Contracts II Outline

CONTRACT INTERPRETATION AND CONSTRUCTION

A. INTERPRETATION
1. Purpose: To determine the parties’ intent with respect to the contract
a. Ascertainment of a contract’s meaning
(Frigaliment Importing Co. v. B.N.S. Int.: Chicken case)
b. Ks are not formed in a vacuum
c. Determine the meaning under the circumstances (Corbin—contextual)
2. Data Available:
a. Intrinsic Evidence: Look at the contract itself
i. Courts prefer this
b. Extrinsic Evidence: Look outside of the contract (“parol evidence”)
3. Data Priority:
a. Contract (“four corners”)
b. Course of performance
c. Course of dealing
d. Trade usage (UCC 1-205): Any practice or method of dealing having
such regularity of observance in place, vocation or trade as to justify an
expectation that will be observed in respect to the transaction in question.
4. Interpretive Tools:
a. Give words their general prevailing meaning unless the term is
technical
b. Interpret agreement in a reasonable, lawful, effective way
c. Custom-negotiated provisions given more weight than standardized
form provisions
5. External ways to view the contract:
a. Ad/marketing
b. Industry practices
c. Past dealings
d. Post-signing dealings
e. Technical lexicon
f. Common parlance (what would the average person look at this contract
think that the terms meant)
g. Negotiations
6. Notes:
a. Does the information itself add anything to the analysis?
b. Why is certain information excluded in the analysis:
i. Relevance
ii. Credibility
iii. Language in the contract that excludes any past dealings
c. Put the intent clearly in the document!
d. With new technology, come new words, issues, and problems
(Guilford v. Pub. Util. Comm.: Def. of “appurtenances”)
e. Ambiguity resolved against the drafter (contra proferentum)
f. The expression of one thing excludes another (exclusio alterius)

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 7. Restatement Second 202: Rules in Aid of Interpretation
a. Words and conduct are interpreted in light of all of the circumstances
and, if the purpose is ascertainable, it should be given great weight
b. A writing is interpreted as a whole
c. Unless other intention is manifested:
i. Where language has a generally prevailing meaning, it is given
such
ii. Technical terms and words of art are given such meanings
d. Relationship and prior dealings of the parties will be considered
e. Intentions should be considered together
B. CONSTRUCTION
1. Def: The methods and considerations that courts use to supplement or
clarify contract terms as a matter of law for intent or for public policy
2. Gap Fillers Approaches:
a. Autonomy of the parties: Try to find their intent and follow it
b. Economic approach: Find the best way to promote efficiency of the law
c. Societal goals: Broad goals of society
d. Considerations of the relationships of the parties
3. Good Faith and Fair Dealing (R. 2nd 205) (UCC 1-203)
a. Def: Every contract contains an implied obligation of good faith and
fair dealing
(Saucy Sisters: Termination for Convenience Clause did not have any
bad faith and therefore stands)
b. Alternative Interpretations:
i. Any rational action complies with the covenant
ii. Any action that is profitable per se complies
iii. Slimy behavior, even if profitable or consistent with literal
terms of the contract is bad faith
*These interpretations are somewhat contradictory to each other
*However, the court may use any of these possibilities
c. Notes:
i. These are very subjective issues (the court may do what it thinks
it right)
ii. There are ethical and moral questions that come into this
analysis
iii. There is no one exact definition of good or bad faith
iv. These can be thought of as gap fillers (this is because it is an
implied term)
v. Reflects a sense of public policy (courts want parties to act
reasonably)
vi. This issue usually arises when two parties enter into a K with an
unexpressed expectation or intent and the other party does
something that goes against this

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 DEFENSES
Void: The K is a legal nullity; it is as though it never happened (void ab initio)
Voidable: One party has the option to deem the K void
Unenforceable: Valid K but no remedy
MISUNDERSTANDING
1. Def: Parties use the same words but attach irreconcilably different meanings
to them (Peerless or Raffles) (Konic v. Spokane)(Frigailment)
a. Ambiguous terms: Suceptible to two different meanings
b. Vague: Wide spectrum of meanings
2. Elements:
a. Parties have different meanings for the same word(s)
b. Neither party knows the other’s meaning
c. Words are material to the contract
d. One party’s meaning is not more reasonable than the other’s
3. Notes
a. This happens with both parties think that they are agreeing to the same
terms, although each has a different subjective belief about the deal
b. Most commonly found when a term used in the K is ambiguous
i. In this sense, the objective theory of contracts does not
strictly apply
c. If one party knew or should have known the meaning understood by the
other party, a K will be formed on the term as understood by the
unknowing party
d. UCC has no provisions dealing directly with the consequences of
misunderstanding (it is left to case law)
e. The difference between misunderstanding and mistake is that
misunderstanding prevents a contract from ever existing at all (whereas
mistake mean that a K exists but it may be avoided by the mistaken party)
f. VOID

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 MISTAKE
1. Def: An erroneous assumption of fact by one or both parties
a. Mutual: Both parties have a mistaken belief about the fact (Wood v.
Boyton: Diamond) (Sherwood v. Walker: Cow) (Mattson v. Rachetto:
Agricultural)
i. Courts often hold that there was no K at all, rescission, or
reformation
ii. This is usually the only grounds for avoidance!
b. Unilateral: Mistake made only by one party
i. Courts often hold that there is no relief
2. Elements:
a. Fact exists at the time of the contract
b. Parties are mistaken
c. Fact relates to basic assumption underlying the contract
d. Mistake has material effect on contract’s value
e. Complaining party does not bear the risk. Risk allocations:
i. By contract
ii. Reckless about lack of knowledge
iii. Reasonable for party to bear risk
3. Notes
a. It it not enough to say that a mistake has been made—there must be
something in addition to the mistake
b. Principle of Conscious Ignorance: A party who bases his assent on a
present fact (that is important and material) but who is consciously aware
that his knowledge of the truth is limited
i. This person should bear the risk (risk allocation)
ii. However, consider the reasonability—should he have to bear
the risk?
iii. This is a situation where the court would say it is probably
fair for him to bear the risk
c. Court may focus on three factors:
i. Nature of the mistake
ii. Seriousness
iii. If it is unfair
d. Remember: This is not about what may happen in the future (those Ks
deal with impossibility, impracticability, and frustration of purpose)!
e. Traditional rule is that ignorance of the law is no excuse –however, the
modern view is that mistake of law may serve to avoid the K (Mattson)
f. VOIDABLE

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 EXCUSE DUE TO CHANGED CIRCUMSTANCES
1. Def: Facts occurring after contract formation that affect the basic contract
assumption
a. The actual performance of the K is significantly different than what
the party originally expected
b. There are three types: Impracticability, Frustration of Purpose, Force
Majeure
2. Elements:
a. Materiality
b. Risk allocation
i. Express
ii. Implied
3. Must be:
a. Unexpected occurrence
b. It was the basic assumption of the agreement
c. The occurrence made the performance impracticable/moot
d. Party seeking relief must not have been at fault
e. Party seeking relief must not have assumed the risk
4. IMPRACTICABILITY: Supervening fact that makes performance
impractical (Paradine v. Jayne: German prince) (Taylor v. Caldwell: Music hall
that burned down) (Opera Co. v. Wolf Trap: Opera perf. in park after elec. storm)
a.. It is not that the K is impossible, it is just that it is SO impractical that
the party should not have to go through with it
b. These cases often apply when:
i. Death or incapacity necessary for performance
ii. Destruction of a specific thing necessary for performance
iii. Prohibition or prevention by law
c. Courts struggle with this because of freedom of contract
5. FRUSTRATION OF PURPOSE: Supervening fact makes performance moot
(something happened that rendered the K not meaningful for either party)
(Krell v. Henry: Coronation of King)
a. The value of performance is diminished
b. Frustration of a hidden, secret, or otherwise undisclosed purpose is not
enough (Scottsdale Rd. v. Kuhn Farm Machinery)
c. Consider foreseeability (although this cannot be analyzed alone)
d. Imprac. and Frust. of Pur. are similar and only differ in purpose and
what the supervening fact does to performance—this is because Imprac.
came from Imposs. and Frus. of Pur. came from Imprac.
6. FORCE MAJEURE: An act of God or an event outside of the parties’
reasonable control
a. Note: If force majeure affects basic contract assumption and makes
performance impracticable or moot, performance is excused UNLESS
the contract specifies otherwise (freedom of K always important!)
b. Remember: Freedom of contract is always important!
MISREPRESENTATION & FRAUD
1. Def: A contract is voidable if assent is justifiably induced by fraudulent or

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material misrepresentation
a. Misrepresentation: An assertion not in accord with the facts
b. Fraud: When the assertion is made with knowledge that it is not in
accord with the facts
2. Situations include:
a. Express situations—a lie or embellishment
b. Deliberate concealment of a fact
c. Failure to disclose a fact
3. Often used for:
a. Lies
b. Overconfident factual statements
c. Actions taken to hide facts
d. Innocent but material misstatements
e. Failure to volunteer facts (in limited situations)
4. Notes:
a. Material Fact: Something that affects the conduct of a reasonable
person in reference to another person (subjective analysis)
b. Types of Fraud
i. Affirmative Fraud (Sarvis v. Vermont State College: Man who
lied on resume for employment)
ii. Silence as Fraud (Stambovsky v. Ackley: Poltergeists case)
c. When Non-Disclosure is Equivalent to an Assertion (R. 161): This
occurs when the party knows that disclosure of the fact would correct the
other party as to a basic assumption upon which the party is making
d. The essential difference between misrep. and fraud is state of mind
e. Fraud in the Inducement: Relates to the fact that forms the basis of
the K and gives the other party incentive to enter the K
f. Fraud in the Factum: Relates not to an underlying fact but to the
document being executed (creates a void, not voidable K)
g. Common remedies for fraud:
i. Rescission (restitution)
ii. Damages
5. VOIDABLE

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 DURESS
1. Def: Assent procured by improper means
2. Notes:
a. Examine if the party had any options left
b. What was the motivation for entering into the K
c. The mere threat of a breach is not, in itself, duress
d. Economic Duress: The agreement was induced by an improper threat,
leaving the party with no other alternative but to assent (Austin
Instr. v. Loral: Navy radar) (Alaska Packers Assn.: Although
decided on consid.)
i. Balance with competitive market
e. Does not constitute duress if substitutes are available
f. Supervening difficulties may allow for the K to be upheld without
new consideration (New England Rock Ser. v. Empire Pav.) UCC 2-209:
i. An agreement modifying a K needs no new consideration
ii. A signed agreement which excludes modification or rescission
except by a signed writing
g. A threat is improper when (R. 176):
i. It is a crime or a tort (or could become one)
ii. It is a criminal prosecution
iii. Threat of use of civil process or in bad faith
iv. The threat is breach of duty of good faith and fair dealing under
a K with the recipient
h. A threat is improper if the resulting is not on fair terms and (R. 176):
i. The act would harm the recipient and would not significantly
benefit the party making the threat
ii. The effectiveness of the threat in inducing the manifestation of
assent is significantly increased by prior unfair dealing by
the party
making the threat
iii. What is threatened is otherwise a use of power for illegitimate
ends
3. VOIDABLE

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 UNCONSCIONABILITY
1. Def: The absence of choice and reasonable terms (NEC Tech. v. Nelson: TV
case) (Williams v. Walker-Thomas Furniture)
a. Something that offends the conscience because it is unreasonably
excessive, unscrupulous, or egregious
b. Remember, there can still be “bad bargains”
c. Prevent oppression and unfair surprise
d. Based on the concept of Equitable Relief
2. Elements:
a. Procedural: Defects in the bargaining process (the way it was formed)
i. Contracts of Adhesion: Non-negotiable form or standardized
contracts
*Any K where one of the parties, having superior
bargaining power, is able to dictate the terms of the K on a
take-it-or-leave-it basis, and the weaker party has no choice
but to adhere to the terms
*This signifies that there was oppression in its formation
ii. Examples: Age, education, intelligence, business knowledge,
experience
b. Substantive: Unfair terms (the terms in the K)
i. Examples: Reasonableness, purpose of the K, allocation of the
risks, language that is incomprehensible, boilerplate terms,
cost-price disparity (selling something for much more), denial or
basic rights or remedies, circumstances surrounding the K,
commercial settings
3. Notes:
a. If one is present and much stronger than the other (P or S), the court will
probably find unconscionability
b. Think about both elements together (the distinction is not as important)
c. These cases are very fact-specific and limited
d. If unconscionability is found, the court may:
i. Reject the K entirely
ii. Excise the offending term(s) and go forward with the rest of K
4. UCC 2-302
a. Un-C clauses may be severed from the rest of the K
b. Meant to prevent oppression and unfair surprise

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 ILLEGALITY
1. Def: A contract that is in violation of a law (Diversified Group v. Sahn)
2. Clause is usually severed
PUBLIC POLICY
1. Def: A contract that is in violation of a public policy
2. Notes:
a. Tension between enforcing the K and upholding the countervailing
public policy
b. Court does not want to overstep judicial lawmaking
c. Rule of Reason: The court tries to find a balance btwn. the K and the
clause that goes against public policy (Stevens v. Rooks Pitts & Poust)
d. Damages: Courts usually look at the least extreme remedy in order to
get the right result
3. Usually VOIDABLE
INCAPACITY
1. Def: Contracts entered into during incapacity are voidable by the incapacitated
party
2. MINOR: A minor does not have the capacity to bind himself to a K, thus
making the K voidable (usually 18 years old) (Webster St. v. Sheridan: K for apt.
lease) (Haldman v. Lemke: Teen who buys car)
a. A minor may disaffirm expressly or by conduct at the time of reaching
majority, or a reasonable time thereafter
b. Exceptions: (must have both)
i. Emancipated Minor: When his parents’ duty of support is
terminated as a result of certain voluntary acts of the minor
(Ex: Getting married, army)
*Just leaving home in not enough
ii. K is for Necessaries: Goods and services essential to the
minor’s existence, but can extend to items which are appropriate
to the minor’s standard of living, as set by his parents’ social
position in life
c. Most courts have held that minor not responsible for loss in value of
property
d. If disaffirmed, minor must return goods (quantum meruit available only
if minor emancipated and contract was for necessaries)
d. VOIDABLE
3. MENTAL ILLNESS
4. INTOXICATED
a. Normally limited to situations where the person is incapable of
understanding and the other person has reason to know he is impaired

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 PAROL EVIDENCE
A. Def: If the parties have a writing that is supposed to be a complete and final
expression of their agreement, then extrinsic evidence of prior contemporaneous
agreements they might have made, which would vary or contradict the terms contained in
the writing, is inadmissible.
(Masterson v. Sine Judge Traynor)
(Pacific Gas & Electric v. Drayage Judge Traynor: Parol evidence is admissible if it is
relevant to prove the meaning to which a word is susceptible—otherwise may undermine
intent of the parties)
1. Notes:
a. Think of this as the extrinsic evidence rule (this is because it applies
to oral and written evidence that is outside of the contract itself)
b. How much credence do we give to a written agreement?
c. Does the information contradict the analysis or is it within the scope?
d. Meant to preserve the integrity of written contracts
e. Remember: Parties may subsequently modify their Ks
f. Integrated=Final
B. Types:
1. FULLY INTEGRATED: Parties intend writing to be complete and exclusive
as a final agreement
a. The parol evidence rule may only interpret ambiguous terms
b. Cannot add or contradict terms
2. PARTIALLY INTEGRATED: Parties intend the writing to be the final
agreement but not comprehensive
a. May add terms but not contradict them (this is because we are
concluding that, although the document is not comprehensive, we give
priority to the final agreement)
b. Terms that contradict are not allowed because otherwise it would not
be final—parties go through negotiations to get the K they have
(Masterson v. Sine: PI because was silent on assignability)
3. Parol Evidence may also show if agreement is fully/partially/not integrated
(How does a party prove that a contract is anywhere on the continuum?)
Focus on the intent (did they intend for the contract to be integrated?) Two ways:
a. Four Corners: Prohibits extrinsic evidence
i. Look at the writing itself to determine if extrinsic evidence is
permitted (Thompson v. Libbey: Quality of logs
ii. Williston (you can think of this approach as an implied merge
clause)
iii. Mitchell v. Lath (icehouse on the property did not have to be
removed even though orally agreed because not in K)
b. Modern Approach: Accept extrinsic evidence to determine whether
integration exists
i. Extrinsic evidence may be used by the court to determine
whether parol evidence rule applies
ii. If the court finds that the parties intended to integrate, then no
other evidence will be admitted

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 iii. Corbin and Winmore (you can think of this approach that they
would not imply a merger clause but the parties can include it)
C. Reasons for parol evidence
1. To keep bad information from juries
2. Reduces litigation costs (not as many discovery issues)
3. To give reason for parties to enter into written agreements
D. Steps to Determine Parol Evidence
1. Is the agreement intended to be a final agreement? (INTEGRATION)
a. If it is the final but not comprehensive agreement, it is partial
i. Evidence inconsistent cannot be introduced
ii. Terms that are missing may be supplemented
2. Is the agreement that is intended to be final, also complete and exclusive?
a. If it is the complete and exclusive writing, it is fully
i. Evidence inconsistent cannot be introduced
ii. Terms cannot be added
iii. Only ambiguous terms may be interpreted
E. Exceptions to the Parol Evidence Rule
*This only applies if the parties are not trying to enforce the contract separately*
1. Contracts that attack the validity of the contract
(Examples include fraud, duress, mistake, illegality, and possibly unconscion.)
a. Example: If a party is trying to claim fraud or duress, extrinsic evidence
is going to be admitted (and there will be no parol evidence rule) because
otherwise a party would never be able to bring these claims
b. There are certain acts that are so egregious that courts do no want to
exclude claims because of a strict evidentiary rule
2. To the extent that an agreement is meant to interpret an earlier contract does
not violate the parol evidence rule
a. Example: Parties have a contract to deliver something in Winter of
2008, which they both understand to be January 2008. A second contract
may interpret this agreement without violating the parol evidence rule.
3. Restatement Section 214(d) deals with these exceptions
F. Notes
1. PE is on the decline
2. Liberal application (Traynor) v. Strict application
3. PUT YOUR INTENT INTO THE K
4. Just because a party gets his evidence in does not mean that it will be believed
5. To avoid parol evidence problems:
a. Put your intent in the K
b. Define terms in the K
c. Use merger clauses
G. Parol Evidence Rule under the UCC
1. Takes a similar approach that fully may not be contradicted or supplemented
2. However, UCC does not permit a final and complete written K to be explained
or supplemented by course of dealings, trade usage, or course of performance

H. MERGER and INTEGRATION CLAUSES

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 1. “All prior oral or written representations, understandings and agreements had
between the Parties with respect to the subject matter of this Contract…are
merged in this Contract, which alone fully and completely expressed their
agreement”
(Bristow v. Drake Street, Inc. Judge Posner)
a. Goes to the intent of the parties (that they do not want the court to
look at evidence since their intent is already included)
b. Terms that are capitalized mean they are defined in the contract
c. Make sure to indicate in the merger clause that this contract stands
alone (this is because parties often have multiple contracts)
d. Remember: This deals with prior oral and written representations
(this means that subsequent agreements could come in)
2. Notes
a. This is a way to contract around the parol evidence rule
b. Remember: You still cannot use a merger clause to get around issues
of validity
c. Courts give a good amount of deference to merger clauses
d. These are particularly valuable in situations when the negotiations
take a long time (to make sure that prior drafts are not resurrected)
e. Evidence of fraud, bad faith, uncon. will always be able to get in

CONDITIONS AND PROMISES

A. CONDITION PRECEDENT
1. Def: Condition must be satisfied before an instant duty of performance
arises
2. Notes:
a. The idea is that the condition arises and at that point precedent arises
b. Example: Assume Binco is buying Targetco by purchasing all of its
stock. The acquisition requires Targetco’s stockholder approval. The
parties have to document the agreement before the approval (so they can
have something to vote on). However, Targetco does not want any
obligations if the stockholders veto the deal. The condition precedent is
that the acquisition will go through only after the stockholder’s approval
c. Policy: Courts generally disfavor condition precedents (“courts refuse
to shift the risk and burden…unless the language clearly indicates that the
parties intended to do so”) (Koch v. Construction Tech., Inc.)
i. This idea is rooted in fairness
B. CONDITION SUBSEQUENT
1. Def: Condition’s failure to occur discharges already-existing contractual
duty (condition that, when it happens, cancels or modifies the duty of the
contract)
2. Notes:
a. Do not get caught up on why it is called subsequent
b. These are rather rare
c. Example: Insurance company promises to insure a homeowner for flood

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 and flood damage. The condition precedent would be that a flood has to
happen. Assume that the insurance company adds another provision that it
will not provide coverage unless it is submitted within 60 days of the flood
(this would be a condition subsequent).
C. Difference between a CONDITION and a PROMISE
1. Condition: An event, not certain to occur, which must occur before
performance under a contract becomes due
a. Something that is a condition and not a promise: No X, then no Y
b. This can result in no duty to perform and no damages for liability
2. Promise: A commitment to act or refrain from acting in a specific way in the
future
a. Something that is a promise and not a condition: If X, then Y
b. This means liability for damages but if it is not a condition, the other
party still has to perform
3. Promissory Condition:
D. TYPES OF CONTRACT PROVISIONS
1. Covenant: A promise to do or not do something
a. Breach of contract is the focus
2. Representation: Statement of fact made to induce a party to enter into a
contract
a. Misrepresentation: This is a defense to contract formation and it may
also include tort-type damages
3. Warranty: Other statements of fact
a. Breach of contract and special warranty remedies are the focus
4. Condition: An event that must occur before performance is required
a. A failure of a condition excuses performance
*Most contract provisions are covenants and not contract provisions*
-This is because people do not draft contracts thinking about how they
can get out of them
E. How Conditions Are Expressed
1. Express Condition: Expressed in the contract
a. On condition that, if, unless, until (condition is the best)
b. Rule: Express conditions must be literally complied with (and
strictly enforced)
c. Although constructive conditions, which are imposed as a matter of law
and drawn from the promises constrained in the contract, may be
substantially performed, express conditions must be literally complied
with. Failure of the condition to occur excuses the promisor from its
duties. (Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co.)
d. Courts will not apply substantial performance to express conditions
2. Implied Condition: Implied in fact
a. These are constructive conditions (see below)
b. “We must weigh the purpose to be served, the desire to be gratified, the
excuse for deviation from the letter, the cruelty of enforced adherence”
(Judge Cardozo in Jacobs & Young)
3. Construed Condition: Implied in law

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 4. Substantial Performance: (Constructive Conditions): Substantial
performance of a contractual duty satisfies any “constructive condition” derived
from that duty to the other party’s obligation to perform
a. Is the breach material?
b. Would it be out of proportion to say that the breach means that the
party does not have to go through with the contract?
i. Would it be fair?
ii. What was the intent of the parties?
c. Jacobs & Young, Inc. v. Kent: The owner’s duty to make the final
payment was subject to the constructive condition of the builder’s
performance of his duty to complete the house according to the
agreed specifications. Substantial performance of the builder’s duty
satisfied this constructive condition.
d. This is rooted in justice and equity
e. The breach cannot be material
f. Judge Cardozo broke down the promises into three categories:
i. Promises that are so plainly independent of each other that they
can never be conditions
ii. Promises that are so plainly dependent that they must always be
conditions
iii. Promises that are dependent in matters of substance but
independent with regard to insignificant departures
g. Trivial, innocent, and inconsequential departures from the contract
h. Cannot frustrate the purpose and cannot be intentional
i. Unless it is clear, contract language is generally viewed as covenants
and not conditions
j. The law does not deal well with “hard to quantify” ideas (such as certain
brands)

MATERIAL BREACH, SUBSTANTIAL PERFORMANCE,

AND ANTICIPATORY REPUDIATION
*Concept: Distinguishes between those breaches that would excuse performance from
those breaches that would not*
A. Def: Failure to perform a covenant or inaccuracy of warranted fact
1. Material breaches create termination right as a gap filler
2. Breacher is entitled to restitution
B. Determine if the breach is material:
1. Material: Where a breach is so serious that it allows the other party to decline
his performance, terminate the contract, and sue for full expectation damages
a. A material failure by one party gives the other party the
right to
withhold further performance as a means of securing his
expectation of an
exchange of performance and suspends the injured party’s
duties until the

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 breaching party cures the default (Seydel v. Ige: Employer
got employee to
move to U.S. to take a job by telling him he would get
stock, apt., etc. and
employee received damages after not transferred)
b. Cure: The breaching party may reasonably fix the
problem before it
becomes serious
2. Not Material: If the breach is not material, need substantial performance
(cannot cancel the contract but can sue for damages)
3. If there is a breach, the other party may:
a. Suspend performance
b. ?
c. Seek to rescind the contract
d. Continue the contract and then sue because of the breach
4. Restatement 2nd 241: Five Factors to Consider in Determining Whether a
Breach is Material: *Know* (Seydel v. Ige) (Worchester Heritage Society v.
Trussell: Seller could not rescind the contract for a home that buyer bought with
a clause that he would restore it, even though it was not restored within time per.)
a. Whether the breach deprives the injured party of a benefit which he
reasonably expected
b. Whether the injured party can adequately compensated for the part of
the benefit that he was deprived
c. Whether the breaching party will suffer a forfeiture by the injured
party’s withholding or performance
i. What will the “suffering” be?
d. Whether the breaching party is likely to cure his breach
e. Whether the breach comports with good faith and fair dealing
*Courts balance these factors to determine if there is a breach*
5. Consequences of Substantial Performance
a. Rule: Measure of damages for substantial performance is the cost to the
victim of rectifying the defective performance (Jacob & Youngs
recognizes an exception to this general rule)
b. Exception: This award is not appropriate where the breach is neither
material nor willful and the cost of remedying the defect would be grossly
out of proportion to the harm—the property award will be to award no
more than the amount that the defective work has reduced the market
value (Jacob & Youngs) (Lyon v. Belosky Contruction: Woman
could
recover for a custom home that was built with improper roof—the proper
measure of damages in cases involving the breach of a construction K is
the difference between the amount due on the K and the amount
necessary to properly complete the job or to replace the defective
construction, which ever is appropriate)
c. Parties may put forward defense of affirmative economic waste that
damages should be calculated on diminution of value (this is the defense

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 that Belosky unsuccessfully tried to use)
C. UCC Perfect Tender Rule 2-601: Buyer may reject non-conforming tenders
a. 2601: If the goods or tender of delivery fail in any respect to
conform to the contract, the buyer may:
i. Reject the whole, or
ii. Accept the whole, or
iii. Accept any commercial unit(s) and reject the rest
b. Exception: Buyer’s right to reject is subject to good faith under
UCC 1-203
i. This means that, if a seller can show that the buyer used the
nonconformity as a pretext to avoid a contract that had become
unfavorable as a result to market changes, the buyer’s rejection
would not be rightful
c. Exception: UCC-2-508: The Seller’s Opportunity to Cure
i. Before the time of performance has expired, the seller may
seasonably notify the buyer of his intention to cure and may then
within the contract time make a conforming delivery
ii. Where the buyer rejects a non-c good, the seller may have
additional time to cure (or substitute the good) if he seasonably
notifies the buyer (Ramirez v. Autosport: Buyer was able to
rescind a contract for a van since reasonable time for cure was
given, although the seller did not cure the problem)
d. Under UCC 2-313: If the seller provides a sample to the buyer, the
usual understanding is that the seller warrants that the goods will
conform to the sample (Printing Center of TX v. Supermind Publishing:
Buyer of books could rescind contract because pages were not printed
the same as the sample they were shown)
e. The ability to cure was incorporated into the UCC to reflect what really
occurs in the business world (sellers reasonably expect to have a “second
chance” to cure the problem)
f. Parties may write the Perfect Tender Rule out of their contract
i. In addition, spell out the terms of what constitutes acceptance
ii. Party should also define what is a material breach
e. UCC 2-612: Installment contracts: does not follow the perfect tender
rule but instead adopts the substantial performance doctrine. Installment contract is
defined under 2-612 as “one that requires or authorizes the delivery of goods in separate
lots to be separately accepted…”
If a contract is an installment contract, UCC 2-612(2) allows the buyer to reject any non-
conforming installment only if:
1: the non-conformity substantially impairs the value of that installment to the buyer; and
2: if it cannot be cured
D. ANALYSIS:
1. Was it a material term?
2. Was there a material breach?

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 REMEDIES

A. PRINCIPLE REMEDIES
1. Money
2. Termination of obligation
3. Specific performance
B. METHODS TO COMPUTE DAMAGES
1. Expectation Damages: Put the non-breaching party in the position as if the
breaching party had performed
a. Also called “benefit of the bargain”
b. Restatement Second § 347
i. The loss in value to him of the other party’s performance caused
by its failure or deficiency, plus
ii. Any other loss, including incidental or consequential, caused by
the breach
iii. Any cost of other loss that he has avoided by not having to
perform
c. Carpel v. Saget Studios, Inc.: Π s could not recover in fed. court from
negligent photographer after they did not receive wedding photos because
could not meet jur. amt.—damages they claimed included sentimental
value, restaging the wedding, etc.
i. Mental suffering and punitive damages are typically not allowed
in contracts
ii. Some losses cannot be avoided and the law does not always
have a good remedy for it
d. Peevyhouse v. Garland Coal & Mining Co.: P. leased land to G., with a
clause that G. will restore the land at the end of the term. G. did not
restore the land, although the court only awarded the diminution of the
land after coal had been extracted and land was used.
2. Reliance Damages: Put the non-breaching party in position as if the promises
had never been made in the first place
a. Reimbursing the expenses incurred in reliance of non-breaching party’s
expected performance
3. Restitution Damages: Put the breaching party in position as if the promises
had never been made
a. What benefits have been made that should be returned?
b. These usually the lowest
4. These methods are alternative—this means that the non-breaching party can
pick the method he wants
a. Typically, amount of damages from most to least is:
expectation—reliance—restitution
5. Example
a. Facts: A sells B a textbook for $10, to be delivered tomorrow. B pays A
$10 and gives him a copy of your notes
i. Text market value: $15
ii. Notes market value: $1

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 iii. Cost for photocopying: $3
b. Ex: B gives $10 and his notes and A does not give B the textbook.
i. Restitution damages: $11 (The $10 cash and $1 notes)
*Do not add the $4 of the photocopying!
ii. Reliance damages: $13 (The $10 cash and $3 that it cost you
to photocopy the notes)
*Do not add the $1!
iii. Expectation damages: $15
C. EFFICIENT BREACH
1. Def: A party should breach if alternative arrangement improve social welfare
*Very controversial
2. Consequences:
a. Non-breaching party should be made whole
b. Breaching party should not be deterred from breaching
i. No “penalties”
ii. No punitive damages
iii. No specific performance
3. Problems with efficient breach theory:
a. Contract damages may not make the breaching party whole
b. No attorney’s fees
c. Much time and hassle for enforcement
d. There are limits to the damages a party can get
*Default remedies may be incomplete*
(Freund v. Washington Square Press: Author got $.06 after publisher
backed out of contract to publish manuscript because damages could
not really be quantified)
4. Notes
a. Some countries follow pacta sunt servanda (commitments must be
honored)
D. TYPES OF DAMAGES
1. Direct: Damages that ordinarily result from the breach regardless of the non-
breaching party’s identity
2. Indirect:
a. Incidental: Administrative costs of remediating a breach (substitute
performance)
i. Ex: Costs of inspecting the defective performance or the costs of
arranging substitute performance
b. Consequential: Idiosyncratic damages suffered by the non-breaching
party due to breach
i. Ex: Lost profits, injury to property, and personal injuries
3. In determining damages, must account for any cost avoided by the non-
breaching party
4. Example:
a. Painted contracts to paint house for $1,000
b. Customer plans to sell home for fair market value of $100,000
c. Painted fails to do job

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 d. Homeowner hires a new painted for $1,200 (direct damages of $200)
e. Homeowner incurs $50 in finding the new painted (incidental of $50)
f. Homeowner’s house sell is delayed and sells for $95,000 (consequential
damages of $5,000)
5. Liquidated Damage Provisions: These are provisions in contracts that spell
out exactly what the party is to get if the other is to breach
a. Ex: A will get $X if the other is to breach the contract
6. Sole Remedy: Parties may put a clause in the contract that spells out exactly
what the damages will be
E. EXPECTATION DAMAGES UNDER THE UCC
Add Class/Book Notes
1. BUYER’S REMEDIES
a. Buyer’s alternative remedies for failure to deliver conforming goods
i. Cover: Buy goods in the open market (the seller pays the
increase in price plus any incidental or consequential damages)
(UCC 2-712)
ii. Damages: Equals the market price of the goods minus the
contract price plus incidental/consequential damages minus
the expenses avoided
iii. Specific Performance (rare)
b. Remedy for breach discovered after acceptance
i. All reasonable losses plus incidental/consequential damages
ii. If there is a breach of warranty, person may receive value of
goods promised minus value of goods delivered
2. SELLER’S REMEDIES
a. If seller has fully performed and buyer fails to pay, seller gets contract
price
b. if buyer breaches before complete deliver, the seller can stop delivering,
resell undelivered goods or cancel the contract
c. If the seller resells, the buyer owes the contract price minus the resale
price plus incidental/consequential damages minus seller’s costs avoided
i. But in cases of “lost volume seller” (in business of reselling
goods), seller gets lost profits plus incidental damages
F. LIMITS ON EXPECTATION DAMAGES
1. Damages are recoverable only if they can be established with REASONABLE
CERTAINTY (cannot be unduly speculative)
a. Mears v. Nationwide Insurance Co.: Insurance company sent out an
announcement to employees that two Mercedes will be given to person
who creates company theme
i. When there is an ambiguity, the complaining party will get the
least favorable option
ii. This case carries with it the idea that we do not have certainty,
and since we do not, it would be unduly speculative to just “make
up” different damages
iii. Trend in courts: Courts allow more leeway to a non-
breaching party as far as establishing reasonable

19
certainty of
damages if the breaching party knowingly or willingly offends
the court
b. Locke v. United States: US terminated a requirements contract to repair
typewriters with Locke without cause
i. If a reasonable probability of damage can be clearly established,
uncertainty as to the amount will not preclude recovery
c. Justice Oliver Wendell Holmes: “The duty to keep a contract at
common law means a prediction that you must pay damages if you do
not keep it—and nothing else”
i. This may not be the trend in most courts today
ii. This seems to be in line with efficient breach
d. ESPN v. Baseball: ESPN contracted with Baseball to play games for
one year. ESPN preempted B. to play football games (Efficient Breach).
Baseball brought suit for “millions” but could only recover nominal
damages because to speculative
i. To recover soft damages, the Π needs to provide some formula
for estimating them
2. Damages are not recoverable if breaching party did not have reason to
FORESEE them as a consequence of breach
a. General damages: Damages arising in the natural course due to
contract breach (direct and incidental damages)
i. Every buyer would have received these damages
b. Special Damages: Damages reasonably contemplated at contract time
as the probably consequence of the breach (consequential damages)
i. Only that particular buyer would have received those damages
ii. Wullschleger v. Jenny: Whether is was reasonably
contemplated that Jenny would use certain fabric for circle skirts
*Case focused on the differences between general and
special damages
iii. Damages must be within the reasonable contemplation of the
parties (Kenford Co. v. County of Erie: Man could not recover for
lost appreciation of land that he purchased around a proposed
stadium site when the stadium did not get built because it was not
within the reasonable contemplation of the parties)
c. Hadley v. Baxendale Rule: Special or consequential damages
awardable only if non-beaching party’s special circumstances were
communicated to or known by breaching party
i. As rearticulated by Restatement 351, consequential damages
awardable only when reasonably foreseeable by breaching party
ii. Forces parties to disclose their priorities upfront
d. Lost profits are typically the damages sought by the other party—
however, the lost profits still must be foreseeable to be recoverable
i. Make the contract clearly specify the purpose and the
profits lost from possible breach (liquidated damages clause)

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 3. Damages are not recoverable to the extent that the non-breaching party
COULD HAVE AVOIDED THEM WITH UNDUE EFFORT
(MITIGATION)
a. Def: Non-breaching party cannot recover damages that could have
been avoided without undue effort (“duty” to mitigate)
i. This is an affirmative defense (it would be on the breaching
party to prove that the non-breaching party did not mitigate)
ii. Rockingham County v. Luten: Construction company was hired
to complete a bridge. He was told to stop from one party and then
privately told to continue (so he did continue). Allowed to recover
for damages up until told to stop and profits if K not breached.
iii. Parker v. 20th Century Fox Films: Actress brought suit after
film company cancelled her film and offered her work on another
film that was somewhat different. Actress able to recover and not
barred by mitigation of damages.
b. Purposes:
i. Do not want to encourage wasteful behavior (efficient breach
concept)—efficiency
c. Employment Context Damages: Non-breaching employee damages
equal the contracted salary minus the amount the employer proves that
the employee:
i. Earned, or
ii. With reasonable effort, might have earned from other
employment that was not “different or inferior”
(Parker v. 20th Century Fox Films: Films held to be different)
d. UCC (Principle for UCC also requires mitigation as long as
“commercially reasonable”)
i. UCC 2-715
ii. UCC 2-710
G. RELIANCE DAMAGES
1. Def: Instead of expectation damages, the non-breaching party can get the
amount incurred in reasonable reliance of the breaching party’s promises
a. Limited by certainty, foreseeability, and mitigation principles
b. In contracts where the Π would have lost money, reliance damages
may be limited to the amount of expectation damages (so they may
be lowered)
2. Notes
a. Hawkins v. McGee: Doctor promised that this patient’s hand would
be fixed and “100% perfect.” The doctor used skin from the patient’s
hand (so its now hairy). Court held that the patient should get damages
of the hand as warranted (100% perfect) versus what the hand is now
(hair).
i. Contract does not deal well with “soft” damages
b. Sullivan v. O’Connor: Doctor gave patient a nose job that did not
turn out as it was supposed to. Patient was allowed to recover out of

21
 pocket expenses and pain and suffering
i. Very rare to get p&s
ii. Court was skeptical to award damages as in Hawkins
H. CONTRACTUAL LIMITS TO REMEDIES
1. Liquidated Damages: What the parties agree upon for damage amount
a. They are enforceable is the amount is a reasonable estimate of loss
and difficulty of proof
i. This can be a way of increasing or decreasing liability
ii. These must all be tailored
iii. Make sure that this is also the sole and exclusive remedy!
iv. Never call the liquidated damages clause a penalty!
v. Mitigation damages should now be irrelevant (if it is well-
written)
b. They are not enforceable if there is a penalty
c. Restatement Second 356: Damages for breach by either party may be
liquidated in the agreement but only at an amount that is reasonable in the
light of the anticipated or actual loss caused by the breach and the
difficulties of proof of loss. A term fixing unreasonably large liquidated
damages is unenforceable on grounds of public policy as a penalty
d. UCC 2-718 (Same as Restatement)
i. Wedner v. Fidelity Security Systems: W. brought suit against
security system for improperly maintaining the system. W. was
only allowed to recover the amount specified in K.
*It does not matter that the K called the clause a liquidated
damages clause, it was held to be a dollar cap!
e. Lake River Corp. v. Carborundum Co.: Distrib. and manu. entered into
a K in which manu. promised to sell distrib. enough goods to cover costs
and make a promise. Manu. breaches and distrib. may recover under the
parties’ liquidated damage clause but only to the extent that it is not
considered a penalty.
2. Consequential Damages Waiver (or other damages)
a. Generally enforceable except as applied to consumer-based personal
injury
3. Dollar Cap
a. Generally enforceable except as applied to scienter-based tort claims
or if cap leaves not effective remedy
b. Wedner v. Fidelity Security Systems: Could be read as a liquidated
damages clause or as a dollar cap
4. Ancillary Limits
a. Shorten the SOL
b. Performance as the “sole and exclusive” remedy
c. Warranty Disclaimers
d. Release/Waiver of Liability
e. Limited Jurisdiction/Venue or Arbitration
I. SPECIFIC PERFORMANCE
1. Def: This is equitable relief that is available only when money damages are

22
inadequate
a. Sometimes characterized as an extraordinary remedy
b. Parties cannot contractually require court to award it
c. Subject to equitable limitations (e.g., unclean hands, laches)
2. Real estate buyers typically can get specific performance
3. UCC buyers typically can get specific performance when damage calculations
undercompensate
a. Van Wagner Advertising v. S&M Enterprises: Tenant brought suit
against new owner/landlord for specific performance to require it to let
them remain on the premises. SP was denied and may only recover lost
revenue.
4. No specific performance for personal services, but negative injunction may be
available

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