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Stone—Spring 2004
By Will Waring
§1 Intent to Contract
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1. Only an “agreement to agree” – parties are in a lease situation and sign a lease that
leaves open future deals but does so in ambiguous terms that do not disclose any of the
relevant details needed to come to culmination.
2. Would a clause calling for “reasonable rental” based on mkt. be more specific? Yes,
gives court more law not just facts where can use §204 and supply a term if you are
wanting to use the first stage of talking to make a K.
3. How do you avoid uncertainty?
a. Percent of sales as basis for rent? Sure
b. Rent tied to price index for mkt.? Sure (§205 Good Faith Requirement)
c. Avg. rental of prev. 3 commercial renters + inflation. Sure
d. Avg./ square foot of commercial rental in the community. Sure
e. Arbitration clause? Sure.
f. Non-binding mediation? Sure
g. All the above could save transaction costs of litigation and determining the
proper price and is more economically sound. Give the court a key (§204), i.e.
guidelines for it to follow
C. Pennzoil v. Texaco – Was there ever a K? This is a first stage v. 2d stage problem
1. B/c P signed a memo of agreement w/ Getty does that = K or §26 Preliminary
negotiations. So which was it – argue Y for P and No for D.
2. Argue Y – The memo of agreement was a valid K that Texaco interfered with.
a. Press release was using words of definiteness
b. “Done deal”
c. Agreement on most of key terms.
3. Argue N – there was no K so D couldn’t have interfered w/ anything.
a. Only a memo of agreement, not a K
b. This was a BIG K, it would have went on for 100’s of pages.
c. Indemnification agreement
d. Trade practice – in mergers there would have been extensive negotiation, (court
doesn't even touch this).
e. Getty board had other alternatives.
1) Approve or alter
2) Decline or pass to shareholders
3) Let it expire by own terms
4) All above could imply that the “Deal wasn’t done”
4. Court finds a K and holds D liable for interfering. See last semester for the required
elements for a Memo to be a K.
D. Application through Hypos: Do parties intend to be bound by 1st writing or only when formal
agreement is executed (finalized, memorialized, 2nd stage etc.) Hinges on intent.
1. 2 CEOs work out terms on a napkin at the dinner table and then consult attys. to work
out details, one party gets cold feet. K or not? Where?
2. Law student looks at Apt, and says I like it, I’ll take it, but B-4 he can sign lease Apt
rents to 2d offeror for more money. K? When? Where?
3. “I accept offer, please sign and return for my records” K? When? Where?
4. “I accept terms, please sign one copy and return new K w/ acknowledgment of different
terms” Court fills no gaps here.
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§ 2 The Offer
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dozen boxes of pints, quarts, and half gallons per gross. When D requested
shipment of several gross of a variety of jars, D said it couldn’t fill the order.
b. Prelude to “battle of the forms” – Each company wants to use their own form K.
c. Case stands as the rule that correspondence should be taken as a whole when
determining intent to offer.
d. Aim of court is to arrive at the intention of the parties.
e. The offer of one party here incorporated the terms of the other so when the other
acknowledged it that served as an offer that could be accepted.
f. Troublesome b/c we don’t want the ee to structure the offer.
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3. Dickenson v. Dodds
a. A type of indirect revocation case. D is selling his farm and makes an offer to P,
keeping the offer open until X time. P hears that D has sold b-4 the time has expired
and comes around wanting to accept. P’s acceptance is no good if he has received
communication that D has already sold thereby revoking his offer to P.
b. 2. Legal Issue: Whether the offer was revoked when Dickinson learned that there was
another offer
c. Argue YES for revocation
1) Here, revoked when P (offeree) heard of sale of unique property from a third
party
2) also from a RPP standard
3) consider intent b/c no meeting of the minds (§24)
d. Argue NO revocation here
1) Revocation was not totally clear to P
2) P received the revocation from a 3rd party.
3) B should be held to his worth
e. Analyze on Consideration grounds.
1) D’s promise was for P’s promise to buy the farm, there was no consideration
given by P for D to keep his offer open until the time
2) This is called a nudum pactum – naked pact – not clothed in consideration so
therefore not an offer.
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days accepting for $5k. NO CONTRACT, why, b/c when B countered, it killed A’s
original offer (if A’s original was a K, then that is different). A’s reply to the counter-
offer could have manifested an intention to renew his original offer resulting in proper
acceptance by B.
B. Counter-Offer Must Have all Elements of Offer
C. Other Counter-Offer Rules
1. Restatement §59--Communications intending to be acceptances but adding new terms
are deemed rejections and counter-offers rather than acceptance.
a. Example: A makes an offer to B, and B in terms accepts but adds, “This
acceptance is not effective unless prompt acknowledgement is made of receipt of
this letter.” --There is no K, but a counter-offer
2. Restatement §61—An acceptance which requests a change or addition to the terms of
the offer is not invalidated unless the acceptance is made to depend on an assent to the
changed or added terms
a. Example: A offers to sell B 100 tons of steel for x price. B replies, “Accept, but
hope that if you can arrange to deliver the steel in wkly installments of 25 tons
you will” – There is a K, but A is not obligated to deliver in installments.
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the offer. –There is no K unless the offer or the circumstances indicate that the offer is
intended to continue beyond the immediate conversation.
I. Option K
A. Restatement §37—The power of acceptance under an option K is not terminated by
rejection of the ee, unless the requirements are met for the discharge of K duty
B. When is a §87 Option K invalidated.
1. Not w/ a counter offer – under option K, the counter offer is only a preliminary
negotiation.
2. Does not constitute a new offer b/c the option to accept is always out there.
3. A unilateral option to ripen into K would only become a K upon ee’s
acceptance.
4. The court will not glibly wipe out a K, need a good reason.
C. Humble Oil and Refining Co.
1. Humble entered into an option K w/ Westside in which Humble would purchase
land outside of San Antonio, TX for $35,000. Humble had the option by giving
notice any time prior to 9:00 p.m. on 6/4/63 or w/in 10 days following the notice
the sum of $1750 as earnest money + $50 as consideration paid at the time of the
execution of the K left H a balance of $33,200 yet to be paid.
2. Westside Argues: H rejected the option agreement through written letters. H’s
letter of 5/2 was a conditional acceptance which amounted in law to a rejection
of the option K. (§59/§39)
3. I: Whether or not the letter of May 2, 1963 constitutes a rejection of the option K
by Humble.
4. H: Humble is entitled to specific performance of the option K and render
judgment for Humble.
5. A: The mere fact that the parties may choose to negotiate before accepting an
option does not mean that the option K is repudiated. The option, considered as
an independent completed agreement, gave the optionee the right to purchase the
property within the time specified.
G. Holder case allows for substitutions of bids but w/ a statutory penalty; court will
only hold sub binding
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H. Exam Time
1. Stone may want a statute to clean up whether subs and gen’ls may rely on
submitted bids. Either require or don’t require reliance.
a. I would probably not require reliance, b/c this is a bilateral K the promise
is for a promise and speaking of inequity the Gen’l still retains the right
to withdraw so both are even, this seems better suited to the market, if the
sub keeps w/d bids he will get a bad name.
2. Plumber wants to bid on several jobs but is concerned about the general relying
on his bid and holding him to it.
a. Thinks the other Gen’ls may not want an option K
b. Doesn’t think that Gen’l may agree to use the bid until approved.
c. Advise this person and tell him what he needs to do.
d. Solution: Try to get around the reliance thing by forming contract to be
one that is only accepted if the Gen’l is awarded the big one.
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2. BUT counter-offers, rejections, and revocations are effective only upon receipt
(§24/§42)
3. Applies to other methods of delivery – email, fax, telegram etc.
B. Hypo: A offers B property for $50
1. 10th the letter delineating the offer arrives at B.
2. 11th – B sends the letter to accept but arrives at A’s place on the 13th.
3. BUT – Back on the 12th = B telephones A and says “I Reject!!”
4. The rule is that on the 11th B accepted by mailing his acceptance.
C. Epstein’s “Simple rules for a Complex world”
1. If you send it off you had better damn well mean it.
2. Allows us to have a simple date of acceptance and efficient allocation of risk.
3. Planning benefits: Mailbox rule applies unless parties intend otherwise, can always put
in letter that acceptance is not effective on sending
a. MBR is more efficient b/c it closes the deal sooner and allows us to begin
planning on the K.
b. Allows parties to allocate the risks of acceptance and offers. The one time that
one has to accept even though the acceptance letter got lost in the mail is not
enough to cancel out the 99 times that the deal is closed and trans. costs are
lowered.
D. Improper Mediums of Communication
1. If offer describes a preferred means of acceptance that must be followed.
2. Authorized means of communication – failure to use may be failure to conform to a
certain (and essential) term and result in a non-acceptance.
3. If words in offer are “may use” then an alternative form is authorized.
4. Hypo—offer by mail and acceptance by carrier pigeon hypo: Rest. §30 Form of
acceptance invited – Offer may be invited by medium that is reasonable to the
circumstances. §60/§63/§67
E. Crossing Communications (Restatement §68)—a written revocation, rejection, or acceptance is
received when it comes into the possession of the person addressed, or of some person
authorized by him to receive for him, or when it is deposited in some place which he has
authorized as the place for this or similar communications to be deposited for him.
F. Ways Around the MBR
1. OR—specify in essential terms that K is effective on receipt of acceptance
2. Ee—counter-offer/ negotiation
3. Remember—MBR is a default rule
G. See UCC §2-206
F. Case Application—Bishop v. Eaton See also 2-206(2) (A promise to guaranty a loan)
(Exception to the general rule notice of an act)
1. Actual Notice—party to whom giving notice truly receives information
2. Constructive—party may not receive notice but law recognizes that he does (notice by
moment of dispatch); economic efficiency approach
3. §54 Nature of acceptance – Eaton (D) promises to act as surety for a loan provided by P
4. Is similar to a re-insurance company, an allocation of risk device to spread out the risks.
5. Eaton offers by mail, Bishop accepts by mail (which D never receives), Acceptance by
Bishop?
a. Yes, b/c of the mailbox rule
6. Was this a unilateral or bilateral K? – Unilateral K b/c act called for was to act as the
surety on a loan.
7. Case hinges on the mailing of the notice for acceptance, and b/c it never reached D was
that sufficient notice to make him liable to P.
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8. Reason is, offeror is entitled to reasonable notice of acceptance of his offer, 2-206(2)
and §54(2) require notice to offeror unless offeror has reason to know of the
performance
9. Here, D would have no way to know of performance w/o notification b/c he lived in
Canada and P and X lived in Mass.
10. What notice is sufficient? – Reasonable manner of notice – usually same method of
notification employed by offeror (mailbox rule) and makes no difference if lost.
a. Moment of dispatch suffices. (R §63(a))
11. Judgment for P b/c of mailbox rule – argue for court: D was in the better position to
avoid harm (could have K’d around the mailbox rule by saying that I will only K if I
receive actual notice of acceptance”).
I. Unilateral K v. Bilateral K
A. Unilateral K = Acceptance by return act (consider part performance, preparation, etc.)
B. Bilateral K = Acceptance by return promise (usually a promise to act)
C. Petterson v. Pattenberg (When does acceptance occur?)
1. P offers (tenders – which means promises) payment to the holder of his loan, which
holder (D) had previously agreed to cut the total due for early payment. P tenders
money at D’s house by saying “I’ve come to pay your money”
2. D says “Too late, I’ve already sold the loan.”
3. Was P’s tender an acceptance of D’s offer to accept less than full value? P tried to
accept – He started the process by tendering the cash – but court said that acceptance
was not valid b/c offer was revoked (more importantly acceptance was not what was
required by D’s offer).
4. Why was acceptance not effective?
a. B/c offeror asked not for a promise of money but an act of actually paying
money so a promise of payment is ineffective.
b. OFFER FOR A UNILATERAL K CAN ONLY BE ACCEPTED BY THE ACT
REQUESTED NOT A PROMISE TO DO IT. §50(1)(3) §58
5. Dissent: P showed up to pay and that was the act required by Rest. §50(2) that says
tender is enough for acceptance by part performance. §45 (Option K Created by Part
Performance)
6. Problem is how much is enough to amount to an acceptance – showing up is mere
preparation to perform and D wants the $ not talk of $. Also, creating more transactions
costs b/c offeror has made K w/ a third party
7. D made a business judgment call where he wanted an act for a promise. Can debtor
avoid the result, yes could have accepted outright or counter offered w/ a bilateral K.
8. Same two way street as before, both can back out until the crunch time of money
meeting skin.
9. Not able to use “good faith” b/c that is uncertain and don’t want to get into the whole
mess of reliance. (§205) (2-203)
D. Brooklyn Bridge Hypo
1. Unilateral K of A saying to B “I’ll give you $100 if you walk across bridge” is a
promise for an act.
2. If A wanted to make a bilateral K then he could have termed it differently such as “..if
you promise to walk across the bridge” if B accepts and doesn’t walk then we have
breach.
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3. In Unil K even if A stops B from performing then A is not bound b/c A is the master of
his offer (under common law via Patterson case).
4. Seem hard on B? If a case where B has unjustly enriched A, B can get that back and
also B always has the right to not do it and won’t change his position.
E. Common Law Approach: Unjust enrichment through implied (quantum
meruit) K
F. Brackenberry v. Hodgkin (A Reliance/ Estoppel Concept)
1. Old lady asked for an Act – full perf. of lifetime care.
2. Couldn’t argument be made that unjust enrichment went to daughter not mom
b/c daughter received whole deal for part performance
3. Both sides – mom would only allow part perf. and trial court found that Mom
was “at fault” (a tort concept).
4. What happens now? Do mom’s have any incentive not to be “at fault”
5. Mom should have been master of her offer and been able to revoke at any time
before full performance had been completed.
a. How much Part performance is enough? Here the court finds that the there was
full acceptance by part perf. (50(2)) or (§45)
1) Under c/l part perf would not have been enough the performer would
have been entitled to a quantum meruit recovery (R. §30(1))
2) Point is that it could go either way and be able to argue both points for
the best result.
G. Conclusions
1. Pattberg theory is the common law acceptance by part performance, and Sunshine and
Brackenbury represents the change to §90 reliance.
2. K is the world of voluntary agreement, reliance doctrine forces an agreement by the
court.
a. Takes wealth instead of creating it
b. Doesn’t work b/c it offers party the chance of K by hope that doesn’t always
come through and raises a false sense of security in contrast to C/L rule.
H. Sunshine v. Manos (Part Performance Test of Definite & Substantial Nature)
1. Same problem as above – How much part perf is enough to = acceptance.
2. Court said test for part perf of a definite and substantial nature is enough
3. Point is that stmt is uncertain and impossible to know how much is enough, this
leads to the slippery slope of equity and a case-by-case determination of facts.
4. Use Pattberg to analyze (§58) – would tender be enough for this court?
5. Court seems to go to a §50(2)/§45/§87/§90 reliance stand, P has gotten a loan
that didn’t conform to the agreement so therefore has breached the agreement
even if they had expended time and money, so are only able to recover expenses,
when is winning losing.
6. Court uses an “I tried” rule to let P have the recovery.
7. D could have avoided liability by letting the K die by its own terms on account
of P’s nonconformance to the terms (§49).
8. Notes on 501-505--§45 and §50(2)—requirement that performance has begun,
preparation is not enough; fallback position is §87(2) reliance doctrine
a. Three problems: (1)Line b/t beginning and preparing to perform is slippery;
(2)Line is often arbitrary and does not reflect a significant increase in economic
commitment by the offeree; (3)Retention of the line increases the complexity of
the Restatement’s internal structure
I. Hypo: Gen. Motors wanted to close plant that made Caprice’s and move operations to TX to
make a better selling model. Officials in MI sued for breach of K. GM promised to provide
employment if tax abatements were granted.
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1. Is there a K? Court says no, but holds under estoppel; Trial court judge issued
injunction against GM
2. Where is the acceptance by the city? the city’s act of excluding GM each year from
collection of taxes; court said city relied on GM’s promise each year. Analysis: GM
was losing money, so wanted to go to better economic place
3. Did GM promise to keep the plant open? apply Patterson and Brackenbury cases
J. Davis v. Jacoby (Court drops unilateral for bilateral K)
1. Uncle writes to niece asking her and husband to come to Cali and take care of him and
his wife (consider that an offer), there was an attempted bi-lateral K acceptance by
promise on part of niece and husband (consider that attempted acceptance). Niece
PREPARES to go to Cali but the uncle commits suicide and niece goes out anyway in
an attempt to accept. Uncle does not follow through on promise to leave money to
niece.
2. D’s argue that it was a unilateral K only accepted by full performance and the offer was
revoked under §48, death of offeror or revoked under letter of 4/15/31. P’s obviously
argue a bilateral K and say that they accepted by promise, in lieu of the court finding a
bilateral K, there was part perf. by their prep to move and then the move itself.
3. Was it unilateral or bilateral?
a. Cal. S.C. finds a bilateral b/c the PRESUMPTION is for a bilateral K, should
make part perf. doctrine irrelevant b/c can be accepted by promise.
b. Court says that a bilateral K would protect a reasonable expectation of the
parties, Certainly
1) Why? On part of P’s would protect the certainty of performance or
remedy against D’s.
2) For deceased – he wants the certainty of promise for aid by the offerees –
He has to rely on their promise.
4. Was the court engaging in subjective mind reading?
a. Y: What did old man want? For the p’s to actually move out there and care for
him, not a promise to do so.
b. Argue Y and N for the ambiguous offer argument as well. Maybe the old man
wasn’t clear in what he was offering or method of acceptance.
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a. Just b/c you draw up the form doesn’t mean you’ll retain control
b. When use language of paragraph 6 court looks at substance of the matter over
form
III. Rewards and the Law of Offer and Acceptance See §58, §60
A. Rewards are an offer for a return act (unilateral K)
1. The offeror is still the master of his offer
2. May state a time limit for acceptance Newman v. Schiff
B. Who may recover?
1. Only those who are aware of the outstanding offer.
2. Well-known exception for offers of rewards by governmental bodies. (One who is
ignorant may collect from gov’t).
C. Time may lapse on reward
1. Gen rule is that offer will lapse after a “reasonable time” (§41)
D. Offer of reward may be revoked (§46)
1. By method in which it was given if given to public at large, then has to be revoked by
providing to public at large those who do not see revocation cannot assert acceptance.
Acceptance of reward by performance (§51)
E. Part of acts performed before learning of reward
1. Present law holds that one who has partially performed the called for act may accept and
receive the reward by completing the act.
F. Actions taken pursuant to a legal duty. (§73)
1. Police, fire and rescue are not entitled to a reward if they were under a legal duty to
perform the act before they undertook the desired performance.
G. Actions not motivated by reward
1. Can usually recover
H. Actions different from requested acceptance
1. Can usually recover
I. Apportionment of rewards
1. Should equal contributors to an act get the reward?
J. Reliance
1. Should the court allow a person who has undertaken that performance requested by the
rewarding party the remedy of expenses even if no completion?
2. Cf. w/ the Sunshine case and the “I tried” rule of that decision.
3. I say NO.
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wrongful as against the OR it is an acceptance only if ratifiesd by him. Determined by an
Objective standard.
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§ 4 Mirror Image Rule
I. Restatement §§ 58/59
A. General Rule—Acceptance must comply with the requirements of the offer as to the promise to
be made or the performance to be rendered (Acceptance must mirror the offer)
1. A purported acceptance that varies the form of the offer, even trivially means that there
is no acceptance, but a counter offer or rejection.
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§ 5 Precontractural Liability
I. Kearns v. Andree (Using Reliance/Estoppel as a Gap Filler in Precontract Liability)
A. Court’s rule here is equity for recovery when the K is unenforceable, seller can recover for
expenses made in expectation of fulfillment of K
1. Is essentially justifiable reliance, but here for precontractural liability, parties had not
consummated K relationship yet.
2. P assumed a K and then relied on his own assumption
B. Stones rules of life and contract
1. Don’t assume anything.
2. Never say never
3. You can’t always say always
4. Use thinking and planning rather than emotion and begging.
C. Who should bear the risks?
1. The party who failed to plan and utilize the writing and the statute of frauds.
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a. Court won’t force an agreement b/w two unwilling parties (where animosity
exists) comparable to a “shotgun business wedding.”
G. Hoffman Rule: 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.
Replevin—an action for the repossession of personal property wrongfully taken or detained by D,
whereby P gives security for and holds the property until the court decides who owns it
II. Mistake
A. Restatement §152—Mutual Mistake (Bilateral Mistake) General Requirements
1. Basic assumption – when both parties entering into a K are mistaken about facts relating
to the agreement, the K may be voidable by the adversely affected party if:
a. The mistake concerns a basic assumption on which the K is made.
b. The mistake has a material effect on the agreed-upon exchange.
1) Party must show that he cannot fairly be required to carry out the K.
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2) Courts more likely to find this situation if circumstances advantage other
party while disadvantaging one.
c. The party seeking avoidance did not assume the risk of mistake.
2. Also, if the thing K’d for is not the thing received the K is void (subject matter
one thought he was getting doesn’t exist – case of mistaken identity).
a. Sherwood v. Walker – pregnant cow case; seller gets rescission as both
parties were unaware that price agreed upon for a barren cow was
actually for a breedable and pregnant cow. Mistake as to quality of
subject matter may be grounds for rescission.
B. A mistake is a mistaken belief as to an existing fact, NOT an erroneous belief about what will
happen in the future
1. These kinds of mistakes are handled by impracticability, impossibility and frustration of
purpose.
C. Two kinds of mistakes
1. Unilateral – one party is mistaken; we usually say tough break and offer no relief to a
unilaterally mistaken party (Restatement § 153/ UCC 2-615)
2. Bilateral – May excuse performance b/c there has been no meeting of the minds. (§ 152)
D. Restatement § 154—Allocation of Risks
1. Entering K is all about taking risks and dealing w/ imperfect information so courts don’t
like to look at situation ex post and decide that party should be able to rescind.
a. Result is that few courts grant relief for mistake when parties are responsible for
their own info gathering.
2. Ways in which the risk of loss will be allocated to a party, thereby removing possibility
of recovery from him
a. Agreement of the parties – freedom of K, you can always agree to accept the risk
of loss. (See Lenawee Cty. Board of Health)
b. Awareness of limited knowledge – if risk taker has only ltd knowledge with
respect to the facts to which the mistake relates but treats his ltd knowledge as
sufficient. (conscious ignorance) (See Wood v. Boynton)
1) Wood v. Boynton where P sold a rock for $1, both seller and
buyer believing it to be topaz, was actually an uncut diamond worth
$700. Court denied rescission to seller reasoning that it was a case of
“mere adequacy of price.” Consideration rule could help here; dispute is
over the amount of consideration
c. By the court – allocation of risks to party by the court but only if it is reasonable
in the circumstances.
3. Market conditions – usually a mistake about market conditions will always result in the
risk being allocated to the one who should know, usually the seller. This info is readily
available.
E. Release forms
1. A party may agree to release another party from all claims arising out of a certain
transaction.
2. Courts are more willing to grant rescission on fact patterns which involve a
personal injury claim release as opposed to those which are in a commercial
setting.
F. Examples of situations in which we grant relief for mistake
1. Express warranty situations – where seller gave an express warranty for the product he
was selling and it turns out he and the buyer were mistaken as to the product’s quality or
characteristic (See Smith v. Zimbalist—where a document was signed that B got a
Stradivarius and instead the violin was a fake)
2. Overt fraud – later
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3. Mistake caused by Innocent misrepresentation – Summit Timber Co. v. US – If both
parties to a K which contains a misrepresentation can, absent unusual circumstances, be
described as having a mutual “state of mind that is not in accord w/ the facts” 1)Material
misrepresentation occurred and 2)P reasonably relied on mistaken misrepresentation
4. Implied warranty for a particular purpose – Hinson v. Jefferson – party who bought
land which seller knew was to be used for a particular purpose but couldn’t be used for
that was entitled to rescission of K on grounds that both parties were mistaken to a fact
“which was of the essence of the agreement.”
G. Unilateral mistake
1. General rule is not to grant relief for a unilateral mistake
a. Exception is: Honest clerical error
b. Does not include an error of judgment on the price quote
c. Also, consider the CL rule that principals are responsible for the actions of their
agents
d. Most often comes up in construction / sub-contractor bid situations.
1) Courts are skeptical b/c owner is responsible for his own bid.
2) GE case—puts burden of mistake on the bidder b/c is in an equal
position of discovery
e. We don’t reward someone for their negligence in estimating.
2. Baptist Church case – relief for unilateral mistake because of honest clerical mistake
a. Judgment is view that some courts take for all mistakes b/c bidder is in charge of
his offer and bid.
3. Three-part test for rescission due to clerical error
a. Mistaken party has to return the innocent party to status quo
b. One party knows or has reason to know of the other party’s clerical error
c. Rescission is to prevent an unconscionable taking advantage of the other party
III. Misrepresentation
A. R. § 163—Misrepresentation to the character or essential terms of a proposed contract induces
conduct that appears to be a manifestation of assent by one who neither knows or has
reasonable opportunity to know of the character or essential terms of the proposed contract.
1. Deceit- breach of fiduciary duty or otherwise to disclose
2. Negligent Misrepresentation- failing to use reasonable care in obtaining or
communicating information
3. Innocent Misrepresentation-
B. R § 162—Must be Fraudulent and Material
1. Fraudulent- promise maker intends his assertion to induce another party to manifest his
assent and the maker either:
a. Knows or believes that the assertion is not in accord with the facts,
b. Does not have the confidence that he states or implies in the truth of his
assertion, OR
c. Knows that he does not have the basis that he states or implies for the assertion.
2. Material- if it would be likely to induce a reasonable person to manifest his assent, or if
the maker knows that it would be likely to induce the recipient to do so.
C. R § 161—Non-disclosure can be actual misrepresentation where:
1. He knows that disclosure is necessary to prevent some previous assertion from being a
misrepresentation or from being fraudulent and material
2. He knows that a disclosure of the fact would correct the mistake of the other party, and
good faith and fair dealing require him to disclose
3. The other person is entitled to know the fact because of a special relationship or
fiduciary duty.
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D. Laidlaw v. Organ (The Duty to Disclose and a Little a/b Fraud)
1. The buyer knew the facts and did not disclose them to the seller who suffered a loss as a
result. Only one party was mistaken as to facts, seller so this is unilateral mistake and
generally make the mistaken party bear the loss.
2. B/c buyer did not disclose what he knew we may have a case for fraud here; 2 kinds.
a. Fraud in the inducement – one party fraudulently encourages another to enter
into a K w/ him.
b. Fraud in execution – self explanatory READ IN SUPPLEMENTS
3. This case concerns fraud in the inducement but does mere failure to disclose a fact
constitute active fraud?
a. Not unless party has a duty to disclose (in this case was for trial court to figure
on remand).
b. General rule: Party has no duty to disclose, each party should look out for his
own self-interest, especially when info is readily available.
c. Silence as active fraud: One party cannot do or say anything to impose
misinformation on another party
1) Active failure to respond to a direct Q is active fraud of not disclosing
full information
d. What is imposing “misinformation”?
1) Shouldn’t buyer have “property rights” to the information that he has?
2) If we require him to disclose then that is coercion of his rights for the
benefit of others who haven’t expended the effort to get the info.
E. Analysis of Duty to Disclose
1. Begin ex ante, neither party has information
2. Who has incentive and is in best position
3. Three-part test
a. Equally difficult to discover, no duty to disclose is required—high information
costs to both (tobacco case)
b. If S can more efficiently discover, he has responsibility to disclose
c. If B can more efficiently discover, he has responsibility to disclose
4. Both parties can have duty to look out for own economic self-interest—will be rare for
court to say parties don’t have equal access to information
F. Upton Case (Calling of the Wrong Fire Dept. Case)
1. No free lunches
2. Powell refuses to pay for fire service b/c he mistakenly thought he was in the same
district at the time he called.
3. Powell believes he’s received a gratuitous service
4. Ct. says Powell was seeking services, not a gift
5. Real question is what was the intent of the parties?
6. Can argue mutual mistake—Powell who mistakenly sought a gratuitous service, called
police dept. and police dept. mistakenly called the wrong fire dept.
7. Also can argue that there was an implied K
IV. Impossibility
A. Basic rule is that a contract is excused for impossibility when the contract cannot be completed,
not when the defendant cannot complete the contract.
B. When alleging impossibility, the party relying on impossibility must establish:
1. The unexpected occurrence of an intervening act
2. The occurrence was of such a character that its non-occurrence was a basic assumption
of the agreement of the parties
3. Occurrence made performance impracticable
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C. All three must be satisfied to qualify for the defense. Foreseeability of the occurrence is only a
factor. The risk must be one that, although foreseeable, should not be guarded against.
D. R. § 261- where, after a contract is made (if before, it’s mistake law area), a party’s
performance is made impracticable, without his fault, by the occurrence of an event. The event
must be one that was not foreseeable by the parties and could not be planned for. It is measured
by an objective standard. Presumption is not to excuse unless one of the following three:
1. Contract for personal services, but death intervenes
2. Contract where intervening legislation makes performance illegal (I would imagine a K
for liquor and then gov’t outlaws, buyer would be excused).
3. Subsequent destruction of the subject matter of the K as long as promisor was not at
fault and it is truly impossible to fulfill terms of K.
1) Distinguish b/w repairs (where excuse is possible b/c there is nothing left to
repair) and new building (where excuse is not b/c builder can start all over).
2) A K for unique services is one that will be declared impossible but one for
services that may be delegated is not.
3. Measured by objective standard: nobody could perform according to the terms
of the K.
D. Taylor v. Caldwell – case in which D rented out his concert hall to P and it soon burnt down, P
sues for damages and court finds that b/c the subject matter of the K was gone it was impossible
to perform.
1. Was the court wrong?
a. P could have sought damages b/c there were probably other venues in which the
D could have paid for the fee.
b. Hall owner took risk that his hall would still be there when it came time to have
the concert.
c. Really though, D was ready, willing and able to perform but for the impossibility
of doing so as result of the fire.
E. Assuming the risk
1. Who assumes the risks of nonperformance due to unforeseen hardship; how do we
allocate the loss?
2. Ex ante up front efficiency analysis
a. Who has the best position to prepare for and avoid the loss
b. In the house builder example – builder is in almost complete control of the risks
b/c owner is not in control yet
F. NIPSCO case – Posner econ analysis case
Notes: True impossibility could be tornado strikes plant, or strike shuts plant down
1. Is NOT a victim case but one where those have to accept the risks of their bargains.
2. NIPSCO claims that it is impossible to perform b/c of ruling PSC who makes them find
a cheaper power source when NIPSCO is locked into a K w/ coal company.
3. Posner does not allow N to get out of K just b/c they made a bad judgment decision,
should have known that PSC could change things up on them
4. Simple rules for allocating risks
a. The black and white rules of K- the terms always rule.
b. Who was in a better position to allocate risks?
1) N b/c they deal w/ PSC all the time and change was foreseeable.
2) N assumes the risks.
5. The use of unforeseeable and foreseeable language
a. Is non-economic and vague
b. Just another way of saying that lower cost fact finder should avoid the loss
G. Wolftrap case—power outage after D had agreed to provide electricity, D refused to pay P for
no performance b/c K was not completed due to impossibility
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1. Are power outages common? Of course, they’re foreseeable
2. General Rule for Foreseeability—relief only granted for unforeseeable events making it
impossible to perform
3. Why did law only give relief from unforeseeable events? gives incentive for people to
plan for foreseeable events in K
4. Wolftrap had the lower information costs here, but court doesn’t see it that way b/c it
analyzes under the factual impossibility of K
5. Can take economic analysis approach of allocation of risks (third party insurance) or use
non-economic criterion (fair, reasonable, and just) of impracticability
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4. Renegotiation for long contracts
E. Remedies for impossibility, impracticability, or frustration
1. GR courts generally leave parties where they find them and just rescind K
2. Exceptions:
a. May give dollar damages—R 272 (Shipping/ Suez case), but is a rare exception
b. If there’s been partial performance (Carroll v. Bowersock)
1) must prove performance by P
2) must also prove benefit to the other side (a practical benefit)
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1. Equity done when woman got all her money back plus the benefits of the dance lessons
she actually went to.
2. She didn’t understand and evaluate her risks and now wants to externalize her costs.
3. Was she injured?
a. She got what she paid for and what about her benefits received.
b. Benefits do come w/ costs.
C. Terms of K should rule unless one of the big 8 will excuse performance
1. Incapacity (R 15) – probably not b/c no evidence of incapacity.
2. Duress (R 175) – Unlawful or coercive? Threats of force or suit? Not here.
a. Econ. Duress – could be if there was a monopoly position.
3. K is voidable for undue influence (Rest 177)
a. Gentle persuasion and abuse of close confidential personal relationship
b. Use age discrepancy and vulnerable status as widow to argue yes.
1) Maybe she wasn’t all that vulnerable: 56 years old, teacher, educated,
world experience – should have known better.
4. Where is the line?
a. What if woman buys a bunch of expensive dresses – would court set that aside if
the salesman played upon the woman’s loneliness and insecurities?
IV. Unconscionability
A. If terms of K are so grossly unfair, sometimes the court will allow the excusal of one party.
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B. A & M Produce – Machine doesn’t work and mfr disclaims all warranties (can do that under 2-
316 “as is” stmt) but court finds disclaimer as unconscionable under 2-719(3)
1. 719 does not define unconscionable
C. Cali defines it w/ a multi part test
1. Procedural Unconscionability
a. Oppression
1) Not real negotiation involved w/ K
2) Absence of meaningful choice.
b. Surprise
2. Substantive Unconscionability
a. Commercially unreasonable
D. No real negotiation
1. Why not in produce case?
a. Court: b/c of sophistication of parties (big v. small), and one has more economic
muscle; also buyer had no access to legal advice.
b. Argue against the court: Businesses take risks and produce company was not that
small and could have obtained counsel.
E. Absence of meaningful choice
1. Form K that big firm throws out for other party to agree to (adhesion K?); take it or
leave it no meaningful negotiation
2. Argue other side: plenty of competition, P could go higher up in authority to negotiate
K, not necessarily higher transaction costs for negotiation b/c of technology.
F. Always tested at the time the K was made, not when it was breached or performed
1. Means that the K must have been unfair when entered into.
2. Greatest indicator is the superior bargaining power of one party over another.
VIII. Incapacity
A. Certain classes of people have limited ability to contract.
1. Person must be 18 to K legally (R 14)
a. Infants – until majority any contract which an infant enters into is voidable at her
option. (Majority set by statute)
1) Only voidable – so minor may still go through w/ it but can always
rescind it.
2) Even reaches out and touches third parties to the transaction if minor
voids the K.
2. Mentally incompetent (R 15) – insane, mentally ill, senile, mentally retarded, or drunk
(high).
a. Lacks capacity to K if either
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1) Is unable to understand in a reasonable manner the nature and
consequences of the transaction
2) Is unable to act in a reasonable manner in relation to the transaction and
the other party has reason to know of his condition.
b. Intoxication
1) If person is intoxicated so that she can’t understand the nature of
transaction and
2) The other party has reason to know that this is the case.
c. Avoidance
1) K’s made by incompetents are voidable, not void so K may be ratified if
maker regains capacity or has guardian appointed who acts in maker’s
interest.
2) If K was made on fair terms and the other party is without knowledge of
the mental illness, the power of avoidance is terminated to the extent that
the K has been performed
IX. Illegality
A. Neither party to an illegal K may enforce it
1. Applies even where only one party’s performance is illegal
2. Parties may get partial remedy on a partially performed K and also the K is divisible
from the illegal part (courts effort to salvage K).
B. Types of illegal K’s
1. Gambling K
2. Those calling for bribes or those procured by a bribe.
3. Licensing requirements where one party to the K should be licensed but isn’t.
X. Duress
A. Available if D can show that he was unfairly coerced into entering into the K or into modifying
it.
1. Any wrongful act that overcomes the free will of a party.
2. Prevents meeting of minds.
B. Methods of committing duress
1. Violence or threats of it
2. Imprisonment or threats of it
3. Wrongful taking or keeping of a party’s property or threats to do so.
4. Threats to breach a K or to commit other wrongful acts.
C. Typically requires something more than charging a high price for something.
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promises to paint a house for $1000. Although the language of the contract doesn’t
make the owner’s promise to pay conditional on the painter’s performance, when the
painter is finished, payment is due.
3. Impracticability or Frustration are bases for failure to perform.
II. Conditions
A. Definition of a condition
1. A condition is an event the occurrence or nonoccurrence of which will create, limit, or
extinguish the absolute duty to perform; is a promise modifier.
2. Distinguish from a promise: A promise is a commitment to do or not do something, can
be based on a condition or not.
a. Whether a promise or condition is based on the “intent of the parties”
b. Use of words such as “if” “on condition that” “unless” usually indicate a
condition.
3. Importance of distinction
a. Failure of a promise = a right to recover damages and a breach of the K.
b. Failure of a condition = relieves a party of the obligation to perform.
4. The fact that an act is a condition does not by itself make it a promise.
5. Courts prefer to interpret as a promise rather than a condition.
B. Classification of Conditions
1. Classification as to time
a. Condition precedent (before) – Trigger to a K obligation, what happens that will
trigger A’s performance if B meets the condition.
1) Ex. A agrees to sell his house to B if B gets financing.
b. Condition subsequent (After) – After the K a condition that if not met will blow
up the K. (Cuts off an already existing duty of performance)
1) Ex. Football player K that is voidable if player gets injured after season
starts and K is in effect.
c. Concurrent conditions – Mutually dependant conditions, to be performed at the
same point in time
1) Most car sales, give salesman the money, he gives you the car.
2. Classification as to form
a. Express conditions – usually require strict compliance
1) Includes satisfactory performance as a condition to performance –
obligee must be satisfied w/ work b-4 he pays.
2) Measured w/ an objective standard to keep the obligee from being
too over stringent. (K may provide for subjective terms)
3) Standard is: Work that a reasonable skillful worker would have
performed in a like manner w/ standards of the industry.
b. Implied / Inherent / Constructive – Implied conditions are found w/in the
K and circumstances surrounding it, constructive conditions are supplied
by the court to ensure that the parties get what they bargain for.
1) Constructive conditions may relate to who performs first.
C. Implications of whether a condition is met or excused
1. A duty of performance becomes absolute when conditions are either performed or
excused.
2. Performed is obvious; excusal can come in a variety of ways.
a. Failure to cooperate – a party who wrongfully prevents a condition from
occurring will no longer be given the benefit of that condition.
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b. Actual material breach – the breach of one party excuses the other from
performing his condition or performance (breach has to be material to extinguish
duty, a minor breach will only suspend it).
c. Anticipatory repudiation – must be unequivocal and applies only if there are
unperformed duties on both sides of the bargain; leaves the non-repudiating party
w/ options to wait or sue now. Repudiation may be retracted until the non-
repudiating party has accepted the repudiation or detrimentally relied upon it.
d. Prospective inability to perform – serious doubts by one party that the other will
be able to perform judged by a RPP standard. Doubting party may suspend her
own performance until she gets some meaningful assurance.
e. Substantial performance – if party has substantially performed but breaches in
some minor way then the other may not completely be excused.
f. Divisibility – when a K is divisible so are the conditions.
3. Conditions, if satisfied, result in duties. A party wishing to avoid performance must have
the duty discharged by one of the “big 8” above.
III. Nonperformance
A. Nonperformance- nothing less than full performance operates as a discharge. However,
nonperformance is not necessarily a breach; it can be justified. When performance is due, any
failure to render it is a breach.
B. Constructive conditions of Exchange- if the only consequence for a party’s nonperformance
were breach, a party of a bilateral contract would have little assurance of receiving the promised
return performance. In a bilateral contract, the promises are the stock of the contract. No
mention is made of the conditions required for one party to satisfy his portion of the contract so
the court will insert the condition.
C. Concurrent Conditions- where parties are to perform at the same time rather than one after
another. Tender of the goods by the seller and tender of the payment by the buyer are
concurrent conditions (UCC § 2-507)
1. Tender- an offer coupled with the present ability to fulfill all the conditions resting on
the tendering party (UCC § 2-503)
2. 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.
D. Order of Performance- determines the amount of security that the concept of constructive
conditions of exchange can afford. How order is determined:
1. Language of the agreement (most common in transfers of goods sold on credit and
delivered before full payment)
2. Return performances are rendered simultaneously, they are due simultaneously
3. Sometimes a lapse of time is necessary (construction contracts- the buyer will not pay
until the house is finished)
4. Performance at one time rather than partial payment over a period of time
E. Methods the court has used to avoid the forfeiture that might otherwise result from the concept
of constructive conditions of exchange
1. Substantial performance as a means of avoiding forfeiture- a purchaser should not be
allowed to resist paying on the grounds of an insubstantial breach by the seller. Only
substantial performance (question of fact) is required of the first parry before that party
can recover under the contract. Look to the injured party to attempt to gauge the loss
suffered, then look to the breaching party to determine whether the performance has
been substantial.
a. Perfect Tender Rule- buyer is entitled to reject goods unless the seller made a
perfect tender, there is no room for substantial performance.
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2. Divisibility as a Means of Avoiding Forfeiture- a contract can be severed to avoid
forfeiture. A contract can be severed if the performances to be exchanged can be
divided into corresponding pairs of part performances in such a way that the court will
treat the parts of pairs as if the parties had agreed that they were equivalents. It must be
proper to apportion the party’s performances into corresponding pairs of part
performances and it must be proper to regard the parts as agreed equivalents
a. Apportionment- met if the price for parts of performance can be determined.
b. Agreed equivalents- look to parties’ intention or language of the contract. Rare
for parties to intend for contract to be divided, so must look to see that the
portion of the contract to be separated is proportional to the value that that
portion of the contract provided.
3. Restitution as Means of Avoiding Forfeiture- party that cannot recover on the contract
for substantial performance can recover for any benefit conferred, less damage for which
that party is liable because of breach. More prevalent in employment or building
contracts than in sales for goods.
V. Prospective Nonperformance
A. Anticipatory Repudiation as breach- effects of party’s repudiation before the time for
performance has arrived. Anticipatory repudiation discharges any remaining duties of
performance of the injured party. They no longer have to be ready to perform. However,
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. In this situation, the injured party must wait
until time for performance to sue for damages. Courts have refused to apply the doctrine when
a party repudiates a unilateral or bilateral contract that has been fully performed by the injured
party.
B. What constitutes repudiation?
1. A manifestation from one party to another that the first party will not perform at least
some of its obligations under the contract.
2. Statement made in words or conduct that the repudiating party cannot or will not
perform. Parties’ expression of doubt as to willingness or ability to perform is not
repudiation.
3. Good faith mistakes concerning rights under the contract are irrelevant.
C. Responses to repudiation
1. Treat contract as terminated and bring suit for damages for total breach
2. Urge the repudiating party to perform or urge that party to retract its repudiation
3. Ignore repudiation and await the time for the return performance
I. Assignments
A. Obligee assigns her rights to the assignee, who is now the one who receives rights from the
obligor.
1. Assignment = Transfer of RIGHTS (benefits of K)
2. Delegation = Transfer of DUTIES (obligations to perform but usually the benefits
thereof).
B. C is obligated to perform for A, A assigns his rights under the K to B.
1. No consideration is needed for the tx of rights to B.
2. All of A’s (assignor) rights are extinguished under the K but he is not off the hook.
a. If A owes a return promise to C and B does not perform in A’s stead then C can
sue A.
C. Irrevocability of assignments
1. Assignments are irrevocable
2. However, if any consideration is given by B to A in order to get benefits from C then the
assignment is irrevocable.
D. Effect of notice on assignment
1. If obligor has notice he has to for sure pay $ to assignee, not the assignor.
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2. Different Jrd go different ways: some say that if obligor pays the assignor then he must
still pay the assignee (as opposed to requiring the assignee to go against the assignor for
the payment he received from obligor).
E. Subsequent assignments
1. What if A assigns K to B but also to C, D and E?
2. 2 rules in differing jrd
a. The first assignee to give notice prevails
b. First to obtain assignment prevails.
3. Add’l thoughts
a. If assignment is made irrevocable (i.e. consideration paid) that subsequent
assignment will take precedence over previous gratuitous assignments as the
gratuitous assignments are revocable.
II. Delegations
A. Y (Obligor/delegator) promises to perform for X (the obligee). Then Y decides to tx her duty
to perform to Z (delegate).
B. What duties may be delegated
1. Generally all except:
a. Duties involving personal judgment and skill.
b. Delegations that would change the obligee’s expectancy.
c. Special trust reposed in delegator by the other party
d. Contractual restriction on delegation.
C. Effect of delegation
1. Delegator remains liable to obligee (b/c if not then a solvent delegator could regularly tx
his duties to an insolvent delegate).
a. BUT – obligee may agree (through novation) to accept the performance of the
delegate in place of the delegator. This releases delegator from all liability.
1) Requires the obligee to expressly accept the delegate’s perfomance in
lieu of the delegator, mere consent not enough.
2. Delegation agreement may be one of two forms:
a. Delegator may simply give the delegate the option to perform and the delegate
makes no promise that he will do so.
1) Delegate has no liability to either the delegator or the obligee if he does
not perform.
b. Delegate may promise that he will perform.
1) Is liable to delegator and possible the obligee, if the obligee is a3rd party
beneficiary of the K.
2) Promise may be made strictly for the benefit of the delegator, in which
situation no liability to obligee.
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1. Creditors – a person to whom a debt is owed by the promisee
2. Donee – a gift was to be received from the promisee.
3. If performance runs directly from the promisor to the 3d party then the beneficiary is
probably intended, if not probably incidental.
4. Best test is the intent of the promisee, did she intend to benefit the 3d party?
C. Incidental beneficiaries – those who stand to profit from the deal but who were not intended to
do so in the making of the K.
1. Ex. Land next door to a hotel deal that fell through is a third party incidental beneficiary.
2. Although he may have gained from the deal he has not right to sue and collect as he
wasn’t intended to profit.
D. When does a beneficiary acquire K rights?
1. Only when those rights have vested.
a. Benef manifests assent to a promise in the manner requested by the parties.
b. Brings suit to enforce the promise
c. Materially changes position in justifiable reliance on the promise.
2. Prior to vesting the promisee and promisor are entitled to modify or rescind the
beneficiary’s rights under the K.
3. If beneficiary has no idea of the K she obviously has no rights.
E. Who can sue whom?
1. Beneficiary may sue the promisor on the K
a. Promisor may use all defenses which he could have used against he promisee.
2. Beneficiary v. Promisee
a. ONLY in the creditor situation on the existing obligation b/w them.
b. A gratuitous beneficiary has no right to sue unless there is grounds for reliance
§90 damages.
3. Promisee v. promisor
a. Promisee may sue promisor both at law and in equity for spec perf if the
promisor is not performing for the third person.
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