Contracts Outline

Contracts I Outline

12/2/2009 12:19:00 PM

1) OVERVIEW a) Purposes of Contract Law i) Predict which promises will be enforced ii) Justify the selective use of states power iii) Determine which promises are enforceable iv) Fill in the gaps in enforceable contracts v) Help define the meaning of the contract vi) Define which rules are default rules and which are mandatory (duress, fraud, unconscionability) b) Sources and Functions of Contract Law i) Sources (1) Doctrines (2) Common Law (3) Restatement (not binding until adopted in cases) (4) UCC (binding adopted by legislatures) ii) Functions (1) Sorting Problem (2) Gap Filling iii) Theories of Contract: (1) Autonomy: subjective contract law protects the freedom of individuals to make binding commitments with each other (2) Economic: objective contract law creates incentives for future contracting parties and should therefore support socially desirable outcomes iv) Types of Contracts (1) Express Contract: (a) Elements: (i) Promise (ii) Bargain/Exchange (RST 17) (iii) Consideration (2) Implied in Fact: (RST 4) promise may be stated in words or may be inferred wholly or partly from conduct (a) Elements: (i) Mutual agreement (ii) Intent to contract

(iii)Promise is implied in actions (3) Implied in Law: quasi-contract: not actually a contract. Intent of parties to contract does not matter (a) Elements: (i) Benefit conferred upon D by P (ii) Appreciation by D of such benefit (iii)Acceptance and retention by D of benefit such that it would be inequitable to retain benefit without payment c) Contract (RST 1): a promise or set of promises for the breach of which the law gives remedy, or the performance of which the law in some way recognizes as a duty d) Promise: a moral charge on a potential act. You can change your mind about the promise being a good idea, but you cannot break a promise. Told you my intention and told you I do not intend to change my mind. i) (RST 2): (1) a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made; (2) person manifesting the intention is the promisor; (3) person to whom the manifestation is addressed is the promisee; (4) where performance will benefit a person other than the promisee, that person is a beneficiary. ii) You are committing to a future activity, the promise and the action promised do not happen simultaneously. iii) Objective test to JUSTIFY belief a promise exists: a reasonable person must believe that a promise has been made. Must be justified in that belief. iv) How a Promise may be Made (RST 4): a promise may be stated in words either oral or written, or may be inferred wholly or partly from conduct. e) Agreement/Bargain (RST 3): an agreement is a manifestation of mutual assent on the part of two or more persons. A bargain is an agreement to exchange promises or to exchange a promise for a performance or to exchange performances. f) Terms of Promise, Agreement or Contract (RST 5): (1) a term of a promise or agreement is that portion of the intention or assent manifested which relates to a particular matter; (2) a term of a contract is that portion of the legal relations resulting from the promise or set of promises which relates to a particular matter, whether or not the parties manifest an intention to create those relations. 2) OFFER a) Bailey v. West (R.I. 1969) horse boarded by Bailey with no contract for services. Bailey sued West to recover payment for services. The trial court found for West granting Bailey only 5 months payment. The P sued based on theory of contract implied

in law. The question is whether there was a contract or quasi-contract. The court found no contract. There is no promise here sufficient to support the claim of a contract because West never intended to enter into an agreement. Bailey took the horse knowing there was a dispute. (1) Was it reasonable for Bailey to believe that this horse had an owner and would pay? Maybe, it is his customary business practice to accept nice horses, an owner is bound to show up. But the 4 yrs really hurts Bailey. (2) Quasi-contract requires: (1) benefits conferred on D; (2) appreciation of benefits by D; (3) acceptance of benefits making it inequitable to retain the benefits without payment. (a) Rejected because Bailey is seen as a volunteer. The performance was issued without any request by West. (3) Objective Theory of Contracts: would a reasonable person believe a contract had been formed? Not in this case (4) People cannot be made obligors against their will. (5) POLICY argument: that people have the freedom to contract and the freedom NOT to contract (6) Incentive for Bailey to be more careful in the future. (7) POLICY argument: Social coordination more Wests than Baileys in the world. Protects the socially accepted way of contracting because it is easier for idiosyncratic people to conform to the majority. This reduces TRANSACTION COST b) Lucy v. Zehmer - (Va, 1954) Zehmer wrote out (and he and his wife signed) a contract of sale of a farm to Lucy. Lucy gave him $5 as consideration and walked out of bar. Zehmer claims it was a joke, but Lucy did not see the contract as a joke. If both parties understand that the contract is a joke, there is no intent, and no contract. Lucy can reasonably understand the Zehmers behavior as serious, so the Zehmers are held to the contract. i) Zehmers Defenses: he was intoxicated and he did not intend for a contract to me made (both rejected by court) (1) RST 16: Intoxicated Persons: a person incurs only voidable contractual duties by entering into a transaction if the other party has reason to know that by reason of intoxication (a) unable to understand in a reasonable manner the nature and consequences of the transaction; OR (b) unable to act in a reasonable manner in relation to the transaction.

(a) It would only matter that Zehmer was drunk if Lucy knew (2) RST 17: Requirement of a Bargain: (1) the formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration (a) Meeting of the Minds (3) RST 18: Manifestation of Mutual Assent: manifestation of mutual assent to an exchange requires that each party either make a promise or begin or render a performance. (a) What matters is the outward manifestation of intent that leads the other party to believe the contract is serious not the actual internal mental intent of the party. (b) How do we determine if there is manifestation of mutual assent? (i) A reasonable person would believe (ii) Offer followed by Acceptance by other party (RST 22) 1. RST 24: Offer is a manifestation of a willingness to enter into a bargain a. RST 26: this manifestation is not present in preliminary bargains (4) Doesnt matter if Zehmer was joking if a reasonable person would have believed he was serious (as Lucy did) talked at length, wrote it out and signed it as did wife, revised the document ii) Instant retraction once binding, it doesnt matter when you try to take the promise back c) Leonard v. Pepsi Co. (SDNY, 1997) P sued Pepsi Co. for specific performance (delivery of the Leer Jet). The court held that given the comic nature of the commercial, no reasonable person would conclude that the Leer Jet is represented as a serious offer. (1) Reasonable person standard one must look at facts of the case to determine if there is a serious offer (2) Rule places burden on non-majoritarian bargainers to conform to majoritarian costs (3) Doesnt matter if Leonard didnt even get the joke if it was objectively recognized as a joke (a) Not promisors burden to inform unreasonable person of joke d) Dyno Costruction Co. v. McWane Lewis bought Dyno and had been previously employed y Reynolds where he had dealings with McWane, so reasonably should have known McWanes policy of requiring a liability waiver. Lewis sign front of forms and faxed them back (the fronts did not include the liability waiver and Lewis claimed he

never got them). Dyno suing for consequential damages flowing from the breach of the contract. McWayne repaired pipes but refused to pay consequential damages. i) Boundary between preliminary negotiations and an actual offer ii) They both performed so there is obviously some sort of contract iii) Issue is terms of the contract/when it was formed (1) Lewis says formed when he called McWane and said to order materials after the 2 price quotes and there was no discussion of liability waivers at the time (a) UCC 2-206 can accept in many forms and 2-207(3): P says that UCC would fill in the necessary missing elements doesnt apply b/c of the liability waiver (1) McWane says the 2 price quotes were invitations to negotiate further: (a) Offer = signing of purchase order sent to Lewis (b) Acceptance = Lewis signed purchase order and sent it back (c) This was the manifestation of their intent (i) Bound Dyno to waiver even though they didnt return backs ii) Price Quote is NOT an OFFER here: starting point for an offer too incomplete the price quote is the Preliminary Negotiation Phase RST 26 (1) Up until point of the offer each party is responsible for their own reliance/expectations (2) Price Quote could be an offer if it is more than price and quantity, both parties extend reliance iii) To determine there is NO OFFER look at text and context (1) TEXT incompleteness of text suggests it was not intended as contract (2) CONTEXT he signed a contract later b) Lefkowitz v. Great Minn. Surplus Store - D published 2 ads. 1st ad: first come, first served $1 ea, P is the first person at the store, but D says sorry the house rules say this applies to ladies only. P comes back after second ad and dismissed because he knows the house rules. P claims D makes an offer for coats and stoles and he accepted it by showing up. i) This is a unilateral promise promise something if you take an action ii) RST 30: (1) an offer may invite or require acceptance to be made by an affirmative answer in words or by performing or refraining from performing a specified act, or may empower offeree to make a selection of terms in his acceptance; (2) unless otherwise indicated by the language or the circumstances an offer invites acceptance in any manner and by any medium reasonable in the circumstances. (1) You are the boss of your offer!!!

(2) You have to specify the conditions (like the house rule) if you dont it is assumed that (2) applies iii) Court only considered stole an offer because it was a specific price, coat said up to $100 so too speculative to be an offer (1) Ds ad was clear and specific about what P must do iv) Need to make house rule explicit before acceptance of offer (put it in the ad), so it doesnt matter if there was a house rule because no one knew about it. v) Court decides he cant recover the first week because the ad was vague, but can recover the second week because ad was specific even though he knew the house rule (1) Zywicki thinks court split the difference the wrong way what seems relevant is that they have a ladies only policy, not that the second time they made n offer vi) Forces other stores to be more careful in ads (burden on store), benefit of having a clear rule and who bears the risk 3) ACCEPTANCE a) Bilateral contract: promise for a promise, acceptance of offer has to be communicated to the offeror b) Unilateral contract: promise for performance, acceptance does not have to be communicated to the offeror. Acceptance is communicated when the offeree commences performance c) RST 63 Time When Acceptance Takes Effect: unless the offer provides otherwise: (a) an acceptance made in a manner and by a medium invited by an offer is operative and completes the manifestation of mutual assent as soon as put out of the offerees possession, without regard to whether it ever reaches the offeror; but (b) an acceptance under an option contract is not operative until received by the offeror. i) The Mailbox Rule: Common law rule that an offer is made or a contract complete at the time it is placed in the mailbox d) Silence as Acceptance: RST 69 Acceptance by Silence or Exercise of Dominion: (1) where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases only: (a) where an offeree takes the benefit of offered service with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation; (b) where the offeror has stated or given the offeree reason to understand that assent may be manifested as by silence or inaction, and the offeree in remaining silent and inactive intends to accept the offer; (c) where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept.

(2) An offeree who does any act inconsistent with the offerors ownership of offered property is bound in accordance with the offered terms unless they are manifestly unreasonable. But if the act is wrongful as against the offeror it is an acceptance only if ratified by him. e) Ever-Tite Roofing Co. v. Green Green contracts P to re-roof residence, sales rep w/o authority signs contract, P runs credit check which came back ok and next day takes crew w/ supplies to house to do the work. When P got there another company already doing the work. P sues D for Breach of Contract. P hired D to perform and P was accepting offer to perform. i) Ever-Tite says accepted offer by performance (1) RST 30 Form of Acceptance Invited: (1) an offer may invite or require acceptance to be made by an affirmative answer in words or by performing or refraining from performing a specified act, or may empower offeree to make a selection of terms in his acceptance; (2) unless otherwise indicated by the language or the circumstances an offer invites acceptance in any manner and by any medium reasonable in the circumstances. (2) Contract said that performance was a method of acceptance ii) Green says he revoked offer before P accepted because P seeing the other crew doing the work was sufficient notice he did not intend to enter into the contract (1) RST 36 (1c) Methods of Termination of the Power of Acceptance revocation by the offeror (a) Allowed to revoke offer until it is accepted (2) RST 35 (2) Offerees Power of Acceptance: a contract cannot be created by acceptance of an offer after the power of acceptance has been terminated in one of the ways listed in 36 (a) Revocation of an offer terminates power of acceptance (3) RST 43 Indirect Communication of Revocation an offerees power of acceptance is terminated when the offeror takes definite action inconsistent with an intention to enter into the proposed contract and the offeree acquires reliable information to that effect. (a) To revoke an offer manifest an intention not to enter into the contract (b) BUT the other party has to know the offer has been revoked iii) Appeals court thinks performance began when P loaded the trucks, so offer accepted at that point (1) Green failed to revoke his offer before Ever-Tite accepted, but did revoke before P terminated performance

iv) RST 45 Option Contract Created by Part Performance or Tender (1) where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it; (2) the offerors duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer (1) Have to pay upon completion, given promisee reasonable time to complete performance v) RST 54 Acceptance by Performance, Necessity of Notification to Offeror: (1) where an offer invites an offeree to accept by rendering a performance, no notification is necessary to make such an acceptance effective unless the offer requests such notification; (2) if an offeree who accepts by rendering a performance has reason to know that the offeror has no adequate means of learning of the performance with reasonable promptness and certainty, the contractual duty of the offeror is discharged unless: (a) the offeree exercises reasonable diligence to notify the offeror of acceptance, or (b) offeror learns of performance within a reasonable time, or (c) offer indicates that notification of acceptance is not required. (1) This is why D must notify P of revocation but P doesnt have to notify D of acceptance (1) applies vi) RST 50 (2) Acceptance of an Offer: acceptance by performance requires that at least part of what the offer requests be performed or tendered and includes acceptance by a performance which operates as a return promise (1) Since D waived prior notification requirement as long as performance began in a reasonable amount of time, D is liable for damages vii) Zywicki thinks: Ever-Tites form was what Green signed and their terms and conditions looks like ET was the boss of the offer (1) More plausible that Green invited Ever-Tite to make and offer and Ever-Tite made offer and then Green never accepted f) Ciaramella v. Readers Digest Assoc. Ciaramella sued Readers Digest for wrongful termination and discrimination, and the 2 went back and forth about the settlement. Ciaramellas attorney told RD they had a deal without his client seeing it or signing the settlement, Ciaramella got a second opinion and refused to sign the settlement. RD brought suit saying settlement agreement accepted orally (through attorney). Question is what did the parties intend? i) Court came up with 4 Part Test to determine if parties meant to be bound orally:

(1) One or both parties expressed reservations to be bound by contract w/o written acceptance (2) Settlement agreement to be binding in the absence of partial performance (3) All terms agreed upon (4) Type of contract usually agreed to in writing ii) Court found parties had intended final agreement to be in writing 4) OFFER AND COUNTER OFFER a) Dataserv Equipment Co. v. Technology Finance Leasing Corp. Dataserv sent Technology a proposal that Techonology accepted in part and rejected in part. Technology would not accept contract unless 3 provisions were changed, Dataserv only changed 2 and when they finally did change the 3rd Technology said it was too late and withdrew their offer. Dataserv then sold items to another company and sued Technology for the difference. i) Appeals Court said that Technology refusing to accept the contract unless 3 provisions were changed was a counteroffer which extinguished the original offer, after Technologys counteroffer, Dataserv accepts only 2 of the changes immediately which changes the counteroffer and is a manifestation of intent not to go into contract ii) RST 36 (1a) Methods of Termination of the Power of Acceptance: rejection or counter offer by the offeree (1) Effect of rejection of the counter offer is to terminate the power of acceptance of the offer iii) Court says that Dataserv then cant go back and accept the counter offer after it has rejected it b) Common Law View i) Mirror Image Rule both parties have to agree to exact same terms for contract to be formed ii) Last Shot Doctrine if the parties do not fulfill the mirror image rule but exchanged performance then the last set of terms proposed is the offer and assume the offeree accepts b/c they performed (1) Problems: people dont read the terms so not actually manifestation of intent, promotes strategic behavior by contracts (undo all previous negotiations) c) UCC 2-207 Additional Terms in Acceptance or Confirmation: eliminates mirror image rule and last shot doctrine (between merchants) (1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it

states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to additional or different terms (2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless: (a) The offer expressly limits acceptance to the terms of the offer; (b) They materially alter it; OR (c) Notification of the objection to them has already been given or is given within a reasonable time after notice of them is received (3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such a case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provision of this act d) Ionics v. Elmwood Sensors, Inc. There had been several orders placed but they had conflicting conditions stipulated in their forms that neither party had read. P sent a purchase order to D and D says we agree only if you follow our warranty. i) Court uses the knock out rule in which they eliminate incompatible terms and satisfy 2c by providing notification in a reasonable amount of time through their conflicting terms ii) Zywicki says analysis in Iconics was wrong it uses UCC 2-207 (2) but there was no offer and acceptance here so (2) doesnt apply (1) It was formed by CONDUCT, so UCC 2-207 (3) should apply (2) But Court got to the same place it would have if it had applied (3) anyways e) Contract Formation in the Internet Age: Battle of the Forms i) Under Common Law people battled out the forms ii) Under the UCC assume people dont read the forms f) StepSaver Data Systems v. Wyse Technology - D had a box top license on the top of their products, but P says they did not intend for those to be the warranty terms. i) TSL args box top license was the contract SS phone call too vague to constitute an offer, the offer was made when TSL sent SS the merchandise and acceptance was made by SS when it did not return merchandise within 15 days (1) TSL says terms on box top specifically terms of transaction and warranty court says no, not gaping holes, UCC and Copyright laws could fill in holes ii) TSL argument in the alternative: this was a conditional acceptance SS calling is the offer, TSL ships merchandise it is the conditional acceptance based on SS agreeing to

the box top license, SS agreed to conditional acceptance because it didnt return the merchandise (1) This is not a conditional acceptance because it violates UCC 2-207(2)(b), so they are actually proposals for additional terms not a conditional acceptance (2) This is not a conditional acceptance under UCC 2-207(2) b/c it fails the 3 part test 1) materially altering 2) only way to accept offer 3) unwilling to proceed without (a) D was willing to proceed without the top warranty. iii) Ruling: P did not accept the offer of the box top licenses when they opened the product because there were material elements of offer missing iv) Logic: this is not a conditional acceptance b/c they were willing to waive the provision that you cannot make copies which means they would not have insisted on provision of warranties (1) These are actually two separate questions according to Zywicki, TSL may allow copies to be made but would not want a warranty that the software will work when installed on someone elses computer v) UCC 2-207(3) fills in those provisions that the parties did not expressly agree upon. i) Boilerplate Contracts b) Hill v. Gateway Hill bought a Gateway system over the phone and after 30 days started to complain that product had shortcomings. Gateway tried to help through customer support. Hill sued Gateway who immediately appealed to enforce their arbitration clause which was in a statement of terms inside the box (failing to return computer w/in 30 days is an expression of acceptance). i) Issue: were terms in package part of the contract? (1) Offer was when Gateway sent box and Hill accepted when he opened the box and didnt return the computer within 30 days (so no additional terms) (a) Hills phone call to Gateway to order the computer wasnt the offer b/c not definite enough (b) No reasonable person believes that all the terms will be stated when you make the phone call (2) Hill can accept the terms by doing nothing because Offeror is the boss of his offer and that is how Gateway set up their offer in the statement in the box (3) Policy argument by Easterbrook: in order for these transactions to work (economic efficiency) have to allow for these conditions, world cant operate w/o expeditious policies 5) CONSIDERATION

a) Consideration is a bright line rule: present contract enforceable, not present contract not enforceable b) Consideration is a necessary but not sufficient condition to the contract/promise c) Over Inclusive: may identify a contract was formed even when not intended (ex: Lucy v. Zehmer consideration doesnt tell us if Zehmer was joking or not) d) Under Inclusive: some contracts that were meant to be enforced are not (ex: In Re Greene no consideration even though the parties intended to be bound) e) Fuller Functions of Consideration (2 and 3 are really together) i) Evidentiary evidence to a third party that the parties have entered into a bargain ii) Cautionary or Deterrent by creating this formality we impress upon you what you are doing and discourage transaction of doubtful utility to guard against rash and impulsive action iii) Channels parties know what you need to do to make a valid contract Bargain vs. Gift f) RST 17 Requirements of a Bargain: g) RST 22 Mode of Assent: h) RST 71 Requirement of Exchange: (Consideration) (1) to constitute consideration, a performance or a return promise must be bargained for; (2) 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; (3) The performance may consist of: (a) an act other than the promise, OR (b) a forbearance, OR (c) the creation, modification, or destruction of a legal relation; (4) The performance or return promise may be given to the promisor or to some other person. It may be given by the promisee or by some other person. i) Comment B concerned with external manifestation rather than undisclosed mental state (1) False recital of consideration or nominal consideration does not suffice ii) Consideration Doctrine manifestation of their mutual assent, consideration makes you do something to evidence your bargain i) RST 74 Settlement of Claims: (1) Forbearance to assert or the surrender of a claim or defense which proves to be invalid is not consideration unless (a) the claim or defense is in fact doubtful because of uncertainty as to the facts or the law, OR (b) the forbearing or surrendering party believes that the claim or defense may be fairly determined to be valid. (2) the execution of a written instrument surrendering a claim or defense by one who is under no duty to execute it is consideration if the execution of the written instrument is

bargained for even though he is not asserting the claim or defense and believes that no valid claim or defense exists. j) RST 81 Consideration as Motive or Inducing Cause: (1) the fact that what is bargained for does not in itself induce the making of a promise does not prevent it from being consideration for the promise; (2) the fact that a promise does not of itself induce a performance or return promise does not prevent the performance or return promise from being consideration for the promise. k) Hammer v. Sidway uncle promised his nephew $5,000 if he did not drink or smoke until he was 21, the nephew performed but his uncles executor refused to follow through with the uncles promise because it was a gratuitous promise and a gift only occurs upon its delivery. i) The nephews performance was consideration because it was something valuable to the uncle ii) Not smoking and drinking was a detriment to the nephew because he gave up his legal right to do so iii) Benefit to the promisor and detriment to the promisee can constitute consideration (1) Does not have to be a quantifiable benefit (2) Under bargain theory this would not have been enough l) Kirksey v. Kirksey Man asks his sister-in-law to come live on his land after his brother dies. He says he will give her a comfortable house and land to cultivate, he then moves her to an uncomfortable house in the woods before kicking her out completely. i) She did suffered legal detriment by moving but it wasnt a promise to induce her to move to her brother-in-laws ii) There was no bargain here. P did suffer a detriment by moving, but it was not bargained for under RST 71(2). D did not induce P to come, he only allowed her to live there as a gratuity. iii) RST 71(2): bargained for if sought by promisor in exchange for his promise and is given by the promisee in exchange for their promise m) Willistons Tramp: If you go to the shop around the corner you can purchase a coat on my credit. i) Walking around the corner to the shop is just a condition of receiving the gift, it is not consideration ii) There was no bargain here and so no consideration (1) There is no benefit to the promisor (2) The purpose of the promise was not to get the tramp to walk to the shop but to give him the gift of the coat

n) St. Peter v. Pioneer Theatre Corp. P put name in ledger for drawing and waited outside for name to be called during theater bank night (its purpose is to induce people to come to the theater) Manager told St. Peters he was one second too late responding to his name being called to get the prize. i) This is a unilateral contract promise for performance so there was valid consideration here consideration is complete upon performance (1) Ps consideration was signing their names on the ledger and waiting until their names were called and reporting to the manager w/in 3 mins (2) Doesnt matter that theater did not receive a direct benefit promisor to specify which acts are required for consideration, so they cannot complain later that the acts required were not adequate consideration ii) As long as the performance fulfills what the offeror demands and bargained for, it counts as consideration o) In re Greene woman was having an affair with Greene for many years, and when their affair ended, Greene and the woman contracted for him to pay her every month for the remainder of their joint lives and to take out a life insurance policy or give her the money if he failed to pay the premiums. In exchange she paid him $1 and released him from any claim she had as consideration. Greene starts performing then quits when he goes bankrupt. i) P claims they had a valid contract based on the consideration provided: (1) $1 = court says nominal, not part of actual exchange/not bargained for (2) Other good and valuable consideration not clear that exists (3) Release of claims court says she doesnt have valid claim so releasing him from imaginary claim is not consideration (a) Zywicki RST 74 if she believes she has a valid claim, use good faith test could work (4) Immunity from taxes and charges on house he bought her not valid b/c he was not legally liable for them ii) Parties obviously meant to have a contract based on the formality but court is injecting Public Policy to keep mistresses from blackmailing men Adequacy of Consideration p) Adequacy Doctrine: court wont decide what is adequate given there is consideration i) Reasons: avoids administrative error, allow parties to freedom to make their own deals, protects idiosyncratic bargainers, respects private order (allows consenting adults to decide what is important to them in a contract)

q) RST 79 Adequacy of Consideration: if the requirement of consideration is met, there is no additional requirement of (a) a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; OR (b) equivalence in the values exchanged; OR (c) mutuality of obligation r) Peppercorn Theory: a peppercorn can be sufficient consideration, what matters is they got what they asked for, court is not going to second guess the adequacy of the consideration i) it is different from nominal consideration because the important thing isnt that it is small but that it was bargained for s) Batsakis v. Demotsis In war-torn Greece, D borrowed got 500,000 dracmas ($25) in exchange for her to give him $2,000 plus interest, styled as a sale, not a loan. D argues this was not adequate consideration. i) If there is consideration, the court will not look at its adequacy. Consideration does not have to be equal it just has to exist. D got what he bargained for, so there is consideration. ii) POLICY: these contracts helped save people during the war, many were probably not paid back and if court does not enforce people will not make loans in future if they are not enforceable t) Wolford v. Powers P agreed to name his son after Lehman. And in return Lehmen promised to provide for the child and drew up a $10,000 note. i) Naming the child after Lehmen was a legal detriment for P because he gave up the right to name him something else, so it can serve as consideration (1) Only a promisor can estimate the value of the gratification of a desire or his fancy. Promissory Estoppel u) Policy purposes of consideration are found even if we dont have consideration turns on whether you are doing something in a bargain context - Fuller Function reliance! i) One party inducing the other party to do something so the other party reasonably does the thing they are being induced to do ii) Alternative to consideration, advances the same goals as consideration which is net beneficial reliance and the fuller function of consideration v) Sword to induce payment w) RST 90 Promise Reasonably Inducing Action or Forbearance: (1) 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 by enforcement of the promise. The remedy granted for

breach may be limited as justice requires. (2) a charitable subscription or a marriage settlement is binding under subsection (1) without proof that the promise induced action or forbearance x) Intrafamilial Promises: Legal enforcement would create only a small increase in reliance on the promise but would create a net decrease in the promises made i) In interfamilial promises you dont normally bargain in the first place ii) Rule of Thumb do not enforce interfamilial promises but enforce unrevoked interfamilial promises if person dies before fulfilling the promise y) Net Beneficial Reliance: enforce the promises where the net increase in reliability outweighs the net decrease in reduction of promises z) Haase v. Cordoza when D thought she was dying, she confessed that her had left P $10,000 in will and would pay it to P through $50/mo. D stops paying when P asks for a promissory note for the money. i) Issue: is there consideration? NO Are there grounds for promissory estoppel? NO ii) Ruling: There is no consideration b/c they didnt bargain for the gift. P cannot reasonably rely on this promise b/c D did not induce P and D got nothing in return. D intended money as a gift, not as a legally binding promise aa) Ricketts v. Scothorn - Grandfather promises P $2,000 to stop working b/c he doesnt want his grandchildren to work. P quits her job. When grandfather dies, still affirming his desire to pay P, his executor refuses to pay the balance. i) Is it promissory estoppel? She relied on his promise by quitting her job which was reasonable because that is what he wanted her to do, and it is inequitable to resist payment on grounds of no consideration. (1) He induced her to quit her job and she did like a BARGAINING context ii) Enforce unrevoked interfamilial promises if person dies before fulfilling the promise bb) Equitable Estoppel: functionally equivalent to promissory estoppel, shield to prevent promisor to prevent payment Charitable Subscriptions cc) Salsbury v NW Bell Telephone D promised to pay P $15,000 over 3 years to start a college. They wrote a letter promising the money, which P took and filled out a corresponding pledge card which was unsigned and sent to material supplier saying this pledge card was his payment. i) No consideration here but because it is a charity there would be no consideration ii) RST 90 charitable subscriptions are binding this is good POLICY (1) Where the subscription is unequivocal, the pledger should keep his word

dd) Congregation v DeLeo Decedent is terminally ill and promises to give temple $25,000. Temple puts money in budget planning to use it for a library in his name. Temple sues for money. i) No consideration here because didnt promise the money in exchange for the library to be in his name ii) Decedent orally said he would donate as a gift in order to be legally bound to it is should have been in writing to demonstrate serious intent iii) Writing the $25,000 into the budget doesnt constitute reliance iv) Court doesnt want to apply RST 90(2) because there is no injustice (hadnt begun construction/paid for library) and congregation had no reasonable reliance that an oral promise was anything more than a gift ee) Alleghany College v. Yates - Yates promised to pay college $5,000 and then to be known as Mary Yates Johnson memorial fund used for specific purpose. i) There was consideration because the bargain was shell give them $5000 and they will spend it how she determines ii) Because she made the first payment and then repudiate they can show reasonable reliance iii) Policy question: should these promises be enforceable? Material Benefit Rule ff) Creates an enforceable promise from past consideration gg) RST 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 its value is disproportionate to the benefit hh) RST 82-85 exceptions to MBR ii) Mills v. Wyman - Ds adult son was shipwrecked and P nurses him, but the son dies anyways. D sent a letter promising to pay him for care and later refused to pay. i) This was a Good Samaritan Act on Ps part completely gratuitous ii) Ruling: A moral obligation is not sufficient to form consideration. P is simply a Good Samaritan. D never asked for the son to be taken care of and got no benefit jj) Webb v McGowin P worked in McGowans factory and saved him from being killed but P is badly injured. McGowan promises P he will make payments to P for the rest of his life, but after McGowans death, his estate refuses to pay P.

i) Webb bestowed a benefit on McGowan by saving his life and that created a moral obligation on McGowan to compensate Webb and then McGowan makes that promise to Webb ii) Webb suffered real harm and the severity of the injury shows there is something more to McGowans promise since Webb gave him a direct benefit and made payments faithfully with a formality of the payment structure kk) Desny v. Wilder P wants to sell film idea about life of Floyd Collins and Ds secretary makes him giver her a synopsis. Secretary says if they use the idea they will pay him for it, but D uses Ps story and doesnt compensate P. i) Inherent tension because D doesnt want to agree to pay until he hears Ps idea and P doesnt want to disclose idea until D agrees to pay ii) Use material benefit rule to protect P from getting taken advantage of (1) Allows parties to get over the inherent bargaining problem ll) Worner Agency v Doyle Worner, a middleman, calls Doyle saying he may want to bid on the IPAT project. Worner says this is a good bid opportunity and Doyle agrees to pay him a 3% finders fee. i) Court makes Doyle pay because Worner givig him the information about his opportunity to bid helps decrease informational costs to this kind of transaction and the commercial norms here were violated. ii) Modern application of material benefit rule used to get over informational hurdles in commercial transactions 6) INDEFINITE CONTRACTUAL AGREEMENTS a) Preliminary Agreements: incomplete contract, the parties didnt intend for there to be a contract yet, promissory estoppel doctrines used in arguments, remedies are reliance damages b) Coley v Lang P is the president of a company that D offers to pay $60,000 for all the stock in the company and allow D to start attending bid conferences as rep for company. D backs out before the letter becomes a definitive agreement. P relied on Ds offer and lost $30,000. i) No Contract it was an agreement to agree ii) No reasonable reliance (no promissory estoppel) time covered was only 18 days and he could have only bid on 2 contracts and there was no evidence he would have won them iii) Reluctant to enforce these preliminary agreements as contracts because up until the point of the actual offer each party is responsible for their own reliance

c) Hoffman v. Red Owl P owned a prosperous bakery and went into negotiations with an agent of D who told him to put up a sum of $18,000 from Ps own money and a loan from his father-in-law. P follows the suggestion of Ds agent: selling his bakery, buying a small grocery store, selling the store so he could run the Red Owl store, buying an option in a new commercial development. Final straw comes when D tries to make Ps father-in-law give P the loan as an outright gift, P finally says no and stops negotiations and sues. i) P contends promissory estoppel he reasonably relied on what D was telling him to do so that he could run a Red Owl store (1) Court said it was promissory estoppel because he did these actions at the request of D specificity of the actions he took is the important thing here ii) Damages in reliance = loss on sale of bakery - $2,000 loss from sale of bakery, $1,000 for option, $125 in rent, $140 in relocation expenses, (1) Could not get damages for lost profits from selling grocery store before the summer tourist season iii) This is a very specific exception to the standard preliminary agreement rule in Coley d) Incomplete Contracts: parties intended a contract and fill in the terms later or have court fill in terms later, contract damages = foreseeable damages so they would also get lost profits (unlike reliance damages), the intent the important aspect e) Sometimes parties leave gaps in contracts i) Foreseeability cant anticipate every possibility ii) Complexity to time consuming and expensive to specify everything f) Court has 2 choices: i) Leave the losses where they fall (adhere to contract) ii) Fill in gaps by interpreting the contract (1) Ex post approach: fill gap with something fair for parties at hand (a) Brings about implicit bargain (2) Ex ante approach: fill gap how we assume most people would want gap filled (a) Reduces transaction costs, gives most people terms they would want, gives you a set of rules automatically in contract (b) If you dont like the rules you can contract for different terms g) Under Common Law incomplete contract, assume parties havent entered into contract, benefit make them hash out their own deals, cost where people intended to contract it wont be recognized

h) UCC Approach easier to contract, benefit save cost of bargaining out terms, cost may not have intended to be bound by contract i) Varney v. Ditmars P employed by D for $35/wk short time after employment began P got another position and in order to keep P, D promised him $40/wk and a fair share of the profits. When P didnt show up on election day due to illness D fired P but P came in once he was better a month later demanding to be kept on. P sues for $40/wk for 11/712/31 and reasonable percentage of profits i) Common Law approach ii) Court said fair and reasonable share of profits was too indefinite to constitute a contract minds of the parties never met iii) Courts cannot aid parties where they are unable or unwilling to agree upon the terms of their own contract j) Corthell Case company agreed to pay P reasonable recognition for his inventions. Company refuses to pay him for inventions they use. i) Court says reasonable recognition was specific enough here to be able to fill in the gaps meant reasonable compensation in return for Ps inventions ii) These are chattels though with a fair market value (more likely to enforce indefinite agreement) k) D.R. Curtis Co. v Matthews P buys crops directly from D (farmer) and sells crops to exporter. D has never sold his crops to D before but had sold them to local brokers. D signs memorandum to sell wheat for $3.85/bushel with no reference to protein basis. P later told D that the protein basis was 14, D said he could not meet that and disavowed the contract and sold his grain to someone else. P sued D for difference between contract price and price he had to pay at market. i) UCC approach flexible standard, easier to contract ii) UCC 2-102: applies to sale of goods iii) UCC 2-105(2): goods must be both existing and identified before any interest in them can pass. Goods not existing and identified are future goods. A purported present sale of future goods or of any interest therein operates as a contract to sell iv) Court says there was a sufficient intent to contract event though an important term was left undefined v) UCC 2-204(3): even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy. vi) UCC 2-305(1): the parties if they so intend can conclude a contract for sale even thought the price is not settled. In such a case the price is a reasonable price at the

time of delivery if (a) nothing is said as to price, OR (b) price is left to be agreed by the parties l) Joseph Martin Deli v. Schumacher rental contract with option to renew at a price to be agreed upon. The parties wanted the judge to decide the appropriate rent. i) Court said they dont write contracts for parties because the right to enter into a contract is just as important as the right not to enter into a contract m) Brown v. Cara after entering into an agreement to agree Brown going out and making upfront investments, Cara decides he is so offended by the final contract sent by Brown he backs out. i) Whether parties have a binding agreement to agree ii) Court found the MOU was a Type II agreement which only created an obligation to negotiate the open issues in good faith in an attempt to reach the ultimate contractual objective iii) Memorandum of Understanding Tests: iv) Type I = complete parties have agreed to all necessary elements of the contract and are therefore bound to the ultimate objective. Four factors to determine if preliminary agreement is enforceable as to the ultimate contractual objective: (1) Whether there is an expressed reservation not to be bund in the absence of a writing (2) Whether there has been partial performance (3) Whether all of the terms of the alleged contract have been agreed upon (4) Whether the agreement at issue is the type of contract usually committed to writing v) Type II = does not commit parties to their ultimate contractual objective, but rather to the obligation to negotiate the open issues in good faith in an attempt to reach the objective within the agreed frame work, this obligation does not guarantee that the final contract will be concluded if both parties comport with their obligation. 5 factor test to determine if there is a Type II agreement: (1) (2) (3) (4) (5) Whether the intent to be bound is revealed by the language of the agreement The context of the negotiations The existence of open terms Partial performance The necessity of putting the agreement in final form, as indicated byt eh customary for of such transactions

7) RELATIONAL CONTRACTS

a) Relational contracts are not like traditional contracts in that the parties are not strangers in a one shot deal, both parties want to preserve the relationship and the benefits from the long term relationship preserve relationship above all else and allow contract to be flexible b) UCC 2-306 Output, Requirements, and Exclusive Dealings: (1) A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded. (2) A lawful agreement by either seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use the best efforts to supply the goods and by the buyer to use best efforts to promote their sale. ii) Requirements Contract buyer agrees to forego supplies from other seller and buy from this seller, buyer foregoes their ability to buy from other sellers, seller is free to sell to other buyers as long as the seller fulfills their obligation to the buyer iii) Output Contract buyer agrees to buy all of sellers output and then buyer can buy from other sellers only after sellers supply is exhausted c) UCC 2-302 Unconscionable Contract or Clause: (1) If the courts as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. (2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination. d) Eastern Airlines v. Gulf Oil Corp. Agreement between that parties that D is supposed to provide P with jet fuel in certain areas with prices determined through the Platts Oilgram prince indicator. This mechanism to control for price fluctuations fails when new government price controls are initiated. Gulf believes Eastern is not honoring the spirit of the contract by fuel freighting. i) Requirement Contract in select locations

ii) Gulf argues that the contract lacks mutuality of obligation so it is too vague to be enforcible, and in the alternative, Eastern violated UCC 2-306(1) by not acting in good faith (1) Court says: does have mutuality of obligation, price was the market price based on Platts, and fuel freighting is not bad faith, it is customary industry practice (2) Course of Dealing UCC 1-205(1): way in which parties interacted prior to entering into this contract (a) Fuel Freighting had been done prior (3) Usages of Trade UCC 1-205(2): accepted industry practice (a) Fuel freighting is an common industry practice (4) Course of Performance UCC 2-208(1): whatever parties do during the course of a contract is the best guess as to what they mean (a) Fuel freighting has gone on during this contract iii) Zywicki thinks the goal of the contract was to share the risk e) Empire Gas Corp v American Bakeries D entered into requirement contract with P to use D to convert their delivery trucks to propane and get all the propane from P. D never converted their trucks i) Requirement contract ii) Under-demand is allowed under UCC 2-306 because supplier can sell to other buyers. P acted I bad faith because they didnt give D a legitimate business reason for their decision not to buy. (1) As a matter of law under-demand cannot be unreasonably disproportionate but can be in bad faith (2) This was not done in good faith need an economically viable reason f) Wood v. Lucy, Lady Duff-Gordon Wood had exclusive right to use Lucys name to endorse products and in return would give her 50% of profits. D uses her name to endorse things without going through P, so P sues. i) Exclusive dealings contract ii) D says not a valid contract because no consideration he is not required to do any work (1) Court says: it is not an express obligation, but an implied obligation to use reasonable efforts to carry out his end of the bargain g) Bloor v Flagstaff Brewing Co. P owned a brewing company and sold it to D. The contract required that D use its best efforts to promote the beer and P gets 50 cents per barrel royalty over 6 years, it also provides a liquidated damages clause that is triggered if

D stops distributing the beer. D stops promoting the beer and its volume drops dramatically, P sues. i) Best efforts clause included because P wanted to make sure this was an exclusive distribution (1) Best efforts does not require D to bankrupt itself or lose money ii) Court says D didnt even abide by good faith much less best efforts (1) Cant promote your own item over the other item iii) Good Faith Test diligence insurance have to take some account for volume and what reasonable business prudence iv) Joint profit maximization court says D isnt allowed to produce at Q3 because D is not treating both beers equally (profit cant be the only concern) MC + $0.50 (Falstaffs Self-Interest) MC = S (Original) MC = S (Integrated) D = MV

Q3

Q1

Q2

v) Liquidated damages clause was inserted so D wouldnt just be buying out their competition (P) Covenants Not To Compete - Ex post restrictions allow the company to make ex ante decisions - Encourage efficient investments in employees ex ante - Protects the trade of the company and the employees right to make a living ex post FOUR PART TEST: (1) Must relate to either a contract for sale of goodwill or other subject property or to a contract of employment (2) Covenant must be supported by adequate consideration (3) Covenant must be reasonably limited in time and geographic territory (4) Covenant must be necessary to protect the employer h) Gagliardi Bros. Inc. v. Caputo D signs a covenant not to compete a few years after he started at the company because their patent for steak ums was denied. Contract said he

could not work at a portion controlled meat business within 100 miles of Gagliardi Bros. When D tries to get a new job with another portioned controlled meat company inside the radius because he and his wife do not want to move since they have an accounting business too, P sues. i) Covenant Not to Compete Test (1) Covenant was not part of his original employment contract or change in his employment status (2) Was not supported by adequate consideration because the raise was one he was going to get anyways (3) D doesnt have valuable information that would make the time necessary, and the geographic scope doesnt apply anymore because P is distributing outside of the radius now (4) Not necessary to protect the employer because he doesnt have any specific information they needed to protect and higher level people didnt have a covenant ii) Court finds the restrictive covenant unenforceable (didnt pass the test) 8) MODIFICATION OF EXISTING AGREEMENTS a) Restatement Approach = rule bound approach pre-existing duty rule i) Uses NEW Consideration as a proxy for good faith ii) RST 89 Modification of an Executory Contract: a promise modifying an executory 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 material change of position in reliance on the promise b) UCC Approach = flexibility see if modification is in good faith i) Gets rid of the proxy ii) UCC 2-209 Modification, Rescission and Waiver: (1) An agreement modifying a contract within this Article needs no consideration to be binding (2) A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded b , but as except between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party. (3) The requirements of the statute of frauds section of this article (2-201) must be satisfied if the contract as modified is within its provisions.

(4) Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver. (5) A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver c) Alaska Packers Assn v. Domenico - D's are hired in San Francisco by P to work in Alaska catching salmon for their cannery for $50 and 2 cents per fish caught. When D's get to Alaska, they refuse to work unless they get a new contract for more money. Captain says he doesnt have authority, but caves in because it is too late to get new men. When they get back to San Francisco the company refuses to pay them $100, so P sues. i) Restatement Approach ii) P says it should be compensated because the nets the company gave them were bad, making it harder to catch fish, so their demand for more money was in good faith. (1) Court says unlikely company would give them bad nets because it is in the companys interest to catch the most fish too (2) Company contends demand for more money was in bad faith because it was a shake down since P knew D could not get more seamen rent seeking situation iii) Court says this is what you contracted for, so it doesnt matter if P didnt realize how bad Alaska was (1) Preexisting Duty Rule modification is valid only for new consideration, and there was no new consideration here Mistake and Excuse - Court can implicitly allocate the risk was allocated ex ante even though it was not expressly allocated (Eastern Airlines) - Court could refuse to allocate the risk and let the losses fall where they lie rescind the contract parties had no agreement on the allocation of the risk or parties contract conditional on risk not occurring Court could allocate the risk ex post based on fairness try to bring outcome in line with what they agreed on

d) Mistake parties were mistaken about the endogenous state of the world during the making of the contract e) Mutual Mistake mistake of fact, by both parties, basic assumption of the contract, material effect, did not bear risk under 154 f) RST 151 Mistake Defined: a belief not in accord with the facts

g) RST 152 When a Mistake of Both Parties Makes a Contract Voidable: (1) where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under 154; (2) in determining whether the mistake has a material effect on the agreed exchange of performance, account is taken of any relief by way of reformation, restitution or otherwise. h) RST 153 When a Mistake of One Party Makes a Contract Voidable: where a mistake of one party at the time the contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk under 154, and (a) the effect of the mistake is such that enforcement of the contract would be unconscionable, OR (b) the other party had reasons to know of the mistake or his fault caused the mistake i) RST 154 When a Party Bears the Risk of the Mistake: a party bears the risk of a mistake when (a) the risk is allocated to him by agreement of the parties, OR (b) 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 elates but treats his limited knowledge as sufficient, OR (c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so j) RST 155 When Mistake of Both Parties as to Written Expression Justifies Reformation: where a writing that evidences or embodies an agreement in whole or in part fails to express the agreement because of a mistake of both parties as to the contents or effect of the writing, the court may at the request of a party reform the writing to express the agreement, except to the extent that rights of third parties such as good faith purchasers for value will be unfairly effected k) Sherwood v. Walker P and D believe the cow is barren which is a basic assumption of the contract because she is sold for $80 instead of the value of a fertile cow which is $750-1000. i) Mutual mistake both buyer and seller thought cow was barren (1) RST 152 ii) If Rose had been known not to be a barren cow there would have been no contract iii) The mistake affected the substance of the whole consideration and considered there was not a contract to sell or sale of the contract as she actually was

l) Anderson Bros Corp. v. OMeara appellant sold dredger to appellee, but the dredger was not the correct kind the appellee needed for his project without expensive modification. i) Unilateral mistake RST 153 there was a mistake of fact that was a basic assumption of the contract ii) Appellee bears risk under 154 because he contracted knowing he had only limited knowledge and did not take the diligence to bring in an expert to determine if the dredger was suitable to his needs iii) Duty to Investigate m) ALCOA v. Essex Group - Plaintiff brought an action against defendant seeking either an equitable reformation of the contract price due to the effects of inflation on the cost of producing aluminum, or enforcement of an oral amendment and an award of damages for defendant's breach of the modification, or recognition of the termination of the agreement. i) Their price term did not protect them from the energy crisis, resulting I a windfall for Essex who was selling their extra aluminum at a profit on the open market, while ALCOA was losing that money (1) ALCOAs losses directly proportional to Essexs gain wealth transfer ii) ALCOA took elaborate precautions to control risk only assumed the risk within a specific range iii) Court found that plaintiff was entitled to relief under the doctrine of impracticability (1) Would lose $60 million over course of contract n) Atlas Corp. v. United States At time of Ps contract with government the health hazard of tailings was not known, so contract they thought would earn profit became money pits when they incurred clean up costs of tailings. P sues D on mutual mistake because they did not know tailings were hazardous. i) Court holds that there is not mutual mistake of fact when there is no fact in existence at the time of the contract they formed no belief whatsoever whether the tailings were dangerous at all ii) Policy dont want government regulations to be the basis of mutual mistake kinds of claims because then every time a new regulation was passed parties would want to come into court to get their contracts reformed o) Excuse Doctrine after the contract was made the exogenous state of the world changed to make performance of the contract impossible or impractical i) Excusing performance, excuses both parties from performance

ii) Paradigm Rule: Just because it is impossible to perform a contract doesnt mean it is excused - Paradigm v James tenant cant live there b/c taken over, so tenant doesnt pay rent but he was supposed to pay rent even if he cant live there; Spees v Leonard not excused from building the building even though it was to be built on quick sand and wouldnt stay up iii) Risk of loss now passes with possession, instead of old version of risk in Minet Case (Sale of goods and it burned up before buyer took possession, seller excused from delivering turpentine, but buyer not excused from paying b/c risk had passed with the title to the goods which was already with the buyer) p) RST 261 Discharge by Supervening Impracticality: Where, after a contract is made, a party's performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary. q) RST 262 Death or Incapacity of Person Necessary for Performance: r) RST 263 Destruction, Deterioration, or Failure to Come into Existence of Thing Necessary for Performance: If the existence of a specific thing is necessary for the performance of a duty, its failure to come into existence, destruction, or such deterioration as makes performance impracticable is an event the non-occurrence of which was a basic assumption on which the contract was made. s) Criteria to demonstrate impracticability: (1) An unexpected contingency must have occurred that was a basic assumption of the contract (2) The risk of the unexpected occurrence must not have been allocated either by agreement or custom (3) Occurrence of the contingency must have rendered performance commercially impracticable t) UCC 2-613 Casualty to Identified Goods: If the contract requires for its performance goods identified when the contract is made, and the goods suffer casualty without fault of either party before the risk of loss passes to the buyer, then: (a) if the loss is total the contract is terminated; and (b) if the loss is partial or the goods have so deteriorated that they no longer conform to the contract, the buyer may nevertheless demand inspection and at the buyer's option either treat the contract as terminated or accept the goods with due allowance from the contract price for the deterioration or the deficiency in quantity but without further right against the seller.

(c) The seller must notify the buyer seasonably that there will be delay or nonperformance and, if allocation is required under paragraph (b), of the estimated quota thus made available for the buyer. u) UCC 2-615 Excuse by Failure of Presupposed Conditions: except to the extent that a seller may have assumed a greater obligation and subject to 2-614: (a) Delay in performance or nonperformance in whole or in part by a seller that complies with paragraphs (b) and (c) is not a breach of the seller's duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid. (b) If the causes mentioned in paragraph (a) affect only a part of the seller's capacity to perform, the seller must allocate production and deliveries among its customers but may at its option include regular customers not then under contract as well as its own requirements for further manufacture. The seller may so allocate in any manner that is fair and reasonable. (c) The seller must notify the buyer seasonably that there will be delay or nonperformance and, if allocation is required under paragraph (b), of the estimated quota thus made available for the buyer. v) Taylor v. Caldwell P and D contract over renting Surrey Gardens for Ps recital, but before the recital was held, the gardens burned down. P sues for damages from his loss from promoting the concert. i) Court finds for D because both of their performance obligations were contingent on the hall still standing, so D is excused from providing the hall and taking money and P is excused from paying for the hall. ii) RST 263 w) Howell v. Copeland - D is potato farmer who entered into contract with a merchant and agreed to sell him 200 tons of potatoes and a disease attacked the crops not in his control and only able to give him 78 tons merchant wants damages for cost of having to find more potatoes. i) Court held the contract is for 200 tons of potatoes grown on his land and when it becomes impossible for him to grow the potatoes he is excused. (1) Implied condition that the required number of potatoes would be grown on his land (2) RST 263

ii) If the court had looked at this under the UCC, 2-613 and 2-615 could both apply see comment 9 from 2-615 iii) UCC 2-501(c) - defines when crops can be identified for a buyers special property interest and an insurable interest in goods, when they are planted or become growing crops x) Seitz v. MarkoLites D bid to create sign for P for $12,800 and won bid but before D could perform their specialist needed to construct the sign was hospitalized due to diabetes. P sued D for damages from having to pay another company more money to perform the work. i) D argued force majeure clause in contract excuses them from theings beyond their control but court said that the illness of the worker was not similar to the other occurrences provided for in the clause ii) D also could not win under impossibility because the contract did not require the hospitalized worker to do the work and he was not the only person capable of doing the work (1) RST 262 not fulfilled y) Transatlantic Financing Corp v. US P contracted to deliver a cargo of wheat from Texas to Iran via the Suez Canal, but the canal was closed so P had to go around the Cape of Good Hope i) Court held P entitled only to contract price because performance was not legally impossible by canals closure, only more expensive ii) RST 261 iii) Impracticability test: not met! (1) Not expected that Suez Canal would be closed (2) Trade custom to go around Cape of Good Hope as an alternate route, and risk built into price evidenced by the big mark up (3) They were able and prepared to make the journey and the grain would not have spoiled (4) Cant recover for Quantum Meruit and get contract price (a) In QM you are not suing under contract, it doesnt exist anymore, you are suing under unjust enrichment (b) Carol v Bowersock QM P can get compensation for the benefit P gave D prior to the warehouse burning down, restitution for anything wrought into the building but not for tools brought into building consumed in fire

(i) Court distinguishes C v B from when a builder partially builds a new building that is destroyed, in that case you dont get any payment until you actually finish building and deliver z) Eastern v Gulf the 2-tier government regulation imposed made the contract impracticable and should be excused. i) Under UCC 2-615 the government regulation was not an unexpected contingency that was the basis of the contract, the risk was allocated implicitly to Gulf, and loss by itself does not sustain impracticability ii) No excuse based on commercial impracticability aa) ALCOA v. Essex basic assumption of the contract was that the price indicator woul work to accurately track ALCOAs costs i) ALCOA assumed the risk but only within a specific range ii) The massive losses rose to the level of commercial impracticability bb) RST 265 Discharge by Supervening Frustration of Purpose: where, after a contract is made, a partys principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary. cc) Krell v Henry D got license for a window to watch procession of king for two days but not nights, D sent deposit but then king fell ill and procession was cancelled. P sued D for breach of contract. i) Court held that performance wasnt impossible but the value of the performance ceased (1) P keeps the 25 pund deposit, but D doesnt have to pay him the remainder dd) Lloyd v Murphy autodealers lease, after government regulations passed restricting sales of new casrs, D said the substantial purpose of their contract was frustrated. i) Court held that in order to qualify for substantial frustration there must be total or near total destruction of the economic value, makes the performance vitally different from what was reasonably expected, must be one of kind and not merely degree ii) This contract not substantially frustrated because he could have sold used cars and gas, gotten lowered rent or could have sublet iii) Test principle purpose, substantially frustrated, w/o fault, basic assumption, unless otherwise allocated