CONTRACTS OUTLINE, FALL 2006PROFESSOR SNYDER

Why do we have contracts? To promote economic efficiency, morality, and justice

ELEMENTS OF A CONTRACT

I. MUTUAL ASSENT

a. Was there an offer?

b. Was there acceptance?

II. ENFORCEABILITY

a. Not enforceable in a minor, or lack of mental capacity, or if illegal

b. Doctrine of Considerationi. One party must “get” something for the benefit of the other on which they have relied

1. Bargained exchange2. Legal Detriment

c. Doctrine of Promissory Estoppeli. When a contract lacks consideration – estoppel can be substituted

1. The party then becomes estopped from not fulfilling the contract

III. BREACH

a. Performance

b. Good Faith Performance

c. Defenses to a breach1. Fraud

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2. Undue influence 3. Mistake4. Impractability5. Frustration of purpose

III. REMEDIES

a. Legal Remedies Damages – Reliance, Restitution, Expectation

b. Equitable RemediesSpecific PerformanceInjunctions

WHAT IS A CONTRACT?

What is a Contract? parties make a legally enforceable promise. A promise is a commitment or undertaking that a given event will or will not occur in the future and may be express or implied from conduct or

language and conduct. A promise is legally enforceable where it:

Was made as part of a bargain for valid consideration; Reasonably induced the promisee to rely on the promise to his detriment; or Is deemed enforceable by a statute despite the lack of consideration.

Types of ContractsContract may be of the following types:

1) Express – an agreement manifested by words2) Implied-in-fact – an agreement manifested by conduct 3) Implied-in-law ("quasi-contract") – not a true contract but an obligation imposed by a court despite the absence of a promise in order to avoid

an injustice

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CONTRACTS GOVERNED BY UCC

Contracts for the Sale of Goods Application of UCC

Article 2 of the Uniform Commercial Code covers all transactions for the sale of goods other than securities (article 9) and leases (article 2A). It applies to any party; it is not limited to merchants although individual provisions may be.

"Goods" Defined Under the UCC, a "good" is any tangible thing that is moveable. UCC § 2-105(1) In addition to manufactured products, "goods" include:

Growing crops or timber, unborn young of animals and other identified things attached to land (other than minerals or the like or structures), regardless of who severs them from the land provided that they can be removed without causing material harm to the land

Currency exchanged as a commodity (as opposed to the medium of payment for a good) Minerals or the like or a structure or its materials to be removed from realty that are to be severed by the seller

The term "goods" does not encompass: Intangible rights such as intellectual property Investment securities Money which is the medium of payment for goods Minerals or the like or a structure or its materials to be removed from realty that are to be severed by the buyer

"Merchant" A "merchant" is one "who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill particular to the practices or goods involved in the transaction" or who employs an agent or broker in such occupation. UCC § 2-104(1)

"Good Faith" Every contract for the sale of goods imposes an obligation of good faith dealing on all parties in its performance and enforcement. [UCC § 1-203]

All parties, including non-merchants, are subject to UCC § 1-201(19) which defines "good faith" as "honesty in fact in the conduct or transaction concerned."

Merchants are subject to an additional good faith standard, set forth in UCC § 2-103(1)(b), which requires "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade."

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MUTUAL ASSENT****There must be mutuality in a contract ***

Rule: if a party’s words or acts, judged by an objective standard, manifest an intention to agree, the agreement is established, and it is immaterial what be the real but unexpressed state of his mind on the subject. Things to consider in determining the manifestation of intent:

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1. The words used2. Surrounding circumstances3. To whom the words are conveyed4. Definiteness of terms5. Whether a written contract is intended

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Mutual Assent ordinarily established by a process of offer and acceptance; both parties intended to contract and agree on the main parts of the deal. (agreed on “essential” terms on the K but not all terms)

To discover whether parties have assented to an agreement courts examine both their words and deeds. Looks at objective conduct not subjective conduct

a. We aren’t mind readers (we don’t know subjective intent)b. Also secret intentions are irrelevant!

Test for intent: What a reasonable person in the position of the other party would conclude that his objection manifestations of intent meant

Ex. Embry v. Hargadine, McKittrick Dry Goods Co . (employment termination thought to be re-contracted by words of boss “go ahead, don’t worry) Pg. 276 Rule: If a reasonable person would have taken a party’s words to constitute assent to the formation of a contract, then that contract will be enforceable. (Not subjective intent)Test: (1) was there mutual assent/ meeting of the minds? (2) Would a reasonable person in P’s position have done the same thing and interpreted the agreement in the same way?

Texaco v. Pennzoil Pg. 281 Rule (s): (1) Parties’ manifested intent towards each other, by their words and deeds, not towards anyone else, is what matters. (2) This can include intent shown by dealings with others if that info was made public (3) Does not include secret meeting or privileged documents. (4) The existence of a binding contract is not dependent on the subjective intent of the parties

Lucy v. Zehmer Pg. 282 (drunken sale of land on back of restaurant check)Rule (s): Under the objective theory, the mental assent and intent of the parties is irrelevant ; A party's intention will be held to be what a reasonable person in the position of the other party would conclude his manifestation to mean; (2) Look to the outward expressions only, prefer objective to subjective manifestation because subjective manifestation would result in an increase in broken contracts – increases chance of “exit strategy”, i.e. fraud. (3) Also: In a business context even if the party makes an offer in jest and the other party believes that she is serious, and seriously accepts the offer, the contract will be binding!

REMEMBER INTENT: Domestic situations are different: in social or domestic where they live together, the presumption is that legal relations were not intended Letters of intent

Say “subject to” not binding Further negotiations may be biding Any procedural formalities ex. Shareholder approval may not be binding

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RESTATEMENTS FOR MUTUAL ASSENT

§17, p. 290: Requirement of a bargain formation of a bargain requires manifestation of mutual assent.(1) formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration, except for(2) special conditions in §§ 82-94

§18 p. 290: manifestation of mutual assent manifestation of mutual assent means that each party either makes a promise or renders a performance

§19, p. 290: Conduct as manifestation of assentManifestation of assent may be made wholly or partly by written or spoken words or by other acts or by failure to act.Conduct is not effective as manifestation unless he intends to engage in the conduct and knows or has reason to know that other party may infer assent from his conductConduct of party may manifest assent even though he does not in fact assent. In such cases a resulting contract may be voidable because of fraud, duress, mistake, or other invalidating cause.

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OFFER*** The offeror is the master of the offer ****

What is an Offer? An offer is “‘the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it” Pg. 319 - Restatement § 24

Note: for a contract to be formed, the parties must reach mutual assent of all essential terms of the agreement. These include: parties; subject matter; time of performance; and price.

However- later actions by the parties can serve as gap fillers for missing terms

Communications that do not constitute offers The following types of communications, do not manifest an intent to be contractually bound, do not constitute offers:

1. Opinions about future results, including professional opinions2. Statements of intention (including letters of intent which merely memorialize negotiations) “would you consider” (Are usually a

Rough draft w/ items to be negotiated and refers to a formal agreement to be drawn up in the future)Empro Manufacturing Co. v. Ball-Co Pg. 306 (Letter of intent to purchase assets sold to another party)Rule(s): Intent is an objective manifestation, determined solely from the language used when no ambiguity in terms exist. Wording of letter indicates considerations were necessary before it becomes a contract - just sets the stage of negotiation –

preliminary negotiations. §26Texaco(Getty) v. Pennzoil (1987) Pg. 309 Questions of IntentRule(s): See § 27 - applies unless either party communicates the intent not to be bound before a final formal document is executed The emphasis in deciding when a binding contract exists is on intent rather than on form, based on an objective standard In deciding whether or not a letter of intent is binding, courts generally examine five factors:

1. The language of the letter of intent; 2. The context of the negotiations 3. Whether either or both parties have partially performed their obligations4. Whether there are any issues left to negotiate, or whether any of these issues are of material importance to the transaction

as a whole; and 5. Whether the letter of intent describes a complex transaction which customarily involves definitive written agreements.

3. Invitations to submit a bid Nebraska Seed Co. v. Harsh Pg. 291 Invitations to trade (Proposed seed sale given by letter)

Rule (s):See §26, not an offer – letter was an invitation requesting bids.

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See §33 - language in letter is general, it is an invitation to make an offer, does not fix a time for delivery, did not fix a definite and certain amount. Factors to consider – trade customs, # of persons communication was addressed to, completeness of terms in “supposed” offer

4. Price estimates – However, where the estimate is deemed to be a factual misrepresentation because it was made by an expert, estoppels may be invoked if the offeree relied to his detriment on the estimate.

5. Advertisements, catalogs and mass mailings – Courts have ruled that it is unreasonable for one to believe that the merchant intends to be bound with all whom receive or read such literature unless the power of acceptance is clearly limited to the first person(s) that fulfills the act for which the incentive is offered.

Leonard v. PepsiCo (1999) Pg. 294 (product points for fighter jet advertisement)Rule(s) Advertisements are generally viewed to be mere requests to consider and examine and negotiate – here would be no

enforceable contract until defendant accepted the Order Form and cashed the check – exceptions to advertisement rule only in cases of clear, definite, and explicit advertisements

Present case isn’t explicit – reserves details to separate writing. Objective standard – no reasonable person would have concluded that the commercial actually offered consumers a

fighting jet as a prize How do we know what is an ad and what is an offer?

The offer test – (1) offer must be: clear, definite, explicit, and leave nothing open to negotiation; (2) The reasonable person test

Note: However, there many be an offer where the ad specifies a particular # of units or the intent to sell items in a particular manner. For example “first come, first served” or “100 coats on sale” also see:

Carbolic Smoke Ball Pg. 329 (advertisement offering reward in use of product)The ad constitutes an offer b/c its language contains an express commitment This was not mere “puff” based on fact that money was actually set aside for this reward by D. Advertisement was a unilateral offer in which acceptance takes the form of performance. Analogous to lost dog reward.

When is the Offer Effective?1. Receipt of offer An offer is not valid until received by the offeree or his agent. Restatement § 682. Duration of offer If the offer has a stated time within which the acceptance must be made, any attempted acceptance after the expiration of that time will fail and

will merely constitute a counter-offer by the offeree.

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If no specific time is stated within which the offeree must accept, it is assumed that the offeror intended to keep the offer open for a reasonable period of time, to be determined based on the nature of the proposed contract, trade usage, prior dealings and other circumstances of which the offeree knows or should know.

Generally, the time for accepting an offer begins to run from the time it is received by the offeree. If there was a delay in delivery of the offer of which the offeree is aware, the usual inference is that the time runs from the date on which the offeree would have received the offer under ordinary circumstances.

Generally, courts hold that in telephonic or face-to-face communications in which an offer is made, the offer lapses when the conversation terminates in the absence of a clear indication that the offer remains open beyond the conversation.

3. If the existence of an offer presents a close question the court will generally find that there is not an offer.

Revocation With limited exceptions an offer is generally revocable at any time prior to acceptance. Communication of revocation An offer may be revoked by any words that communicate to the offeree that the offeror no longer intends to

be bound. (An offer is also revoked by action that is inconsistent with the intent to be bound once the offeree learns of such inconsistent action.)

a. Words or conduct must be clearb. Must be communicated to offereec. Effective when received (minority rule is w\then dispatched)

Effective time of revocation A revocation is effective upon receipt by the offeree.

Dickinson v. Dodds, (Options contract for sale of property sold to third party) P. 314Rule(s) No need for express/actual withdrawal from offer, inferred from D’s intent to sell to 3rd party No meeting of the minds at time P chose to accept offer (D already intend to sell to another), therefore no contract Promise to hold till 9am is a promise without consideration, therefore it’s not binding

Offers that may not be revoked 1. There is an option contract in which the offeree gave consideration for an irrevocable offer for some period of time; (also known as an

options contract)2. The offeree relied to his detriment upon an implied or express promise by the offeror not to revoke if such detrimental reliance was

foreseeable by the offeror; 3. The offeree relied to his detriment upon the offer itself if the such detrimental reliance was reasonably foreseeable by the offeror

[Restatement § 87(2)] (performance is an example – Carbolic Smoke Bomb)4. In the case of a unilateral contract, the offeree began performance of the promised act to any extent [Restatement § 45] – Upon

commencement of performance, the offeror must give the offeree the amount of time specified in the offer (or, in the absence of a specified

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time, a reasonable time) in which to complete the bargained-for promise. However, the offeree's mere preparation to perform does not preclude the offeror from revoking.

a. In goods contracts, a merchant indicates in a signed writing that an offer to buy or sell goods will be held open for the stated time or a reasonable time if no time is specified, not to exceed three months, if no consideration if given [UCC § 2-205]

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RESTATEMENTS AND UCC FOR OPTIONS

Restatement (Pgs. 319-20)

§22 Mode of Assent — Usually offer and acceptance, but can be fuzzy - The manifestation of mutual assent to an exchange ordinarily takes the form of an offer or proposal by one party followed by an acceptance by the other party or parties (2) A manifestation of mutual assent may be made even though neither offer nor acceptance can be identified and even though the moment of formation cannot be determined

§24 Offer Defined — Willingness to enter bargain and reasonably understood invitation - An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.

§25 Option Contracts — Limits promisor’s power to revoke an offer

§26 Preliminary negotiations - a manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.

§ 29 To Whom an Offer is Addressed (1) The manifested intention of the offeror determines the person or persons in whom is created a power of acceptance. (2) An offer may create a power of acceptance in a specified person or in one or more of a specified group or class of persons, acting separately or together, or in anyone or everyone who makes a specified promise or render a specified performance.

§33 Certainty - The fact that terms are left open or uncertain may show that manifestation of intent is not intended to be an offer or an acceptance(1) Manifestation of intent cannot be accepted as to form a contract unless the terms of the contract are reasonably certain(2) Reasonably certain if they provide a basis for determining the existence of a breach and or giving an appropriate remedy

§35 Acceptance — Offeree has power unless revoked under §36 – Pg. 319

§36 Termination — Power of acceptance terminated by rejection or counter-offer, lapse of time, revocation, death, or non-occurrence of conditionAn offeree's power to accept an offer is terminated by:

The death or insanity of the offeror, even without notice to the offeree of such occurrence Death or insanity of the offeree, unless an offer is irrevocable, such as in the case of an option contract Death or destruction of a person or thing essential to performance The offeree's rejection of the offer, which cannot be reinstated by the offeree's subsequent attempted acceptance. The offeree's counter-offer, which impliedly manifests a rejection of the offer Revocation of the offer Expiration of the offer (lapse of time)

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§37 Termination Under Option Contract — Does not fall under §36 - Notwithstanding §§38-49, the power of acceptance under option contract is not terminated by rejection or counter-offer, by revocation, or by death or incapacity of the offeror, unless the requirements are met for the discharge of a contractual duty. Enter into the proposed contract and the offeree acquires reliable information to that effect.

§42 Revocation by Communication — Power of acceptance terminated by communication of intention not to enter into contract by offeror

§43 Indirect Communication — Definite action can satisfy §42

§ 87(2): Offers that become irrevocable by virtue of the reasonably foreseeable inducement of an action or forbearance of a substantial character on the part of the offeree before acceptance e.g., where a general contractor receives bids from a subcontractor and relies on such bid in preparing its own bid for a project

In some circumstances, it does make sense to allow reliance on an offer before acceptance and to make the offer irrevocable because of that significant reliance. An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice. This rarely applies: the offeror usually has no reason to expect reliance before acceptance. The offeror supposes that the offeree will accept first and then start relying on the newly-formed contract.

UCC

§2-204 Formation in General - 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 reasonably certain basis for giving and appropriate remedy.

§2-205, p.321: firm offers - an offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period exceed three months.

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ACCEPTANCE

Acceptance Defined A manifestation of willingness to be bound by the terms of an offer made in a manner invited or required by the offer. (Rest.2d § 50(1).) An acceptance of an offer must be absolute and unconditional. Can only be accepted by the person to whom the offeror intended §29, 54 Acceptance results in the formation of a contract: both parties are bound and neither can withdraw from the bargain without incurring liability to

the other. Ordinarily, acceptance must be expressed or communicated by the offeree to the offeror, in order to manifest mutual assent. The manner in which acceptance is to be communicated may be specified in the offer, in which case that becomes the exclusive means of

acceptance. But if the offer prescribes no means any reasonable and usual mode may be adopted. (See Rest.2d §30.) Mailbox Rule

The Mirror Image Rule (p.321): In order for the acceptance to be effective all of the terms of the offer must be accepted without change or condition.

o Consider the effect of varying the terms of an offer. (Rest. 58 & 59) o Varying the terms in any way operates as a rejection or counteroffer.o This rule does not apply once performance has begun

Ardente v. Horan pg. 322 Termination b/c of counteroffer. "My clients are concerned that the following items remain with the real estate … I would appreciate your confirming that these items are a part of the transaction, as they would be difficult to replace."Rule(s): An offer to form a bilateral contract, the offeree must communicate his acceptance to the offeror before any contractual obligation can

come into being. A mere mental intent to accept the offer, no matter how carefully formed, is not sufficient. The offeree made a counteroffer and did so not with the intent of accepting the initial terms “if not” these. Look at Restatement 61 - Acceptance which requests change of terms – where a party can accept the offer on its face and at the same

time request or suggest another term but the acceptance must be “clear and unequival” (58) and the acceptor must appear willing to accept the offer whether or not this request is granted.Ask yourself:

1. Are they important terms? 2. Is the variation minor?

If there is a variation, is it a counteroffer? Important from a policy point of view for certainty that contracts will be followed, and a legal point of view b/c my rights need to be

protected

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Manner of Acceptance Traditionally, the nature of the contract dictated whether the offer could be accepted by a return promise or by actual performance of the promised

act. Notice of Acceptance The offeror is entitled to notice of the acceptance. Thus, even if the offeree effectively accepts an offer and a contract is

formed, failure by the offeree to notify the offeror of the acceptance within a reasonable time may preclude the offerer from enforcing the contract. Restatement § 54 and § 56

I. Acceptance by correspondence The Mailbox Rule – p. 325 Rest 63 Unless the offer provides otherwise, a standing offer is accepted upon dispatch The “master” of the offer chooses the medium of how acceptance is communicated to them. Acceptance is made in the same medium as the offer, unless it is indicated otherwise, or is one that is customary for the offer in that same

time and place. The “master” can also modify the mailbox rule. For an option, however, acceptance is operative upon receipt by the offeror (see mailbox rule issues in B 326-7). Late Acceptance A number of approaches are applied to communications that are intended as an acceptance but sent after the offer

expires: 1. The communication may qualify as a counter-offer; 2. The offeror may waive the lateness and honor the acceptance; 3. If the acceptance is nevertheless sent within a reasonable time, albeit after the offer's stated expiration, the acceptance is valid and results in the formation of a contract if the offeror does not reject it within a reasonable time;

Rejection of Offer A rejection of an offer by the offeree is effective when received by the offeror. If an offeree dispatches more than one response to an offer, regardless of whether the rejection is sent before or after the acceptance, if

the rejection is received later than when the acceptance was dispatched, a contract is formed since an acceptance is effective upon dispatch but a rejection is effective upon receipt.

Nevertheless, estoppel may operate to bar enforcement of such a contract where the offeror receives the rejection before the acceptance, and acts in reliance on such rejection.

II. Acceptance by Performance; Unilateral Contracts In a unilateral contract, the offer empowers the offeree to only accept by complete performance of the promise. The offeree's failure to perform does not constitute a Notice of Acceptance by Performance Where an offer invites acceptance by performance, no notice is required to make the acceptance

effective, unless the offeror so specifies. However, if the offeree has reason to know that the offeror has no adequate means of learning of the performance with reasonable

promptness and certainty, the offeror's contractual duty will be discharged unless: The offeree exercises reasonable diligence to notify the offeror of acceptance; or The offeror learns of the performance within a reasonable time; or

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The offer indicates that notification of the acceptance is not necessary.

Carlill v. Carbolic Smoke Ball Co . (1893) Pg. 329 (advertisement offering reward in use of product) Acceptance need not be communicated if performed This was not mere “puff” based on fact that money was actually set aside for this reward by D. Advertisement was a unilateral offer in which acceptance takes the form of performance. Analogous to lost dog reward.

Leonard v. PepsiCo, (product points for fighter jet advertisement) The Harrier Jet case again. Not a contract b/c it wasn’t in the catalog. Ct discusses the difference btw reward invitations and invitations to negotiate Also means of acceptance are made clear – use the order form

White v. Corlies & Tifft, (Contract for building offices, silence deemed no acceptance)“Upon an agreement” Mental determination not indicated by speech or put in course of indication by act to the other party is not an acceptance that will bind the

parties. D ignored the note and began work. §32, p. 345: Where there is doubt as to acceptance - in cases of doubt, offeree may accept by performing what the offer requests or by

promising to perform, as the offeree chooses. Rest 45 - where there’s an offer to accept by partial performance, the objective beginning of performance gives offeree an option to finish

the performance. Objectviely manifested partial performance creates a bilateral contract which allows offeree to finish.

Peterson v. Pattberg (1928) Pg. 348 Termination b/c revocation before acceptance?Facts: Payment of mortgage in full by certain date to get a discount on it. Patterson comes to pay and Pattberg refuses to accept to payment b/c he has sold the mortgage. Ct finds that he has terminated the offer before acceptance.Rule: Offeror can revoke as long as it’s communicated before acceptance.Dissent: Disagrees – believes acceptance was made

**Offeror invites performance: Sometimes its unclear whether person is to act or to make a bilateral promise. If ambiguous – the offer “is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering the performance” Rest. 32

Hamer v. Sidway, Pg. 608 (uncle’s reward for nephew’s purging of vices)The circumstances of the language indicate that the uncle is probably not interested in his promise to refrain by only that he actually refrained.If Nephew begins to refrain, and if he refrains until he is 21, there is a contract.

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Acceptance by Return Promise; Bilateral Contracts In a bilateral contract, the offers empower the offeree to only accept by return promise. Bilateral contracts are formed upon the giving of the promise to perform an obligation in the future, and failure to fulfill such promise results in

breach.

Acceptance by SilenceSilence may not constitute an acceptance except where:

Based on prior dealings between the parties, it is reasonable that the offeree should notify the offeror if he does not intend to accept; or "Where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction, and the offeree

in remaining silent and inactive intends to accept the offer." Restatement § 69

Hobbs v. Massasoit Whip Co . (1893) (eel skins retained by D assumed as acceptance ) Pg. 353 Rule (s): Similar eel skins were frequently sent to D in this manner, duty on D to act upon receipt of eel skins and silence on its part coupled with

retention of skins for an unreasonable time gave P good reason to assume D accepted goods. D didn’t have a duty to notify acceptance but D had duty to negate acceptance by notifying P. This would be unjust enrichment.

RECAP:Terms of Acceptance

1. Non-goods Contracts1. Under the "mirror image" rule, applied in common law transactions, an acceptance must conform to the terms set forth in the offer. 2. No contract is formed if the acceptance contains terms that are different from or additional to those set forth in the offer. Such

communication merely constitutes a counter-offer. 3. The formation of a contract is generally precluded even if the discrepancy is trivial, although courts are now increasingly giving effect

to an acceptance if the additional or different terms relate to an immaterial detail. 4. A contract is formed if the offeree unequivocally accepts the offeror's terms, despite a simultaneous suggestion of alternative terms.

1. Such circumstances merely represent an attempt to modify the terms of an already formed contract based on the original terms, as long as the acceptance is not contingent on the offeror accepting the proposed changes.

2. Contracts for the sale of goods 1. The UCC rejects the mirror image rule. 2. It give effect to a definite and seasonable expression of acceptance even though it contains additional or different terms from those

offered, unless the offeree expressly makes the acceptance conditional on the offeror's assent to the different or additional terms . [UCC § 2-207]

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3. Additional Terms 1. In contracts where at least one party is a non-merchant, if the offeree unambiguously accepts but states additional terms, the terms are

construed as mere proposals for modification and the terms of the existing contract are those set forth in the offer.2. Where both parties are merchants, the additional terms become part of the contract unless:

The offer expressly limits acceptance to the terms of the offer; They materially alter it; or Notification of objection to them has already been given or is given within a reasonable time after notice of them is received.

[UCC § 2-207(2)]

Shrinkwrap and Clickwrap: Challenges to Mutual Assent

Shrinkwrapped Warranties Cases are divided on whether a purchaser is bound by an arbitration clause contained in a limited warranty that is packed within the product box

and shrinkwrapped at the factory where the purchaser is unaware of such clause. Similarly, when a shrinkwrap package containing a software program contains a printed warning to the effect that unwrapping the package

constitutes consent to the terms of the license contained therein, jurisdictions are split as to the binding effect of such license terms on the purchaser.

ProCD v. Zeidenberg (license terms upheld)

Box-Top Licenses At least one court has held that if a purchaser is unaware of license terms printed on the box because the transaction was conducted over the

telephone, with no mention by the seller's representative of the license terms, such terms were not binding on the purchaser. Step-Saver Data Systems v. Wyse Technologies - reversing the trial court finding that a box-top license was intended as the final expression

of the parties' agreement, the court noted that "[w]hen a disclaimer is not expressed until after the contract is formed, UCC § 2-207 governs the interpretation of the contract, and, between merchants, such disclaimers, to the extent they materially alter the parties' agreement, are not incorporated into the parties agreement."

ClickwrapWhere software is downloaded from the Internet, with the licensee being required to click on the "I agree" button indicating agreement to the licensor's terms, such conduct is deemed to be a binding acceptance of the licensor's offer.

Specht v. Netscape x 2 Pg. 359 (Smart Download – Browse wrap agreement not a K)Issue(s): Are the Ps bound by this agreement because there was a reference to the agreement? Are they bound to the arbitration clause?Holding: No, Ps could download without making assent. No agreement, no contract, clause was invalid, P wins;

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Rule(s): Promises become binding when there is a meeting of the minds and consideration is exchanged. (1) Downloading is not assent (it’s just to obtain a product); (2) Affirmative action is required to express consent (3) The language is suggestive not written as a condition “please review”It’s free like a free newspaper – no sense of a contractual relationship.

Caspi v. Microsoft Network: (“I agree!” Microsoft did it exactly right)Issue: Did P argee to a forum selection clause?Holding: YES! You clicked “I agree” - Before becoming a member, subscriber is required to view a number of screens that contain forum selection clause

Ticketmaster v. Tickets.com (had to scroll to the bottom for “terms and conditions”)There was an arbitration clause there but you must scroll down to see it and no mutual assent is required resembles the browse wrap in Specht; website only asks that you “Please review”

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§30, p.: 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...(unilateral contract).;(2) unless otherwise indicated by language or circumstances, an offer invites acceptance in any manner and by any medium that is reasonable

in the circumstances

Medium of AcceptanceUnless the offeror indicates otherwise, the offeree may use any medium that is reasonable under the circumstances UCC § 2-206(1)(a) or, in non-goods contracts, the same medium as was used to communicate the offer or any other medium "customary in similar transactions at the time and place the offer is received." Restatement § 65

§58§61§63§64§65§66§54§30§32

§69 Acceptance by Silence - Where offeree fails to reply to an offer, his silence = acceptance if he takes the benefit with reasonable opty to reject and knows they were offered in return for compensation, or where the offeror has stated or given reason to know that assent may be manifested by silence or inaction. The parties’ previous course of dealings is very important here

UCC2-207

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CONTRACT INTERPRETATIONS

Note: If acceptance doesn’t mirror performance but contract begins what terms did the parties agree to? Once there has been mutual assent (offer and acceptance) to a contract there has to be agreement of the terms in the contract. That’s where interpretation comes into play!

This is done in 3 parts:1. Interpreting the meaning of terms

a. Ambiguousb. Vague

2. Gap Fillinga. Agreements to Agree b. Illusory Promises

3. Identifying which term to use

Different Meanings Intended by the Parties Where the parties attach different meanings to a term, the interpretation that prevails is that of the party that did not know (or had no reason to

know) of any different meaning attached by the other, and the other knew (or had reason to know) the meaning attached by the first party. Restatement § 201

Interpreting the meaning of terms Are the terms ambiguous? Ex. “right to bear arms” – is this a weapon or an appendage Are the terms vague? Ex. Does “arms” also include nuclear bombs?

A. Ambiguous Terms “misunderstanding” – is there mutual assent? If not, are there enough facts to deem mutual assent? Intentions are deduced

Raffles v. Wichelhaus, (mistaken identity of Peerless boat used in delivery of goods)Rule: Because there was conflict as to which boat was meant in contract, court deemed there was no mutual assent, no “meeting of the minds”(subjective test) and ambiguity effects a material term of the contract because conditions of wildly fluctuating prices arrival date is important (objective test) and therefore, no contract. MUTUAL MISTAKE VOIDS CONTRACTNote: difference between latent ambiguity (each interprets the same term differently) and patent ambiguity (a term is undefinable), parol evidence pointed to the meaning of a term is allowed by the UCC, this includes usage of trade and prior dealings between the parties

Oswald v. Allen, (Swiss coin collection, mistake of what was for sale) Pg. 389

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I: Was there a valid contract even though both parties had different views of what was being sold?Rule(s): (1) When terms used in agreement are ambiguous and parties understand it in different ways, there cannot be a contract unless one party had reason to be aware of other’s understanding. (2) Although mental assent of parties is usually not a requisite to formation of contract this cause is an exception because there is “no sensible basis for choosing between conflicting understandings”. (Applies Raffles)Holding: MUTUAL MISTAKE VOIDS CONTRACT

B. Vague Terms - did the terms used apply beyond their agreed meaning?

Weinberg v. Edelstein Pg. 393 (ladies dresses, coats and suits)Issue: Does the term “dresses” preclude the sale of “blouse skirt” combos? What is the meaning of the word dress? Rule: Where both parties have convincing arguments, policy dictates that restrictive covenants should be construed narrowly against the person seeking to enforce it to promote competition and free use of land. Ct: Looked at contract, industry standards, customs, and trends. Also mentioned that both parties are in the same business – therefore they each should have knowledge of this term.

Frigaliment Importing Co. v. B.N.S. International Sales Corp . Pg. 397 (chicken- no breach)Issue: When important terms of a contract are perceived and interpreted differently by each party, may one party hold the other liable for breach of contract?Rule: The party seeking a narrower meaning has the burden to show that is what was intended. Want to encourage party with narrow meaning to declare it during negotiations and insert an explicit term. Objective meaning and trade usage permitted either interpretation.Ct: looks at trade usage (USDA definition), definitions in each language, pre contract correspondence, contract

Filling Gaps in Terms the act of supplying the missing terms. If manifestation of assent is incomplete can a contract be enforced? Supplying terms to a contract when contracts are silent on a particular issue

Two types of terms:1. implied in fact – the terms parties implicitly agreed to2. implied in law – thought to be imposed on parties w/o their consent

Two types of gap fillers:1. Default rules – legal rules parties can avoid by express clauses2. Immutable rules –may not be varied by consent

Filling Gaps – Agreements to agreeSun Printing & Publishing v. Remington Paper & Power, Contract for sale of paper Pg. 404Issue: Is there a contract when a term left open in the contract cannot be agreed upon by the parties?

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Rule: No, the time element is essential to the formation of the contract, inability to agree upon this element causes the failure of the contract and neither party is bound. H: There is no basis to determine what time and price elements should be, therefore no contract.Rule: To avoid in the future, set price based on an external standard or specifically contract actions to take when no agreement can be reached by partiesDissent: Should be enforced b/c set quantity; used sale forms of D; both big businesses; both had intent to be bound; unjust; law is sanctioning deliberate breach.

Texaco v. PennzoilI: Can a contract be binding even if the terms intended to be included into an agreement are too vague and incomplete?Rule(s): (1) terms in contract must be sufficiently complete so that parties in good faith can find in the agreement words that will fairly define their respective duties and liabilities. (2) parties’ intent not conclusively discernible from their writings alone, extrinsic evidence of relevant events is consideredHolding: there was a breach

Illusory Promises and Good Faith Dealing leave complete discression to perform or not in the hands of the promisor. The court then fills the “gaps” by creating an obligation of good faith to comply among the parties. A promise is subject to a condition which is within the control of the promisor Nevertheless, common law and the UCC have recognized an implied promise to use best efforts in an agreement for exclusive dealings, which

furnishes the necessary consideration. See Wood v. Lucy, Lady Duff-Gordon, (involving an agreement by the defendant to give the plaintiff the exclusive right to market its name

and designs); UCC § 2-306(2)

CASESNY Central Iron Works v. US Radiator, extensive need of radiators not provided by D Facts: quantity was an open term of contract. Are the terms that were left open essential?Issue: Was there a mutual mistake in framing contract since the intention was to limit the quantity of goods to be delivered to an amount such as had been ordered in previous years? Should contract be reformed to reflect this intention?Rule: No sign of bad faith or unfair dealings on part of P, therefore D breached contract. Both parties must carry out contract in a reasonable wayP asked for more radiators in good faith and D should have complied.

Eastern Air Lines v. Gulf Oil Corp (exclusive gas supply contract, issue on $ for renewal) Facts: P and D dealt with one another for decades. Issue: Did Eastern violate the contract where missing terms of quantity subjects Gulf to the whims of Eastern?

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Holding: YES! K is valid. The real issue is to look at the intent of the parties and to see if there is good faith. At all times, Eastern acted with the good faith of a merchant. Lack of mutuality and indefiniteness of contract resolved by court with reference to objective evidence of volume of goods required to run business. Notes: this is a requirements contract P is giving $ for oil in exchange for D to supply P with “any” of its needs. Requirements contracts are valid if they have good faith. Since P did not demand an exorbitant amt. of gas it is. There is also an element of commercial impractibility on the part of Gulf – “too bad if you entered into a failing contract”

Wood v. Lucy, Lady Duff-Gordon, P hired to help in endorsements of Ds clothing She claims illusory promise should make contract void. - Because P did not specifically promise anything, is a contract void?Rule: No, “a promise may be lacking and yet the whole writing may be instinct with an obligation imperfectly expressed” §2-306Holding: Because D gave an exclusive privilege, which, acceptance by P constitutes assumption of duties to increase profits (since P’s own profits are tied to his endeavor) – promise has value – reasonable effort standard. Ct. looks for good faith performance.

Identifying the terms of the Agreement

A. Form Contracts or “Contracts of Adhesion” An adhesion contract is a contract drafted by one party and reduced to a form agreement that generally presents no opportunity for

negotiation. While not per se objectionable, adhesion contracts are subject to greater scrutiny than contracts that result from negotiation between the

parties. To protect the non-drafter, who is often in an inferior position, the Restatement provides that only those contractual provisions that a

reasonable person would anticipate and agree to should be considered part of the contract. Restatement § 211(3) Also think about whether the term may be unconsciousable.

Carnival Cruise v. Shute, choice of venue clause on back of ticketI: Is clause on venue selection on back of ticket enforceable?H: Not unconscionable even if P didn’t know until after buying the ticket. There are many reasonable business interests for requiring litigation in D’s home state. Some of these may lower costs, resulting potentially in lower prices for other Ps.Rule: this clause is not the sort of thing that one bargains for, and therefore this is governed by ordinary commercial considerations. The clause is reasonable and was made in good faith. Clause is enforceable because it does not preclude recovery. Dissent: P does not see conditions of contract until after purchase of ticketsTest: Is this clause “fundamentally unfair”?

Caspi v. Microsoft: P had adequate notice of forum selection clause - if adequate notice of FSC is provided, the clause will control. This is an electronic medium verus printed in Carnival. See restatement 211.

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B. Which Terms were agreed to? This problem often arises when there are conflicting writings and/or multiple forms used known as “battle of the forms.” Typically only takes place in commercial transactionsThis occurs b/c the UCC doesn’t apply the mirror image rule

It doesn’t want to release one party from the contract so tries to give them one last chance Also the UCC is different than common law b/c btw merchants additional terms can be added if the other party remain silent on them – acceptance by silence.

ProCD, Inc. v. Zeidenberg Pg. 451 (telephone directory software – copied and resold)Every box had warning that terms were within. Buying the product = acceptance. (contract is formed upon payment. Also it flashed every time it was used!Issue: Are licenses enforceable upon software buyers?Rule: Shrinkwrap licenses are just as enforceable unless their terms are objectionable on grounds applicable to contracts in general.Ct: Company’s can’t be made to put the terms on the outside of the box! There can be notice outside, terms inside, and the right to return if you don’t agree. Look at 2-204 – vender is master and can invite acceptance by conduct. Also Z loses b/c if the ct. allowed this – cost of products would rise (bad for consumers)Other examples of terms received after purchase: (1) insurance policies; (2) airline tickets; (3) concert tickets.

C. Terms that Follow Later – look at 2-207 Additional Terms In Acceptance or Confirmation

§ 2-207. Additional Terms in Acceptance or Confirmation.(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 the 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 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 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 provisions of this Act.

Hill v. Gateway 2000 Pg. 457 (Bought a PC over the phone w/ CC)

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Did the standard term in the box bound him? They didn’t like the PC tried to go to courtIssue does 2-207 apply? The big questions are: (1) When was the contract formed? (2) What are the terms of that contract?Analysis: They were deemed to have notice was b/c gateway had ads out there that all their products had a limited warranty – this is a huge leap! Buyer beware! The Easterbrook opinions suggest that “cash now, terms later” is standard. What’s the best argument you can make in favor of the Easterbrook position? It’s a useful way to do a lot of business and it would be tiresome at best and burdensome in many ways to have all the terms laid out at

the time of the deal because we’re dealing with complicated products. It would be difficult to get all the terms out on the outside of the package and make everybody read a lot of stuff. There is a lot of utility in “deal now, terms later”. How do we fit this into the existing law? Without making people read all the terms, you can flag the idea that the purchase is subject to some terms which will follow later. You can make the purchase subject to such-and-such terms to follow later.Holding: The P’s had 30 days to return if they didn’t want to accept the terms. They didn’t so D wins.

Klocek v. Gateway (2000) Pg. 461 (P suing for breach of contract /warranty 4 tech support) Issue: Did P agree to the arbitration clause enclosed in the package by not returning it in 5 days?Holding: No.Analysis: This court uses 2-207 which was not used in the 2 other cases. It says just b/c there is only one form doesn’t mean that the UCC 207 doesn’t apply. Also the ct. believes that 5 days is not enough!

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INTERPRETATION UCC AND RESTATEMENT

§201, p. 391: Whose meaning prevails?(1) if same meaning attached, interpreted with that meaning(2) if different meanings attached, interpreted in accordance with the meaning attached by one of them if at the time the agreement was made

a. that party did not know of any different meaning attached by other, and other knew meaning attached by first, orb. that party had no reason to know any different meaning attached by other, and other had reason to know the meaning attached by

first,c. Except as stated in this section, neither party is bound by the meaning attached by the other, even though the result may be a

failure of mutual assent.

§202, p. 391: Rules in aid of interpretation(1) words interpreted in light of circumstances, intention of parties is given much weight(2) writing interpreted as a whole(3) unless different intention manifested

a. language interpreted with general meaningb. technical terms given technical meaning when interpreted in technical field

(4) when agreement calls for repeated performance with opportunity for objection, any course of performance/negotiations accepted without objection will be given great weight in interpretation

(5) wherever reasonable, manifestation of intention are interpreted as consistent with each other and with any relevant course of performance, course of dealing, or usage of trade. (Weinberg v. Edelstein, p.468, definition of a dress determined by trade usage and background research done by court.)

§34, p. : Certainty and choice of terms, effect of performance or reliance - there is stipulation for selection of terms in course of performance part performance may remove uncertainty and establish an enforceable contract (bargain has been formed) reliance on agreement may make a contractual remedy appropriate even though uncertainty is not removed.

Course of Performance represents a pattern in the performance of the contract. If a contract involves repeated occasions for performance by either party, and the other party knows of the nature of the performance and has an opportunity to object to such performance, any course of performance accepted or acquiesced to without objection is relevant to the meaning of the agreement. UCC § 2-208(1)

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TERMS OF THE CONTRACT&

PAROL EVIDENCE RULE

Parol Evidence Rule - The rule governs whether parties may introduce evidence of extrinsic agreements to prove the existence of additional or modified terms.

Remember!1. PE can not be used to contradict or add to the terms of a total (complete) final written contract (integration).2. PE can not be used to contradict the terms of a partial final written contract (integration), but you can add terms.3. PE does not bar extrinsic evidence offered for the following purposes:

Aid in the interpretation of existing terms - vague or ambiguous terms Show that a writing is or is not an integration or to establish that an integration is complete or partial - always allowed To establish subsequent agreements or modifications between the parties To show that terms were the product of illegality, fraud, duress, mistake, lack of consideration or other invalidating cause

Ask yourself: (1) is the writing integrated (meaning was it intended to be final)? IF YES – nothing to contradict

Ask yourself (2) was the writing supposed to be complete or partial?If total – no PE to add a termIf partial – PE ok to add a term!

If NO – PE rule doesn’t apply

Finality of Writing The more formal and complete - the more likely it is that it represents the final agreement. The writing need not be signed or complete in order to be deemed final.

Writing as Integration A written document that serves as a final embodiment of the agreement may be either a: (1) Complete integration – an expression of the parties' agreement in its entirety (2) partial integration – an expression of only a portion of the agreement.

If a writing is found to be a partial integration, the parol evidence rule precludes the following types of extrinsic evidence: (1) prior agreements (whether written or oral) that contradict a term in the contract; (2) contemporaneous oral agreements (3) Consistent additional terms: contemporaneous writing(s); course of dealing, course of performance or trade usage

Determining Whether a Writing is a Complete or Partial Integration – SEE Corbin/Williston/UCC

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Merger Clauses A merger clause establishes that the writing is intended to be the complete expression of the agreement between the parties. Such clauses are

generally conclusive on the issue of integration and will be enforced absent proof of fraud, mistake or other defense. A merger clause contained in a contract of adhesion, however, may be given less weight than such clauses in non-adhesion contracts.

CASES:

Thompson v. Libbey, P. 468 (verbal warranty as to quality of purchased logs) Issue: Can a verbal warranty be admissible as evidence when whole of contract is in writing?

Holding: No.Analysis: PE not allowed because the written contract seems complete – fully integrated – therefore any PE evidence that alters or adds to contract is inadmissible. The court is saying that there was a clear legal obligation and it was not unclear or ambiguous.

Brown v. Oliver, P. 469 (sale of hotel, fight over furniture)Facts: Parties discussed sale of hotel to include furniture but final contract did not include it.Issue: Should furniture term be considered part of the agreement even though it was not written into actual contract? Can the court take parol evidence into account in a professionally written contract?Holding: PE evidence RULE does not apply b/c it was not a complete contract. Analysis: Is the contract final? This is opposite of Thompson b/c you can rely on parol evidence instead of just looking to the contract to determine if the contract was final. If there is nothing in the contract that discusses the “terms” of the contract then the “term” that the P wants discussed may convince the court that the contact is partial not integrated. This contract dealt w/ land only.

Pacific Gas and Electric v. G. W. Thomas Drayage & Riggins Co. (1968) Pg. 474 (fix a steam turbine at PGE) What is an indemnity clause? If you and I have a contract and I agree to build a ditch and a 3rd party is injured in the process and they sue me, the clause means if someone sues me for your work and I am held liable for any damages, you are gonna owe me. Here the P’s own property is damaged, no damage to a third party does the clause apply to this situation?Issue: Was there alternative intent to the contract?Holding and Rule: Yes. The argument of the D is not out of the realm of reasonableness. However, PE can not be admitted to change/add/vary terms of the contract. The English language is ambiguous in itself, and we can not be held to any “plain language” definitions of terms in a contract. Since the contract would always be ambiguous under this reasoning then parol evidence can always be admitted as evidence to the parties intentions. (TEST Pg. Top 475) Pacific says that evidence cannot be used to change/add/vary terms of the contract, but that evidence can be admitted to determine what the terms are (this is where we part ways from the reasoning in Brown). Once we know what the terms are, we can reject the parol evidence if they contradict/change/add/vary those terms.

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Case #4: Trident Center v. CT General Life Ins. (1988) Pg. 477Conclusion: Claim #1: the K is ambiguous (There is ambiguity b/c one clause in the note says that Trident can’t prepay till January 1996. Another clause of the note provides that “in the event of a prepayment resulting from a default prior to January 1996 , the prepayment fee will be 10% but the court rejects Trident’s ambiguity claim b/c if their interpretation is correct, the default clause would override the no prepayment clause → Rule: court should construct a K to avoid internal conflict’s)Claim #2: extrinsic evidence should be introduced (Trident argues that even if the K isn’t ambiguous the deal that the parties actually struck is much different than what the K states → so Trident wants to offer extrinsic evidence that the parties agreed that Trident could prepay at any time w/in the first 12 years & pay only the balance owing + 10%) Since California doesn’t follow the traditional rule but instead uses CA Supreme Court case Pacific Gas → held that “contractual obligations flow not from the words of the K, but from the intentions of the parties → this essentially turned back the notion that a K can ever have a plain, understandable meaning w/out introducing extrinsic evidence the Pacific Gas decision casts a shadow of uncertainty over all transaction executed & negotiated under California law & chips away at the

foundation of the legal system.

Holding: Reverse & remand for Claim #2

What’s the 9th circuit’s beef? (LOL…in the words of Smyth) Finality is scary to them.

B. Reforming a writing – Mistakes in Integration - The parol evidence rule does not bar extrinsic evidence offered to show that terms were the product of illegality, fraud, duress, mistake, lack of consideration or other invalidating cause.

The Travelers Insurance Co. v. Bailey (1964) Pg. 487Facts: Life ins. Policy for $5,000 with annuity of $500/yr after age 65 for 10 years. Mistakenly written as 500/yr after age 65 for life.Issue: Can parol evidence fix a mistake?Holding: Yes

C. Requiring a writing – The Statue of Frauds (Pg. 490)Under-enforcement the failure of the legal system to enforce a legit exercise of assentOver-enforcement erroneous enforcement of an alleged assent that in fact never occurred.

Requirements of the Statute of FraudsCertain agreements must satisfy the statute of frauds, which requires the agreement to:

1) be memorialized in a writing or record;2) be signed by or on behalf of the party against whom enforcement is sought;3) indicate that a contract has been made between the parties;

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4) state with reasonable certainty the essential terms of the unperformed promises, in the case of non-goods contracts;5) specify the term of quantity, in the case of contracts for the sale of goods. UCC § 2-201 specifically states that "a record is not insufficient

because it omits or incorrectly states a term agreed upon but the contract is not enforceable . . . beyond the quantity of goods shown in the record."

Contracts Within the Statute of FraudsThe following types of agreements fall within the statute of frauds:

1) Agreements that by its terms cannot be performed within a year from the making of the contract 2) Promise to answer for the debt, default or miscarriage of another 3) Agreements made upon consideration of marriage, other than mutual promises to marry, e.g., to provide a dowry or child support.4) Agreements for the sale of land and for an interest in land (see § 6.04[2] for an exception) 5) Agreements for the lease of real property for longer than one year6) Agreement by a purchaser of real property to pay an indebtedness secured by a mortgage or deed of trust upon the property, unless

assumption of the indebtedness by the purchaser is specifically provided for in the conveyance of the property.7) Contracts for the sale of goods for the price of $500 or more [UCC § 2-201]; under the proposed revision, the price threshold is raised to

$5,000 (see § 6.04[1] for an exception) 8) Contracts for sale of other personal property – e.g, intellectual property, royalties – in the amount or value exceeding $5,000 [UCC § 1-

206]9) Leases of goods in the total amount of $1,000 or more [UCC § 2A-201]10) Agreements which creates a security interest in personal property if it is not in possession of the secured party, and agreements for

the assignment of contract rights [UCC § 9-203(1)(a)]

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ENFORCEABILITY

How do we know which contracts to enforce and which not to enforce? In the old days – they used a seal of commitment Now we use the doctrine of consideration substituted by promissory estoppel

There are 6 principles of Enforceability:

I. Party based principals:1. Will principle – parties consent to be bound voluntarily “meeting of the minds, therefore enforceable

Exception: objective manifestation of consent unless subjective intent can be proven to be contrary What are the limitations? Personal acts can be disconnected – like secret intentions which may be valid or worthy – this subjective – we

can’t rely on this – it may not have even been communicated.2. Reliance principle – liable for harm caused by verbal behavior (oral or written) we will enforce it whenever someone has relied on that promise

Is there a contract w/o reliance? Yes we need only damages to bring an action for a breach of contract.3. Restitution principle – to prevent unjust enrichment of promisor (one of benefited and now wants out)

Do lawsuits need to have unjust enrichment for a cause of action NO What is the limitation here? One party needs to have been unjustly enriched however if this has not occurred then you can’t bring suit

based on this principle.II. Standard based Principles:4. Economic efficiency – if benefits of enforcement exceed benefit of unenforcement (max. of social wealth)

Limitation? Who is in a position to determine this?5. Substantive fairness – only enforce contracts that are fair – “just” prices and terms

You evaluate the transactions to see if its fair

Principle of unconscionablility

Inadequately of consideration Limitation? It doesn’t tell us which conscionable contracts to enforce.

III. Process Principles6. Bargain principle – mutuality of inducement (also look at fairness of bargain, look for consideration)

Derived from assumpsit This can be a promise but may also be performance or agreement to refrain from acting. Advantages: a bargin (or exchanged promises) is a good indications of (1) serious intention and obligation; (2) intent to be bound. This is

good in a commercial context, and excludes most social promises Not about what was bargained for but rather that both parties were promising something to the other for something else (ex. I’ll build your

house if you pay) This is consideration. Exception: “I promise to take out the trash” no bargain, not enforceable

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Limitations arise when court’s interpret contracts narrowly (ex. If the court only looks at the contract on its face). It remains within the doctrine of consideration – otherwise all types of cases would arise.

Issues of over and under enforcement. Obstacles exclusive focus on process, fails to ensure enforcement, doesn’t provide explanation for why some promises are enforceable

while others are not.

Marvin v. Marvin, live in love, express contract? Pg. 591Issue: What principles should govern distribution of property acquired in a non-marital relationship?Rule 1: Courts shall enforce express contracts between non-marital partners except if it’s founded on sexRule 2: Courts inquire into conduct to determine if there is an implied contract – there is when a man and a woman live together and agree to pool their earnings and share equally in their joint accumulation, equity will protect the interests of each in such property.Rule 3: Quantum meruit (not a contract at all, but a method to collect damages, applied when courts believe not applying would result in unjust enrichment) – recoverable for the reasonable value of household services rendered less the reasonable value of support received if he can show that he rendered services with the expectation of monetary rewardHolding: Looks at will and reliance principles, theory of quantum meruit, and implied contracts.Defined as: Will principle – parties consent to be bound voluntarily “meeting of the minds, therefore enforceableDissent: judicial overreach!

Morone v. Morone, cohabitation, implied contract? Pg. .598Facts: Non givenRule: There is no contract – the scope of such an agreement can not be determined by the court.Holding: In living together you provide services without an expectation of payment – it is hard to determine in retrospect which services were gratuitous and which were not

Posner v. Posner (1972) Pg. 599 (written nuptial)Facts: Couple was married 6 years and had agreed that if they divorced he’d pay 600 in alimony and 600in chills support / month.Issue: Is a antenupitail valid? Is this one valid?Holding: YES - NOReasoning: If you made the bargain in good faith – tough luck! In history these were looked at as bad public policy. The court held that the agreement was valid today. In this case the wife did not enter into the contract with full knowledge of his wealth. Parties do have the right to enter into a bad bargain but whether it will be upheld or not depends on the good faith of both parties. Here the husband entered in bad faith b/c he knew his own wealth.

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CONSIDERATION

If the doctrine of consideration is viewed restrictively then the following promises have a lack of consideration:1. Promises to keep an offer open2. Promises to release debt In all these situations there is3. Promises to modify a contract NO BARGIN4. Promises to pay for past favors thus no consideration so not 5. Promises to assume the obligations of another enforceable6. Promises to covey land7. Promises to give to charity (However judges want to be just8. Promises made by bailees or family and therefore Prom. Estop. came into being)

Function of Consideration: To distinguish unenforceable promises from enforceable ones – light interpretation undermines it b/c social promises become enforced. Consideration requires a bargained exchange in which each party incurs a legal detriment.

Meaning of Consideration: The factors which the promisor considered when he promised and which moved or motivted his promising. Remember: To know why a promise is binding you need to know why the promise was made.

The Bargain Theory of Consideration: (Pg. 604)1. A contract is an enforceable promise (§ 1 and 2)2. With some exceptions (§17(2)), to be enforceable a promise must be supported by consideration (§17(1))3. A promise is supported by a consideration if it is bargained for. (§71(1))4. A 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.” (§71(2))

Consideration has a:Bargained exchange (performance or return promise which is given by the promisee in exchange for the promisor's promise.) ANDLegal Detriment (engages in an act that the party was not previously obligated or refrains from exercising a legal right)

Promises Without Consideration1. Gifts (only effective upon delivery of actual thing promised)

Johnson v. Otterbein University, promise to donate $ to Univ to liquidate indebtedness P.606

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Facts: Promise by Johnson to donate $ to Univ to liquidate indebtedness. Specific amt. and time noted.Issue: Did D breach a contract to P? So is this a contract (an enforceable promise)?Holding: NoRule: A promise to pay money as a gift may be revoked anytime before payment.Reasoning: Since U is not doing anything to benefit D or detriment itself, there was no bargain for consideration and therefore no contract.Hamer v. Sidway, Pg. 608 (uncle’s reward for nephew’s purging of vices)Facts: Promise for $5,000 to give up smoking/drinking, which he did. Issue: Was there consideration even if Uncle received nothing tangible?Rule: Forbearance of legal right to vice is consideration.Rule: Ct. will not question the “what” of the bargain but whether a bargain existed.Holding: Yes, “it is enough that something is promised, done, forborne, or suffered by the party to whom the promise is made as consideration for the promise made to him.” Rule: The P’s Detriment/Benefit need not be economic (one party does not need to profit) it deals more with give up of something (i.e. the P’s right to vice.)Extra Comments: Gift promises do not include consideration, and thus we will not enforce them. In Hamer, there was a gift but also an element of exchange. Also a statue of frauds issue in this case b/c the contract was going to be performed after a year and it was not in writing. The court used the oral statements and the letter from the Uncle constituted a waiver to negate the violation of the statue of frauds.

Dahl v. Hem Pharmaceuticals Corp. pg.615 (chronic fatigue syndrome - test new drug) The P’s performed and the D’s were supposed to give them free drugs for a year if the drug was later approved. D’s breach and claimed no consideration on the part of the P’s.Holding: P’s did incur detriment and D got the benefit of the testing for FDA approval binding contract exists! (unilateral contact) Compare to carbolic smoke ball case – performance was the acceptance. Look at restatement §3, §17, and §18.

2.Past consideration (not usually enforceable)Moore v. Elmer, Pg. 619 (clairvoyant, D promises to pay her mortgage if prediction is true)Issue: Can clairvoyant request D to pay for services rendered during reading session?Rule: No, no consideration since there was no bargain before he sat down for reading, he only promised to pay post reading. If there was a contract he didn’t receive any benefit from it since service was rendered prior to making of contract. Past consideration not binding except in certain situations §86

3. Moral ConsiderationsMills v. Wyman, Pg. 620 (promise to pay for nurse's prior care of deceased son.)Issue: Is there consideration?Rule: No legal consideration, no benefits to D – no non-doctor Good Samaritan rule

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Society has chosen to leave it up to the defendant’s conscience whether to pay back a purely moral debt. A moral obligation may only form consideration for an express promise in three cases: cases of statute limitations, infancy, or

bankruptcy Holding: NO. “It is only when the party making the promise gains something, or he to whom it is made loses something, that the law gives the promise validity....” nothing more than moral obligation. Also you need a pre-existing obligation.

Exception to this rule:Webb v McGowan, Pg. 629 (sacrifice of self to save boss’s life) Issue: Consideration even if no bargain?Holding: Yes, the material benefit rule applies if there is both a moral obligation and a subsequent promise to pay, even if there was no original duty or liability. No doubt that parties meant to be bound. (minority rule applied)Rule: No benefit promise + moral obligation + material benefit = valid consideration - “[A] moral obligation is sufficient consideration to support a subsequent promise to pay where the promisor has received a material benefit”. When the promisor gets a big benefit, it pushes toward enforcement.Note: Under §71, P may have lost since act was not induced by D’s promise to payThis type of analysis may open a Pandora’s box by opening up possibilities under moral obligation that did not exist before.

4. Contract Modification under the Pre-exisiting Duty Rule Rule: As long as there is a pre-existing duty between the parties to perform, changed circumstances will not alter the contract because the additional consideration (legal detriment or bargained-for exchange) was not in the contemplation of the parties at the time of the contract.

Stilk v. Myrick, Pg. 634 (due to desertion, captain promises to increase wages of existing crew) Issue: Is captain’s agreement with crew enforceable? I.e. can crewmembers collect extra wages?Holding: No, they cannot. There was no additional consideration in the alteration of the contract, the crew members did the work they were expected to do in the first place and there was no additional benefit to the D. Before P’s set sail they had undertaken to do all that they could under all the emergencies of the voyage.Rule: Generally, a contract may not be altered or modified without additional consideration.

Alaska Packers Ass’n v. Domenico, Pg. 636 (crew in Alaska strikes for higher wages)Issue: Does the replacement contract stand even if D’s rep stated he had no authority to contract and even if D had no alternative but face losses and failure?Holding: No, according to preexisting duty rule, P’s offered as consideration only what they had already contracted to do. No new consideration in modification of contract.Rule: For good faith, the validity of contract modification is going to come down to whether it is a change necessitated by a change in circumstances or if it is one party exploiting another.

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Brian Construction v. Brighenti Pg. 644 (excavation underestimate, recontracted)Issue: Whether parties’ agreement constituted a legally enforceable contract obligating D to remove unexpected rubble.Rule(s): (1) Exception to preexisting duty rule – the subsequent agreement imposes upon the one seeking greater compensation an additional obligation, therefore there is new consideration – binding. (2) When a contract must be performed under unforeseen burdensome conditions, and the parties renegotiate a fair new contract, then the new contract has consideration. Separate valid contract.Holding: Since no assumption of risks and unforeseen circumstances, modified contract is valid. See §2-209 UCC

US v. Stump Pg. 649 (Modification of a loan agreement)Old Rule: A contract may not be modified w/o consideration.New Rule: Enforce contract modifications (at least is written) regardless of consideration and rely on the defense of duress to prevent abuse. See UCC 2-209

Sufficiency of Consideration Adequate vs. Sufficient Consideration

Adequacy of consideration relates to whether the bargain involves an exchange of equal value. Generally, however, courts do not concern themselves with whether consideration is adequate, honoring the concept of freedom of contract.

Courts do require consideration to be "sufficient", which relates to whether there is a legal detriment incurred as part of a bargained exchange of promises or performances. i.e. nominal considerations.

Nominal consideration - If nominal consideration is given as a mere formality in order to create a binding contract rather than as a bargained exchange, the consideration is insufficient. See Restatement § 71

In option contracts, a payment or promise to pay nominal consideration is sufficient consideration to make enforceable a promise not to revoke, provided the option time is relatively short (e.g., 10 days) and the price to be paid if the option is exercised is a fair price. See Restatement § 87

Three types of problems with consideration1. Want (or lack) of consideration – nothing whatsoever given in exchange for the promise2. Failure of consideration – thing not worth as much as you thought (Ex. Lotto Ticket)3. Inadequate consideration – person did not get what they bargained for – a sham = no consideration – nothing passed btw the parties

Newman & Snell’s state bank v. Hunter pg. 652 (consideration of a bad note was a sham – widow not liable)D A: Want of consideration. Issue: Whether the manner of handling the stock of the Hunter Company furnished a considerationRule: No value on one-side of the deal, therefore there is no consideration even though there was a bargained-for-exchanged.Holding: She’s not liable to pay the bank for the note. The bank was stuck with the bad debt. She didn’t have any liability for her dead husband’s note.

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Dyer v. National By-Products, pg. 655 (lost foot at work, life time employment nixed)Facts: Dyer lost his right foot in a job-related accident. Held that for forbearance of a lawsuit he had an oral exchange of lifetime employment.Issue: Was there consideration when P agreed not to litigate accident claim in exchange for lifetime employment? Does P have a right to sue now that he was laid off?Rule: Forbearance is sufficient.Reasoning: Would seem like there’s consideration but in actuality P had no valid claim for personal injury. However, ct thinks P’s good faith belief that he did have a claim may constitute consideration. Good faith forbearance allows there to be consideration even if based on an invalid claim and contract is enforceable. Good faith and reasonable grounds for that good faith.

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RESTATEMENTS AND UCC FOR CONSIDERATION

§17: requirement of a bargain(1) formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration, except for(2) special conditions in §§ 82-94

§71: requirement of exchange; types of exchange(1) consideration must be bargained for;(2) must take place in exchange context;(3) may consist of:

(a) an act or(b) forbearance, or;(c) the creation, modification or destruction of a legal relation.

§79, adequacy of consideration (mutuality of obligation) Pg. 654if the requirement of consideration is met there is no additional requirement of:

1. a gain, advantage or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or2. equivalence in values exchanged, or;3. "mutuality of obligation"

§ 86 - Promises grounded in the past - Pg. 633§86: we will sometimes enforce a promise on the basis of a benefit previously received to prevent injustice unless the promisor hasn’t been unjustly enriched or the value is disproportionate to the benefit. §86: promise for a benefit received (minority view)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 if:

a. the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched;b. to the extent that its value is disproportionate to the benefit.

§89 Modification of an executory contract Pg. 647 a promise modifying a duty under a contract not fully performed on either side is binding:

a. if the modification is fair and equitable in view of the circumstances not anticipated by the parties when the contract was made; orb. to the extent provided by statute; orc. to the extent that justice requires enforcement in view of material change of position in reliance on the promise.d. a circumstance can be considered unanticipated even though it was considered - provided that the contract did not price it accordingly

§364 - Effect of unfairness pg. 654Where specific performance would be unfair because the exchange is grossly inadequate, court will deny SP. Permits court to refuse equitable relief on grounds of unfairness, even in situations where they would not necessarily refuse to award damages

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§2-209(U), p.648: modification, rescission and waiver Pg. 6481. modification needs no consideration 2. a signed document with a clause excluding modification or rescission except by signed writing cannot be changed, but except as between merchants such a requirement

on a form contract must be signed by the other party3. requirements of Statute of .Frauds must be satisfied if the contract is within it4. although an attempt at modification or rescission does not satisfy (2) or (3), it can operate as a waiver5. a party who has made a waiver....[not important]6. unless modification was waived in the original contract; requires good faith and reasonable commercial standards of fair dealing and usage of trade;

ESTOPPEL

Defined When a promisee foreseeably relies to his detriment on the promisor's promise, even in the absence of an enforceable contract, the doctrine of promissory estoppel may be invoked to make such promise binding in order to prevent injustice. The remedy in such cases is based on the extent of the promisee's reliance, not his expectation. Restatement § 90(1)

Equitable Estoppel Where the promisor makes a representation pertaining to the writing and the party seeking to enforce the contract relied to his detriment upon

such representation – the promisor may be estopped from raising the lack of writing as a bar to enforcement.

Promissory Estoppel (substitute for consideration when needed for justice) Action of asking for compensation for detrimental reliance on a promise even if there was no consideration Where one party has performed already – the promise has induced reliance Usually acts as a substitute in (1) Family promises; (2) Promises to Convey Land; (3) Inducement is a value conferred in return for promise (4)

inducement is a step in the bargaining process

In other words, a promise is binding if:1. There is an inducement by promisor reasonably expected to produce an action or reliance (reasonably foreseeable to the promisor that promisee

would rely on the promise); and2. Action or reliance actually takes place (actual reliance in a reasonable way); and3. That action leads to some detriment on the part of the promisee; and4. Injustice cannot be avoided without enforcement of the promise.

Applicability of DoctrineExamples of situations in which promissory estoppel may be applied include:

1) Intra-family promises Rickets v. Scothorn, Pg. 701 (Grandpa gives $ so granddaughter doesn’t have to work)Issue: was the promise a gift for want of consideration?

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Holding: Not exactly, because Grandpa should have known (indeed he intended) that his promise would induce P to act, which she did. Reasonable reliance on promise to her detriment and injustice can only be avoided by enforcing promise. No consideration but equitable estoppel.

2) Philanthropic subscriptions made to educational, charitable or religious organizationsAllegheny College, pg. 709 (endowment for fund in D’s name) P A: This is a contract. They relied on her and set up a fund. Reliance constitutes their acceptance.Issue: Whether a charitable subscription is enforceable Rule: Not PE but actual consideration –D immortalized in endowment in exchange for $Dissent: Note was a gift, or a unilateral contract. P had not performed stipulations and D has not yet been unjustly enriched so no contract. Extra Comments: Courts will not enforce purely gratuitous promises with some exceptions such as charitable subscriptions. You can bargain for a charitable promise, and you can have consideration. Some charitable promises are enforceable on these grounds. Other charitable promises may be enforced on the basis of foreseeable detrimental justifiable reliance. A “smidgen” of reliance will not cause justice to demand enforcement unless you are dealing with a charity as the promisee.How is this different from Johnson? The elements are different as to what the money will go to.

3) Promises to make a gift of land where the promisee takes possession of the land and makes improvements upon it, with the knowledge and assent of the promisor

Greiner v. Greiner Pg. 706 (Son says mom gave him the 80 acres) Issue: Does son get the land? Was there a contract?Rule: A gratuitous promise to transfer property is enforceable if the promisee had relied on it by moving onto the land and making improvements.Holding: Yes- he moved, he made improvements, he spent money, he lived on the land. Extra comments: Equitable doctrines tend to be very fact specific. Frank gave no consideration. Contract is clarified once the reliance has been made. This is a fluid doctrine – more so than ordinarily seen in contracts. This is a straight application of Section 90. (Clean hands also important here)

4) Promises made by a bailee relating to bailed goods and on which the bailor relies

5) Offers that become irrevocable by virtue of the reasonably foreseeable inducement of an action or forbearance of a substantial character on the part of the offeree before acceptance [Restatement § 87(2)], e.g., where a general contractor receives bids from a subcontractor and relies on such bid in preparing its own bid for a project

Drennan v. Star Paving Co.Pg. 725 (reliance and PE, P wins)

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Issue: Did the plaintiff’s reliance make the defendant’s offer irrevocable?Rule:

1. If you make an offer that you should reasonably expect will cause the promisee to act in reliance to their detriment, and it actually does cause them to act, then that offer may become an option contract if necessary to avoid injustice.

2. A mere offer may become an enforceable promise based on promissory estoppel even if the offer is revoked.Holding: Award of the difference btw bids.Analysis: An implied subsidiary promise is a promise to hold the offer open until the general contractor accepts the big, main contract. Since the subcontractor wants the job, and the subcontractor wants the contractor to use the subcontractor, the offer by the subcontractor is irrevocable until a reasonable time after the general contract is awarded. The general relies on this promise in putting its bid together.

Feinberg v. Pfeiffer Co., Pg. 716 (retirement pension for life promised) Issue: Is D liable for the payments even if there is no consideration?Holding: Yes. D should have known that P would have relied on the promise and knew that in fact she did (and did not seek other employment). Other elements met. – P subsequent illness was not the “action or forbearance”See Section 75

6) Contract modifications where one party materially changed position based on it [Restatement § 89(c)]

7) Preliminary contract negotiations where one party encourages the other to engage in activities that would facilitate entering into a contract but which would be detrimental to such party if the transaction is not in fact consummated, e.g., relocation, purchase of property, or borrowing money

Hoffman v. Red Owl Pg. 732 (Supermarket Franchise deal costs too much $$)Issue: Where an agreement actually made or relied upon? § 90? Rule(s):

Insofar as it’s necessary to prevent injustice, a promisor will be held to their promise if they reasonably expected that promise to induce reliance on the part of the promisee and they actually did so.

Even if there is never an offer, an enforceable promise can be found on the basis of reasonable reliance on statements or “instructions”, especially when they come from a stronger party.

On the other hand, in a commercial situation, you’ll have parties that have more equal bargaining power. In that case, reliance becomes less and less reasonable the more equal the parties are.

Analysis: yes, P meets the elements for promissory estoppel – finds sufficient promise and detrimental reasonable reliance the result of which injustice can only be avoided by enforcing the promise The court also goes over the damages and finds them all reasonable except for the damages related to selling the small grocery store.Conclusion: The order of the appellate court is affirmed.

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8) Extensive contract negotiations in which one party gradually increasingly commits itself in reliance on the negotiations resulting in a binding contract, the other party negotiates through a low ranking representative who lacks full authority to seal the agreement

9) Indefinite contracts that are too vague to be enforced but for which the courts may award reliance damages

10) Letters of intent upon which one party justifiably relies in the belief that the transaction will occur but it does not when the other party abandons the negotiations

OTHER CASES: Construction Bids

James Baird Co. v. Gimbel Bros., Inc. P. 722 (subcontractor errs in estimate relied on by GC)Issue: Can Gimbel be held to this price if it was a mistake and if it notified everyone on the same day?D A: The P should have known it was a mistake based on the amt. the other bids had come in on.Rule: Ordinarily, if the offer was revoked before it is accepted, then the acceptance is too late. Analysis:

Hand finds there was no contract between the parties because putting in a bid could not be construed to constitute an acceptance Hand says § 90 doesn’t apply when the defendant is bargaining for an acceptance, not a bid. Hand shall not use promissory estoppel if he can’t find any promise to hold the offer open. When the parties are big and strong and able to protect themselves, we’re not going to go out of our way to protect them. This is

the traditional view.Extra comments: This is an offer to be the subcontractor if their bid is accepted. But there is no acceptance here. The P is looking for promissory estoppel: “My reliance on the bid, takes the place of an acceptance.” The court held that there was no reliance on this bid b/c the contractor did not know they were bound by the offer. Why doesn’t the court here say that promissory estoppel was enough?

1. This bid was so off this was a question of “good faith”2. Also industry practice is that usually bids were incorrect3. If the wanted a contract they should have issued a contract and then the parties would have been bound if they had in fact

gotten the bid.4. PE can’t substitute for acceptance.

 Promissory estoppel as an alternative to breach of contract

Goodman v. Dicker Pg. 730 (Dealer franchise to sell radios)Issue: Can the plaintiffs recover on promissory estoppel even though the franchise agreement, if performed, would have been “at will”?

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Rule: “[O]ne who acts to his detriment on the faith of conduct of the kind revealed here should be protected by estopping the party who has brought about the situation from alleging anything in opposition to the natural consequences of his own course of conduct.”Analysis: The court finds that the trial court was correct in awarding the plaintiffs damages based on how much they spent in reliance on having the franchise and being able to sell radios. The defendants, however, are found to be not liable for lost profits on an initial order of radios.Conclusion: The judgment was affirmed.Also: think of this case in terms of damages. A injuried party can only recover for reliance damages in promissory estoppel. Thus he cannot collect profits!

MODERN APPLICATION AND LIMITS OF PROMISSORY ESTOPPELA. Promise

Blatt v. University of Southern California Pg. 752 (nonadmittance into law school legal society)Issue: Can P claim reliance on promise to his detriment under PE?Holding: No, there was no promise of definite admission into society, just a promise for “eligibility” for election into society. This promise was fulfilled…his application was reviewed and denied.Rule: Fails PE because P faced no real detriment – not of a “definite and substantial character”The court is driven by the idea of groups / organizations having autonomy to choose who they want and do not want in their groups. If a constitution right is not violated – then the groups are free to choose who they want. The court doesn’t want to get involved in this issue.How does this compare to Hammerd? Hammerd is the exception, not the rule; the determent here is not as persuasive; and the court here has a driving principle.

Spooner v. Reserve Life Insurance Co. Pg. 755 (Bonuses to be paid to employees)Issue: does the bulletin contain an enforceable promise?Analysis: No breach of a binging contract. There was an express disclaimer.Holding: for D’s – reversed and dismissed Class Notes: This is an illusory promiseYpsilanti v. General Motors, Pg. 758 (tax abatement for keeping company in town) Issue: Did GMs statements and conducts constitute a promise to maintain a plant in town if town continued to offer it tax abatements?Holding: cannot invoke promissory estoppel because there was no promise.

GMs statements were mere sales “puff” and expressed hopes and expectations not promises. Also, since there is proof of hesitancy on side of D, cannot say the reliance on alleged promise was reasonable.

2. Reasonable Reliance

Alden v. Vernon Presley, Pg. 772 (Elvis’ promise to pay debts of future mother-in-law.)Issue: Was reliance on promise sufficient to allow for promissory estoppel?

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Holding: No, not reasonable reliance because she knew executor would fight to renege promise from Elvis before she filed for the divorce and settlement on the house.Rule: no detrimental reliance §90.

Cohen v. Cowles Media Co . Pg. 784 (newspaper release of secret names)Issue: Did the paper need to uphold the promise?Holding: YES. Analysis: The Supreme Court ruled that journalists are not protected when they break promises because of the First Amendment. As Justice Souter suggests, “ ...the First Amendment does not confer on the press a constitutional right to disregard promises that would otherwise be enforced under state law...”

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RESTATEMENTS ESTOPPEL

§90 “promise reasonably inducing action or forbearance1. A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and

which does induce such action or forbearance is binding if injustice can be avoided only be enforcement of the promise. The remedy granted for breach may be limited as justice requires.

2. A charitable subscription or a marriage settlement is binding under Subsection (1) without proof that the promise induced action or forbearance.”

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MODIFICATION

Good Faith Modification Subsequent to the formation of a contract, the parties may, by mutual assent, modify the contract. The modification must be a product of good

faith and fair dealing. A modification resulting from an improper threat to breach the contract or to refuse to do business with the party from whom the modification is sought – referred to as "business compulsion", "economic duress" or "extortion of a modification" – will be held unenforceable.

A party to a contract for the sale of goods must have a legitimate reason for seeking a modification. An example of a legitimate commercial reason to seek a modification may exist where a market shift would create a loss to the party seeking relief even if such circumstances would not justify an excuse of performance. [UCC § 2-209, comment 2]

Consideration The UCC does not require modifications to be supported by consideration. [UCC § 2-209(1)] In non-sale-of-goods executory contracts, a modification must be supported by new consideration except:

if the modification is fair and equitable in light of circumstances not anticipated by the parties at the time contract was made (the "unforeseen difficulties exception"); or

to the extent that justice requires enforcement of the modification due to a material change of position in reliance on the modified promise. [Restatement § 89]

Writing RequirementPromissory estoppel may be invoked to enforce an oral modification that is subject to the statute of frauds if it would be unjust to reinstate the original term(s) where a party materially changes position in reliance on the agreement to modify.

The UCC requires modifications to be in writing where: required by a signed agreement between the parties (in order to give effect to any such requirement stated on a form supplied by a merchant

to a consumer, the consumer must also sign the form) the contract as modified falls within the statute of frauds. [UCC § 2-209(2), (3)]

Ineffective Modification as Waiver of Original TermsUnder both common law and the UCC, an ineffective attempted modification that is unenforceable due to noncompliance with the writing requirement (and any consideration requirement under the common law) may constitute a waiver of the original terms. A waiver is only effective against an existing contractual right and cannot create a new obligation. Waivers generally apply to conditions in the contract, e.g., delivery or filing date if time is not of the essence, but not essential parts of the bargain, e.g., promise to render services or sell goods.

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Unlike terms in the formation or modification of a contract, waivers do not require mutual assent or consideration and do not fall within statutory writing requirements. Waivers can generally be retracted unless the other party has relied on such waiver to his detriment.

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PERFORMANCE

The Implied Duty of Good Faith Performance We have seen this doctrine before in Eastern v. Gulf (requirements contract), in Lady Duff, and in Wood v. Lucy. Every contract has an implied duty of good faith The following 3 cases should how good faith works in a lease contract w/ % gross sales

Goldberg v. Levy, Pg. 799 (minimum profits as threshold in maintaining contract) Issue: Can court enforce contract although stipulation for a way to end contract is met due to D acting in bad faith?Rule: Purposeful diversion is an act in violation of good faith doctrine. Breach of implied covenant. Landlord can sue for breach of contract.Holding: Yes, a purposeful diversion to get out of lease by lowering profits is an act in violation of good faith doctrine. By diverting business, D was not using reasonable efforts to bring profits into existence. Note: landlord should have explicitly prohibited opening of another store nearby or prohibited advertising of new store.

Mutual Life Ins. Co. v. Tailored Woman Pg.800 (most important of all cases in this section)Issue: Was the 5th floor integrated with the first 3 in that the landlord had the right to collect above the fixed rent as a percentage of the sales from the 5th floor?Rule: Lack of foresight does not create rights or obligationsHolding: NO – P may only collect on those sales which came from the main store.Dissent: Business practices – it is unjust and there is a disconnect btw the rent being paid for that floor and the profits gotten from it. Raises the question of what are the parameters of good faith.

Stop and Shop v. Ganem, Pg. 806 (lot rented to be supermarket was left unused) Issue: If it is not explicitly expressed, is there an implied stipulation to continue using lot as a supermarket? Did P act in bad faith in transferring business to another store?Rule: To determine if there was an implied contract, court must look at the intent of the parties in making the contract.Holding: No. What factors did the court look at to determine this? The flat rate rent was fair it was not just a nominal rent with the D depending on the money from % profits. (Like other cases had been) Also the other stores opened were not done in bad faith and were in the area but not directly near the first store, and the lease did not state what the use/purpose of the land at rent had to be.

Food Fair Stores v. Blumberg P. 809What are the rules here?

All contracts have implied covenants Nominal rents are looked at (is the rent at issue substaintial or nominal?) Have other business been opened? If so, why and what effect does this have on the first store.

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What was the parties intent? We look to terms such as the rent amt, % to be paid, if you can show the activity done is done for good business reasons or simply done to decrease the payout to the landlord

Choc. Chip 811: (no blanket duty of good faith, everyone’s out for themselves) It’s a given in every state to act in good faith. Why is the court even bothering to interfere in these provisions? Parties to a contract have no fiduciary duty to each other. It’s not the court’s position to put the parties on the same level. We won’t reform contracts, but since a provision had been invoked dishonestly to achieve a purpose contrary to that for which the contract

had been made

Things to consider in determining bad/good faith: What are motives of party in reducing sales at store? Was base rent just nominal or was there a disparity between fixed rent and rental value? Did party intentionally attempt to draw customers from one store to another? Why did party open up another store? Was store nearby?

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RESTATEMENTS AND UCC FOR PERFORMANCE

§205, p.789: duty of good faith and fair dealing every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.

2-103(b), p.789: good faith defined honesty in fact in the conduct or transaction concerned. In the case of a merchant mean honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.

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NON-PERFORMANCE AND DEFECTIVE PERFORMANCE

Is a party justified in unilaterally ending a contract?? Courts have developed 3 doctrines to answer this question: (1) constructive conditions; (2) anticipatory reputitation; (3) material breach.

What Constitutes a Breach Any non-performance of a contractual duty which has become due constitutes a breach. An anticipatory repudiation of obligations also serves to breach a contract. In contracts for the sale of goods, in addition to repudiation, a seller breaches the contract by offering a tender or delivery of non-conforming

goods, and the buyer breaches by wrongfully rejecting goods, wrongfully revoking acceptance of goods, or failing to make a payment when due.

Material Breach in Non-Goods ContractsIf a party fails to perform a promise and the breach is material, and no cure is forthcoming, the aggrieved party may:

cancel the contract and sue for all damages under the contract; or continue the contract and sue for partial damages

If the breach is not material, the aggrieved party may not cancel the contract and can only sue for partial damages.

Factors which are relevant to a determination of whether a breach is material are: The extent to which the aggrieved party will be deprived of the benefit he reasonably expected; The extent to which the aggrieved party can be adequately compensated for the benefit of which he will be deprived; The extent to which the breaching party will suffer forfeiture; The likelihood that the breaching party will cure his failure, taking into account all the circumstances including any reasonable assurances; The extent to which the breaching party has acted according to standards of good faith and fair dealing. Restatement § 241

I. Constructive Conditions – requires an inquiry as to the intentions of the parties at the time of formation. (This is different from a material breach which is looking forward at intention in the future.)

Jacobs & Young v. Kent, (stipulation of Reading pipe not followed) p.867Holding: This was substantial performance. There are two types of damages possible. Cost to replace makes no sense, because the pipes are installed. Also, the pipes are functional equivalents - even made it past D’s inspector. Other method is diminution of value, which is negligible. YES SUBSTANTIAL PERFORMANCE BECAUSE DEVIATION MADE IN GOOD FAITHRule(s): Factors to consider whether literal fulfillment is to be implied by law as a condition:

1. Purpose to be served2. Desire to be gratified

3. Excuse for deviation from the letter4. Cruelty of enforced adherence

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Classes of Promises: (consideration of justice and presumable intention will decide which class this promise falls into) Damages: Not cost of replacement but difference in value. – Cost of pipe, difference in value of house due to pipe difference (minimal

assuming no special value held for Reading pipe) and cost of completion. No cost of performance based on economic waste theory “Economic waste” – falls under doctrine of expectancy damages critics say the the party should get want the bargained for! THIS IS AN EQUITIABLE REMEDYNOTE: Owner is entitled to cost of completion, unless cost of completion is greatly disproportionate to the good obtained. If that's the case, measure is difference in value.

I.I Cost of Completion vs. Diminution in vale

GROVES IS DIFFERENT B/C THE BREACH WAS WILLFULGroves v. John Wunder , lease of land in exchange for removal of gravel and sand Issue: Award cost of performance or diminution in value if D has performed?Holding: for P - new trial that could lead to the $60,000, judge applies cost of performance rule to grading contract despite disproportionate cost. Cost of performance even if disproportionateRule(s): “where the contractor willfully and fraudulently varies from the terms of a construction contract, he cannot sue thereon and have the

benefit of the equitable doctrine of substantial performance” the goal, given the lack of good faith, should be to give P what he has bargained for, what has been promised, and what he has been

deprivedNOTE: Should damages be cost of completion ($60,000) or fair market value of land if performance had occurred ($12,000)? Land worth nothing without levelling. Court gives P cost of completion - most agree this case was decided wrong.

Peevyhouse v. Garland Coal, strip mine lease, failure to restore landHolding - for P - limited to the $300, but the damages should be based on “relative economic merit” Rule - While the default rule is cost of performance, if application of that rule would result in grossly disproportionate economic benefit as compared to the cost of performance, then use the value rule. Basis is that the remedial work was incidental to the primary purpose of the contract and economic benefit of cost of performance rule would be grossly disproportionate.Dissent: bad faith on part of D, should apply CoP regardless of disproportion. “Economic waste” – falls under doctrine of expectancy damages critics say the the party should get want the bargined for!NOTE: Farmers get fair market value ($300) - cost of completion would have been $29,000. Most people think this case was decided wrong - they had great subjective value in the farm, were left with useless land.

II. Prospective nonperformance

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1. Anticipatory Repudiation What Constitutes a Repudiation

A party repudiates a contractual duty by: making a statement indicating that he will breach the contract engaging in a voluntary affirmative act that renders him unable to perform the duty failing to provide an assurance of due performance in response to such a request by the other party when there exists reasonable

grounds to believe that the obligor will not perform. [Restatement §§ 250, 251; UCC § 2-609(4), proposed revised § 2-610(2)]

Effect of Anticipatory Repudiationo In non-goods contracts, anticipatory repudiation by one party entitles the other party to:

bring an action for damages for total breach discharge his remaining obligations. Restatement § 253

In goods contracts, an anticipatory repudiation which will substantially impair the value of the contact to the aggrieved party, allows the aggrieved party to:

await performance by the repudiating party for a commercially reasonable time seek remedy for breach even if he has notified the repudiating party that he would await performance and has urged retraction suspend his own performance. [UCC § 2-610]

Retraction of RepudiationIn goods contracts, a repudiating party may retract his repudiation up to the time his next performance under the contract is due, unless the aggrieved party has since:

cancelled materially changed his position otherwise indicated that he considers the repudiation final. UCC § 2-611

The Restatement likewise allows for retraction of repudiation under similar circumstances but without terminating the right of retraction upon the repudiating party's next performance installment. [Restatement § 256]

Albert Hochster v. Edgar De La Tour this is a clear cut repudiation caseDA: No repudiation until performance is due - Thus no cause of action.Holding: Repudiation and cause of action occur at time of known repudiation (when the breach occurred). Currier had a duty to mitigate damages.

Harrel v. Sea Colony, breached condo contract P. 879

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Good illustration of wrongful renouncementIssue: Did P’s letter asking for a mutual rescission constitute an anticipated repudiation allowing D to breach contract and sell to a third party? Is the agent for D liable?Rule: Agent not liable since principal’s identity is fully disclosed.Holding: No, D unilaterally attempted to convert P’s request for a mutual rescission of the contract to an anticipatory breach or repudiation. A mere request for a change in the terms or a request for cancellation of the contract is not in itself enough to constitute a repudiation.Rule: To constitute an anticipatory breach of contract; there must be a definite and unequivocal manifestation of intention on part of the repudiator that he will not render the performance when the time fixed for the it in the contract arrives. Small issue: Remember in a change in contract there must be mutual asset to changes and consideration given to the change.

2. Assurance of Due Performance Right to Make a Demand for Assurances Both the Restatement and the UCC provide that where there are reasonable grounds to believe

that a party will not be able or willing to perform, the party entitled to receive such performance may make a demand for assurances from the other party that performance will be forthcoming. [Restatement § 251; UCC § 2-609] Such demand in goods contracts must be in writing. Between merchants, commercial standards dictate the reasonableness of grounds for insecurity and adequacy of any assurance offered.

Suspension of Performance Pending Assurances Upon making a demand for assurances, a party may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance.

Effect of Failure to Provide Assurances A party's failure to provide assurances within a reasonable time – in goods contracts not to exceed 30 days – constitutes a repudiation of the contract by such party.

Scott v. Crown, bushels of wheat contract rescinded in belief that buyer couldn’t pay P. 885When can you act on the basis that the other party will not perform?Look at UCC §2-609 (know this UCC) **** reasonableness for grounds of insecurity determined according to commercial standards Must be commercially reasonable, a justified demand, adequate assurance.Issue: Did S have reasonable grounds for insecurity and did they properly ask for adequate assurance?Holding: Yes, there was reason for insecurity but assurance was asked for improperly. Driver isn’t appropriate person to ask for assurance and request was oral.Rule: Demand for adequate assurance must be done in writing, oral demand is not enough. Holding: No subsequent pattern of interaction between parties that would clearly demonstrate that B understood S had asked for assurance of performance. In actuality, S’s actions constituted an anticipatory repudiation allowing B to cancel contract. Class Notes: Seller wrote letter to ask for assurances and demanded partial payment – this is a unilateral modification of contract terms. Is this reasonable? Seller then sues Buyer for payment.

III. Material Breach

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B&B Equipment Co. v. Bowen Pg. 891 (Retiring / new partner and sale of stock)

Lane enterprises - Bridge – 3 party situation - Is there a material breach - Pg. 898 restatement 241

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DEFENSES

VOID AND VOIDABLE CONTRACTS

Distinction Between Void and Voidable ContractsCertain defenses – generally those that affect assent – can render a contract voidable by the aggrieved party. Other defenses – typically those that pertain to law and public policy – may render a contract void. The distinction is not clear-cut; for example, while defenses such as incapacity, duress or mistake generally render a contract merely voidable, if the circumstances prevented a meeting of the minds, the contract will be deemed void. Likewise, contracts with an illegal purpose will generally be deemed void unless the parties are not in pari delicto.

The legal effects of a contract being deemed voidable as opposed to void are:1) Where a contract is merely voidable, the innocent party may enforce the contract, but the contract cannot be enforced against him. If a

contract is void, neither party can enforce the contract. 2) Rights in a voidable contract are transferable; rights cannot be transferred in a void contract.3) If a party improperly transfers property to a bona fide purchaser for value, the injured party may recover the property if the contract governing

the transaction is void but not if it was voidable.4) Voidable contracts may be ratified by the party with the power to avoid the contract once the reason for such avoidance – such as minor age,

mental impairment, duress, undue influence or mistake – no longer exists. Void contracts cannot be ratified.

Defenses Affecting Assent1) Incapacity to contract – (Minors, Mental Impairment)2) Duress

If assent to a contract was obtained by coercion constituting duress, the contract may be avoided by the person subjected to the duress. An improper threat of harm that induces the other party to assent to contract terms constitutes duress. "Improper threat" is established where:

the threatened act would harm the recipient and would not significantly benefit the party making the threat; the effectiveness of the threat in inducing the manifestation of assent is significantly increased by prior unfair dealing by the party making

the threat; or what is threatened is otherwise a use of power for illegitimate ends. [Restatement § 176(2)]

Examples of duress include threats to: commit a criminal or tortuous act against the party, his family or his property extort money commence a civil action under circumstances which could be deemed abuse of process refuse to do business with the party

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blackmail the party refuse to perform a contract in order to extract an economically unjustified modification terminate an employment contract unless the party or someone close to him consents to an agreement not connected with the employment

contract.

The threat must be of sufficient gravity to make the contract voidable, determined based on an examination of the victim's experience, sophistication, age, and other relevant personal characteristics. The highest standard is applied in cases constituting "economic duress", such as refusals to do business with the victim.

Headley (log delivery, settle for less due to economic hardship )Issue: Does the courts relieve him? Does this constitute economic duress?Holding: NO – his dire financial strains are not the issue of the other party. Nothing illegal going on, all D did was tell P all he could give him at the moment even though he knew P was having financial problems. It’s P’s own fault that he has economic problems that put him in this position. This would have not caused duress if the P had not been in financial strain.

Case #2: Loral v. Austin (gov’t defense contract – want of exclusive rights, or else)Austin sues b/c Loral doesn’t pay. Loral says they were under duress to agree to change the payment terms in order to get the materials needed for the Navy job. Duress occurs when consent is induced by improper threats and leaves the victim with no reasonable alternatives.Issue: did the threat not to deliver constitute economic duress?Holding: Yes, a “classic case”. D was time sensitive. Subject matter was defense instruments, exacting standards. No alternative suppliers in a timely/reliable manner. D was right to wait to sue because that was the first safe time. No adequate alternatives, no legal remedy alternatives without fear of tarnishing representation in eyes of gov’t. 1. Austin was holding things hostage to get them to pay the debt - no one else could provide them with this highly specialized equipment2. Tangible evidence of the no other alternative - they called a bunch of other vendors, couldn't get it.3. Terms of contract said they could cancel anytime and had genuine concerns4. New business was key to Loral's viabilityRule: a contract is voidable on the ground of duress when a threat deprives a party of free will. NOTE THAT THIS RESULT COULD HAVE BEEN DETERMINED BY §2-209 §89 APPROACH OF GOOD-FAITH AND LEGITIMATE COMMERCIAL REASON.

US v. Progressive EnterprisesHolding: NO duress. P awarded the difference.Analysis: Court looks at consideration – not required in a contract modified under the UCC. However good faith in the modification is needed. Reasoning of this court mirrors the concerns in the Headley case.

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3. Undue influenceA defense based on undue influence may arise where:

one party takes advantage of the other party's position of weakness, e.g., based on age, illness, mental state, intoxication, etc., thus preventing the latter from exercising free will in the transaction; or

one party breaches a fiduciary relationship with the other party.

Business contracts between an attorney and his client are presumptively invalid but can be overcome if the attorney demonstrates that:1) the transaction was fair and equitable;2) the attorney informed the client of the nature and consequences of the transaction;3) the attorney fully disclosed his own interest in the matter; and4) the attorney encouraged the client to obtain independent advice or rendered the client the type of advice that a disinterested attorney would

have given a client.

Odorizzi v. Bloomfield School District, (homosexual teacher resignation) Pg. 996Issue: Is there an action for undue influence?Holding: yes. No duress but executed in the face of over-persuasion which deprived P of his ability to think or act rationally. Mental state is important when you are talking about freedom of contract because you need the ability to reason for freedom of contract to have any meaning.Rule: there was a special relationship between parties and there was improper persuasion of weaker party by stronger party. There is no duress because there’s no unlawful threat and D doesn’t know threat is false. There is no actual fraud because there is no knowledge of falsity, intent to induce reliance, and no constructive fraud no confidential relationship between P and D.

4. Mistake A mistake is an erroneous belief related to the facts as they exist at the time the contract is made.

Mutual mistake The adversely affected party may void a contract based on mutual mistake made at the time of the contract formation where:a. the mistake concerned a basic assumption on which the contract made;b. the mistake materially affects the agreement; andc. the adversely affected party does not bear the risk of the mistake. Restatement § 152

The Restatement's requirement that the mistake concern a basic assumption deviates from early case law that required the mistake to concern the subject matter of the contract. E.g., Sherwood v. Walker, 66 Mich. 568 (1887).

Sherwood v. Walker, (mistaken breeding cow for barren cow) Pg. 1029Issue: Can this contract be voidable on the grounds that there was a mutual mistake on barrenness of cow?Holding: both parties' belief that cow was barren is a bi-lateral mistake voiding going to the essence of a thing, voiding contract. Rule(s):

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1. Mutual mistake means that both parties are wrong about the same fact.2. Mistake must go to the essence of the contract, or the very thing that was bargained for to be voidable.

Nester v. Michigan Land & Iron Co. Pg. 1037 D sold P pine for logs - Neither side knew the quality of the wood.

Wood v. Boynton, (uncut diamond sold for $1)Issue: Is the sale void on the fact that there was a mistake as to the identity of the item and fraud of D?Holding: No fraud, D didn’t act in bad faith, truly didn’t know what item was when he bought it. No pretense of mistake since the object for sale was presented to both parties before sale was made and both parties knew they were clueless as to the identity of the stone, both supposed $1 was an adequate $ at the time.Rule: Court will not grant rescission once contract is already performed (unlike Sherwood). In absence of fraud or warranty, the value of the property sold, as compared with the price paid, is no ground for a rescission of a sale.

Lenawee County Board of Health v. Messerly, (condo condemned by poop, worthless)Issue: Can this contract be voided on grounds of mutual mistake and failure of consideration?Holding: Mistake is not characterized as collateral because it also affects the very essence of the consideration as well as value. (avoids Sherwood decision). Parties’ mistake as to basic assumption materially alters the agreed performances of the parties. Because of “as is” clause, buyer bares risk.Rule: Ct, in mistake of two innocent parties, determines who should bear the risk based on §154. Existence of assumption of risk clauses in contracts determines who bears risk. The court does not allow recession – why? Step 1. Was there a mutual mistake? Step 2. Determine that if there is a mutual mistake did the mistake concern a basic assumption that materially affected the aggrieved performance of the parties? If yes to 1 and 2 then go to 3 is there anything that warrants allocated the risk to one party over the other.

Also see Raffels! (Peerless)

b. Unilateral mistake Common law provides that a party may avoid a contract based on a unilateral mistake where the mistake was palpable, i.e., the other party knew or had reason to know of the mistake, such as where the contract contains an egregiously erroneous recording of a price. If the unilateral mistake is not palpable, the aggrieved party may avoid the contract where:

1) enforcement of the contract against the mistaken party would be unconscionable; and2) avoidance would not result in substantial hardship to the non-mistaken party.

Additionally, the following circumstances must exist in order to avoid a unilateral impalpable mistake:1. the agreement is entirely executory or the other party can be placed in the status quo ante;2. the mistake is substantial (but not astronomical as that would likely make the mistake palpable); and3. mistake is of a clerical or computational error or other such misconstruction of the terms.

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Tyra v. Cheney, (subcontr. mistakenly left off amount stated in oral bid in written bid) P. 1052Issue: Can P collect damages for a mistake in estimate made to D that D knew about when accepting bid?Holding: Yes, D knew of mistake.Rule(s): 1. Since GC knew mistake was made, there was no mutual assent (error in contract formation). No enforceable contract to begin with, so

terms of contracts are refused to be imposed by the court. This is an implied agreement – no contract here.2. Work did benefit other party, to prevent unjust enrichment, court awards restitution. When only one party has made a mistake – “tough on

them.” Since D knew about mistake, he didn’t really rely on the bid, therefore, no contract.

Drennan v. Star Paving, (misquoted SC estimate, GC wins bid on estimate) Pg. 1054 Drennan entitled to $3000 since P relied on mistake. Issue: Can D rescind since it made a mistake? Holding: NO, because P did not know about mistake and relied on it, contract is enforceable. Rule: Burden of loss on party that made the mistake in the case when both parties are innocent unless otherwise stipulated. Look at 153 and 154 to find if this contract is voidable.

Laidlaw v. Organ, (Treaty of Yent, Tobacco investment, S attempts to take tobacco back) P. 1055Issue: Can Seller claim fraud when Buyer knew price of tobacco would rise due to Treaty of Yent which was not yet known to other persons? is suppression of information known by buyer considered fraud? Rule: Organ is not bound to communicate information, but each party cannot do anything tending to deceive another. Case remanded to determine if there was any imposition of Buyer on Seller.

Mistakes that do not give rise to a defenseA party seeking to avoid the contract may not rely on mistake as a defense where the party:

assumed the risk of mistake with respect to the accuracy of facts existing at the time the contract was made is at fault for the mistake, e.g., erroneous calculation of costs or prices, but generally only where the fault amounts to gross negligence,

violation of a legal duty or failure to act in good faith and in accordance with standards of fair dealing failed to read the contract (with some exceptions for adhesion contracts or where a writing does not accurately reflect an existing agreement

between the parties).

Void Contracts based on MistakeMistakes that prevent a meeting of the minds render a contract void, such as where:

the offeree knows that the offer is the product of a mistake the offeror makes the offer to a party intending it for another who is aware of the mistake

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the parties attach a materially different meaning to the communications and neither party is aware or has reason to be aware of the meaning attached by the other.

MisrepresentationAn aggrieved party may avoid a contract based on misrepresentation where:

1) the assertion was either material or fraudulent; and 2) the person seeking to avoid the contract reasonably relied to his detriment on such assertion. Restatement § 162

A misrepresentation is material if: it would be likely to induce a reasonable person to agree to the bargain, or the party who made the misrepresentation knew or should have known that it was likely to induce the other party to manifest assent to the

bargain, whether or not a reasonable person would have been induced.

A misrepresentation is fraudulent if it was made with:1) the intention of inducing the other party to rely on it, and2) knowledge of its falsity or lack of adequate foundation for the representation. (scienter)

Reasonableness of the reliance is assessed based on the totality of the facts, including the party's age, education, and experience, and the transaction's subject matter, nature, and circumstances under which it was made. Reliance on opinion may be reasonable in some cases where the opinion is expressed by one who possesses or appears to possess superior knowledge on such matter, such as when there exists a special relationship of trust between the parties (e.g., attorney-client).

Misrepresentations of Law and OpinionMisrepresentations of fact may render a contract voidable. Misrepresentations regarding the law or that constitute an opinion do not render the contract voidable, except where:

there is a relationship of trust and confident between the parties (particularly important in cases regarding a misrepresentation of the law where the maker of the statement is a lawyer)

the maker of the statement is in fact or claims to be an expert on such matter the maker of the statement has superior access to facts underlying the false opinion the statement is made by a third person posing as a disinterested person the statement is such that no reasonable person in the position of the maker of the statement could legitimately hold such opinion

Halpert v. Rosenthal Pg. 966 (termites were discovered in the house)Issue: Can the misrepresentation of a fact, whether it is “innocent” or fraudulent, be the basis for the rescission of a contract?Rule: An innocent misrepresentation of a material fact is grounds for the rescission of a contract.

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Holding: Yes. It is not necessary, in order that a contract may be rescinded for fraud or misrepresentation, that the party making the misrepresentation should have known that it was false. Halpert’s appeal was denied and dismissed. The Supreme Court of Rhode Island found for Rosenthal. The case was remanded to the Superior Court of Rhode Island.Note: This particular case is concerned with the first remedy (Rescind the contract to recover what he has paid Pg. 968), and whether an innocent misrepresentation of a material fact warrants the granting of a claim for rescission.

Byers v. Federal Land Co., Pg. 972 (purchaser of land paid more than land was worth)Issue: Can P sue D for misrepresentation for having P believe it was the actual owner and in possession of the land and that the value of the land was $35/acre when it was actually $15?Holding: not fraudulent misrepresentation, it was an honest mistake and not intentional in regards to $, brokers had no special knowledge regarding landRule: under this court – only dishonest opinions are fraudulent misrepresentationsMust be a material fact

Vokes v. Arthur Murray, Inc., Pg. 975 (bad dancer induced to purchase more dance lessons)Issue: Were D’s actions just mere “sales puffing” or did they constitute fraudulent misrepresentation?Rule: Statements of dance potential is an opinion of D. Usually, opinions are not actionable except in cases where:

a. there is a fiduciary relationship between parties orb. where there has been some artifice or trick employed by representor orc. where parties do not in general deal @ “arms length” ord. where the representee does not have equal opportunity to become apprised of the truth or falsity of the fact represented

Holding: voidable – a statement of a party having superior knowledge may be regarded as a statement of fact although it would be considered as opinion if parties were dealing on equal terms.

Duress, Undue Influence, or Misrepresentation by a Third PartyThe defenses of duress, undue influence and misrepresentation may be available to an aggrieved party even if committed by a third party, if the other party to the contract knew or had reason to know that the victim was improperly induced to enter the contract. Some cases have even allowed such defenses in the absence of the other party's knowledge, unless such other party materially relied on the agreement.

Remedies in Avoidable Contracts1. Reformation - When a record does not reflect the parties' agreement due to duress, mistake or misunderstanding, the remedy of reformation may

be available, except where the rights of third parties, such as good faith purchasers for value, will be unfairly affected. Reformation addresses nonconformities – typically typographical and other inadvertent errors – in the record that evidences or embodies the agreement, not the contract itself. Reformation does not seek to remake the bargain.

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2. Restitution - Where enforcement of a contract is avoided, a party that has rendered full or partial performance under a contract may be entitled to restitution. Special rules apply where a contract is avoided based on incapacity. Most states hold that a minor who is a plaintiff in an action to avoid a contract must make full restitution but a minor-defendant need only be liable for the value of tangible consideration still retained. A minority of states (lead by New Hampshire) takes a different approach and holds a minor liable for the entire value of any benefits received, regardless of whether he is the plaintiff or the defendant. A mentally incapacitated party who seeks avoidance may be liable for restitution if the other party had no reason to know of the incapacity. If the incapacity should have been obvious to a reasonable person, the incapacitated party will generally be liable only for the consideration received that he still has in his possession. A minority position holds that the mentally incapacitated party need only return consideration still retained, regardless of whether his incapacity was apparent to the other party. In addition to restitution for consideration (in whole or in part), an incapacitated party will generally be held liable for the full value of any necessities furnished to him or his dependents, such as food and medical care.

Defenses Based on Unconscionability, Law and Public PolicyA contract, in whole or in part, may be void or voidable based on unconscionability, illegality, or violation of public policy. If the contract performances are severable, the court may refuse to enforce the terms that offend law or public policy and enforce the remainder of the contract.

UnconscionabilityGenerally, a defense based on unconscionability must present both procedural and substantive unconscionability. Procedural unconscionability, which is manifested by unfair surprise, relates to the aggrieved party's understanding of the contract terms due to factors such as:

inconspicuous print in the writing unintelligible legal language or highly technical language lack of opportunity to read the contract or seek clarification of terms illiteracy imbalanced bargaining positions (such as in adhesion contracts) - gross inequality of power terms unreasonably favoring the stronger party no meaningful choice for the weaker party - no real alternative one-sided at the time the contract was made

Substantive unconscionability relates to contracts that are, in whole or in part, deemed to be oppressive, such as: provisions that deprive one party of the benefit of the agreement or an adequate remedy for the other party's breach provisions that bear no reasonable relation to the risk involved provisions that are substantially disadvantageous to one party without producing a commensurate benefit to the other party a great disparity between the cost and the selling price of the item that is the subject of the contract in absence of objective justification for

such disparity

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Walker Thomas (Purchase of furniture on installment plan)Holding: Repossesion provision on consumer goods purchase agreement is unconscionable, and a court may refuse to enforce a contract that was unconscionable at the time it was made.Note: court maneuvered around the recent adoption of § 2-302, which it enforced, and which was adopted after the acts occurred. Court took the opinion that the code merely codified CL.Rule #1: “when a party of little bargaining power, and hence of little real choice, signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that his consent, or even an objective manifestation of his consent, was ever given to all the terms.” Unequal bargaining power – procedural unconscionabilityRule #2: “In determining reasonableness of fairness, the primary concern must be with the terms of the contract considered in light of the circumstances existing when the contract was made.” Terms unreasonably favorable to one party – substantive unconscionability.How do you establish no meaningful choice?

Wille v. Southwestern Bell Co . Pg. 1018Facts: Wille sued for omitted listings saying that he had to purchase other listings to compensate. He sued for $9000 in lost profits from omissions in a telephone directory and breach of contract. What case does this remind you of? The case about the windmill shaft – Hadley and Baxendale – limitations on damages. Where does unconscionability come into play?What are the elements of unconscionability?

Unreasonably advantageous to one party Absent a meaningful choice Look at page 1020 for factors:

Boiler plate contracts Significant cost disparity or excessive price as compared to mkt value Unfair …. The inclusion of penalty clauses The hiding of clauses – disadvantageous to one party Incomprehensible phrasing of clauses Exploitation of the underprivileged.

Illegality and Violation of Public PolicyContracts that violate law or public policy may be denied enforcement, such as contracts that involve:

a crime a tort a violation of a licensing requirement a restraint of trade or interference with contractual relationships of others impairment of family relationships

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an interference with the administration of justice an agreement not to be bound by usury, limitations or consumer protection statutes an exculpatory clause that would absolve a party for liability for harm caused by intentional or reckless conduct an exculpatory clause that would absolve an employer for harm caused to an employee by simple negligence an exculpatory clause that would absolve a public utility or other public service for harm caused in the course of fulfilling the public service

function a situation in which the parties are not in pari delicto (not equally at fault)

If a contract violates a law intended to protect a given class of persons, under the principle of in pari delicto, the contract may not be enforced against a party who is a member of such protected class but such member may nevertheless enforce the contract against the other party, e.g., an employment contract that violates the wage-hour law may be enforced against the employer despite the fact that the employer may not enforce the illegal wage-hour provision against the employee.

In the Matter of Baby M, surrogacy contract, egg from surrogate - wife with MS I: are these contracts void?R: yes, conflicts with:

1. law of state – violates rules of adoption and prohibits termination of parent rights by contract2. public policy – court does not what to encourage baby bartering, lacks counseling and evaluation, use of money to purchase children,

mother does not make an informed decisionH: no remedy, contract is void

Johnson v. Calvert, surrogacy contract – sperm and egg from couple F: couple wants to be known as parents, Ps are natural parents, D is just carrierI: Does surrogate, D, have any rights to child or visitation rights?H: No, surrogate has no rights because to hold otherwise would create instability

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IMPRACTICABILITY AND FRUSTRATION OF PURPOSE

Supervening Impossibility and Impracticability of PerformanceIf, after a contract is formed, circumstances arise which make a party's performance impossible or impracticable, his duty to render that performance is discharged. In order to prove impracticability:

1) an event must have occurred that makes performance, or performance in the contemplated sense, impossible or impracticable;2) the party seeking relief must not have been at fault in causing the event to occur;3) non-occurrence of the event must have been a basic assumption upon which the contract was made; and4) the party seeking relief must not have assumed the risk of the event occurring. [Restatement § 261]

Applying the same criteria, UCC § 2-615 provides that a seller's delayed delivery or non-delivery of goods based on impracticability is not a breach . The proposed revision expands the availability of the impracticability excuse to "performance" and "non-performance" of any and all sellers' contractual duties.

Events that may make performance of the contract impossible include: death or disability of a person indispensable to performance of the contract destruction of the subject matter of the contract or other thing necessary for the performance of the contract, provided the destruction is not

the fault of the party asserting impossibility failure of a specific thing necessary for performance to come into existence supervening governmental action that makes performance of the contract illegal where performance would subject the party to potential harm shortages or significant price increases in materials due to embargo or war other circumstances that would involve "extreme or unreasonable difficulty, expenses, injury or loss." [Restatement § 261, comment d]

Increased cost alone does not excuse performance but an alternative performance that requires an unreasonable expenditure of resources may make performance of the contract impracticable.

Partial Impracticability If the circumstances giving rise to the impracticability affect only part of the performance, and the promisor can render substantial performance of

his obligations, he must do so, as well as make reasonable substitute performance if available. Performance will be discharged only if the partial impracticability makes the remaining performance substantially more burdensome. In goods contracts, if the impracticability affects only a part of the seller's capacity to perform, the seller must allocate production and deliveries

among its customers. [UCC § 2-615(b)]

Supervening Frustration of Purpose

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If, after the contract is formed, circumstances arise which substantially frustrate a party's purpose in entering into the contract, the party's remaining duties are discharged, provided:

1) the party seeking discharge was not at fault;2) the nonoccurrence of such event was a basic assumption on which the contract was made; and3) the language or the circumstances do not prohibit excuse based on frustration of purpose. [Restatement § 265]

This principle does relieve a party for mere "economic" or "commercial" frustration, where all that is frustrated is the party's ability to make a profit but not the actual purpose of the contract.

Existing Impracticability and Frustration of PurposeIf the impracticability or frustration of purpose exists at the time the contract was made, no duty to perform arises where:

1) the party raising the excuse, without fault, had no reason to know of the facts giving rise to the impracticability or frustration; and2) the non-existence of such facts is a basic assumption on which the contract was made. Restatement § 266

Temporary Impracticability and Frustration Where a party is unable to perform due to a temporary impracticability, e.g., illness, the other party may be able to suspend performance of the contract, and if there is a reasonable probability that substantial performance will not occur, cancel the contract. When the temporary impracticability ceases, if the delay will make the performance substantially more burdensome, the obligation may be discharged.

CASES:Case #1: Paradine v. JaneFacts: P rented land from D. The Prince invaded the land and P was kicked off and stopped paying. D sued P for lost rent. Holding: P had an obligation to pay.

Taylor v. Caldwell, (place of rental burned down before use) Issue: Whether, because place burned down before use by P, the loss which P sustains needs to fall upon D.Holding: the parties contracted on the continued existence of the particular place, because the theater burned down, the impossibility of performance shall excuse the performance Rule: implied condition in contract for existence of place for contract results in an excuse for performance however exceptions include N on party in causing fire, foreseeability, or expressed terms to the contrary. Implied condition can be contracted around. Look for evidence for assumption of risk. if party’s contract becomes impracticable and not fault of party and not assumed by parties, then party is no longer under any duty to perform unless contracted around.

CAN & American v. Phoenix

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sucide was not something expected impossibly foreseeable when he killed himself.Holding: One can ever recover against death – no matter how the death occurred.

Eastern Air Lines v. Gulf Corp., (exclusive gas supply contract, issue on $ for renewal) Pg. 1072Holding: for P. The energy crisis was foreseeable, and D was in a better position to mitigate. Also, D never actually proved that it was losing money, due to lack of evidence about costs and intracompany transfers. The court grants SP!Rule: Increased costs will not excuse.

CASES (Frustration of Purpose Makes the contract void)

Krell v. Henry, (rented room to watch coronation of king) Issue: Is contract void because the purpose of the contract, to get a good view of coronation, was no longer present? Holding: Yes, contract was based on the basic assumption that D rented to view the coronation. The value of the room to the promisee has greatly diminished. Lower court: Implied condition that the coronation would take place, like Taylor v. Caldwell.Rule: This is not a mistake case. Only a mistake case if window was facing the wrong way. Not a impossible/impracticability case because the contract can still be performed, it’s not commercially impossible or impracticable. The change in event must be the purpose of the contract in order to claim frustration of purpose. Everything in contract was structured around the coronation.

Three part test: 1. What was foundation of the contract?2. Was the performance of the contract prevented? Take into account surrounding circumstances; 3. Was the event which prevented the performance of the contract of such a character that it cannot reasonably be said to have been in the

contemplation of the parties at the date of the contract? If foreseeable, parties could have taken steps to allocate risk. This becomes a very important question.

Lloyd v. Murphy, (property on Wilshire Blvd for sales of cars) Pg. 1083Issue: Is this a frustration of the purpose since government regulation has prevented D from selling of cars as he wanted to do at this property.Holding: No, not frustration of purpose. Promisee had assumed risk because regulation by government in the wake of imminent war was foreseeable. He could have used the space for other purposes. Rule: Given risk is foreseeable, risk should be specifically be allocated in contract or else it is inferred to be assumed.

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REMEDIESThree Types of Remedies:I. $$$$$ Damages

(a) Reliance damages(b) Restitution(c) Expectation

II. Specific PerformanceIII. Injunctions

I. DAMAGES3 TYPES OF DAMAGES:

1. Restitution (disgorge the value received)1. Restitution compensates a party for the benefit conferred on the other party as a result of partial performance or reliance, and is aimed at

preventing unjust enrichment. i. There has been reliance on a promise AND

ii. A gain by the promisor (or breaching party)2. Restitution may be available:

In cases of breach, to either party Where a contract is unenforceable (e.g., due to lack of consideration or writing) Where a contract is voidable Where a duty is excused or discharged due to impracticability, frustration of purpose, non-occurrence of a condition, or disclaimer

by a beneficiary3. Remember

i. Where a party cant estimate cost of completion they collect restitution for mkt value of the work doneii. A party who has not fully performed can collect amt. in excess of total contract price.

iii. If Fully performed – P recovery is limited to contract price even if mkt value has gone up!

2. Reliance damages to put the P in the position he would have been in if the promise had not been made. (does not include profits) used when (1) expectation damages cannot be proven, and may not exceed the anticipated benefit of the bargain; (2) when the P recovers on promissory estoppel

Two types: a. Incidental reliance: whether you have done something that is incidental to the contract Ex. The plaintiff may have already

incurred costs associated to the contact. Example: you contract for a pool, to prepare you get rid of trees etc. The pool installer breaches but has not gotten any benefit from you.

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b. Essential Reliance: Ex. P sells land to D; takes down 4sale sign; has title search done; D breaches we want to award P damages for the gains prevented and opportunity lost

1. P has changed his position in reliance of the promise2. Doc charges for missed appt. Why? B/c he could have scheduled someone else

However, we only compensate for expenses/loss incurred in reasonable reliance on the contract that was breached.

Winston Cigarette v. Wells-Whitehead 115: speculative v. measurable profits Damages can’t be awarded to punish someone for breach of K Claims for lost profits will be rejected if the profits are subject to too many contingencies (mkt fluctuations, chances of

business to constitute a sale) We must distinguish between profits that are provable by some standard, and profits that are wholly speculative When you claim lost profits as a damage, your burden is to show that the profits are provable against some standard (ie. profit

from past fights, past machines)

Anglia Television v. Reed, (actor breaches contract to appear on television film)I: Since D cannot determine lost profits due to breach can they claim “wasted expenditures”, i.e. reliance damages before contract signed?R: Yes, P can collect damages even prior to contract provided that it was a foreseeable loss due to breach

3. Expectation damages Expectation damages compensate the injured party for the benefit he would have received had the contract (been performed) not been breached, minus any amount he would have spent in performance of the contract. Formula for calculating: ED = value of D’s performance (usually contract price) minus any benefits P receives from not having to complete his own performance.

Fuller and Perdue Notes: Why do we have expectation damages?a. Psychological – this is rejected because it would mean that all promises would be protected by law, and this is unreasonableb. Economic/Commercial reason – the promise you ultimately uphold is related to the agreement in the first place – thrown out

Expectancy – expectation of future values in our society become present values – “crdit” is significant in our society – but has value because the law enforces it – thrown out, circular reasoning

c. Will theory – Parties are at will to make contracts; but most parties do not stipulate what will happen if one party breaches (w/o expectation damages the P could only get reliance)

d. Juristic – protection of the expectation interest provides a cure for loss incurred by P (gives P a positive gain instead of just reimbursing him for what he paid)

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Legal Reasons for Expectation Damages: (1) the need to cure and prevent the harms of reliance; (2) the need to facilitate reliance on business agreements)

Hawkins v. McGee – (hairy hand skin grafting, promise of a 100% perfect hand)I: Can oral guarantee of 100% success in operation hold a doctor liable when operation fails? i.e. when a special contract is made?R: Yes, utterance of words are done with the intention that they would be taken at face value by patient inducing them to consent to operation. D went beyond offering a medical opinion when offering a “perfect” hand Expectation damages = value of perfect hand (a+b) – value of current hand + incidental cons.

3. Such damages must be proven with certainty, and may be measured by the contract price, loss in value, or lost profits. (Certainty of Harm – limitation)

Chicago Coliseum Club v. Dempsey, (boxing match contract breach by boxer)I: What damages to provide when expected profits can not be determined?Rule(s):2. Only reliance and restitution expenses that flow from and are the result of the breach3. Compensation for damages for a breach of contract must be established by evidence4. A party can only recover for damages which naturally flow from and are the result of the act complained of (you cannot

recover for expenses incurred before the contract was entered into)5. Items which are recoverable include those which were a necessary expense in furtherance of performance.

4. Expectation damages – which may be general or special – must be foreseeable. Hadley v. Baxendale, 156 Eng. Rep. 145 (1845). (Foreseeability of Harm – limitation)

Hadley v. Baxendale, (failed to deliver on time shaft that runs mill)I: is D liable for loss of profits?H: No, damages limited to what was contemplated at the time of contract.R: Must be foreseeable. For special situations, damages can be awarded only if P informs D of the special situation or if the damages were reasonable foreseeable. Note that this encourages information sharing when deviating from a default rule.** Damages to be awarded should have fairly and reasonably arise naturally **

1. General damages are the “natural and probable” consequence of a breach and are deemed to have been within the contemplation of the breaching party. (A party seeking general damages need not offer further proof that the damages were foreseeable)

Hector Martinez v. South. Pac. Trans . , (delay and damage of dragline)

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I: Should D be liable for P’s loss profits without and conveyance of “special circumstances” notice?R: Yes, as long as it’s foreseeable and not remote to a reasonable person

Although we want to compensate P we do not want to unfairly charge D w/ damages that D could have not foreseen this would be unfair and could lead to paralyzing commerce.

Damage is foreseeable as long as it is a “proximate and usual” consequence of the action P does not have to give any special notice is harm in foreseeable See §351 – Unforeseeability and Related Limitations on Damages

2. Special damages arise from the special facts and circumstances of the case and are not deemed to be within the contemplation of the breaching party unless he was made aware of such specific facts and circumstances. (A party seeking consequential damages must demonstrate that the damages were foreseeable at the time the contract was formed.)

Morrow v. First National Bank of Hot Springs Pg. 102 (Coin collection – safe deposit box case – not foreseeable)Facts: P sued for breach of contract to recover the value of stolen coins, as the bank failed to notify of availability of safety-deposit boxesCourt Held:

1. Special circumstances must be stated at the time they make the contract (Hadley) – each party freely assumes obligations to each other

a. However, mere notice is NOT enoughi. The other party has to accept to make a party liable for a huge loss in exchange for a minimal

consideration is not fair. 1. This is known as the Tacit agreement test: P must prove that D at least tacitly agreed to assume

responsibility [ex. bank failed to give notice of box’s availability]2. Here Morrow paid $75 for SDB and lost $32,000 in coins – the bank wouldn’t take such a loss

for $75.2. Foreseeability and reliance interest are not absolute; the bank would not have known that coins would be stolen if they

were not in the security box

Mitigation of Damages (Avoidability of Harm) A party aggrieved by a breach must use reasonable efforts to mitigate damages. In the specific case of breach of an employment contract, courts will not generally require an employee that has been discharged to take onerous or difficult measures to secure new employment, such as taking a far inferior position or relocating.

Rockingham County v. Luten Bridge, breach of buyer on construction of bridge p.124I: Should D be liable for damages sustained by P post notification of breach?

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R: No, it is P’s duty to do nothing to increase the damages flowing from breachDamages = expenses incurred prior to breach + expectancy interest (profit expected)

Shirley MacClaine Parker v. 20 th Century Fox , Pg. 128 (Bloomer Girl v. Big Country) Issue: Does 20th century owe Parker for Bloomer Girl? Rule: When a contract is for personal services, plaintiff is not required to accept any position substantially different from, or inferior to, the one contracted for in order to mitigate damages.

It is not always clear whether or not work is inferior, which forces the court to calculate imponderables. (Ex. Court says BCBM was not substantially similar work to Bloomer Girl. She didn’t have control over script and director, had to go to Australia, political convictions, etc.)

You only have a duty to mitigate when you can find substantially similar and not inferior work. Holding: An employee’s rejection of or failure to seek other employment of a different or inferior kind, cannot be used to claim she failed to mitigate damages. Other employment must be substantially similar to that promised in the K, “not different or inferior.”Remember: Employment Ks are different from other Ks because we are close to the line of a person’s freedom to make employment decisions for themselves – implicit in the employment decision is a subjectivity different from a K for a boatTest for different or inferior – depends on facts and circumstances but in this case, court was able to determine that films were different as a matter of law because

a. Different types;b. Different locations; c. Different contract terms.

COMMERCIAL RULES Mitigation of Damages as applies to Seller’s under UCCA buyer breaches a contract for the sale of goods by:

Wrongfully rejecting the goods Wrongfully revoking acceptance of goods

Failing to make a payment when due Repudiation

In the case of a buyer's breach, the seller may: Withhold or stop delivery of goods Resell the goods and recover damages for

the breach Recover damages for non-acceptance or

repudiation

Recover lost profits Recover the contract price Obtain specific performance Recover liquidated damages Reclaim the goods [UCC § 2-703]

UCC 2-706

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Resale of Goods The seller may, in good faith and in a commercially reasonable manner, resell goods that the buyer wrongfully does not accept. In such cases, damages are measured by the difference between the resale and contract prices plus incidental expenses, less expenses saved as a consequence of the breach. [UCC § 2-706]

UCC 2-708 Damages for Buyer's Non-acceptance or Repudiation Where a buyer wrongfully rejects goods or unjustifiably revokes acceptance

of goods or repudiates, damages are measured by the difference between the market price at the time and place for tender and the contract price together with any incidental damages less expenses saved as a result of the buyer's breach. [UCC § 2-708]

Damages for lost profits If the usual damages allowed for breach are inadequate to give the seller the benefit of the bargain, the seller may recover the lost profit (including reasonable overhead), along with incidental damages, due allowance for costs reasonably incurred, and due credit for payments or proceeds of resale. [UCC § 2-708(2)]

Neri v. Retail Marine, (breach of buyer in purchase of boat) P.140I: Should P be awarded loss profits and incidental damages from a breach by a buyer even if it eventually sold said boat to another?R: Yes, since P is a boat dealer it is assumed that breach by buyer prevented the sale of two boats instead of one, D may be entitled to restitution damages. Where a promisee seller could have made 2 sales, he is entitled to lost profits from the breached sale plus incidental costs.

_____________________________________________________________________________________What happens when a party puts in a clause so that damages are established in the contract?

Stipulated damages (liquidated damages) At the time the contract is formed, the parties may agree to a fixed sum of money or a set formula for setting damages in the event of a breach.

Stipulated damages will be enforced if they reflect an honest effort to anticipate the harm caused by a breach. (Liquidated damages) Stipulated damages will be deemed invalid if they represent an attempt to punish the breaching party, such as in the case of unreasonably

large damages. (Penalty Clauses)

Under common law, the reasonableness of stipulated damages must reflect: (1) The anticipated or actual harm caused by the breach; and (2) The difficulties of proof of loss.

In sales contracts, stipulated damages must be reasonable in light of: (1) The anticipated or actual harm caused by the breach; (2) The difficulties of proof of loss; and (3) The inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.

Kemble v. Farren, (comedian’s breach in contract for failure to perform) Pg. 149 I: Can court grant damages as stipulated in contract of £1000?

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Holding: NO this is a penal sumR: If you have a clause that says “for any breach the damages will be X”, that clause will be held to be a penalty because it’s not measured, it has a punitive effect.

However a clause would have been reasonable if actual damages cannot be ascertained, but, in this case, actual damages are easily calculated

Wassenaar v. Towne Hotel, (liquid damages in termin. of employment contract) I: Does P need to mitigate damages other than what is stipulated in contract? No.Reasonableness test: Pg. 154 – is clause reasonable under the totality of circumstances?

i. Did the parties intend to provide damages or for a penalty? –This question of law the parties really don’t decide this.ii. Is the injury caused by the breach one that is difficult or incapable of accurate estimation at the time of the contract?

iii. Are the stipulated damages a result of the harm caused by the breech? When was the contract made and when was it breached.

Why we do like SD’s:a. Control exposure to riskb. Advantages are undercut

c. Avoid uncertainty, delay, expense of judicial processd. Create economically efficient remedye. Correct inadequate judicial remedies → introduces element of certainty

Lake River Corp. v. Carborundum Co . (comments on liquidation clause)R1: Penalty clause may discourage efficient and inefficient breaches of contractR2: Should be applied only if gains > costs of penalty clause and other costs

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RESTATEMENT PROVISIONS Damages for Breach of Contract

§347; Measure Of Damages In General Pg. 68Subject to the limitations stated in §350-53, the injured party has a right to damages based on his expectation interest as measured by

a. The loss in the value to him of the other party's performance caused by its failure or deficiency, plusb. Any other loss, including incidental or consequential loss, caused by the breach, lessc. Any cost or other loss that he has avoided by not having to perform.

§351 Unforeseeability And Related Limitations On Damages Pg. 101-102(1) Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made.(2) Loss may be foreseeable as a probable result of a breach because it follows from the breach

a. in the ordinary course of events, or

b. as a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know.

(3) A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation.

§346 Availability Of Damages Pg. 117(1) The injured party has a right to damages for any breach by a party against whom the contract is enforceable unless the claim for damages has been suspended or

discharged.

(2) If the breach caused no loss or if the amount of the loss is not proved under the rules stated in this Chapter, a small sum fixed without regard to the amount of loss will be awarded as nominal damages.

§349 Damages Based On Reliance Interest As an alternative to the measure of damages stated in §347 the injured party has a right to damages based on his reliance interest, including expenditures made in preparation for performance or in performance, less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed.

§ 352. Uncertainty As A Limitation On Damages Damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty.

§350 Avoidability As A Limitation On Damages Pg. 140(1) Except as stated in Subsection (2), damages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation.(2) The injured party is not precluded from recovery by the rule stated in Subsection (1) to the extent that he has made reasonable but unsuccessful efforts to avoid loss.

§ 355 Punitive Damages Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable.

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§ 356 Liquidated Damages And Penalties (1) 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.(2) A term in a bond providing for an amount of money as a penalty for non-occurrence of the condition of the bond is unenforceable on grounds of public policy to the extent that the amount exceeds the loss caused by such non-occurrence.

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UCC PROVISIONS Damages for Breach of Contract

Pg. 144-145

§ 2-706. Seller's Resale Including Contract for Resale.

§ 2-708. Seller's Damages for Non-acceptance or Repudiation.

§ 2-710. Seller's Incidental Damages.

§ 2-718. Liquidation or Limitation of Damages; Deposits.

§ 2-719. Contractual Modification or Limitation of Remedy.

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REMEDIES (Cont.)

II. Specific Enforcement (Equitable Remedies) Pg. 179 Specific enforcement is a remedy in the form of a court order that the breaching party render performance of the contract. Specific performance is not available if expectation damages are adequate to put the aggrieved party in as good a position as he would have been

had the contract been fully performed.

Expectation damages are deemed to be an inadequate remedy: Where the subject matter is unique In real property transactions

In goods contracts, "where goods are unique or in other proper circumstances," e.g., where the goods are in short supply. [UCC § 2-716]

Pros Provides incentive to settle rather than breach and litigate. Settlement is more likely to reflect idiosyncratic values. Unlike damages, where the price is set by the court, here the price is set by the parties (but much more by promisee than by promisor because

the former has most of the leverage). Because it is more likely than damages to capture true values, it is more likely to result in efficiency. More likely than damages to compensate fully. Disgorges surplus, spreading it over both parties. Elimination of complex damage calculations would reduce litigation costs.

Cons Courts aren’t very good at

administering/supervising. Administration/supervision can be costly. Bargaining process can break down.

LandLoveless v. Diehl, (specific performance on option to purchase land improved upon) pg. 184I: should SP be upheld in sale of land promised to one party and sold to third?R: Yes, land is special/unique, damages are clear and D’s would be unjustly enriched otherwise, P had invested improvements in land. Also, public policy - if no SP, people would not want to enter purchasing deals. SP may be ordered as the remedy as a matter of course

GoodsCumbest v. Harris, (specialized stereo equipment as collateral in loan, sentimental item) Pg. 189I: Does personal property of unique or sentimental value allow for specific performance?R: SP will not be enforced if the subject matter of the contract sought to be enforced is personality.

Exceptions: No adequate remedy at law/damages hard to determine

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Where the specific articles or property are of peculiar, sentimental or unique value Where due to scarcity, the chattel in not readily obtainable

H: SP, because stereo is unique

Scholl v. Hartzell, conflict over sale of a 1962 Corvette, SP or no SP on car? P. 192I: Should P receive SP on a car he put a small down payment on to D?R: Replevin lies wherever one person claims personal property in the possession of another, provided the claimant has the exclusive and immediate right to possession of the goods in question, SP when item is unique or in “other proper circumstances”R: Inability to cover is an exception to non-SP rule, but does not apply here car not unique and P can likely cover

Sedmak v. Charlie’s Chevrolet, (limited edition customized car breached ) P. 194I: Should SP be granted for purchase of a limited edition car customized for the P’s who had put a down payment on car?R: Yes, since car is limited edition, it is unique and hard to obtain - Also, the UCC 2-716 says SP can be granted for “unique” items and “in proper circumstances.” The court considered factors:Mkt priceMkt demandLoss

Delay TroubleMilage

ConditionOwnershipAppereance

Options

Personal services

The case of Mary Clark, a woman of color, servant by indenture P. 199I: whether P’s service, although involuntary in fact, shall not be considered voluntary by operation of law, being performed under an indenture voluntarily executed? SP?R: State of servitude produced by direct or permissive coercion will not be considered voluntary either in fact or in law, therefore, no SP.

III. Injunctions directs a party to refrain from doing a particular actNegative Covenants (covenants not to compete) Courts will only enforce the negative covenant when the person who repudiated your employment contract (1) is unique or extraordinary (2) the

liklyet result will not leave the employee w/o other reasonable means of making a living.

Lumley v. Wagner, contracted singer breaches in attempt to sing at competitor’s theater P. 203I: Can injunction be awarded preventing D from performing elsewhere if SP can not be awarded forcing D to perform at P’s theater against her will?R: Since court can not order specific performance, will attempt to bind parties to contract by preventing her from doing something she bound herself not to do – injunction allowed due to negative stipulation specifically written into contract. – 1852

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Rationale: The court cannot compel the D to sing, but the court can issue an injunction barring her to abstain from the commission of an act which she has bound herself not to do. The K states she is to refrain from singing elsewhere during the period in question.   If she attempts to do so she will have broken the spirit and meaning of the contract.

Ford v. Jerman, contracted singer breaches in attempt to sing at competitor’s theater P. 205I: Can injunction be awarded preventing D from performing elsewhere if SP can not be awarded?R: No SP, harsh to compel obedience by imprisonmentR2: No, injunction would be more injurious to D and less beneficial to P than SP, cannot be enforced even with a negative stipulation implanted in contract (overrules Lumley) – 1865**R3: NO SP for personal services in the case of those whose business is to amuse as well as entrust and whose labors are worth nothing if given grudgingly, without the spirit that should parade and give life to art.

Duff v. Russell (1891) Pg. 209Issue: Whether the plaintiff can enforce the injunction of restrain the defendant from singing and performing in Casino?

A negative covenant is void if too broad scope, time, or geography.

Dallas Cowboys v. Harris 219 injunction against D playing for other football teamAnother unfulfilled contract here with a non-compete clause. Typical among CEOs and specialists – they can’t work for a rival for a period of time

d. All equitable relief is discretionable to the partiesi. Recall “clean hands” – inadequacy of money of damages as a remedy

ii. Probative evidence shows money is not the best relief – they won’t let him performiii. The court must take the equities of all parties accountiv. Clause #8 (equitable relief through injunction) may be unconscionable but is not conclusive

UCC §2-716 (where the party possesses a unique skill there may be a right to injunction) – does this hinge on the player’s unique skill? (If there were another equally skilled player available to the Cowboys, would this even matter?)

TEST: can the same skill be easily obtained from others? RULE: if the employee is of unique skill or has special knowledge, and this skill and knowledge cannot be easily obtained from

others, then injunctive relief is available Holding: affirms P’s injunction of D (he can’t play anywhere else)

o Philosophical support: we value our individual liberty so highly that SP interferes with it. There is a freedom to enter into contracts.

o Equitable support: court won’t grant remedy they can’t enforce (such as SP) because there is no police power over the quality of performance

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o Preventing a party from working for someone else would be too much like slavery, but it didn’t matter here because D’s new league doesn’t compete with P

Restitution – Damage Interest and Cause of Action (aka Quasi-Contract)Restitution takes a variety of forms:

1. Remedy to the non-breaching party for the breach of a contract2. Remedy to the breaching party for the breach of a contract3. A separate cause of action where there is no contract at all

a. Contracts implied at law Quasi contract, Ex. Case of the surgeon imply an obligation to pay for the services rendered. The contract itself is a legal fiction. And the court is trying to avoid unjust enrichment.

b. Contract implied by fact the facts suggests that a contract was entered into by the parties (we will look at this during contract formation) Ex. Facts of editor and writer.

Bush v. Canfield (Contract for $7/ barrel. Buyer pays / seller never delivers; price of wheat has fallen to $5/ barrel)Issues: What’s the usual measure of damages for failure to perform? To put the P in the position he would have been in had the contract been preformed? Measure for non-delivery = Value of article at time and place of delivery and interest (expectancy) The dissenting judge says they are

over compensating the P and the D suffers. He says just because he made a deposit doesn’t mean he can recover more. He should have recinded the contract.

Rule: Even where promisee would have lost from performance, promisor cannot breach and then sue on the contract

Britton V. Turner (1 yr employment contract/worked for 9 months)Issue: What is the measures of damages?Restitution to the Party in Breach: prevent unjust enrichment of non-breaching employer Labor or certain goods have already been used or put out there If goods cannot be rejected, then restitution for party in breach an option (reward labor that has therefore unjustly enriched another)

1. How much do you pay? Is there a measure of damages that isn't arbitrary?2. Is there a market value? Can we ascertain that?3. If goods can be rejected still, then money is not owed

Britton rule: maximum amount is that for which parties contracted - cannot get more in restitution

Vines v. Orchard Hills, Inc. Pg. 247 (Breach by buyers for condo – want deposit back)General Principle: the availability of the remedy of a cause of action in a contract.

A. One who (1) without intent to act gratuitously, (2) confers a measurable benefit on another (3) is entitled to restitution, 1. He affords another an opportunity to decline the benefit or else (3) has a reasonable excuse for failing to do so

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2. If the other refuses to receive the benefit, he is not required to make restitution unless the actor justifiably for the other a duty imposed upon him by law.

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§2-716 – Buyer’s Right to Specific Performance or Replevin1. Specific Performance may be ordered where the goods are unique or in other proper circumstances2. The judgment (decree) for specific performance may include such terms and conditions as to payment of the price , damages, or other relief as

the court may deem just3. The buyer has a right of replevin for goods identified to the contract if after reasonable effort he is unable to effect cover for such goods or the

circumstances reasonably indicate that such effort will be unavailing or of the goods have been shipped under reservation and satisfaction of security interest in them has been made or tendered.

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4. DISCHARGE

Events that Discharge Contractual DutiesA party's contractual duties may be discharged by the following types of occurrences:

complete performance rescission of the contract substitute contract accord and satisfaction avoidance of duties in a voidable contract illegality bankruptcy rejection of proper tender breach by the other party impracticability and frustration of purpose failure of consideration

Rescission When Available -Parties to a contract may mutually agree to rescind their contract where:

1) there are duties still to be performed by both parties; and2) any vested third party rights will not be affected.

Writing Requirement - The common law generally permits oral rescissions, even if the contract falls within the statute of frauds. An exception exists where the rescission would result in a transfer of title to land.

o In contracts for the sale of goods, a rescission must be in writing if there is a signed agreement that expressly requires any rescission to be in a signed writing. Where such provision appears on a form supplied by a merchant, the form must be signed by the other party unless the other party is also a merchant. [UCC § 2-209(2)]

Consideration - If both parties' duties are executory, an agreement to rescind is binding without additional consideration since the release of each party's rights provides the consideration. If one party has fully performed, the other party must furnish consideration to support the rescission.

Accord and Satisfaction - An accord is an agreement between parties of a pre-existing contract that the obligee will accept the performance stated in the accord in satisfaction of the obligor's contractual duty. Performance of the accord suspends the contractual duty but if the obligor breaches the accord, the obligee may bring action on the original contract or the accord. [Restatement § 281]

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Substitute Contract - Unlike an accord and satisfaction which merely suspends the original contractual duty, a substitute contract immediately discharges all duties under the original contract. If the obligor breaches the substitute contract, an action may be brought on the substitute contract alone.

Answering a contracts question: Who is the potential P? Who is the potential D? What is the cause of action? What does P want? Why is P entitled to it? What are the defenses? What are the counter-defenses? What can be argued back and forth?

Elements of a Contract Analysis: Intent

o Does each party have intent to enter K? o Do parties have legal capacity?

Contract Formationo Offero Acceptance

Consideration Breach Remedy

o Specific performance o Money damages

Interpretation – Determine the parties’ intent, as expressed by them in their contract or as inferred from surrounding evidence and reasonable expectations

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