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Contracts Outline I
Professor Stone

I. Introduction
A. §1: A contract is a promise or set of promises for the breach of which the law gives a
remedy, or the performance of which the law in some way recognizes as a duty
B. A contract is formed from offer, acceptance, and consideration
C. Unenforceable contracts, generally
1. Void contracts
a) Void contracts have no legal effect
b) No real contract has been formed
2. Voidable contracts
a) A contract that one party may opt to enforce or not enforce
3. Unenforceable contracts
a) A contract that does not give some immediate right to judicial relief
b) May be converted into a fully binding contract by the act of one of the parties,
whereas a void contract cannot
D. Economic Approach to Contracts
1. Adam Smith - The Wealth of Nations
a) How contracts are enforced:
(1) Golden Rule
(a) If you want others to contract with you, you must uphold your end of
the contracts
(2) Competition/Incentives
(a) If x fails to contract with y, y will go to z.
(b) Market is the dominant force in forcing parties to complete contracts
(c) Wealth Maximization
i) Greed/self interest drives contracts
ii) Each party contracts to get something they think is better than what
they are giving up
iii) Enlarges the total utility of the entire economic system- called the
synergy of contracts
(3) Rule of Law
(a) 99.999% of contracts are entered into and complete voluntarily
(b) This is the highest contract cost and should be the least used
(c) In a world of scarce resources, there is less and less incentive to sue
II. Consideration
A. §72 Any performance bargained for is consideration (exceptions exist)
1. If consideration does not exist, the contract is unenforceable (exceptions exist)
B. Purpose and Function of Consideration
1. Purpose of consideration is to distinguish between promises that are enforceable
and those that are not
2. Functions of consideration:
a) Evidentiary Function
(1) Consideration provides objective evidence that the parties intended to make a
binding agreement
b) Cautionary Function
(1) Consideration acts as a check against inconsiderate action
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(2) Shows that parties seriously intended to contract
c) Channeling Function
(1) Consideration furnishes a simple and external test of enforceability
(2) Allows more resources and directs them to their highest and best use
C. How consideration is met:
1. §73 Parties must give up something that they have a legal right to
a) The legal detriment requirement
b) Promisee is circumscribing their liberty in some way
2. Promisor made promise as part of a bargain
a) The bargain requirement
b) Promise made in exchange for promisee incurring a legal detriment
3. Problems with consideration arise from a problem with the existence of a bargain
or a problem with the existence of the legal detriment
D. Mutuality of consideration
1. Each party furnishes the consideration of the other
a) The detriment induces the promises
b) The promise induces the detriment
2. Can’t say, “I promise to do x unless I change my mind.”
3. Both parties must make promises that somehow bind them
E. The Bargain Element of Consideration
1. §71 A performance or return promise is bargained for if it is sought by the promisor in
exchange for his promise and is given by the promisee in exchange for that promise
a) When one receives a naked promise and it is broken, he is no worse off than he
was because he gave nothing for it, has lost nothing by it, and on its breach has
suffered no damage to be recognized by the courts; see Davis & Co. v.
Morgan
b) Gratuitous promises, gifts, are not bargains and do not furnish consideration
(1) Conditional gifts do not furnish considerations because although a legal
detriment existed, the meeting of the condition was not the promisor’s
motive for making the promise
(a) No bargain exists
(b) See Kirksey v. Kirksey
(c) May provide for promissory estoppel
(d) To determine bargains from pre-conditioned promises, ask whether the
occurrence of the condition benefits the promisor
i) Non-economic benefits may be a bargain
ii) Altruistic pleasure (for love and affection, e.g.) not sufficient
c) Sham v. Nominal Consideration
(1) Nominal consideration often viewed as an attempt to make a gift look like a
bargain
(2) See §71 illustration 5
(a) A desires to make a binding promise to give $1000 to his son B. Being
advised that a gratuitous promise is not binding, A offers to buy from B
for $1000 a book worth less than $1. B accepts the offer knowing the
purchase of the book is a pretense. There is no consideration for A’s
promise to pay $1000.
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2. Dealing with Bargains
a) Enforcement of bargains comes from the belief that enforcement enhances utility
b) Bargains benefit society overall and satisfy the requirement of consideration -
people bargain to maximize their total utility and together they increase the total
utility in their joint system. This leads to overall enlargement of the economic pie.
c) Greed and self-interest create an incentive to perform
3. Past consideration
a) No consideration exists for a promise made in return for a detriment previously
suffered by the promisee
F. The Detriment Element of Consideration
1. Detriment may be non-economic so long as the promisee has circumscribed their
freedom is some way
2. Detriment may be either another promise or performance of some kind
3. Court does not determine the adequacy of a detriment
a) §79 If the requirement of consideration is met, there is no additional requirement
of:
(1) A gain, advantage, or benefit to the promiser or a loss, disadvantage, or
detriment to the promisee; or (see Hamer v. Sidway)
(2) Equivalence in the values exchanged
(a) §84 Leave adequacy of things bargained for to the parties, not the court
i) If a person wants to contract $1 in exchange for $500 that’s their
own business (see Batsakis v. Demotsis)
4. Consideration is inadequate if it is gained through fraud, duress, or unconscionability
a) No consideration exists if the contract is illegal
b) §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. (See Mitchell v. C.C. Sanitation Co.)
c) §176 a threat is improper if:
(1) What is threatened is a crime or a tort
(2) It is a criminal prosecution
(3) It is the use of the civil process and is made in bad faith
(4) The threat is a breach of the duty of good faith and fair dealing under a
contract with the recipient
(5) Threat of bankruptcy is not considered duress, extortion, however, is
(a) §208 If a contract is unconscionable at the time the contract is made a
court may refuse to enforce the contract
i) Unconscionable: no man in his senses and not under delusion would
make on the one hand, and as no honest and fair man would accept
on the other
ii) Gross inequality of bargaining power together with the terms
unreasonably favorable to the stronger party may act as evidence of
coercion
5. Pre-existing Duty
a) No consideration if promisee promises to do what they are already legally
obligated to do
(1) See Alaska Packers Ass’n v. Domenico
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b) Rewards and bonuses generally unenforceable for lack of consideration if
promisee is already under a legal obligation to perform the act being rewarded
(e.g. Cop catching a bad guy).
c) §73 Performance of a legal duty owed to a promisor which is neither doubtful nor
the subject of honest dispute is not consideration; but a similar performance is
consideration if it differs from what was required by the duty in a way which
reflects more than a pretense of bargain
d) Unforeseen Circumstances
(1) For difficulties arising that allow a party’s refusal to perform to be okay, the
difficulties must be substantial, unforeseen, and not within the contemplation
of the parties when the contract was made; see Blakeslee v. Board of
Water
(a) General economic adversity is never a reason for breach
(2) § 89 A promise modifying a duty under a contract not fully performed on
either side is binding:
(a) If the modification is fair and equitable in view of the circumstances not
anticipated by the parties when the contract was made, or
(b) To the extent provided by statute, or
(c) To the extent that justice requires enforcement in view of a material
change of position in reliance on the promise
(3) If different or even slightly new duties are assumed the undertaking of the
duties does represent a detriment
e) UCC has pretty much banned the pre-existing duty rule under §2-209(1)
f) Accepting part payment of debt in satisfaction of a whole
(1) When the amount due is in dispute, and the debtor sends cash or check for
less than the amount claimed, clearly expressing his intention that it is sent as
a settlement in full, the cashing of the check is held to be an acceptance of
the offer operating as full satisfaction. See State Dep’t of Fisheries v. J-
Z Sales Corp.
G. Problems with Mutuality - Illusory, Alternative, and Implied Promises
1. Illusory Promises
a) A statement that appears to promise something, but in fact does not commit the
promisor to anything
b) May occur when the promisor reserves the right to change his mind
(1) Exceptions:
(a) Promissory estoppel - occurring when the promisor should reasonably
expect the promise to induce action or forbearance on the part of the
promisee and this reliance does in fact occur
(b) Objective standards - If promise of forbearance provides some standards
for determining when promisee may rely, then it would probably be
sufficient
(c) Posner tries to put good faith and bad faith terms into Coasean contract
theory in order to clarify, see Empire Gas Corp. v. American
Bakeries Co.
(d) Generally boils down to an evidence case and what evidence is
presented for breaching in good or bad faith
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2. Implied Promises
a) See Wood v. Lady Duf - Cardozo says we may imply the use of best efforts in
the contract terms
3. Alternative promises
a) §77 Generally only consideration if each of the alternative performances by
themselves would have created consideration
4. Employment at Will and Right to Terminate Agreements
a) Courts are somewhat split
5. Conditional Promises
a) If the condition is outside of the promisor’s control that almost never prevents his
promise from being consideration
(1) If the promisor knows at the time, however, that the condition cannot occur,
no consideration
b) If condition is in partial control of the promisor, this implies a promise to attempt
to make the condition occur, thus the promise will constitute consideration
III. Promises Binding Without Consideration
A. If consideration does not exist, exceptions exist that allow for enforcement of contracts.
B. Promises to Pay Past Debts that are no longer legally enforceable
1. A debt may be legally discharged
a) The debtor has gone bankrupt
b) Statute of limitations has run on creditor’s claim
2. If debtor makes a gratuitous promise to repay the debt after it is no longer legally
enforceable, the promise is enforceable even though no consideration exists
3. § 82 Promise to Pay Indebtedness; Effect on the Statute of Limitations
a) A promise to pay all or part of an antecedent contractual or quasi-contractual
indebtedness owed by the promisor is binding if the indebtedness is still
enforceable or would be except for the effect of a statute of limitations
b) Allows for the enforcement of express or implied promises made from the
debtor’s actions
(1) A voluntary acknowledgement to the obligee, admitting the present
existence of the antecedent indebtedness
(2) A voluntary transfer of money made as interest on or payment of or
collateral security for antecedent indebtedness
(3) A statement to the obligee that the statute of limitations will not be
pleaded as a defense
4. § 83 Promise to Pay Indebtedness Discharged in Bankruptcy
a) An express promise to pay all or part of an indebtedness of the promisor,
discharged or dischargeable in bankruptcy proceedings begun before the promise is
made, is binding
b) Enforces only an express promise and will not infer such a promise from the
debtor’s actions
5. Some statutes required that this promise be made in writing
C. Promise to Pay for Benefits Received
1. Where services were requested, and rendered with an expectation of payment
a) Creates an implied-in-fact contract to pay for them assuming the person
performing the service expected to be paid
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b) §86 Promise for Benefit Received
(1) A promise made in recognition of a benefit previously received by the
promisor from the promisee is binding to the extent necessary to prevent
injustice
(2) A promise is not binding under subsection (1)
(a) If the promisee conferred the benefit as a gift or for other reasons
the promisor has not been unjustly enriched; or
(b) To the extent that its value is disproportionate to the benefit
2. Where services were not requested
a) A renders services to B without B’s having expressly requested the services, and
then B promises to pay
b) Assume that at the time A renders services he is not intending a gift
c) Cases are split
(1) Older cases say that the promise is unenforceable
(2) Modern trend is in favor of increased enforceability
(3) §86 simply says they are enforceable to the “extent necessary to prevent
injustice”
D. Promise to perform a voidable duty
1. §85 Except as stated in §93, a promise to perform all or part of an antecedent
contract of the promisor, previously voidable by him, but not avoided prior to making
of the promise, is binding
2. Promise to perform a duty may be voidable if it is made under fraud or duress
a) If person promising the services discovers the option to avoid the promise but
reaffirms it anyway, the subsequent promise is enforceable even though it lacks
consideration
E. Modification of Contracts
1. UCC specifically removes the consideration requirement for modification of
existing contracts
2. §2-209(1) An agreement modifying a contract within this article needs no
consideration to be binding
a) Exception: if agreement includes a clause excluding modification except by
signed writing; generally called a “no oral modification clause”
F.Option Contracts
1. Most courts do not require consideration for an option contract to be binding
2. §87 Option Contract
a) An offer is binding as an option contract if it:
(1) Is in writing and signed by the offeror, recites a purported consideration
for the making of the offer, and proposes an exchange on fair terms within a
reasonable time; or
(2) Is made irrevocable by statute
b) An offer which the offeror should reasonably expect to induce action or
forbearance of a substantial character on the part of the offeree before acceptance
and which does induce such action or forbearance is binding as an option contract
to the extent necessary to avoid injustice
3. Firm offers under the UCC
a) §2-205 Allows the creation of an option contract without consideration
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G. Guaranties
1. A promise by one person to pay the debts incurred by another person owed to a
third person
2. §88 a promise to be surety for the performance of a contractual obligation, made
to the obligee, is binding if
a) The promise is in writing and signed by the promisor and recites a purported
consideration; or
b) The promise is made binding by the statute; or
c) The promisor should reasonably expect the promise to induce action or
forbearance of a substantial character on the part of the promisee or a third person,
and the promise does induce such action or forbearance
3. Guaranty given simultaneously with the creation of debt
a) There is no problem of consideration in this situation since the guarantor is
bargaining for a detriment to be incurred by the creditor
4. Guaranty given after underlying debt has arisen
a) Where the guaranty is not given until after the underlying debt has been created,
consideration will not necessarily be present
b) Invalid in some jurisdictions
c) Most modern decisions say that if the guaranty is in writing and states that
consideration (even nominal) has been paid to the creditor, the guaranty is
enforceable
d) UCC §3-408 No consideration is necessary for an instrument given in payment of
or as security for an antecedent obligation of any kind
e) Guaranty might be binding under promissory estoppel if the guarantor should
reasonably have expected the person to whom the guaranty is made to rely on him
and the reliance actually occurs
H. Contracts under seal
1. Common law- an agreement made under seal was enforceable even if not
supported by consideration
2. Seal made it clear that the parties intended to be bound
3. Most states have enacted statutes that modify or abolish the effect of the seal
4. UCC §2-203 states that the law with respect to sealed instruments does not apply
to a contract for goods
I. Promissory Estoppel- Reliance on a Promise as a Basis for Enforcement
1. Promises that are made without bargaining for anything in return may in some
cases induce the promisee to rely on his detriment. Promissory estoppel may be used to
enforce such promises that are made without consideration.
2. §90 Promise Reasonably Inducing Action or Forbearance
a) A promise which the promisor should reasonably expect to induce action or
forbearance on the part of the promisee or a third person and which does induce
such action or forbearance is binding if injustice can be avoided only be
enforcement of the promise. The remedy granted for breach may be limited as
justice requires
b) A charitable subscription or a marriage settlement is binding under subsection 1
without proof that the promise induce action or forbearance
c) Read the illustrations and comments on this §!!!!
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3. Idea that the promisor may be bound by the promise even though it is not
supported by consideration if the promisee relies on the promise to his detriment and
the promisor should have foreseen this reliance.
4. Generally applied to gratuitous promises that are relied on
5. Actual reliance must occur
6. Look at in context of at will relationships
a) Typically, promisor promises to enter into or continue in an at-will arrangement
and the promisee relies, and then the promisor changes his mind. Courts often
conclude that the fact that the promise involved an at-will relationship does not
mean that reliance upon that relationship’s continuation for at least some additional
period was per se unreasonable
b) At will job
(1) Problem occurs when employer promising an at-will job revokes the
promise before the employee showed up for work or very soon after
(2) Court says employer is not free to withdraw the promised job without
giving the employee at least some chance to “show his stuff”
(3) Employee should be given a good faith opportunity to perform his duties
to the satisfaction of the Δ
c) Promise to Continue At-Will Business Relationship
(1) Courts will generally allow relier to recover at least reliance damages
under the theory of promissory estoppel
7. Lack of good faith or negligence during the bargaining process may also allow for
recovery under promissory estoppel
8. Promissory estoppel is based essentially on the idea of reliance
a) May allow for injured party to recover out of pocket expenses so that he may be
placed in the position he would have been had the promise never been made
9. Not explicitly recognized under the UCC, however most courts allow that a party
to a contract for the sale of goods may invoke the doctrine under certain circumstances
a) Look at §2-205 and the firm offer provision- may allow for a promise by an
offeror who revokes his offer after inducing the offeree to reasonably rely on it
10. Expenses incurred at another’s request is sufficient consideration of a promise to
pay.
11. §323 One must perform his promise to render services to another if his failure to
exercise increases the risk of harm or harm is suffered because of the other person’s
reliance on the undertaking
a) Caveat to § 323: Misfeasance v. Non-feasance
(1) A Δ who actually entered under the performance of his undertaking is liable
for harm to the Π that resulted from his nonperformance (misfeasance)
(2) A Δ who never commenced performance at all is not liable for harm to the Π
that resulted from his nonperformance. The mere breach of a promise,
without more is simple non-feasance.
(3) There is no reason why the breach of a promise which has induced reliance
and caused harm should not be actionable in tort, particularly if the harm
caused is physical harm
IV. Mistake
A. General Rule on Mistake
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1. §151 A mistake is a belief not in accord with the facts.
2. Does not include an erroneous belief about what will happen in the future
3. Mistake of law generally does not furnish grounds for avoidance of the terms of
the contract
B. Mutual Mistake
1. §152 When Mistake of Both Parties Makes a Contract Voidable
a) 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
b) 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
2. Requirements for a mutual mistake:
a) Mistake must concern a basic assumption on which the contract was made
b) Mistake must have a material effect
c) The adversely affected party must not bear the risk of the mistake
C. Unilateral Mistake
1. §153 When Mistake of One Party Makes a Contract Voidable
a) Where a mistake of one party at the time a contract was made as to a basic
assumption on which he mace 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
(1) The effect of the mistake s such that enforcement of the contract would be
unconscionable, or
(2) The other part had reason to know of the mistake or his fault caused the
mistake
2. §154 When a Party Bears the Risk of a Mistake
a) A party bears the risk of mistake when
(1) The risk is allocated to him by agreement of the parties, or
(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, or
(3) The risk is allocated to him by the court on the ground that it is reasonable
in the circumstances to do so
3. Occurs when mistake is made by only one party
4. Courts generally hold that no relief is available to that party.
D. Defenses And Remedies for Mistakes
1. Negligence usually not a defense
a) Unless negligence is gross or culpable
b) Fault will not deprive a party of avoidance unless it amounts to a failure to act in
good faith and in accordance with reasonable standard of fair dealing
c) If mistake result from a failure to read the contract, not entitled to rescind
2. Remedies
a) Avoidance of the contract
(1) Generally restitution is an element of avoidance
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b) Reliance damages
c) Adjustment of contract as substitute for avoidance
d) Reformation
(1) Occurs when a document incorrectly reflects an oral agreement
(2) Either party may obtain a reformation (a rewriting) of the contract so that
it correctly reflects the oral agreement
(3) Failure to read does not allow for reformation
(4) Parole evidence rule- prevents a party to certain types of writings form
showing that there were prior written or oral understanding that conflict with
the writing
V. Parole Evidence Rule
A. Generally
1. Bars from the fact finder’s consideration all evidence of certain preliminary
agreements that are not contained in the final writing, even though this evidence might
persuasively establish that the preliminary agreement did in fact take place and that the
parties intended it to remain part of their deal despite its absence from the writing
2. Preliminary oral negotiations, letters, lists of items for discussion, etc. are not
intended to be part of the contract themselves and the final contract may fail to include
treatment of some of the issues raised in the preliminary oral discussions
B. Total and Partial Integration
1. Integration
a) Written document may not always represent a deal that the parties consider final,
may only be a tentative draft
b) If parties intend a document to represent the final expression of their agreement,
the document is an integration of their agreement
c) Parole evidence rule applies only to documents that are integrations
2. Partial v. Total Integration
a) If document is not intended by parties to include all details of their agreement, the
document is in partial integration
b) If document is intended by the parties to include all details of their agreement, it is
in total integration
3. Statement of the parole evidence rule
a) Partial integration- When a writing is a partial integration, no evidence of prior
contemporaneous agreements or negotiations (oral or written) may be admitted if
this evidence would contradict a term of the writing
b) Total integration- when a document is in total integration, no evidence of prior or
contemporaneous agreements or negotiations (oral or written) may be admitted if it
would either contradict or add to the writing in any way
c) Summary:
(1) Evidence of prior agreement may never be admitted to contradict an
integrated writing, and
(2) Evidence of prior agreement may never supplement any total integration
(3) If agreement was in total integration, court must ignore any and all
evidence that would contradict or add to the contract even it would show
conclusively what the parties intended
d) Contemporaneous and subsequent expressions
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(1) If an ancillary writing is signed at the same time a formal document is
signed, the ancillary document will be treated as part of the writing and is not
subject to the parole evidence rule; the writings are treated as if they form one
single document
(2) Subsequent agreements
(a) Parole evidence rule never bars consideration of subsequent oral
agreements
(b) A written contract may always be modified after its execution by
an oral agreement unless a no oral modification clause is included
e) UCC’s Parole Evidence Rule
(1) §2-202 Terms with respect to which the confirmatory memoranda of the
parties agree or which are otherwise set forth in a writing intended by the
parties as a final expression of their agreement with respect to such terms as are
included therein may not be contradicted by evidence of any prior agreement or
of a contemporaneous oral agreement but may be explained or supplemented:
(a) By course of performance, course of dealing or usage of trade; and
(b) By evidence of consistent additional terms unless the court finds
the writing to have been intended also as a complete and exclusive
statement of the agreement
(2) Summary of Code Provision:
(a) If a writing is an integration, it may not be contradicted by any
prior oral or written agreement or any oral contemporaneous agreement
(b) Integrations may be supplemented, however, by evidence of
consistent additional terms unless it was a final integration
(c) Almost identical to regular parole evidence rule
C. Roles of Judge and Jury
1. Preliminary determinations made by judge of whether the integration is partial or
total
2. Conflicting Views on How Judges Decide if writing is partial or total integration,
and whether evidence contradicts, supplements, or explains a document
a) Williston’s View
(1) Merger Clause
(a) Trial Judge should first examine the writing itself
(b) Many writings contain a merger clause that indicates that the
writing is the sole agreement between the parties
(c) Merger clauses conclusively establish that the document is a total
integration
(2) Rest of Writing
(a) If no merger clause, writing as a whole should be examined
(b) If writing is obviously incomplete or expresses the duties of only
one party, the writing is a partial integration and additional terms may be
demonstrated through oral evidence
(c) If writing on its face appears to be complete, it is a total integration
and no contradictory or additional terms should be looked at unless the
additionally terms were a separate agreement by the parties
(3) Four Corners Approach
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(a) In Williston’s view the Judge should not look beyond the “four
corners of the document” in determining whether the document is a total or
partial integration
(b) Adopts a reasonable person standard and assesses whether
reasonable people in the position of the contracting parties would have
naturally put the terms of the alleged oral agreement into the final writing
or would have left them out
b) Corbin’s View
(1) Believed Judge should look at the actual intentions of the parties to decide
whether the integration was total or partial
(2) If all evidence introduced by the parties shows that they did in fact not
intend the written contract to contain all terms of their agreement, and that in
fact other oral agreements were made and were intended to be binding, this
evidence should be given to the jury
(3) Places less emphasis on the writing itself than Williston
(4) Effect of this approach is that the parole evidence rule is almost
extinguished
c) UCC Approach- The Middle View
(1) If the additional terms are such that , if agreed upon, they would certainly
have been included in the document in the view of the court, then evidence of
their alleged making must be kept from the trier of fact
(2) Williston would not allow evidence of consistent terms if they might
naturally have been included in the writing by reasonable men, but the Code
would bar these terms only if the would certainly have been included int eh
document
(3) Code does not go as far as Corbin does where Corbin looks to the actual
intention of the parties, and not to whether reasonable persons would certainly
have included the terms in the document
d) Judge will often also have to decide:
(1) Whether the writing is in fact a final expression (integration), and
(2) Whether the oral terms sought to be introduced contradict or supplement
the writing
(3) All this must be determined by the judge and not the jury
D. Situations in which Parole Evidence Rule Does Not Apply
1. Rule does not bar a showing of illegality, fraud, duress, mistake, or lack of
consideration, or any other fact that would make the contract void or voidable
2. Rule never prevents in the introduction of evidence that would show that no valid
contract exists
3. If the contract or a duty of performance is made conditional by an oral agreement
of the parties and then sign an agreement that does not include the conditions orally
agreed to, most courts will allow proof of this condition despite the parole evidence
rule
4. An oral agreement that is collateral and is supported by separate consideration to
the main agreement may be demonstrated even if it occurs prior to completely
integrated writing
5. Parole evidence rule never bars agreements made after the signing of the writing
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E. Interpretation
1. Extrinsic evidence in the case of ambiguous terms
a) All courts agree that if a term is found by the trial court to be ambiguous extrinsic
evidence must be allowed
b) Extrinsic evidence must be evaluated by the jury
c) Evidence about the parties own pre-contract negotiations indicated to be the
meaning of the ambiguous term is to be admitted and heard by the jury
2. Unambiguous terms
a) If the term is decided to be unambiguous by the judge, the judge and not the jury,
gets to say what the term means
b) Jury is instructed by the judge on the terms meaning
3. How judge determines the existence of ambiguity, three main approaches:
a) Four Corners Rule
(1) Most stringent
(2) Judge may not consult any extrinsic evidence whatsoever in determining
whether a term is ambiguous
(3) Ambiguity is determined solely by looking at the four corners of the
contract
b) Plain Meaning Rule
(1) Court will not hear evidence about the parties’ preliminary negotiations in
determining whether a term is ambiguous
(2) Court will hear evidence about the circumstances or context surrounding
the making of the agreement
c) Liberal Rule
(1) Evidence of prior negotiations is admissible for the limited purpose of
enabling the trial judge to determine whether the language in dispute lacks the
acquired degree of clarity
(2) Judge may look at parties’ pre-signing negotiations
(3) Runs the risk of weakening the parole evidence rule
4. Burden of Persuasion
a) A party who is allowed to give testimony about what the parties intended by a
term will have problems of proof
b) Π has burden of persuading the court that the term is favorable to him was in fact
the one intended by the parties may be substantial
5. Maxims of Interpretation
a) Primary purpose rule- If the primary purpose of the parties in making the contract
can be ascertained, that purpose is given great weight
b) All terms made reasonable, lawful, and effective- All terms will be interpreted,
where possible, so that they will have a reasonable, lawful, and effective meaning
c) Construction against the draftsman- An ambiguous term will be construed against
the draftsman
d) Negotiated terms control standard terms- A term that has been negotiated between
the parties will control over a standardized portion of the agreement that is not
separately negotiated
F.Trade Usage, Course of Performance, and Course of Dealing
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1. At common law a party who argued that a particular meaning should be used
could show that this meaning was in accord with a custom or traditional usage and
allowed to introduce evidence of a particular custom only if it met a series of
requirements, including that it be lawful, reasonable, notorious, universal, ancient, etc.
2. Modern tendency is to allow party more leeway in showing a particular meaning
is in accord with custom or usage
3. Three Sources of meaning in the UCC that may be used in interpreting the terms
of contracts:
a) Course of performance
(1) Refers to the way the parties have conducted themselves in performing the
particular contract at hand
(2) Idea is that the parties own actions in performing the contract supply
evidence as to what they intended the contract terms to mean
b) Course of dealing
(1) Refers to how they have acted with respect to past contracts and not with
respect to the contract in question
c) Usage of trade
(1) Usage of trade refers to any practice or method of dealing having such
regularity of observance in a place, vocation, or trade as to justify an
expectation that it will be observed with respect to the transaction in question
4. Effect on Parole Evidence Rule
a) Course of dealing, course of performance, and usage of trade customs may be
introduced to help interpret the meaning of a writing even if it is a complete
integration--not effected by parole evidence rule
b) May also be used to add or subtract terms to or from the contract, under the UCC
they can supplement the contract meaning, even if it is in complete integration
c) Cannot, however, contradict express terms of the contract. Express terms always
win.
G. Omitted Terms Supplied by Court
1. When 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 supplied by the court
VI. Conditions of Breach and Aspects of Performance
A. Substantial Performance
1. If one party fails to substantially perform, the other party does not have a duty to
perform
2. Substantial performance is the antithesis of material breach
a) Other party may still have a valid claim for damages even if substantial
performance has occurred
b) Important to distinguish whether substantial performance has occurred in the
event of a deviation from contract terms to determine whether the non-breaching
party still has a duty to perform or not
3. Suspension and Discharge
a) If a party fails to substantially perform but the defects in his performance could be
easily cured, the other party’s duty to perform is only suspended, not discharged
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b) If defect is so substantial that it cannot be cured within a reasonable amount of
time the other party is completely discharged from their duty to perform and may
sue for breach of contract
4. Determining whether the breach is material
a) Deprivation of expected benefit
(1) The extent to which the essence or principle reason for making the
contract has not been performed must be examined in determining whether the
breach is material
b) Adequacy of compensation for loss
(1) Extent to which non-breaching party may be adequately compensated for
his loss by the awarding of damages
(2) Usually relates to whether damages can be adequately calculated, if it is
too speculative a court is less willing to find that there has been substantial
performance and thus will allow the non-breaching party be discharged
c) Part performance
(1) Greater the part performance that has been rendered by the breaching
party the less likely the breach will be deemed material
d) Likelihood of cure of breach
(1) If the breaching party seems likely to be able to and willing to cure the
breach, the less likely the breach will be deemed material
e) Willfulness of breach
(1) Willful breach is more likely to be material than a breach caused by
negligence or other factors
(2) Usually found in cases where the breaching party abandons the contract,
deliberately substitutes inferior materials, or acts in bad faith
(3) Trivial defects are allowed
f)Delay in performance
(1) Delay in performance only constitutes a material breach if it significantly
deprives the other party of the benefit of the contract
(a) Time is not necessarily of the essence as it was under old common
law
(b) Other circumstances surrounding the bargain will determine
whether the date mentioned in the contract is vital to the agreement
(c) Delay in performance, even where time is not of the essence,
suspends the other party’s duty. Even if the breaching party cures he may
still be liable for damages
(d) If a delay is likely to hinder the non-breaching party from making
substitute arrangements the delay is more likely to be considered material
5. Material Breach and the UCC
a) Perfect Tender Rule applies when the seller’s performance is less than perfect
b) §2-601 As long as the contract does not involve installments, unless otherwise
agreed, if the goods or the tender of delivery fail in any respect to conform to the
contract, the buyer may (a) reject the whole; or (b) accept the whole; or (c) accept
any commercial unit or units and reject the rest
c) When a buyer rejects they give the goods back to the seller and is completely
discharged from the contract
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d) Appears to give the buyer the right to reject goods that are defective in any
respect, no matter how immaterial, courts however don’t strictly apply this and
generally only allow buyer to reject if the defect is substantial
e) Remember- seller has right to cure the defect, buyer must also cover
f)§2-712 Buyer’s Right to Cover
(1) Buyer may purchase conforming goods from a third party, and recover
from the seller the difference between the contract price and the price he has
paid the third person
(2) If buyer does not cover, he may recover the difference between the
contract price and the market price at the time when the buyer learned of the
breach, § 2-713
(3) Buyer may also recover any incidental damages and consequential
damages
(a) Incidental- expenses involved in storing, selling, or returning the
rejected goods, and in procuring substitute goods
(b) Consequential- any loss resulting from the general or particular
requirements and needs of which the seller at the time of contracting ahd
reason to know an which could not reasonably be prevented by cover or
otherwise and injury to person or property proximately resulting from any
breach of warranty, see Hadley v. Baxendale
B. Repudiation and Prospective Inability to Perform
1. General effect of prospective breach:
a) A party indicated that he will subsequently be unable or unwilling to perform,
other party has the right to suspend their own performance
(1) Anticipatory repudiation- when a party indicates that he will later refuse to
perform, the other party can suspend their performance
(a) If he indicates that he would like to perform but cannot, this is not
anticipatory repudiation, but the other party can still suspend their own
performance
2. Insolvency or financial inability
a) Allows other party to stop their own performance
b) Where prospective ability or unwillingness to perform is certain, the other party
can cancel contract and make alternate arrangements
c) Where it is not certain that the first party will be unable or unwilling to perform,
the other party may only suspend his performance and must wait and see what
happens in order to cancel
3. Right to adequate assurance of performance
a) Allows other party to suspend, not cancel
b) Other party has right to demand assurances that the other party will perform
c) UCC §2-609 says a contract for sale imposes an obligation on each party that the
other’s expectation of receiving due performance will not be impaired. When
reasonable grounds for insecurity arise with respect to the performance of either
party the other amy in writing demand adequate assurance of due performance and
until he receives such assurance may, if commercially reasonable, suspend any
performance for which he has not already received the agreed return
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(1) §251 of the restatement provides essentially the same effect for non-goods
cases
(2) Applicable where a buyer has fallen behind in payment of his account to
the seller
(3) Seller under contract makes defective deliveries of the same kinds of parts
to other customers and the buyer finds out about these other mistakes
(4) A manufacture breaches and exclusive franchise deal by selling through
other dealers
(5) Buyer learns that the seller of real estate does not have present title to the
property
d) Must be based on new facts- the reasonable grounds for insecurity must arise and
not be known to the insecure party at the time of contracting
VII. Anticipatory Repudiation and Other Aspects of Breach
A. Total and Partial Breach
1. Total breach- a severe breach that discharges the other party’s duty to perform and
allows the wronged party to sue for damages based on the entire contract
2. Partial breach- a non-material breach that does not relieve the wronged party from
continuing to perform under the contract, still has right to sue for damages caused by
the partial breach
B. Anticipatory Repudiation, Generally
1. Occurs when a party makes it unmistakably clear even before performance is due
that he does not intend to perform.
2. Aggrieved party may institute a suit for breach even before the repudiator’s time
for performance has come due, or will allow the aggrieved party to suspend their
performance until the actual breach occurs and then sue
a) Reasons for allow aggrieved party to sue before breach occurs:
(1) Prompt disposition
(2) Need for certainty to determine whether anticipatory repudiation has
actually occurred
3. What Constitutes Repudiation
a) Traditional view: if the promisor left any chance open that performance would
occur, no repudiation has occurred
b) Modern view: repudiation occurs when any positive statement by the obligor to
the obligee which is reasonably interpreted to mean that the obligor will not or
cannot perform his contractual duty. May come through:
(1) A statement by the promisor that he does not intend to perform
(a) Not enough that the promisor expresses vague doubts, although
these doubts may entitle the promisee to request an assurance of
performance
(b) Statement must be made to the promisee, not some third party
(2) An action by the promisor making his performance under the contract
impossible; and
(a) The act by the promisor must make performance actually
impossible
(b) Act by promisor must be voluntary
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(3) An indication by the promisor or via some other means that the promisor
will be unable to perform although he desires to perform
(a) Promisee may suspend his performance
(4) Bankruptcy generally considered to be anticipatory repudiation
(a) Insolvency does not constitute anticipatory repudiation but instead
may give rise to grounds for reasonable insecurity
(5) Threatened breach must be material to be anticipatory repudiation
C. Other Aspects
1. Repudiation after repudiator’s performance is due (not anticipatory)
a) Discharges the wronged party from performance and allows them to sue for total
breach of contract
b) Repudiation accompanied by partial breach may also allow wronged party to sue
for total breach of contract
2. §256 Retraction of Repudiation
a) Repudiation may be retracted until the wronged party has
(1) Sued for breach or
(2) Changed his position materially in reliance on the repudiation or
(3) Stated that he regards the repudiation as final
b) This applies to both anticipatory and regular repudiation
c) Works the same way in the UCC, §2-611
3. Wronged party’s options
a) May sue immediately for total breach of contract
b) May not continue to act as if repudiation did not occur if doing so would
aggravate damages, the wronged party must mitigate their damages § 350
c) UCC provides that the measure of damages for a wronged party is the difference
between the market price at the time when the buyer learned of the breach and the
contract price, together with any incidental and consequential damages
4. In regular and anticipatory breach wronged party must tender his performance
a) Wronged party must show an ability and willingness to perform if he is to recover
full damages for the breach
b) If it is shown that the repudiatee would have been unable or unwilling to perform
his share of the bargain if the breach had not occurred, then he is unable to recover
c) §254 Effect of Subsequent Events on Duty to Pay Damages
(1) A party’s duty to pay damages for total breach by repudiation is
discharged if it appears after the breach that there would have been a total
failure by the injured party to perform his return promise
(2) A party’s duty to pay damages for total breach by repudiation is
discharged if it appears after the breach that the duty taht he repudiated would
have been discharged by impracticability or frustration before any breach by
non-performance
5. Repudiation of a unilateral obligation to pay money
a) Where the aggrieved party does not owe any further performance, either because
the contract was originally unilateral or because he has already rendered all
performance required of him by the contract, the courts generally do not allow an
immediate suit for breach based on anticipatory repudiation
b) §253 Effect of a Repudiation as a Breach and on Other Party’s Duties
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(1) Where an obligor repudiates a duty before he has committed a breach by
non-performance and before he has received all of the agreed exchange for it,
his repudiation alone gives rise to a claim for damages for total breach (allows
for immediate suit)
(2) Where performances are to be exchanged under an exchange of promises,
one party’s repudiation of a duty to render performance discharges the other
party’s remaining duties to render performance
(3) Comment C: An obligor’s repudiation alone gives rise to no claim for
damages at all if he has already received all of the agreed exchange for it. Rule
in subsection 1 does not allow a claim for damages for total breach in such a
case.
c) Payment of money
(1) Most common illustration of Comment C: An anticipatory repudiation of
an unconditional unilateral obligation to pay money at a fixed time does not
give rise to a claim for breach until that time arrives
(2) Frequently applies where an insurance company cancels a disability policy
and refuses to make payments under it. Π may only sue for those payments
already due as of the time of the suit, not those which will come due
subsequently
(3) Acceleration clauses- many loans and mortgages contain an acceleration
clause where if a party misses a payment it causes all future installments to
become immediately due, that way the creditor can sue immediately
6. Damages for Repudiation under UCC
a) §2-713 The measure of damages for repudiation by the seller is the difference
between the market price at the time the buyer learned of the breach and the
contract price, together with any incidental and consequential damages
b) When does buyer learn of breach?
(1) At the time they learned of the repudiation; or
(2) The end of commercially reasonable time; or
(3) Measurement at the time for performance
7. Can demand assurances when you learn of reasonable grounds for insecurity
about whether there will be performance; if other party fails to provide these assurances
this failure in itself is considered a breach
VIII. Statute of Frauds
A. Overview
1. Certain types of contracts are required to be in writing to be enforceable
2. Purpose of putting certain types of contracts in writing is to avoid fraudulent
claims
3. Five types of contracts that fall within the statute of frauds:
a) Executor-Administrator
b) Suretyship
c) Marriage
d) Land contract
e) One year
f)UCC Sale > $500+
B. Suretyship Agreements
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1. §110 Promise to pay the debt of another
2. Purpose of requiring this in writing is to provide evidence of existence, also
serves as a cautionary function
3. Applies to defaults and debts--anytime a third party will complete any kind of
contractual work should the obligor fail to do it himself
4. Suretyship provision applies only where there is a guarantee of another person’s
legally enforceable debt or obligation
5. Promise of suretyship must be made to the creditor, not to the debtor
6. If the promisor’s principal purpose in making his promise of suretyship is to
further his own interests, his promise does not fall within the Statute of Frauds
a) Generally called the Main Purpose Rule, §116
b) Examine the consideration that is given in return for his promise
(1) If the consideration is a direct benefit to the promisor, strong indication
that the case falls within the main purpose rule and is not within the Statute of
Frauds
(2) For it to fall within the Statute, consideration of the promisor promising
suretyship must entirely benefit the debtor
C. Marriage Provision
1. §124 A promise for which the consideration is marriage or a promise of marriage
must be in writing and falls within the Statute of Frauds
2. Ordinary oral engagement, however, made by mutual promises to marry, is
enforceable
D. Land Contract Provision
1. §125 A promise to transfer or buy any interest in land is in the Statute of Frauds
2. Does not apply to the conveyance of land but to the contract providing for the
subsequent conveyance of land
3. Other interests in land that fall within the Statute of Frauds:
a) Leases
(1) Exception: an oral lease for < 1 year may be enforceable
b) Mortgages
c) Easements
d) Crops are not considered to be interests in land
e) Contracts only incidentally related to land do not count, interest must be the main
part of the contact
E. One-Year Provision
1. §130 If the promise contained in the contract is incapable of being fully
performed within one year after making the contract, the contract must be in writing
2. Year is measured from the time of execution of the contract
3. Performance must be impossible within the year period, and chance that it may be
performed in one year makes it not have to be in writing
F.Contract for the Sale of Goods
1. §2-201 A contract for the sale of goods for a price of $500 or more is not
enforceable unless there is some writing sufficient to indicate that a contract for sale
has been made
2. Exceptions:
a) Goods specially manufactured and are not suitable for sale to others
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b) Estoppel by pleading or testimony- occurs when the party against whom
enforcement is sought admits in the pleading that a contract was made
c) Goods on which payment has been made and accepted or goods that have been
received and accepted
d) Non-statutory exceptions from case law may exist
G. Satisfaction of the Statute by a Memorandum
1. Memorandum must contain the following in order to satisfy the writing
requirement of the statute of frauds:
a) Reasonably identifies the subject of the contract
b) Indicates that a contract has been made between the parties
c) States with reasonable certainty the essential terms of the contract; and
d) It is signed by or on behalf of the party to be charged
2. UCC §2-201 simply requires that some writing be sufficient to indicate that a
contract for sale between the parties has been made and signed
a) Error or omission of a material term renders the memo ineffective
b) Memo must be signed by the party against whom enforcement is sought
H. Effect of Non-Compliance
1. Some states make the contract completely void if the contract does not satisfy the
Statute
2. Most states simply make the contract voidable if the contract does not satisfy the
Statute
3. If voidable, Δ must plead the Statute of Frauds as an affirmative defense
4. If void, Δ may answer with a general denial and still raise the Statute as a defense
at trial
5. Effect where only part of the contract
I. Oral Rescission and Modification
1. Rescission does not have to satisfy the Statute of Frauds, therefore if a contract is
required to be in writing under the Statute an oral rescission (cancellation) of the
contract is effective unless there is a no oral rescission clause
2. For modification it depends on the terms of the contract
a) Both the terms in the original contract that remain unmodified plus the newly
modified terms must be examined to see whether anything is within the Statute of
Frauds
b) If anything is in the Statute of Frauds, an oral modification is not effective
c) If the modified contract is unenforceable under the Statute of Frauds, most courts
hold that the original contract is left standing and its as if the modification never
occurred
d) Reliance on oral modification occurs if either party materially changes his
position as a result of the modification. Court may enforce the modification in this
situation even if it would not usually be enforceable under the Statute
e) No oral modifications clause can also be put into the contract
J. Restitution, Reliance, and Estoppel
1. Quasi Contractual Recovery
a) A Π who has rendered part performance under an oral agreement that is within the
Statute of Frauds may recover in quasi-contract for the value of the benefits she has
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conferred upon the Δ. These benefits may be int he form of a cash payment or by
the performance of services
(1) Not limited by pro-rata contact price (may be able to recover the market
value of the services, for example, rather than what the contract originally
stipulated
(2) Π must not be materially in default under the terms of the oral agreement.
Thus, even if Π has partly performed, he may not recover the value of his
performance if it materially deviated from the terms of the unenforceable oral
agreement
b) Reliance damages
(1) Usually the measure of damages for a part-performing Π whose contract is
unenforceable because of the Statute is his restitution interest (the extent to
which is performance has benefited the Δ)
(2) Courts recently have been allowing the Π to recover his reliance interest
(the expenditures he has made in preparing to perform, even where the
expenditures have not directly benefited the Δ
2. Promissory Estoppel
a) When the Π recovers in quasi-contract, he generally loses the benefit of his
bargain since he is awarded only restitution or reliance interest and not expectation
interest
b) However- where Δ’s conduct foreseeably induces Π to change his position in
reliance on the oral agreement, courts sometimes invoke promissory estoppel and
occasionally award expectation damages
c) Promissory estoppel is used in this situation to remove the contract completely
from the Statute of Frauds
d) Traditional Estoppel grounds
(1) Where the Δ has intentionally and falsely told the Π that the contract is not
within the Statute of Frauds, or that a writing will subsequently executed courts
have traditionally invoked promissory estoppel
(2) Modern courts broadened this to include cases where the Δ’s promise has
induced detrimental reliance by the Π even where neither party ever referred tot
he need for or lack of writing
(3) §139(1) A promise which the promisor should reasonably expect to induce
action or forbearance on the part of the promisee or third person and which does
induce the action is enforceable notwithstanding the Statute of Frauds if
injustice can be avoided only by enforcement of the promise. The remedy
granted for breach is to be limited as justice requires.
(a) Damage measures- courts may enforce the contract by its terms or
may instead merely award restitution or reliance damages
(b) §139(2) lists five factors to consider in determining whether a
contract should be enforced according to its terms
i) Availability and adequacy of other remedies, particularly cancellation
and restitution
ii) The definite and substantial character of the action or forbearance
in relation to the remedy sought
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iii) The extent to which the action or forbearance corroborates
evidence of the making and terms of the promise, or the making and
terms are otherwise established by clear and convincing evidence
iv) The reasonableness of the action or forbearance
v) The extent to which the action or forbearance was foreseeable to
the promisor
(c) Some courts disagree with this and say that where there is no
showing that the Δ committed fraud, they decline to find the Statute of
Frauds inapplicable
i) Especially used where the contract is an oral one for employment for
more than one year and the reliance is that the Π sacrificed other
employment opportunities
ii) Courts say that in this situation detrimental reliance will be too
easy for Π to claim and too hard for Δ to disprove and result in an
unjustified erosion in the employment at will doctrine
3. Limits on Promissory Estoppel
a) Some courts try to keep reliance and estoppel from eroding the entire Statute of
Frauds by allowing reliance to overcome the Statute only where it is the case that
either:
(1) Δ misrepresented to Π that the Statute’s requirements had been complied
with
(2) Allowing the Statute of Frauds defense would impose great injury on the
Π, or would unjustly enrich the D
IX. Remedies
A. Recovery on and off the Contract
1. Suit on the contract
a) When parties have made a legally enforceable contract, and the Δ has breached
the contract, Π will sue on the contract
b) Terms of the contract will control for purposes of judging the Δ’s wrongful
conduct and in calculating damages
2. Suit in Quasi-Contract
a) Damages are based on the value of the performance Π has rendered, irrespective
of any price set out in the contract.
b) Situations where quasi-contractual recovery may be available:
(1) Contract is unenforceably vague
(2) Contract is illegal
(3) Parties are discharged from the contract because of impossibility,
impracticability, or frustration of purpose
(4) Π has himself materially breached the contract
B. Remedies at Equity
1. When awarded:
a) § 359 Money damages would be inadequate
(1) Factors affecting adequacy of damages:
(a) Difficulty of proving damages with reasonable certainty
(b) Difficulty of procuring a suitable substitute by means of money awarded
as damages
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i) § 360(a) in land contract cases, specific performance is typically
available as a remedy because the law views specific tracts of land
as unique and impossible of duplication by the use of any amount of
money, see Van Wagner Advertising Corp. v. S & M
Enterprises
(c) Likelihood that an award of damages could not be collected
b) § 370 Contract’s terms were definite
(1) See Laclede v. Amoco Oil, Co.
c) § 366 Court’s task of enforcing and supervising the relief is not unreasonably
difficult.
2. Types of remedies at equity:
a) Specific Performance § 357(1) - an order to do something
b) Injunctions § 357(2) - an order to refrain from doing something
(1) Generally only awarded when:
(a) Seller of goods has an inability to cover
(b) Services are unique or extraordinary
(c) Employee has special knowledge of the employer’s business
(d) Not awarded if the injunction would leave the employee without any
other reasonable means of making a living
(e) § 367 A contract to render personal service will not be enforced (violates
13th Amendment against involuntary servitude).
i) See American Broadcasting Co. v. Wolf
c) Limitations on the use of equity
(1) Three pre-conditions to granting equitable relief:
(a) Money damages must be inadequate to protect the injured party
(b) Contract terms must be definite enough to allow the court to frame an
adequate order
(c) Court’s task of enforcing and supervising the relief must not be unduly
difficult
(2) Inadequacy of Damages
(a) Speculative or hard-to-calculate damages, cannot be estimated with
sufficient certainty
(b) Unavailability of substitutes for the contracted-for performance
i) Uniqueness of land
ii) Situations where performance consists of forbearance (e.g. A
promise not to compete with promisee, damages probably will not
be sufficient)
iii) Sale of a business if it is shown no closely comparable business is
available for sale
iv) Patents and copyrights are unique, so damages concerning
intellectual property is normally not adequate relief
(3) Definiteness
(a) A party who does not follow a court order is subject to contempt of
court
(b) Courts thus require that the rights and obligations of the parties be
specified with greater definiteness if there is to be equitable relief
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(4) Difficulty of Enforcement or Supervision
(a) Construction contracts are difficult to supervise
(b) Personal service contracts are rarely enforced, injunction may be
allowed
(c) Land sale contracts are the most common situation in which specific
performance is decreed
(d) Sale of goods- unless the buyer can show that the goods are unique
C. Remedies at Law
1. Expectation Interest
a) § 347 Contract damages are ordinarily based on the injured party’s expectation
interest and are intended to give him the benefit of his bargain by awarding him a
sum of money that will, to the extent possible, put him in as good a position as he
would have been in had the contract been performed
b) See Hawkins v. McGee
c) This award may give the other party an incentive to break the contract if, and only
if, he gains enough from the breach that he can compensate the injured party for
his losses and still retain some of the benefits of the breach: Efficient breach
(1) Allows economic pie to grow
(2) Market is self-correcting, future buyers will not contract with a company that
repeatedly breaches
(3) Non performance and the consequent reallocation of resources is socially and
economically desirable
d) Usual formula for calculating expectation damages:
(1) Value of Δ’s promised performance (usu. contract price) minus
(2) Whatever benefits Π received from not having to complete his own
performance (generally expenditures Π would have had to make to complete
his performance under the contract)
e) Other Issues with Expectation Interest:
(1) Generally allocation of overhead is not allowed since this is a fixed cost
(2) Cost of completion v. Decrease in value
(a) Courts will not allow expectation interest where the economic value of
the Δ’s defective performance is less than the cost of remedying Δ’s
defective performance
(b) In this case Π should be awarded the net economic loss sustained by the
Δ’s breach (the lesser sum) instead of the cost of remedying Δ’s
defective performance (the greater sum)
i) Court should not grant the cost of remedying effects if the cost is
clearly disproportionate to the probable loss in value to the Π
ii) Court should not award cost of completion where the defect is minor
and its completion would involve economic waste through the
destruction of what has already been done
(c) Cost of completion may be awarded if it can be shown that Δ’s breach
was willful and intentional or in construction contracts
(3) §352 Reasonable Certainty Requirement
(a) Π may only recover for losses that can be shown with reasonable
certainty
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(b) Profits from a new business
i) May allow expectation damages if Π had an old similar business that
can be used for estimation
ii) Generally courts do not allow profits from a new business not yet
open to be recovered because it would be too speculative to
determine
iii) Where Δ’s breach is the thing that makes it difficult for the Π to
establish lost profits with certainty, court will sometimes try to
resolve the matter in a way that punishes the Δ
(c) Public Whim
i) Courts will probably not allow recovery of expectation interest if
profits are dependent upon public whim
ii) Generally applicable to entertainment and sporting events
iii) May be allowed if there is evidence of comparable enterprises
(d) Cost of Completion Unknown
i) Unless contractor can show with specificity what it would cost him
to complete the job, he will not be able to recover expectation
damages
(e) UCC more liberal
i) §2-715 Allows buyer to recover consequential damages and states
that the burden of proving the extent of loss incurred by way of
consequential damages is on the buyer, but the section on liberal
administration of remedies (§1-305) rejects any doctrine of certainty
which requires almost mathematical precision in the proof of loss
ii) No recovery for loss of customer or other kinds of good will
iii) UCC §1-305 follows expectation rule
(1) Provides that all code remedies be liberally administered to the
end that the aggrieved party may be put in as good a position as
if the other party had fully performed
2. Reliance Interest
a) § 349 - An alternative measure of damages: includes expenditures made in
preparation for performance or in performance, less any loss that the party in
breach can prove with reasonable certainty that the injured party would have
suffered had the contract been performed
b) Allowed when expectation interest is not allowed:
(1) When Π cannot show lost profits with sufficient certainty
(2) Π is a vendee under a land contract and the jurisdiction is one where
expectation damages are not awardable in the situation
(3) When there is no legally enforceable contract but the Π is entitled to some
protection (promissory estoppel)
c) See Security Stove & Manufacturing Co. v. American Railway
Express Co.
d) UCC § 2-715 allows for aggrieve buyer to recover incidental damages
(1) Defined as expenses reasonably incurred in the inspection, receipt,
transportation and care and custody of good rightfully rejected...and any
other reasonable expense incident to the delay or other breach
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(2) § 2-715 also allows for the recovery of consequential damages, defined as
any loss which the seller at the time of contracting had reason to know and
which could not be reasonably prevented by cover
e) Reliance is generally calculated as cost to the Π, not value rendered to Δ
f) Limitations on Reliance Recovery
(1) Contract price limits amount of awardable damages
(2) Recovery is limited to profits, in other words Π’s reliance damages may not
exceed expectation damages if they could be awarded
(a) Burden of proof is on the Δ to show what Π’s loss would have been
(3) Incidental reliance damages not recoverable traditionally
(a) Modern view allows recovery for both essential and incidental reliance,
so long as the incidental reliance was reasonable and foreseeable
(4) Expenditures occurring before the contract was signed are not recoverable
because they were not made in reliance on the contract
g) Reliance Damages and the UCC
(1) §2-715 allows for the buyer to recover incidental damages- this is expenses
reasonably incurred in inspection, receipt, transportation, and care and
custody of goods rightfully rejected, any commercially reasonable charges,
expenses, or commissions in connection with effecting cover and any other
reasonable expense incident to the delay or breach
(2) Consequential damages are also recoverable- includes any loss resulting
from general or particular requirements and needs of which the seller at the
time of contracting had reason to know and which could nto reasonably be
prevented by cover or otherwise; and injury to person or property
proximately resulting from any breach of warranty
3. Restitution
a) § 370 Restitution can be granted only to the extent that he has conferred benefit
on the other party by way of part performance or reliance
b) Generally calculated as value rendered to Δ, look to market value, damages not
limited to the contract price
c) § 371 May be, as justice requires, measured by:
(1) Reasonable value to the other party of what he has received (see Cotnam v.
Wisdom) or
(2) The extent to which the other party’s property has been increased in value
(see Mich. Central R.R. V. State- an Indiana Rev. Statute dictated which
of these forms of measurement was to be picked)
d) § 373 Injured party is entitled to restitution for any benefit he has conferred on the
other party through reliance or partial performance and the injured party has no
right to restitution if he has performed all of his duties under the contract and no
performance by the other party remains due other than payment of a definite sum
of money for that performance (see Bollenback v. Continental Casualty
Co.)
e) Recovery for party in breach:
(1) § 374 - quid pro quo - see Bollenback v. Continental Casualty Co.-
Party in breach is entitled to restitution for any benefit that he has conferred
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by way of part performance or reliance in excess of the loss that he has
caused by his own breach
(2) See Farash v. Sykes Datatronics, Inc.
(3) Theory of quantum meruit - allows for recovery of the reasonable value of
services rendered - see Schneider v. Delwood Center, Inc.
(4) Can only be recovered in quasi or implied contracts
f) Not limited to contract price- may allow for recovery of whatever amount the Δ
has been enriched
g) Not available where Π has fully performed
D. Doctrine of Substantial Performance
1. If one party fails to substantially perform his obligations, the other party is discharged
from performing his duties
2. Where one party does substantially perform, the other party is not relieved of his
duties. If the other party refuses to perform, the substantially performing party may
sue for breach
3. Substantial performance has occurred when the contract’s essential purpose has been
met
4. Δ will generally have a counterclaim for damages suffered by virtue of Π’s deviations
when Π has substantially but not completely performed
a) As long a defects can be remedied without unreasonable economic waste, Δ’s
damages are the cost of remedial work
b) If waste would be involved, then Δ’s damages are the difference between the
value of the product which the Δ would have received if the contract was fully
performed and the value of the product as actually rendered by the Π, aka the
diminution in value resulting from the deviations
E. Agreed Remedies - Liquidated Damages § 356
1. Liquidated Damages are allowed for recovery of anticipated or actual damages
occurring as a result of a breach if:
a) Difficulty in determining proof of loss exists
b) Amounts stipulated are a reasonable estimation of the damages
c) See California and Hawaiian Sugar Co. v. Sun Ship, Inc.
2. Penalty damages are generally not upheld, although Posner offers some compelling
reasons for upholding penalty clauses:
a) Force credibility and allow some wealth maximizing contracts to be made that
might otherwise have not been made (enlargement of the economic pie)
b) Promisor will likely insist on a contract price sufficient to cover the increased risk
of not having the penalty clause if penalty clauses are disallowed, so there’s really
no reason not to allow them
c) What appears to the court to be a penalty may be the result of the parties’ different
perceptions of the risk of breach
d) If expectancy damages are uncompensatory, permitting parties to stipulate
damages makes efficient breach more, not less, likely, and permits the parties to
divide the gains resulting from an efficient breach
e) Downside of penalty clauses is that they may provide a windfall to injured party,
as in Lake River Corp. v. Carborundum Co.
F. Limitations on Remedies
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1. Cost of Completion v. Diminution of Value
(1) Cost of performance: How much it costs to finish the work stipulated by the
contract
(2) Diminution of value: Loss of value to the injured party by the breaching
party’s failure to perform
(3) See Peeveyhouse v. Garland Coal & Mining Co.
(4) If the cost of performance exceeds the diminution in value, courts will likely
award the injured party the amount of the value loss in order to avoid
economic waste- “the significance of the default is grievously out of
proportion to the oppression of the forfeiture.” Standards used?
(a) “Clearly disproportionate” standard
(b) Economic Waste § 346
(c) Willfulness of the breaching party may also affect whether cost of
completion or diminution of value is awarded
(d) Cost of completion generally only used in construction contracts
2. Reasonable Certainty - § 352 - Injured party may only recover for losses that can be
shown with reasonable certainty
a) In the case of a new business, lost profits cannot be awarded unless there is
sufficient evidence to prove what they might have been, i.e. past business records,
etc. See Ferrell v. Elrod
b) Generally courts find that lost profits are uncertain with public whim type of
events, i.e. Cancellation of a Lady Gaga concert or boxing match
3. Foreseeability - § 351 - Damages are not recoverable for loss that the party in breach
did not have reason to foresee as a probable result of the breach when the contract
was made
a) See Hadley v. Baxendale and Morrow v. First National Bank of Hot
Springs
b) Damages must either:
(1) Arise naturally according to the usual course of things, or
(2) Arise from special circumstances that were clearly communicated by the Π
to the Δ
c) Whether damages were foreseeable is calculated from whether or not they were
contemplated at the time the contact was made
d) Modern Application:
(1) Court will impute foreseeability to the Δ as to those damages which any
reasonable person should have foreseen, regardless of whether or not the Δ
saw them (direct or general damages)
(2) Court will also award damages as to remote or unusual consequences, but
only if the Δ had actual notice of those consequences (special or
consequential)
e) Parties may allocate risks themselves
(1) Π gives Δ notice of special circumstances
(2) Parties may agree that Δ will not be liable for certain reasonably foreseeable
consequences
f) Knowledge of consequential damages necessary; Δ is only responsible for
damages if they had reason to know the special circumstances
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g) Foreseeability is measured at the time the contract is made
h) UCC rule is fairly liberal and allows Π to recover consequntial damages
4. Mitigation of Damages
a) §350 Injured party must attempt to mitigate the damages by finding substitution,
new employment, and not incur avoidable damages
b) Π must make reasonable efforts to mitigate damages
c) See Hussey v. Holloway and Rockingham County v. Luten Bridge
Co.
d) Mixed contracts involve sale of goods and services. If the goods are merely
incidental to the contract, apply common law mitigation rules. If goods are the
primary purpose of the contract, apply UCC rules.
e) UCC rules require injured parties to “cover” by finding substitute goods. Cover
must be made:
(1) In good faith
(2) Without unreasonable delay or cost
(3) In substitution of the goods due from the seller
(4) See Dura-Wood Treating Co. v. Century Forest Industries, Inc.
and Interior Elevator Co. v. Limmeroth
G. Anticipatory Breach
1. § 2-610 - Deals with mitigation of damages when the other party repudiates before
contract performance is due, also see § 2-611
a) The party receiving repudiation has several options, including doing nothing and
awaiting performance by the repudiation party for a reasonable amount of time
b) See Cargill, Inc. v. Staford
c) § 2-713 says that market price to be recovered is the market price of the goods at
the time the buyer learned of the breach
d) § 2-723 says explicitly when another date is to be used in determining market cost
H. Suits in Quasi Contract
1. No actual contract exists- also called implied contract. Four types:
a) Never an attempt to make an actual contract
b) Contract was unenforceable due to impossibility, illegality, Statute of Frauds, etc.
c) Π has materially breached and may not recover on the contract
d) Cases where Δ has breached but Π is not entitled to damages on the contact
2. Any of the three damages is allowable
a) Courts almost never award expectation damages
b) Reliance damages and restitution damages frequently awarded
c) Courts determine what measure of damages to apply by looking at the facts of
each particular case and seeing what would be most equitable
3. Quasi Contracts Where No Contract Was Attempted
a) Emergency Services Supplied
(1) No recovery where contract with another exists
(2) No recovery when services were intended as a gift
(3) Recovery may be allowed, see Cotnam v. Wisdom (the streetcar case)
4. Unenforceable Contracts
a) Contract is unenforceable or voidable due to:
(1) Statute of Frauds
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(2) Mistake
(3) Illegality
(4) Impossibility
(5) Frustration of Purpose
b) Court will normally allow suit on quasi contract and allow Π to recover either the
value of the services performed (restitution) or the Π’s reasonable expenditures
(reliance)
5. Recovery by Breaching Π
a) Π has substantially but not completely performed
b) Π may get recovery with an allowance to the Δ for damages for the non-material
breach
c) Quantum meruit- as much as he deserves- occurs when the Π is allowed to
recover his restitution interest less the Δ’s damages for Π’s breach when Δ has
benefited from Π’s partial performance and Π’s breach was not willful
d) Generally limited to pro-rata contract price so that Π is not allowed to profit from
his own wrong
e) If Π’s breach was willful, Π cannot recover anything
(1) §374 A party who intentionally furnishes services that is materially different
from what he promised is properly regarded as having acted officiously and
not in part performance of his promise and will be denied recovery on that
ground even if his performance was of some benefit to the other party
(2) Courts do not allow Π to recover if they acted in bad faith- e.g. breached out
of convenience or financial advantage
f) UCC allows partial restitution to breaching buyer with respect to payments made
to seller before the buyer breached
(1) §2-718(2) When seller justifiably withholds delivery of goods because of the
buyer’s breach, the buyer is entitled to restitution of any amount by which
the sum of his payments exceeds:
(a) The amount to which the seller is entitle by virtue of an enforceable
liquidated damages provision; or
(b) In the absence of such provision, 20% of the value of the total
performance for which the buyer is obligated under the contract or
$500, whichever is smaller
(2) Seller may offset the buyer’s claim by any damages he sustained as a result
of the buyer’s breach and by the amount or value of any benefits received by
the buyer directly or indirectly by reason of the contract
6. Π not entitled to contract damages
a) Occurs when the standard of expectation measure damages produces no recovery
for the Π
b) If the Π has conferred a benefit on the breaching party, most courts will allow the
Π to recover the fair value of any goods or services he has conferred upon the Δ,
even though such a recovery puts Π in a better position than the expectation
measure would have
I. Punitive and Nominal Damages
1. Haynes v. Dodd- an English case
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a) Says that punitive damages should only be awarded in the case where the contract
that has been breached was itself a contract to provide peace of mind or freedom
from distress
b) Stone really likes this, keeps us from being such a litigious society
2. §205- Every contract imposes upon each party a duty of good faith and fair dealing in
its performance and enforcement.
a) See Seaman’s Direct Buying Service, Inc. v. Standard Oil Co. of
California
3. §355- Punitive Damages- Punitive damages are not recoverable for a breach of
contract unless the conduct constituting a breach is also a tort for which punitive
damages are recoverable.
a) In awarding punitive damages, look to: (see Ainsworth)
(1) Wealth of Δ- should be directly proportionate to size of award and enough to
deter Δ from repeating the conduct in the future as well as to punish him for
past behavior
(2) Culpability and blameworthiness of breaching party
(3) Vulnerability and injury suffered by offended party
(4) Offensive conduct as compared to societal values of justice and propriety
(5) Means judged necessary to deter future misconduct
b) Also awardable in fraud cases
(1) Elements of fraud:
(a) Representations were made
(b) Representations made were false
(c) Δ knew statements were false
(d) False statements were intended to deceive Π
(e) Π did in fact suffer damages as a result of relying on the false
information
(2) See Club Mediterranean, S.A. v. Stedry
4. §353- Loss Due to Emotional Disturbance- Recovery for emotional disturbance will
be excluded unless the breach also caused bodily harm or the contract or the breach is
of such a kind that serious emotional disturbance was a particularly likely result.
a) See Lamm v. Shingleton
b) Insurance companies are under a duty to negotiate with its insureds in good faith
and to deal with them fairly. “Negotiations between a wealthy, sophisticated
commercial venturer and a naive consumer cannot be of equal strength,” thus to
make it fair the drafter is responsible for ambiguity in their contracts. See
Ainsworth v. Combined Insurance Co. of America
5. Breaches can be “oppressive” and thus punitive damages awarded
a) Clear and convincing evidence must exist
6. Nominal damages are awarded if losses for recovery are not foreseeable or are too
speculative
a) See Freund v Washington Square Press, Inc.
J. Sales Contracts and the UCC
X. Warranties
A. Warranties Generally
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1. A warranty is a guaranty or promise by a seller of goods that the goods will have
certain characteristics
2. The seller of goods is not an absolute insurer of their quality. In order to recover
for breach warranty, a buyer must prove:
a) That Δ made a warranty under one of the applicable UCC sections
b) That the goods were defective at the time of sale
c) That the buyer’s loss or injury was proximately and actually caused by the defect
and not by the buyers negligent or inappropriate use of the goods; and
d) That no affirmative defense, including disclaimer, statute of limitations, lack of
privity, lack of notice, and assumption of the risk applies
B. Express Warranties
1. An explicit promise or guaranty by the seller that the goods will have certain
qualities
2. §2-313 Three ways an express warranty may come into being:
a) Any affirmation of fact or promise made by the seller to the buyer which relates to
the goods and becomes part of the basis of the bargain creates an express warranty
that the goods shall conform to the affirmation or promise
b) Any description of the goods which is made part of the basis of the bargain
creates an express warranty that the goods shall conform to the description
c) Any sample or model which is made part of the basis of the bargain creates an
express warranty that the whole of the goods shall conform to the sample or model
3. Buyer must rely on the seller’s warranty
4. Warranties can be made to persons other than the Π
5. Words warranty or guarantee do not have to be included, puffing and expressing
an opinion about the product, however, is not a warranty
C. Implied Warranty
1. UCC §2-314 Imposes the Implied Warranty
a) Unless excluded or modified, a warranty that goods shall be merchantable is
implied in a contract for sale if the seller is a merchant with respect to goods of that
kind
b) Meanings of Merchantable
(1) Fit for ordinary purposes for which such goods are used, an objective
standard is applied, goods must also pass without objection in the trade under
the contract description
D. Warranty of Fitness for a Particular Purpose
1. §2-315 Where the seller at the time of contacting has reason to know any
particular purpose for which the goods are required and that the buyer is relying on the
seller’s judgment to select or furnish suitable goods, there is...an implied warranty that
the goods shall be fit for such purpose
2. Buyer must prove three things:
a) That the seller had reason to know the buyer’s purpose
b) That the seller had reason to know that the buyer was relying on the seller’s skill
or judgement to furnish suitable goods; and
c) That the buyer did in fact rely on the seller’s skill or judgement
E. Warranty of Title Against Infringement
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1. §2-312 Imposes, in any sale of goods, an implied warranty that the seller has full
title to the goods, and that the goods do not infringe upon any patent or trademark
F.Privity
1. Two persons are in privity with each other if they contracted with each other
2. Three alternative privity sections in §2-318
a) Alternative A
(1) Strictest privity statement
(2) Extends a seller’s warranty to any natural person who is in the family or
household of his buyer or who is a guest in his home if it is reasonable to expect
that such person may use, consume, or be affected by the goods and who is
injured in person by a breach of the warranty
b) Alternative B
(1) Extends the warranty to all cases of personally injury involving who may
reasonably be expected to use, consume, or be affected by the goods
c) Alternative C
(1) Broadest privity statement
(2) Extends the warranty to all person and corporations who may reasonably
be expected to use, consume, or be affected by the goods
(3) Covers property damage as well as personal injury
(4) May also cover intangible economic loss
G. Disclaimers of Warranty
1. §2-316 Words or conduct relevant to the creation of an express warranty and
words or conduct tending to negate or limit warranty shall be construed whenever
reasonable as consistent with each other; but subject to the provisions of this article on
parol or extrinsic evidence (§2-202), negation or limitation is inoperative to the extent
that such construction is unreasonable
a) If the scope of the disclaimer is clear, and the scope of the express warranty is not
as clear, the court should construe the warranty narrowly so that it doesn’t conflict
with the disclaimer
b) If there is no reasonable way to construe the disclaimer and the warranty together,
the disclaimer is ineffective
2. Disclaimers of Implied Warranty
a) A disclaimer of the warranty of merchantability must mention the word
merchantability
b) Disclaimer must be conspicuous
c) A disclaimer of the warranty of fitness for a particular purpose must be in writing
H. Modifying Contract Remedies
1. Limitations exist for limiting the remedies available to buyers