatement Second, an offer to accept by performance automatically creates an option
contract when the offeree has begun performance, conditional upon his/her completion of the
intended performance. What constitutes the beginning of performance, thus, is a question of fact
and must be distinguished from mere preparations to begin performance versus the actual
beginning of performance under § 45.
i. A contracts with B to build A a deck in his backyard. B procures materials and draws up plans
for the deck but has not actually started construction. B’s efforts thus far probably constitute
mere preparation to perform since the performance bargained for under the putative
unilateral contract was construction of a deck, not plans and materials for the construction of
a deck.
ii. The distinction becomes important under § 45 in that efforts undertaken that amount only to
mere preparation do not create a binding option contract where actual commencement of
performance would create a binding option contract. If the putative agreement is not yet a
binding option contract, then the offeror may revoke his offer prior to actual commencement
of performance.
b. Restatement 2d § 87(2) poses an interesting conflict, however, in that it provides a contract is
binding “to the extent necessary to avoid injustice.” Hence, under § 87(2), an option contract
presumed under § 45 could be binding after mere preparation and before actual commencement of
performance. This is an interesting conflict that should be raised on an exam question.
8. Sunshine v. Manos: D, Manos, made a unilateral offer to P, Sunshine, that if P procured a loan on
specified terms D would pay a commission of 1% of the face value of the loan. P began the work to procure
a loan according to D’s exacting qualifications; P obtained a loan offer for terms slightly different than
what D prescribed. P pitched the loan offer to D and D, thinking that P was trying to alter the terms of the
agreement, rejected the offer and instructed P to cease its efforts to procure a loan for D. P sued for
breach of contract. Held, P’s efforts to procure a loan to D’s qualifications constituted substantial time
 13
and effort sufficient to find part performance that would bind the parties to the unilateral contract in
question.
a. The court’s adjustment to the common law unilateral contract rule: “Where a contract is unilateral
on its face, it does not come into existence as a binding contract until the broker has performed, or
at least partially performed, his duties under the agreement. Prior to that time, it is nudum pactum
and may be revoked by the offeror at any time.”
b. To prove partial performance sufficient to bind the parties to a unilateral contract, it must be shown
that there was an expenditure of time, money, and/or effort. The court held that P’s expenditure of
time and effort was sufficient to constitute partial performance under the unilateral contract.
c. Having failed to establish a right of revocation or that the offer was rescinded prior to the time
plaintiff expended time and effort to perform, defendants thereby breached their contract and
became liable to plaintiff for such damages as he could prove were sustained by him as a result of the
breach.
9. Davis v. Jacoby: An elderly man with a dying wife wrote her niece, Caro, and the niece’s husband, Frank:
“If Frank could come out here an be with me and look after my affairs . . . Caro will inherit everything . . .,”
adding “Will you let me hear from you as soon as possible.” After the couple had made arrangements to
travel, the offeror committed suicide and they cared for his wife for a month until she died as well only to
find that the estate was left to other people. Held, a bilateral contract existed and was accepted by the
couple’s response to the elderly man’s letter.
a. Restatement (2d) Contracts § 32: In case of doubt an offer is interpreted as inviting the offeree
to accept either by promising to perform what the offer requests or by rendering the performance, as
the offeree chooses.
i. Functionally, § 32 allows the offeree to presume the existence of a bilateral contract (promise
to perform as consideration rather than actual completion of performance) when there is no
clear language in the offer/acceptance/written terms.
ii. It is a separate question whether the offeree undertakes any responsibility to complete
performance once begun, or whether he takes any responsibility for the quality of the
performance when completed.
b. Restatement (2d) Contracts § 62: (1) Where an offer invites an offeree to choose between
acceptance by promise and acceptance by performance, the tender or beginning of the invited
performance or a tender of the beginning of it is an acceptance by performance. (2) Such an
acceptance operates as a promise to render complete performance.
10. “Home Office” Acceptance
a. A common device used to delimit the power of acceptance is a home-office-acceptance clause which
typically provides that the agreement is not binding until it has been approved at the home office to
review the text of the proposed agreement to make sure that the salesperson has made no changed
from the standard form or, in the case of sales on credit, to allow the home office to check the other
party’s credit before being bound. Whatever its purpose, the clause prevents the proposal from
being an offer and thereby delays the making of a contract.
b. Empire Machinery Co. v. Litton Business Telephone Systems: See brief. Held, UCC § 2-206; A
contract containing a clause that acceptance can only be made by approval of officers at the home
office can be accepted in a manner other than by such written approval. (1) The conduct on the part
of the offeree which will constitute assent under these circumstances must be directed towards
fulfilling the contractual obligation. (2) The actor must have authority to bind the party to the
contract.
11. Notice of Acceptance
a. If an offer invites acceptance by performance rather than a promise, the offeree must ordinarily
notify the offeror that the offer has been accepted if the offeree has reason to believe that the offeror
will not learn of the acceptance without notice.
b. Restatement (2d) Contracts § 54
i. (1) Where an offer invites an offeree to accept by rendering a performance, no notification is
necessary to make such an acceptance effective unless the offer requests such a notification.
ii. (2) If an offeree who accepts by rendering a performance has reason to know that the offeror
has no adequate means of learning of the performance with reasonable promptness and
certainty, the contractual duty of the offeror is discharged unless
1. (a) the offeree exercises reasonable diligence to notify the offeror of acceptance, or
2. (b) the offeror learns of the performance within a reasonable time, or
3. (c) the offer indicates that notification of acceptance is not necessary.
c. Bishop v. Eaton: Where P, holder of a note, sued D as surety and surety claimed that he should not
be bound since he did not receive notice that his offer to serve as guarantor was accepted, the court
 14
held that “Ordinarily there is no occasion to notify the offeror of the acceptance . . . and the promisor
knows that he is bound when he sees that action has been taken on the faith of his offer. But if the
act is of such a kind that knowledge of it will not quickly come to promisor, the promisee is bound to
give him notice of his acceptance within a reasonable time after doing that which constitutes the
acceptance.”
12. Rewards
a. The law of rewards is generally viewed as an application of the principles of offer and acceptance. Of
course, the offer in a reward is made publicly, usually by an advertisement, and the acceptance must
be the performance of the act that is called for (a promise will not suffice).
b. The black letter law of contracts clearly requires an offeree to be aware of the offer if the
performance of the act called for is to be an acceptance of the offer. A person who acts without
knowledge of the reward is not induced thereby and arguably is therefore not within the class or
group of persons to whom the offer was addressed. Private offers of rewards are enforceable only to
the extent they are contracts. A well recognized exception exists for offers of rewards made by
governmental bodies, which arguably are not contractual at all but a governmental act that is
designed to encourage all citizens to assist in the performance of some generally desirable action.
c. Like any other offer, an offer of reward lapses after a reasonable time.
d. When a notice of termination of the offer of reward is made publicly, the offeree’s power of
acceptance is terminated. Since rewards are usually publicly proclaimed, it is impossible, as a
practical matter, to notify every person who may be aware of the offer that it has been revoked. One
cannot normally expect to do better than public the revocation in the same manner as the offer was
published.
e. See issues of acceptance on pp. 540—542.
E. Acceptance by Silence or by Acceptance of Benefits
1. In general, a party’s “mere inaction” will not be taken to imply any sort of promise or acceptance of an
offer. However, if there are additional circumstances from which a promise may be inferred, a court may
find an implied-in-fact contract and the putative offeror may recover.
2. Restatement (2d) Contracts § 69
a. (1) Where an offeree fails to reply to an offer, his silence an inaction operate in the following cases
only:
i. (a) Where an offeree takes the benefit of offered services with reasonable opportunity to reject
them and reason to know that they were offered with the expectation of compensation
(quantum meruit/quasi-contract).
ii. (b) Where the offeror has stated or given the offeree reason to understand that assent may be
manifested by silence or inaction, and the offeree in remaining silent an inactive intends to
accept the offer.
iii. (c) Where because of previous dealings or otherwise, it is reasonable that the offeree should
notify the offeror if he does not intend to accept.
b. (2) An offeree who does any act inconsistent with the offeror’s ownership of offered property is
bound in accordance with the offered terms unless they are manifestly unreasonable. But if the act
is wrongful as against the offeror it is an acceptance only if ratified by him.
3. Elements of Acceptance by Silence
a. Silence (i.e., no affirmative words or showing of acceptance);
b. Duty created (don’t assume it, prove it);
c. Retention of consideration for an unreasonable time without rejection.
4. Hobbs v. Massasoit Whip Co.: P and D apparently had a standing commercial relationship: from time to
time P would send D eel skins. It was generally understood between the parties that if the skins met D’s
specifications, D would accept the skins. The incident leading to this litigation involved P sending D eel
skins as usual and not hearing from D who retained the skins for a few months until they were destroyed.
P sued for breach of contract. Held, D was contractually bound to accept the skins and pay P as usual.
a. Conduct which imports acceptance or assent is acceptance or assent, in the view of the law, whatever
may have been the actual state of mind of the party.
b. In such a situation, the court reasoned that the plaintiff was warranted in sending the defendant
skins conforming to its requirements, and even if the offer was not such that the contract was made
as soon as skins corresponding to its terms were sent, sending them did impose on the defendant a
duty to act about them; and silence on his part, coupled with the retention of the skins for an
unreasonable time, amounted to acceptance.
5. Ransom v. Penn Mut. Life Ins. Co.: P was solicited by D to purchase a life insurance policy. P was
examined by a physician who determined that P was moderately obese with higher-than-average blood
pressure but with nothing wrong, in general. After the evaluation, P made a written application for
 15
insurance and remitted the full amount of the first premium. D indicated that it wanted P to undergo
further medical evaluation prior to delivering the policy but before that could be accomplished, P was
killed in a car crash. An autopsy revealed that P was killed by “external violence,” not an internal medical
condition. D refused to pay the policy, P brought suit for recovery. Held, contract for insurance existed
between the parties.
a. Rule: the understanding of an ordinary person is the standard which must be used in construing a
contract for insurance.
b. The court reasoned that a reasonable person of ordinary prudence would have read the application
for insurance to provide that insurance coverage began with the insured’s remittance of the first
premium. Accordingly, the court reasoned that the clause was subject to the interpretation that the
applicant is offered a choice of either paying his first premium when he signs the application, in
which case the insurance shall be in force from the date of the application, or of paying upon receipt
of the policy, in which case no insurance shall be in force until the policy is delivered.
c. Compare with Roberts v. Buske.
6. Roberts v. Buske: Similar as to the facts above on the renewal of a policy for car insurance. The court says
that silence is not acceptance. Plaintiff sent defendant an unsolicited renewal for auto insurance and a
notice attached stated that if defendant did not wish to accept it he must return it or be liable for the
premium. Defendant made no response and paid nothing. The court could not find that acceptance of a
single previous renewal policy was in itself sufficient to constitute an implied acceptance of a second
renewal based solely on the silence of the offeree. This case is different from the Whip case b/c the court
treats this course of dealing differently. One prior course of dealing was not enough. Argue yes/no on the
exam to answer, “what is prior course of dealing?”
7. Felton v. Finley: The attorney worked to fight the will and several of the heirs refused to fight the will.
Distributive checks were made out to each one of the six heirs jointly with respondent and the heirs
refused to accept them, taking the position they had never employed the attorney and were not obligated
to pay him. This suit is to establish the implied contract and to enforce the attorney’s lien. It is an
elementary rule that, whenever services are rendered and received, a contract of hiring or an obligation to
pay what they are reasonably worth will generally be presumed. The heirs did pocket the greater amt of
inheritance money procured for them by the attorney, and there was created in law an implied contract of
employment. No such thing as a free lunch. Does silence w/regard to the benefits imply an acceptance?
Rest. 69(1)(a and b).
8. While courts will, from time to time, heed an argument as to silence by acceptance, it is among the low-
probability legal arguments. Raise the issue and argue yes/no on the exam, but do not rely on weak
arguments like this in practice. In reality, the rule rejecting acceptance by silence is so fundamental that
offeror’s, as masters of their offers, cannot reject it. An offeror cannot include in his offer words to the
effect of “if I don’t hear from you in one week I will consider you to have accepted my offer.” The cases in
which courts have found silence to equate acceptance are exceptional – they are the exception and hardly
the rule.
a. In general, in these situations, the offeror has reason to believe from the offeree’s silence that the
offeree assents. Reliance (§ 90) by the offeror, although not itself sufficient, is a significant factor.
b. Other factors that may lead a court to conclude that silence is acceptance include prior dealings
making it reasonable for the offeree to notify the offeror if the offeree does not intent to accept,
solicitation of the offer by a representative of the offeree, and failure by the offeree to return
property or something symbolic of agreement.
F. Battle of the Forms: Offer and Acceptance in Form Contracts
1. The “black letter” rule is that any communication in response to an offer that attempts to accept the offer
must conform precisely to the terms of the offer; any purported acceptance that varies any term of the
offer is not an acceptance but a counteroffer. This rule is universally called the mirror image rule.
2. Due to the commercial impracticably of drawing up fresh contracts to govern every new transaction a
medium or large scale business undertakes, problems with the mirror image rule arise as businesses use
generic form contracts to govern routine transactions, usually involving the purchase and sale of goods.
The buyer’s form will contain language that favors the buyer and the seller’s form will contain language
that favors the seller. Each considers its form to contain the governing contractual language but, often,
the forms disagree as to key terms, raising the specter of doubt as to the real existence of offer and
acceptance under the mirror image rule.
a. Generally, two options are available for courts to deal with this situation: a relaxation of the mirror
image rule, requiring a subjective analysis of the part of the court to determine what the parties
really intended (public ordering) or strict adherence to the letter of the mirror image rule.
b. Clearly, the first choice involves the substitution of the business judgment of the parties for the
business judgment of the courts and would be another step on the road to serfdom.
 16
3. Businesses apparently began using printed forms to conduct their transactions at about the beginning of
the twentieth century. Their use provides tangible benefits to the user in the form of increased efficiency:
(1) they simplify decision-making since only a limited number of blanks need to be filled in to describe any
specific transaction; (2) they permit a business to seek to establish favorable, standardized terms on which
they purchase or sell goods; (3) they limit the discretion of lower level personnel; (4) and they enable
large, bureaucratic businesses to systematically keep track of their transactions through the use of
multiple copies of each form, usually coded by different colors for each department or office that needs
information about the transaction.
4. Restatement (2d) Contracts § 58: An acceptance must comply with the requirements fo the offer as to
the promise to be made or the performance to be rendered.
a. The Restatement applies the traditional contract understanding of the mirror image rule. Under
this formulation, the law favors the party who fired the “last shot” in the battle of the forms.
b. Performance by both parties makes it clear that there is a contract, and since each subsequent form
is a counteroffer, rejecting any prior offer of the other party, the resulting contract must be on the
terms of the party who sends the last counteroffer, which is then accepted by the other party’s
performance. This is also an application of Restatement § 59 in conjunction with § 58.
5. UCC § 2-207: Subject to 2-202, if (i) conduct by both parties recognizes the existence of a contract
although their records do not otherwise establish a contract, (ii) a contract is formed by an offer and
acceptance, or (iii) a contract formed in any manner is confirmed by a record that contains terms
additional to or different from those in the contract being confirmed, the terms of the contract are:
a. terms that appear in the records of both parties;
b. terms, whether in a record or not, to which both parties agree; and
c. terms supplied or incorporated under any provision of this Act.
6. The UCC differs from common law for flexibility to keep the smooth flow of commerce going.
7. UCC § 2-207 deals with the following eight types of cases (White & Summers Article, p. 574):
a. Cases in which the parties send printed forms to one another, and a crucial term is covered one way in
one from and the other way in the other form.
b. Cases in which a crucial term is found in the first form sent (the offer), but no term on that question
appears in the second.
c. Cases in which a crucial term is found in the second form (the acceptance), but there is no consistent or
conflicting term in the first.
d. Cases in which a crucial term is found in the second form but not in the first, and the second form is a
counter-offer (because “expressly conditional”).
e. Cases in which at least one form contains a term that provides that no contract will be formed unless the
other party accedes to all of the terms on that form and offers no others.
f. Cases in which there is a prior oral agreement.
g. Cases in which the parties do not use forms but send a variety of messages and letters and conduct
intermittent oral negotiations that ultimately produce an agreement.
h. Cases in which the second form differs so radically from the first that it does not constitute an
“acceptance
8. Roto-Lith, Ltd. v. F.P. Bartlett & Co.: Relaxed mirror image rule. Does a reply to an offer which states
additional terms fail to act as acceptance? Rest. 59 would say the counter-offer kills the offer here. But
the court relaxes the mirror image rule. Rule: A response to an offer which does not in all
respects correspond to the original offer is still an acceptance to the extent it corresponds
to the offer. The additional terms will act as a counter-offer. The court stated, “A response
which states a condition materially altering the obligation solely to the disadvantage of the offeror is an
acceptance expressly conditional on assent to the additional terms.” Plaintiff accepted the
goods with knowledge of the conditions specified in the acknowledgment. It became bound. The counter-
offer was accepted by silence and Restatement § 69 use of the goods. Section 2-207 the warranty
limitation can become part of the contract. The exception? Unless the counter offer’s acceptance is
expressly conditioned on express acceptance. The court says that wasn’t the case here.
9. Itoh: Seller inserted an arbitration clause into the form contract. Buyer accepted with a form contract that
did not contain the arbitration clause and got a bad product and wants to sue instead of arbitrate.
Arbitration clause was considered a material term so no contract was formed. Arbitration clause is not a
gap filler term that can be supplied by the UCC so it is a material term. 2-207 prevents an exchange of
forms from creating a contract where acceptance is expressly made conditional on assent to the additional
terms.
10. Tradition Application vs. Relaxation of the Mirror Image Rule

Traditional Mirror Image Rule Relaxation of Mirror Image Rule

 17
Restatement §§ 38, 58, 59 UCC § 2-207
“Perfect Tender” Rule Split-the-baby-approach: contract as to
common terms, counteroffer as to divergent
terms.
No acceptance unless in precise conformity with Service of process limited by Rule 4(k)(1)(A)
the terms of the offer.

11. Both buyers and sellers should carefully tailor their forms to the precise language of UCC § 2-207. Most
large business enterprises have long ago had their form reviewed by legal counsel to ensure maximum
protection is obtained under that section, but the same may not be true of smaller businesses.
G. Precontractual Liability
1. Under the basic rules of offer and acceptance, there is no contractual liability until a contract is made by
the acceptance of an offer. Prior to acceptance, the offeror is free to back out by revoking the offer. No
sympathy is lost on the offeree if the offer is revoked, for an offeree is regarded as amply protected by the
power to accept before revocation. An offeree that chooses to rely on the offer without accepting is seen as
taking the risk that the reliance will go uncompensated. This “freedom from contract” is enhanced by the
judicial reluctance to read a proposal as an offer in the first place. Indeed, the general rule is that there is
no obligation of good faith and fair dealing during precontractual negotiations.
a. Aleatory View of Negotiations: a party that enters negotiations in the hope of the gain that will
result from ultimate agreement bears the risk of whatever loss results if the other party breaks off
the negotiations. That loss includes out of pocket costs the disappointed party has incurred, any
worsening of its situation, and any opportunities that it has lost as a result of the negotiations. In
general, court have resisted suggestions that parties may in some circumstances come under a duty
to bargain in “good faith.”
b. “Aleatory:” derived from the Latin word for “gambler,” aleatory refers to a thing that is dependent
on unknown contingencies. Hence, an aleatory view of negotiations means that the negotiations are
seen as dependent on the happening of an unknown contingency, viz., the completion of a final,
formal agreement the form of which is unknown at present.
2. However, in certain extraordinary and isolated situations, courts have shown increasing willingness to
impose precontractual liability. The possible grounds can be grouped under four headings: (1) unjust
enrichment resulting from the negotiations; (2) a misrepresentation made during the negotiations; (3) a
specific promise made during the negotiations; or (4) an agreement to negotiate in good faith.
a. Unjust Enrichment Resulting from the Negotiations
i. The duty to make restitution of benefits received during negotiations is sometimes a
compelling ground for precontractual liability. A negotiating party may not with impunity
unjustly appropriate such benefits to its own use. To prevent such unjust enrichment, the law
imposes liability measured by the injured party’s restitution interest.
ii. Recovery for precontractual misappropriation of ideas is among the more clear-cut cases of
this variety. The receiving party should not misappropriate ideas presented during the course
of negotiations, in theory, if the negotiations do not result in a formal agreement. Such
misappropriation may be a breach of contract, either express or implied-in-fact, though this is
rarely the case. A more usual ground for imposing liability is that the idea is regarded as the
owner’s property.
iii. A party may also seek restitution for services rendered, somewhat akin to the theory of
quantum meruit. But the mere circumstance that the party’s services benefited the other party
does not give a claim to restitution, for under the aleatory view of negotiations, a court may
treat benefit, as well as loss, as being at risk in the negotiations.
iv. Few courts have entertained claims for restitution of benefits conferred during failed
negotiations. Because a party’s expenses during negotiations typically result in no benefit to
the other party, such expenses have not often given rise to claims to restitution.
b. Misrepresentation during Negotiations
i. Misrepresentation has been no more popular a basis for precontractual liability than
restitution has been. A negotiating party may not with impunity fraudulently misrepresent its
intention to come to terms. Such an assertion of fact, the argument goes, if fraudulent, may be
actionable in tort.
ii. Implicit in the act of negotiating is a representation of serious intent to reach agreement with
the other party.
c. Specific Promises Made during Negotiations
 18
i. Precontractual liability can be based on specific promises made during the course of
negotiations in order to interest the other party in the negotiations, if the other party has
relied on the promise.
ii. Hoffman v. Red Owl Stores: P sought to obtain a franchise with D, grocery store chain. D
assured P that he would be granted a franchise if he took steps to gain experience and that the
$18,000 he had to invest would be sufficient. Over the course of more than two years, he
made extensive preparations that included the sale of his bakery, the acquisition and sale of a
small grocery store, a move to another town, and a down payment on a lot—each time on
assurances of D’s representative. The negotiations collapsed and P sued for recovery of
expenses based on specific promises made during negotiations. Held, P entitled to recovery
for expenses.
1. The court addressed the question of whether the promise necessary to sustain a cause of
action for promissory estoppel must embrace all essential details of a proposed
transaction between promisor and promisee so as to be the equivalent of an offer that
would result in a binding contract between the parties if the promisee were to accept
the same. The court concluded that this was not necessary and that injustice would
result if P was not granted some relief because of the failure of D to keep its promises
which induced p to act to his detriment.
2. It can be argued that the case for precontractual liability is even stronger where there is
no offer, for there is nothing for the promisee to accept as an alternative to acting in
reliance on the promise.
3. On the other hand, it could be argued that the action should have been brought in tort
as the appropriate legal vehicle for liability for blameworthy contract rather than
contract, which is the field of liability based on obligations voluntarily assumed.
iii. It is reasonable to interpret Hoffman as furnishing authority for the proposition that one may
in some circumstances come under a duty to bargain in good faith, breach of which duty may
result in liability for damages, at least to the extent of compensating the detrimental reliance
of the injured party.
iv. Contract to Bargain/Agreement to Negotiate Distinguished: Though an agreement to
negotiate in good faith circumvents the general rule providing that there is generally no duty
to negotiated in good faith, courts have had a hard time enforcing such contracts. Courts such
as the 8th Circuit have found the contracts to be too nebulous for the purposes of reliance and
have generally not enforced them though the trend favors enforceability – at least where the
parties have reached agreement on a significant number of the major terms of the ultimate
agreement.
III. Mistake, Impossibility, and Frustration
A. Introduction: the Nature of the Problem
1. One who contracts with another ordinarily makes a number of assumptions in assessing the benefits to be
received and the burdens to be shouldered under the proposed exchange of performances. This section is
concerned with the problems that arise when one of the parties seeks to be excused from performing on
the ground that one of that party’s assumptions has turned out to be incorrect.
2. General Rule
a. The general rule is that duties imposed/undertaken by contract are absolute regardless of one’s
failed assumptions. “The idea that finality is desirable in consensual transactions, lest justifiable
expectations be disappointed, is expressed in the maxim, pacta sunt servanda (“agreements are to
be observed”), rendered by the 7th Circuit as “a deal’s a deal.”
b. Alternatively stated: “If a man bind himself, by a positive, express contract, to do an act in itself
possible, he must perform his engagement, unless prevent by [an] act of God, the law, or the other
party to the contract. No hardship, no unforeseen hindrance, no difficulty short of absolute
impossibility, will excuse him from doing what he has expressly agreed to do.” Stees v. Leonard, 20
Minn. 494, 503 (1874).
3. Qualified Duties: Though the rule itself may be seen as harsh, creative contracting parties have devised
a number of ways to qualify or limit their liabilities under a contract in the event their expectations fail.
Some examples are:
a. Option contracts;
b. Best efforts clauses;
c. Requirements/extent of output contracts;
d. Cancellation clauses imbuing a general power of termination;
e. Force majeure clauses, excusing performance on the occurrence of specified events; or
f. Flexible pricing clauses.
 19
B. Mistake
1. Restatement (2d) Contracts § 151 defines a mistake as “a belief that is not in accord with the facts.”
2. Farnsworth notes that the law of “mistake” applies to an erroneous perception of the facts as they exist at
the time the contract is made – ex ante to the formation of the contract. A “misprediction,” or an
erroneous prediction of future facts (i.e., facts that emerge subsequent to the formation of the contract)
may or may not be covered by the law of impossibility/impracticability or the law of frustration.
a. The line is difficult to draw: in Taussig v. Leasco, the court held that the parties mistake as to the
company’s earnings was a future fact rather than a present fact and that relief on the basis of
mistake was not available. In ALCOA v. Essex, however, the court found that the parties
miscalculation in a 16 year contract by use of an economic forecasting model, was a present fact
rather than future and that relief was available on the basis of mistake.
b. Once the party seeking relief has convinced the court that a mistake and not a misprediction is
involved, the party must also convince the court that the mistake justifies relief.
3. Mutual Mistake
a. A mutual mistake occurs when both parties are under substantially the same erroneous perception
as to the facts. If both parties are mistaken, but their mistakes are materially different, the case is
one of unilateral mistake.
b. Sherwood v. Walker: Litigation arose out of a contract for the sale of a cow known as “Rose 2d of
Aberlone.” According to the seller, both he and the buyer believed that Rose could not breed and,
therefore, the price was fixed at $80, about one-tenth of what the cow would be worth if she were
fertile. When the seller discovered that Rose was in fact with calf, he attempted to avoid the contract
and refused to deliver the cow to the buyer. Buyer sued for replevin. Held, seller entitled to avoid
the contract since the mistake was a mistake as to substance—i.e., the actual thing bargained for was
not the thing to be delivered.
i. Mistake as to substance vs. incidental mistake: “if there is a difference or
misapprehension as to the substance of the thing bargained for, if the thing actually delivered
or received is different in substance from the thing bargained for and intended to be sold, then
there is not contract; but if it be only a difference in some quality or accident, even though the
mistake may have been the actuating motive to the purchaser or seller, or both of them, yet the
contract remains binding.”
ii. Here, the court reasoned that the bargained-for cow was a cow that could not breed. Since the
cow was actually capable of breeding, it was not the thing bargained for and the mistake was a
mistake as to substance.
c. Restatement (2d) Contracts § 152
i. (1) Where a mistake of both parties at the time a contract was made as to a basic assumption
on which the contract was made has a material effect on the agreed exchange of performances,
the contract is voidable by the adversely affected party unless he bears the risk of the mistake
under the rule stated in § 154.
ii. (2) In determining whether the mistake has a material effect on the agreed exchange of
performances, account is taken of any relief by way of reformation, restitution, or otherwise.
d. Farnsworth’s elemental formulation of Restatement § 152:
i. The mistake goes to a basic assumption on which the contract was made;
1. The term “basic assumption” is derived from UCC § 2-615. It is such an assumption as
a person would make walking in to a room and assuming that the room has a floor. For
instance, the seller of a life insurance policy might assume that the person whose life is
being insured is alive at the time of the policy’s purchase.
2. A mistaken assumption greater than a “basic assumption” does not satisfy the mistake
rubric.
ii. The mistake has a material effect on the agreed exchange of performances; and
1. To show this, the adversely-affected party must show more than a mere loss of
advantage from the contract or that the party would not have entered into the contract
had there been no mistake. “He must show that the resulting imbalance in the agreed
exchange is so severe that he cannot fairly be required to carry it out.” Restatement §
152, commentary.
2. Ordinarily, a mistake that has a material effect on the agreed exchange of performances
will affect one person positively and the other negatively. This was true in Sherwood
where the seller of the cow was negatively affected and the buyer of the cow positively
affected. Though this can aid in arguing the materiality of the mistake’s effect, the
commentary to § 152 does not require such a showing. However, courts have been
reluctant to grant relief absent such a showing.
 20
iii. The mistake is not one of which that party bears the risk pursuant to § 154. A party bears the
risk of a mistake when:
1. The risk is allocated to him by agreement of the parties;
a) Lenawee Cty. Bd. of Health v. Messlerly: Though the parties’ mutual mistake as
to the condition of the property’s sewer system was substantive under
Sherwood’s holding, the contract clearly allocated the risk of the mistake on the
buyer. Pursuant to § 154, therefore, no relief was accorded to the purchaser on
the basis of mistake.
2. He is aware, at the time the contract is made, that he has only limited knowledge with
respect to the facts to which the mistake relates but treats his limited knowledge as
sufficient (Wood v. Boynton; Stone’s analysis of Sherwood); or
3. The risk is allocated to him by the court on the ground that it is reasonable in the
circumstances to do so (40 MPH maybe).
e. Fault of mistaken party (§ 157): A mistaken party is not barred from relief merely because that
party could have avoided the mistake by the exercise of reasonable care. If the law were otherwise,
the availability of relief for mistake would be greatly limited. However, in rare cases the mistaken
party’s fault may be so extreme as to bar the party from relief for the mistake. The critical degree of
fault is “gross” or “culpable” negligence. In other words, if the mistake is the product of the
mistaken-party’s gross or culpable negligence, the party may be barred from relief.
4. Unilateral Mistake
a. A unilateral mistake occurs when only one party has an erroneous perception as to the facts. In a
sense, of course, even in a case of unilateral mistake, both parties are mistaken: one is mistaken as
to some fact and the other mistaken in thinking that the first party is not mistaken. In general,
courts have been reluctant to avoid a contract for a mistake that was not share by the other party.
b. Restatement (2d) Contracts § 153: Where a mistake of one party at the time a contract was
made as to a basic assumption on which he made the contract has a material effect on the agreed
exchange of performances that is adverse to him, the contract is voidable by him if he does not bear
the risk of the mistake under the rule stated in § 154, and either
i. (a) the effect of the mistake is such that enforcement of the contract would be unconscionable
ii. (b) the other party has reason to know of the mistake or his fault caused the mistake
(Laidlaw?).
c. Most common example are the contractor/sub-contractor bidding errors that must be rescinded to
avoid economic calamity for the mistaken party. To avoid the contract, a sub-contractor would have
to show (1) basic assumption, (2) materiality of effect, (3) absence of allocation of risk, and (4)
unconscionability or knowledge or fault on the party of the other party.
d. Laidlaw v. Organ: With knowledge of the signing of the Treaty of Ghent in 1815, Organ purchased a
large quantity of tobacco, confident that the price of the commodity would rise after the lifting of the
British blockade of New Orleans. Laidlaw sold the tobacco to Organ and asked whether there was
anything he knew of that would affect the price. Organ staid silent. When the price shot up after the
lifting of the blockaed, Laidlaw sued. Held, parties have no duty to disclose information to other
side of the contract – they are opponents in the contract, each seeking the best bargain possible
according to their own self-interest.
C. Impossibility/Impracticability
1. Impossibility—Traditional Rule
a. General/Traditional Rule: The common law was slow to give effect to the maxim impossibilium
nulla obligatio est (“there is no obligation to do the impossible”). It was generally held that if a
party contracted to do something, that party was obligated to do the thing unless released by the
other party even if the bargained-for performance became “impossible.”
b. Three Exceptions to Traditional Rule
i. If supervening governmental action (i.e., the passage of a statute, regulation, or administrative
provision) prevents a party’s performance by prohibiting it or imposing requirements that
make it impossible, that party is excused. See Restatement § 262.
ii. If a contract required performance by the promisor, no action will lie for its breach if the
promisor dies before performing. This also applies to some other person whose existence
might be necessary for performance of a duty. See Restatement § 264.
iii. An intervening act of God.
c. Taylor v. Caldwell: Parties contracted for a series of music concerts to be held in a particular
concert hall. Prior to the concerts but after significant funds were spent in promoting, advertising,
and securing musicians, the concert hall burned down. Pursuant to the traditional common law
rule, the plaintiff sued for recovery of its advertising/fees expenses. Held, for defendant. “Both
 21
parties must have contemplated the continuing existence of the musical hall, as the foundation of
what was to be done; the music hall having ceased to exist, without fault of either party, both parties
are excused.”
i. See Restatement § 263 re: supervening destruction of a specific thing necessary for
performance.
2. Modern Rule: Doctrine of Impracticability
a. Restatement (2d) Contracts § 261: Where, after a contract is made, a party’s performance is
made impracticable without his fault by the occurrence of an event the non-occurrence of which was
a basic assumption on which the contract was made, his duty to render that performance is
discharged, unless the language or the circumstances indicate contrary.
i. Comment: This Section states the general principle under which a party’s duty may be
discharged due to impossibility of performance. The following three sections (262 thru 264)
deal with the categories of cases where this general principle has traditionally been applied.
ii. However, like UCC § 2-615, this section does not purport to identify a comprehensive list of
scenarios or types of impracticability and it “deliberately refrains from any effort at an
exhaustive expression of contingencies.”
b. It should be noted that the modern doctrine of impracticability is “far removed” from the reasoning
of Taylor v. Caldwell. The doctrine gradually has been freed from the earlier fictional and
unrealistic strictures of such tests as the “implied term” and “parties’ contemplation.” The “new”
synthesis candidly recognizes that the judicial function is to determine whether, in the light of
exceptional circumstances, justices requires a departure from the general rule that the promisor
bears the risk of increased difficulty of performance.
c. Four “Modern” Requirements—§ 261:
i. The intervening/supervening event must have made “performance as agreed impracticable.”
ii. The non-occurrence of the event must have been a basic assumption on which the contract
was made.
iii. The impracticability must have resulted without the fault of the party seeking to be excused.
iv. That party must not have assumed a greater obligation than the law imposes – i.e., “unless the
language or the circumstances indicate the contrary.”
d. UCC § 2-615: UCC version of impracticability defense. Like § 261ff., the Code mentions the three
traditional areas where the doctrine of impracticability has been applied but does not purport to
present a comprehensive expression of contingencies that would allow the defense. Note that the
UCC, Article 2, is applied in contracts involving the sale of goods.
e. Opera Co. of Boston v. Trap Foundation:
f. Where the traditional rule required some semblance of absolute impossibility, the modern trend
seems to have largely disregarded this favoring a doctrine of impracticability rather than outright
impossibility. The specter of greater-than-expected cost, leading to significant losses, may be
enough to satisfy the defense of impracticability, for example. However, it should also be noted that
impracticability is another low probability defense. A deal’s a deal.
D. Frustration of Purpose
1. Though similar to impracticability, the doctrine of frustration represents a defense to a contract for
alternate reasoning: though performance may be practicable, some intervening event has frustrated the
purpose of the contract so that, although the material terms of the contract may still be able to be
performed, the purpose for which those terms were negotiated can no longer be accomplished. The
landmark case Krell v. Henry was the first to articulate this concept.
2. In Krell, the defendant arranged for a room in plaintiff’s home to view Edward VII’s coronation procession
in the earlier twentieth century. Subsequent to the defendant’s reservation of the room, Edward
contracted an appendicitis and required emergency surgery, causing the elaborate coronation procession
to be cancelled. Defendant refused to pay the balance on the contract arguing that the purpose of the
contract had been frustrated. Held, defendant may avoid the contract. Though the defendant could still
pay the plaintiff for use of the room on the days reserved, the purpose for which the rooms had been
rented was frustrated. Hence, renting the rooms would have been moot in the eyes of the defendant.
3. Restatement (2d) Contracts § 265: Where, after a contract is made, a party’s principal purpose is
substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a
basic assumption on which the contract was made, his remaining duties to render performance are
discharged, unless the language or the circumstances indicate contrary.
4. Four Requirements—§ 265:
a. The event must have “substantially frustrated” that party’s principal purpose;
b. It must have been a “basic assumption” on which the contract was made;
c. The frustration must have resulted without the fault of the party seeking to be excused;
 22
d. That party must not have assumed a greater obligation than the law imposes.
5. Though the requirements for impracticability and frustration are remarkably similar, courts have been
much more reluctant to avoid a contract on the basis of frustration of purpose than impracticability.
Parties seeking to excuse on this ground have found the first and fourth requirements particularly
troublesome.
E. Existing Impracticability and Frustration
1. Existing Impracticability
a. This excuse is generally recognized in American courts. It covers grounds for impracticability that
exist at the time of the formation of the contract as opposed to supervening events that render
performance impracticable, subsequent to the formation of a contract.
b. The same four requirements pursuant to § 261 must be met in addition to the complaining party
demonstrating that it neither knew nor had reason to know of the facts that made performance
impracticable.
c. Functionally, an existing cause of impracticability is the same as a supervening event rendering
performance impracticable. That is, without knowledge or a reason to know, an existing event has
the same effect as supervention when the complaining party learns of the impracticability. This is
the argue yes point.
2. Existing Frustration
a. Likewise generally recognized by American courts and likewise subject to the four requirements
imposed by the Restatement, § 265.
b. Griffith v. Brymer: Another case related to Edward VII’s cancelled coronation. A contract to hire a
room to view the coronation was made an hour after the decision to operate on the king made the
procession impossible. Since “neither party was aware of this fact when the agreement was entered
into,” it was held that the contract was “void” because of a “missupposition” of the state of facts
which went to the whole root of the matter.
i. The principle factor here was that the complaining party did not know of the frustrating factor.
ii. Hence, since the other four requirements required by § 265 are present, this is a case of
existing frustration though it is still a low probability defense to breach of contract.

Note: remedies for impracticability and frustration are found at Restatement § 272, which allows for
restitution and reliance damages.

IV. Policing the Bargaining Process

1. The Eight Common Law Policemen
a. Fraud
b. Misrepresentation
c. Duress
d. Illegality
e. Incapacity
f. Undue Influence
g. Impossibility/Impracticability/Frustration
h. Mistake
2. Fraud
a. Two types: fraud in the inducement and fraud in the execution.
b. No cases or Restatement provisions.
c. Bal-Fel, Inc. v. Boyd:
3. Fraudulent Misrepresentation: to qualify as fraudulent, a misrepresentation must be made with
deliberate dishonest intent. Though it is bandied about by many a lawyer, fraud in contracts is not easy to
prove.
a. In General
i. Four Elements of Fraudulent Misrepresentation: (1) false representations of fact were made,
(2) defendant made the misrepresentations with knowledge of their falsity (i.e. scienter) and
with intent to induce the other party into the contract, (3) the misrepresentations deceive the
other party, i.e. the plaintiff falls for it and relies upon them as a basis of his bargain, (4) the
other party suffers damages as a result of the misrepresentations.
ii. Misrepresentation is itself a tort for which punitive damages can be recovered; where
fraudulent misrepresentations have taken place in contract, punitive damages may be rightly
awarded but proving fraud in contracts is a very serious and difficult undertaking.
iii. Farnsworth seems to indicate that pursuit of damages for fraudulent misrepresentation is
properly done in tort; the remedy in contracts seems to be avoidance of the contractual
 23
obligation though, perhaps, § 347 expectation damages could apply where the
misrepresentation affected the plaintiff’s economic standing in some fashion.
b. § 168: The mere promulgation of opinions – as opposed to statements of fact – are not actionable as
fraudulent misrepresentations even if they prove to be patently false. This applies if the assertion
“expresses only a belief, without certainty, as to the existene of a fact or expresses only a judgment
as to quality, value, authenticity,” etc.
c.
4. Duress
a. Where duress is involved in the contracting process, consideration will be deemed lacking. § 175:
“If a party’s manifestation of assent is induced by an improper threat by the other party that leaves
the victim no reasonable alternative, the contract is voidable by the victim.” Also, § 176 re:
definition of “improper threat.”
b. Improper threats include crimes and torts, the threat of criminal prosecution or civil, and other,
similar gun-at-the-head situations.
5. Illegality: A contract, the performance for which is either a crime, tort, or other purpose contrary to
existing law, is void and unenforceable on the grounds of public policy. § 178.
6. Incapacity: see Farnsworth.
7. Undue Influence: Under Restatement § 177, undue influence is “unfair persuasion of a party who is
under the domination of the person exercising the persuasion or who by virtue of the relation between
them is justified in assuming that that person will not act in a manner inconsistent with his welfare.” This
is akin to duress, but more personal. Under § 178, the contract is voidable by the victim.
V. Conditions
A. Condition Defined
1. Restatement (2d) Contracts § 224, “A condition [precedent] is an event, not certain to occur, which
must occur, unless its non-occurrence is excused, before performance under a contract becomes due.” A
promise subject to such a condition is said to be conditional and the performance it requires need not be
performed until the occurrence of the condition.
2. Almost any event can be a condition. The even may be largely within the control of the obligor, as when
the owner of a house conditions the duty to pay for painting the house on the owner’s “honest satisfaction”
with the job. Or, it may largely be in control of the obligee. The condition could even be largely in the
control of a third person.
3. The obligor need not render performance until the occurrence of the condition.
4. Conditions usually are events of significance to the obligor but need not be. In exercising their freedom to
contract, the parties are not fettered by any test of materiality or reasonableness. If they agree, they can
make an apparently insignificant event a condition. This freedom is subject only to the doctrine of
unconscionability and a few other constraints.
5. Express Conditions: conditions that are agreed to by the parties are express conditions. Parties often
use language such as “if,” “on condition that,” “provided that,” “in the event that,” and “subject to” to make
an event a condition, but other similar words may suffice.
6. Implied Conditions
a. Even if the agreement does not make an event a condition, the court may supply a term that does so.
Thus, if an obligor’s duty cannot be performed without some act by the obligee, such as giving notice
to the obligor, the court will supply a term making that act a condition of obligor’s duty.
b. The distinction between express and implied conditions is ingrained in the thinking of lawyers and
is rooted in a faith in freedom of contract. It is of practical importance because the rule of strict
compliance is limited to express conditions.
7. Conditions do not Regulate Formation of Contracts: The Restatement uses “condition” in the
context of a contract that already exists. This excludes events, such as the acceptance of an offer, which
also must occur before a contract is made. Hence, under the Restatement’s definition in § 224, the
making of the contract marks the border between the law of offer and acceptance, which governs contract
formation, and the law of conditions, which governs performance.
8. Not Certain to Occur but Must Occur: § 224 specifies that a condition is an event that is not certain
to occur but which must occur prior to performance becoming due (unless the contract specifies
otherwise). Hence, an event that is certain to occur cannot render a promise conditional.
9. Conditions Subsequent: Restatement § 230 provides for conditions subsequent – uncertain events
that extinguish a duty to perform upon their occurrence so long as the occurrence of the event is not the
result of a breach by the obligor or could not have been prevented.
a. Lardas v. Underwriters’ Ins. Co.: P’s insured warehouse burned down and P failed to bring suit to
recover the value of his policy within one year of the event pursuant to the express terms of the
 24
policy. Held, P failed to live up to the term of the contract due to the occurrence of a condition
subsequent, viz., P’s failure to bring suit within a year.
B. Effects of Non-Occurrence of a Condition
1. Restatement (2d) Contracts § 225
a. (1) Performance of a duty subject to a condition cannot become due unless the conditions occurs or
its non-occurrence is excused.
b. (2) Unless it has been excused, the non-occurrence of a condition discharges the duty when the
condition can no longer occur.
c. (3) Non-occurrence of a condition is not a breach by a party unless he is under a duty that the
condition occur.
2. Farnsworth’s Formulation of § 225
a. On non-occurrence of a condition, the obligor is entitled to suspend performance on the ground that
the performance is not due as long as the condition has not occurred.
i. This stems from the very definition of a condition in § 224: a condition is an uncertain event
that must occur before performance is due.
ii. Hence, the non-occurrence of the condition entitled the obligor to suspend performance so
long as the condition has not occurred.
b. If a time comes when it is too late, for the condition to occur, the obligor is entitled to treat its duty
as discharged and the contract is terminated.
i. The underlying rationale is that suspension cannot last indefinitely. Either on the terms of the
condition itself or lapse of a reasonable amount of time, a condition becomes unfeasible and
the obligor’s putative duty under the contract is discharged.
3. Non-occurrence Excused
a. Even if a duty is conditional at the time the contract is made, subsequent events may excuse the
condition, causing performance to become due even though the condition has not occurred at all or
even though it has not occurred within the required time.
b. None of these effects follow, under § 225, if the condition or its non-occurrence have been excused.
Even if a duty is conditional at the time the contract is made, subsequent events may cause the
performance to become due, even though the condition has not occurred at all or has not occurred
within the required time.
c. The non-occurrence of a condition of a duty is said to be excused when the condition need no longer
occur in order for performance of the duty to become due. The non-occurrence of a condition may
be excused on a variety of grounds:
i. It may be excused by a subsequent promise (contracted around), even without consideration,
to perform the duty in spite of the non-occurrence of the condition;
ii. It may be excused by acceptance of performance in spite of the non-occurrence of the
condition, or by rejection following its non-occurrence accompanied by an inadequate
statement of reasons;
iii. It may be excused by a repudiation of the conditional duty or by a manifestation of an inability
to perform it;
iv. It may be excused by prevention or hindrance of its occurrence through a breach of the duty of
good faith and fair dealing (§ 205); and
v. It may be excused due to impracticability (§ 271).
d. Excuse by Waiver: A common ground for excuse of a condition is that, after the contract was made,
the obligor promised to perform despite the non-occurrence of the condition or despite a delay in its
occurrence. Such a promise is known as a waiver.
i. E.g., if an owner whose duty to make progress payments is conditional on the contractor’s
furnishing architects certificates excuses that condition by promising to make payments
without certificates, the owner is said to waive the condition and performance of his duty to
make payments is due.
ii. The obligor’s promise to perform is not effective unless the obligor knows or at least has
reason to know of the essential facts, but the obligor’s knowledge of its legal situation and the
legal effects of its promise is immaterial.
iii. A party can waive a condition only if the condition is for that party’s own benefit, i.e., only if
that party is the obligor that owes the duty that is subject to the condition. Hence, the owner
in the above example could excuse the condition by waiver, but the contractor could not since
the condition “favored” the owner.
iv. Waiver by Election: When the time for occurrence of a condition has expired, the party whose
duty is conditional has the choice to not render performance or choose to render performance.
The party’s choice to render performance would be an example of waiver by election.
 25
e. Excuse by Breach: An obligor may excuse a condition of its duty by committing a breach that causes
the non-occurrence of the condition. When the condition is excused by breach, the obligor’s duty
becomes absolute.
f. Excuse to Avoid Forfeiture: In two exceptional kinds of situations, courts have determined that they
possess the power to excuse a condition where the non-occurrence of the condition will cause
forfeiture and the condition has not been excused by waiver or breach.
i. Courts have excused a condition when its occurrence becomes impossible, or at least
impracticable, and forfeiture would result if it were not excused.
ii. Courts have excused a condition when “extreme” forfeiture would result if it were not excused.
According to the Restatement, a court may excuse a condition to the extent that its non-
occurrence would cause “disproportionate forfeiture.”
VI. Problems of Performance
A. Nonperformance
1. If a duty is fully performed it is discharged. Nothing less than full performance is a discharge.
Nonperformance is NOT always a breach. If the nonperformance is justified, it is not a breach. When
performance is due, any failure to render performance is a breach.
2. Constructive Conditions of Exchange: If the only consequence of a party’s nonperformance were
liability for breach of contract, a party to a bilateral contract would have little assurance of receiving the
promised return performance. If the other party failed to perform, the injured part would still be bound
to perform. The court determines whether one party’s promise is dependant on the other party’s return
promise. If it is, the court supplies a term making the first party’s promise conditional on performance of
the return promise.
3. Concurrent Conditions: Where parties are to perform at the same time rather than one after another.
Tender of the goods by the seller and the payment by the buyer are concurrent conditions under UCC § 2-
507.
4. Tender: an offer coupled with the present ability to fulfill all the conditions resting on the tendering
party.
5. A party that requires concurrent performance must still make an effort to perform before bringing an
action for breach. Mutual abandonment will be considered an agreement of rescission.
B. Order of Performance
1. The parties can fix the order of performance by the language of their agreement.
2. Insofar as return performances are to be rendered simultaneously, they are due simultaneously. The law
favors an order of performance that results in concurrent conditions of exchange.
3. If it is impossible to perform simultaneously, one party’s performance will take time and the other’s will
not, there must be another rule. When the performance of a contract consists of doing on one side and
giving on the other, the doing must take place before the giving.
4. Judicial preference for performance at one time rather than over a period of time.
C. Methods the Court has used to avoid the forfeiture that might otherwise result from the concept of
constructive conditions of exchange:
1. Substantial Performance – if one party’s performance is a constructive condition of the other party’s
duty, only “substantial” performance is required of the first party before that party can recover under the
contract. Strict compliance is NOT necessary to recover under the contract. Whether performance is
substantial is a question of fact that depends on the particular circumstances of the case. Main focus is the
injured party. How much of the benefit that the injured party reasonably expected from the exchange has
been received? Also look at the party in breach; the extent of forfeiture that the party in breach will suffer
is relevant in determining whether performance has been substantial.
a. If breach is “willful” then the performance cannot be substantial.
b. Doctrine of substantial performance has generally NOT been applied to a seller’s claim against a
buyer that has rejected either real or personal property under a contract of sale. Seller can avoid
forfeiture by selling the rejected property elsewhere at a reasonable price.
c. Perfect tender rule – Buyer is entitled to reject goods unless the seller made a perfect tender.
Substantial performance is not enough.
2. Divisibility of Contract: Even if a party’s performance falls short of that required by the doctrine of
substantial performance, a court can avoid forfeiture and allow recovery on the contract by holding that
the contract is divisible (or severable) rather than entire in nature. It will then allow a pro rata recovery
based on the contract price for the proportion of the performance rendered. A contract is said to be
divisible if the performance to be exchanged can be divided into corresponding pairs of part performances
in such a way that a court will treat the parts of each pair as if the parties had agreed that they were
equivalents.
a. Rest. § 240 two requirements for a contract to be considered divisible:
 26
i. It must be possible to apportion the parties’ performances into corresponding pairs of
performances. This is possible if the price for parts of the performance can be determined.
ii. It must be proper to regard the parts of each pair as agreed equivalents. Fundamental
question is whether the part performances are of roughly equivalent value to the injured party
when viewed against the background of that party’s expectations as to the agreement as a
whole.
3. Restitution: Courts tend to grant restitution to the party in breach. Thus a party that is precluded from
recovery on the contract because of not having substantially performed can at least recover for any benefit
conferred, less damages for which that party is liable because of breach. This is more prevalent in
employment or building or employment contracts than in sales for goods.
D. Responses to Breach by Nonperformance
1. Power to Suspend Performance and to Terminate the Contract: The question is whether a
breach justifies the injured party in exercising a right to self-help by terminating the contract and refusing
either to render any remaining performance or to accept any further performance by the party in breach.
Liability is imposed on the first party in time to have committed the material breach.
2. Damages for Total Breach: If the injured party chooses to terminate the contract, it is said to treat the
breach as total. The injured party’s claim for damages takes the place of its remaining substantive rights
under the contract. Damages are calculated on the assumption that neither party will render any
remaining performance. Injured party is compensated for the loss that it will suffer as a result of being
deprived of the balance of the other party’s performance minus the amount of any saving that resulted
from the injured party not having to render any remaining performance of its own.
3. Damages for Partial Breach: If the injured party does not terminate the contract, either because he
had no right to or does not choose to, the injured part is said to treat the breach as partial. The injured
party has a claim for damages for partial breach, in addition to its remaining substantive rights under the
contract. Damages are calculated on the assumption that both parties will continue to perform in spite of
the breach. They compensate the injured party ONLY for the loss it suffered as the result of the delay or
other defect in performance that constituted the breach, not for the loss of the balance of the return
performance. Injured party is NOT relieved from performing so there is no saving to be subtracted.
a. Risk of splitting the claim by suing immediately for damages for partial breach is that the party may
be precluded from bringing the suit again. No second action is allowed on the same claim.
4. Breach when conditions are concurrent: A party must tender its own performance in order to put the
other party in breach. On tender, the injured party is excused from performing and has a claim for
damages for total breach.
5. Material Breach and Suspension: In order for a breach to justify the injured party’s suspension of
performance, the breach must be “material”; it must be significant enough to amount to the
nonoccurrence of a constructive condition of exchange. The injured party doesn’t have to suspend, it can
instead continue to perform and claim damages for partial breach. An immaterial breach does NOT
entitle the injured party to suspend performance; the party must continue performance and can claim
damages for partial breach. If the injured party disrupts performance by suspending in response to an
immaterial breach, that party itself commits a breach. Time for determining materiality is the time of the
breach and NOT the time that the contract was made.
6. Cure: Even though a breach is serious enough to justify the injured party’s suspending performance, the
party in breach can often “cure” the breach by correcting the deficiency in performance.
a. If the time for performance has not yet expired at the time the seller rejects, the seller can cure
within the time for performance.
b. After the time for performance has expired and the seller had reasonable grounds to believe that the
goods would be acceptable, then the seller has a reasonable time to cure by tendering acceptable
goods as evidenced by prior dealings and usage of trade.
7. Total Breach and Termination: Although a material breach justifies the injured party in exercising a
right to self-help by suspending performance, it does NOT necessarily justify the injured party in
terminating the contract. Fairness ordinarily dictates that the party in breach be allowed a period of time
to cure the breach if it can. If the party in breach does cure within that period, then injured party is not
justified in further suspension of its performance and both parties are still bound to complete their
performances. After some period of time, the injured party can put an end to the contract by terminating
it. A claim for damages for total breach does NOT rest on the premise that the contract has been avoided,
but rather on the premise that the injured party is entitled to compensation for the performance that has
not been rendered. To recover such damages, the injured party must show that, had there been no breach,
it could have performed or tendered performance as required under the contract.
E. Prospective Nonperformance
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1. Anticipatory Repudiation as a Breach: Party repudiates before the time for performance has
arrived. Anticipatory repudiation discharges any remaining duties of performance by the injured party.
They no longer have to be ready to perform. Repudiation of a duty does not operate as a breach if it occurs
AFTER the repudiating party has received all of the agreed exchange for that duty. The injured party must
then await the time for performance to sue for damages. Thus courts do not apply the doctrine of
anticipatory repudiation when a party repudiates a unilateral contract or a bilateral contract that has been
fully performed by the injured party.
2. What Constitutes a Repudiation?
a. Repudiation is a manifestation by one party to the other that the first cannot or will not perform at
least some of its obligations under the contract. It may be by words or other conduct. Repudiation
must be serious enough that the injured party could treat it as total if it occurred and under the UCC
is must substantially impair the value of the contract.
b. Repudiation by Words: Repudiation generally consists of a statement by the repudiating party
that it cannot or will not perform. A party’s expressions of doubt as to its willingness or ability to
perform do not constitute a repudiation. Intention must be communicated and must be made to a
party to the contract.
c. Party’s good faith is irrelevant, its still a repudiation.
3. Responses to Repudiation:
a. Injured party may treat the contract as terminated an claim damages
b. Injured party may attempt to save the deal by insisting that the other part perform or by urging it to
retract its repudiation
c. Injured party may ignore the repudiate and await time for performance.
VII. Third Party Beneficiaries
A. A contract is made for the benefit of the contracting parties. However, at times, the performance of a contract
effects the rights, duties, and obligations of third parties. Though the performance of a contract usually
benefits persons other than the parties who made it, they cannot ordinarily enforce it. When does the duty of
a promisor extend to one other than the promisee?
B. Intended and Incidental Beneficiaries
1. Under the Restatement, an incidental beneficiary is one who does not receive any rights under a contract
to which it is not a party. An intended beneficiary does receive rights under the contract.
2. Restatement (2d) Contracts § 302: (1) Unless otherwise agreed between promisor and promisee, a
beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the
beneficiary is appropriate to effectuate the intention of the parties and either (a) the performance of the
pomise will satisfy an obligation of the promisee to pay money to the beneficiary; or (b) the circumstances
indicate that the promisee intends to give the beneficiary the benefit of the promised performance. (2) An
incidental beneficiary is a beneficiary who is not an intended beneficiary.
3. Two Requirements to Qualify as an Intended Beneficiary
a. One must show that “recognition of a right to performance in the beneficiary is appropriate to
effectuate the intention of the parties.”
b. One must show that that either:
i. (Creditor) The performance of the promise will satisfy an obligation of the promisee to pay
money to the beneficiary; or
ii. (Donee) The circumstances indicate that the promisee intends to give the beneficiary the
benefit of the promise performance.
4. In general, for a third party to qualify as a beneficiary under a contract to which it was not a party, it must
show that the promisor and promisee created rights in the beneficiary by manifesting an objective intent
to do so. Under the regimen of the Restatement Second, incidental beneficiaries cannot enforce a
contract.
C. Rights of Parties
1. Third Party’s Rights Against Promisor
a. Once it is decided that a third party is an intended beneficiary, it follows that the party has a right
against the promisor. The beneficiary can enforce that right without joining the promisee in an
action against the promisor for damages or specific performance.
b. Beneficiary ordinarily has not right to restitution from the promise since any benefit the promisor
has received was conferred by the promisee, not by the beneficiary.
2. Third Party’s Rights Against Promisee
a. Beneficiary retains any right that the beneficiary had against the promisee before the contract
between the promisor and promisee. In other words, if the promisee already owed a duty to the
beneficiary, neither the making of the contract not the beneficiary’s acceptance of it operates to
discharge that duty.
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b. Instead, there are now two duties owed to the beneficiary—one owed by the promisor and one by the
promisee—and the beneficiary can get judgment against both, though the beneficiary is entitled to
only one complete satisfaction
VIII. Assignment and Delegation
A. Terminology/Background
1. A contract right is a type of property and its transfer is governed by the law of property rather than the law
of contracts.
2. Assignment of Rights vs. Delegation of Performance
a. An obligee’s transfer of a contract right is known as an assignment of the right. By an assignment,
the obligee as assignor (B) transfers to an assignee (C) a right that the assignor has against an
obligor (A).
b. An obligor’s empowering of another to perform the obligor’s duty is known as a delegation of the
performance of that duty. By a delegation, the obligor as delegating party (B) empowers a delegate
(C) to perform a duty that the delegating party owes to an obligee (A).
c. A party to a contract that both assigns rights and delegates performance to another person will
referred to as a transferor (B); the other person will be referred to as a transferee (C); and the
transaction will be called a transfer of the contract.
B. Assignment
1. While the common law shunned the assignment of rights under a contract, American law has long since
repudiated the old doctrine and substituted a principle of free assignability though subject to certain
limitations.
2. The word assignment here refers to the act by which an assignor transfers a contract right to an assignee.
Such an act will sometimes also be referred to as an effective assignment, as distinguished from an
attempted or purported assignment.
3. To make an effective assignment of a contract right, the owner of that right must manifest an intention to
make a present transfer of the right without further action by the owner or by the obligor. The owner may
manifest this intention directly to the assignee or a third person. No words of art are required; the word
“assign” need not even be uttered. The question of whether the owner of a right has manifested an
intention to transfer it is a question of interpretation to be answered from all the circumstances, including
words and other conduct.
a. It is important, however, not to confuse an assignment – the present transfer of a right – with a
contract – a promise of future performance.
b. Absent a statute to the contrary, no writing is necessary for an effective assignment. However, the
land contract provision of the statute of frauds may require a writing if what is assigned is a right
under such a contract.
4. Limitations on Assignability
a. Assignments against public policy will not be effective.
b. Assignments that “adversely affect” the obligor will not be effective.
i. Under the UCC § 2-210(1)(a), an assignment is ineffective if it “materially changes” the duty
of the obligor, materially increases the burden or risk imposed upon that party by the contract,
or materially impairs that party’s chance of obtaining return performance.
ii. Under the Restatement § 317(2)(a) provides the identical prohibitions of UCC § 2-210 and
adds, in subsections (b) and (c), that the assignment is ineffective if it is forbidden by statute
or is otherwise inoperative on grounds of public policy, or precluded by a clause in the
contract.
5. Revocability of Assignments
a. Gratuitous assignments are revocable. If the assignment is revoked, or the donor becomes
incapacitated or dies the assignee’s rights are terminated.
b. If an assignee gives value for the assignment, it is not gratuitous and is NOT revocable. An assignee
gives value by taking the assignment either in exchange for something that would be consideration
for a promise.
6. Effect of Notice on Assignment
a. If the obligor has notice of the assignment, he has to pay the money to the assignee, not the assignor.
Some courts hold that if the obligor pays the assignor, then he is also required to pay the assignee.
The assignee is not required to go against the assignor to get the payment received from the obligor.
b. If the obligor pays the assignor without knowing of the assignment, the obligor is not required to
also pay the assignee.
7. The assignee stands in the shoes of the assignor. The assignee generally has the same rights against the
obligor as the assignor.
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8. Competing Claims of Ownership
a. If an assignor assigns his rights to B, then later assigns them to C also who is unaware of the
assignment to B –
b. New York Rule – 1st assignee wins.
c. English Rule – 1st assignee wins UNLESS the 2nd assignee had notified the obligor of its assignment
before the 1st assignor notified the obligor of his. Whoever notifies the obligor first wins.
d. Massachusetts “Four Horsemen Rule” (Restatement Rule)– 1st assignee wins unless the second
assignee did one of these things:
i. Received payment or other satisfaction of the obligation
ii. Obtained judgment against the obligor
iii. Made a new contract with the obligor by novation
iv. Obtained possession of a symbolic writing.
e. UCC Rule – Assignee that first files a financing statement covering its assignment prevails.
f. NOTE: If assignment was made irrevocable (value was given) that subsequent assignment will take
precedence over previous gratuitous assignments because the gratuitous assignments are revocable.
C. Delegations
1. Delegation is the obligor’s empowering of another to perform the obligor’s duty. By a delegation, the
obligor as delegating party empowers a delegate to perform a duty that the delegating party owes to an
obligee.
2. Delegation refers to the act by which one owing a duty manifests an intention to confer upon another
person the power to perform that duty. If the delegating party accomplishes that intention the delegation
is said to be “effective”.
3. Under an effective delegation, the delegating party is not relieved of its duty. A delegation of performance
does not relieve the delegating party of any duty to perform or liability for breach. The significance of
delegation is not that the delegation itself will discharge the duty (it wont’) but that the performance of the
duty by the delegate will discharge the duty. An effective delegation means that the obligee must accept
performance by the delegate as performance of the duty owed by the delegating party. If the obligee
refuses to accept delegate’s performance, it will constitute a repudiation.
4. Non-delegable Duties
a. Duty is not delegable if the parties to the contract explicitly provide that a performance is not
delegable.
b. Duties are not delegable if they are “personal” in that they involve character, reputation, taste, skill,
or discretion.
c. Delegations that would change the obligee’s expectancy are not effective.
d. If a special trust is reposed in delegator by the other party the duty is not delegable.
5. Restatement § 318 and UCC § 2-210 govern delegation.
D. Assumption v. Novation
1. The delegate is under no duty to perform. He has no liability if he does not perform. The obligee only has
a claim for breach against the delegating party.
2. Assumption: The delegate may assume the duties of the delegating party by promises the delegating
party to perform that party’s duties. The delegate is then under a duty to the delegating party, and is also
under a duty to the obligee because the obligee is an intended beneficiary of the assumption agreement.
The assumption does not discharge the duty of the delegating party to the obligee. Both the delegate and
the delegating party are liable to the obligee to render the same performance. The obligee is entitled only
to one performance. The delegating party acts as a surety for the delegate. The delegate is the principal
and the delegating party is the surety.
3. Implied Assumption: If a party transfers an entire contract (rights and duties) an assumption of the
duties may be implied.
4. Novation: If the delegate promises to perform the duty of the delegating party and the obligee consents
to it, then the delegating party’s duty may be discharged. There may be