Contracts – Scott: Fall 2010

Table of Contents

Introduction........................................................................................................................................................ 4

Enforcing Promises........................................................................................................................................... 7Consideration................................................................................................................................................................. 7

Bargain vs. Gift................................................................................................................................................................................ 7Adequacy............................................................................................................................................................................................ 8

Promisory Estoppel....................................................................................................................................................... 9Intrafamiliar Context...................................................................................................................................................................... 9Employment Context......................................................................................................................................................................9

Material Benefit Rule................................................................................................................................................. 10

Bargain Context.............................................................................................................................................. 11Offer and Acceptance................................................................................................................................................. 11

Offer.................................................................................................................................................................................................. 11Acceptance..................................................................................................................................................................................... 12Revocation....................................................................................................................................................................................... 14

Offer and Counteroffer.............................................................................................................................................. 15Common Law View..................................................................................................................................................................... 15UCC §2-207....................................................................................................................................................................................15

Relational Contracts...................................................................................................................................... 18Uncertainty................................................................................................................................................................... 18

Preliminary Negotiations........................................................................................................................................................... 19Binding Preliminary Agreements............................................................................................................................................20

Output/Requirements/Exclusive Dealings.............................................................................................................20Output/Requirement.....................................................................................................................................................................21Exclusive Dealings Contracts.................................................................................................................................................22Reducing Conflicts of Interest..................................................................................................................................................23

Modification of Existing Agreements..................................................................................................................... 25

Regulating the Bargaining Process............................................................................................................. 26Duress............................................................................................................................................................................ 26Fraud.............................................................................................................................................................................. 27

Willfull + Negligent.....................................................................................................................................................................28Disclosure + Concealment.........................................................................................................................................................28

Unconscionability..................................................................................................................................................... 29Statute of Frauds......................................................................................................................................................... 30

Identifying + Interpreting Terms................................................................................................................ 32Identifying Terms........................................................................................................................................................ 32

Common Law: Hard Parol Evidence Rule...........................................................................................................................32UCC: Soft Parol Evidence Rule...............................................................................................................................................32

Mistake + Excuse............................................................................................................................................ 33Mistake.......................................................................................................................................................................... 34Modern Excuse of Impracticability........................................................................................................................ 35

Remedies........................................................................................................................................................... 37

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Basic Remedies............................................................................................................................................................ 37Compensation.................................................................................................................................................................................38Expectation Damages: Cost to Complete vs. Diminution of Value............................................................................39Specific Performance...................................................................................................................................................................40

Limitations on Compensation.................................................................................................................................. 40Certainty........................................................................................................................................................................................... 41Duty to Mitigate............................................................................................................................................................................ 41

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ISSUE SPOTTTING:

UCC or Common Law/Restatements?

Is there an enforceable contract?Consideration (§71)Promissory Estoppel (§90)Material Benefit (§86)Implied in FactQuasi-ContractStatute of FraudsIndefiniteness§2-207OfferAcceptance

What are the terms?Parole EvidenceLeval Test§2-207Modification

Was there a breach?Which Right or Duty?

Can it be voided?Duress Fraud: Willful/NegligentFraud: Concealment/Non-DisclosureUnconscionabilityImpractability FrustrationMutual MistakeUnilateral MistakeRisk allocation

What are the Damages?Specific PerformanceThick Market v. Thin MarketForeseeabilityCertaintyDuty to MitigateExpectation RelianceRestitution

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Cost to Complete vs. Diminution of Value

Introduction

R2d §1: Contract Defined: A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty

R2d§ 2: Promise; Promisor; Promisee; Beneficiary (1) A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made. (2) The person manifesting the intention is the promisor. (3) The person to whom the manifestation is addressed is the promisee. (4) Where performance will benefit a person other than the promisee, that person is a beneficiary.

R2d§ 4: How a Promise May Be Made : A promise may be stated in words either oral or written, or may be inferred wholly or partly from conduct.

3 types of Contracts1. Express 2. Implied-in-fact (§4)3. Quasi (Implied-in-law)

Quasi-Contract (Implied-in-Law): benefit is conferred where there is no promise1. Benefit conferred2. Appreciated (comprehended not enjoyed)3. Unjust enrichment would result – inequitable to not contract

Typically no recovery unless(either):1. “Last clear chance” – watched benefit conferred and didn’t stop it (ex-post)2. Deception/trickery/inducement - (ex-ante)

Is there a promise? Thumb on the scales against using coercive power of the state Autonomy: respect for individual rights, must have clear justification Instrumentalist: too much enforcement, activity level effect + costly precautions

Why Enforce at All? Social benefit of ability to make plans (better choices from bringing future to present) While it reduces total number of promises, increases quality of promises Promotes freedom to bind yourself and make plans

Instant Retraction: Not allowed because we want to enhance the perceived credibility of promises

Objective Theory: Judge intent (existence of promise) by “reasonable person” standard; Gallup pole Auto: Provides manifestation of assent available to all, preserves individual boundaries Inst: Easier/cheaper for idiosyncratic to act normal than for normal to worry about idiosyncrasy

Bailey v. West RI (1969)

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Facts: Δ purchased horse from seller. When delivered, it was lame. Δ instructed trainer to send horse back to trainer, who refused delivery. Trainer then delivered horse to Π, though not at the direction of Δ. Π sends bill to Δ, who refuses to pay.

Holding: (1) Π didn’t introduce any evidence for the “quasi-contract” argument upon which the trial judge ruled (2) Neither a contract, or intent to enter into implied contract, ever existed between Δ and Π, and (3) Π acted as volunteer, so he can’t recover on Quasi Contractual basis.

Lucy v. Zehmer SCOA of VA (1954) Facts: Δ (and his wife) agrees to sell farm to Π while both were drinking. Δ alleges the contract was

created as part of a drunken joke upon Π that can not be taken seriously as a legal transaction. Holding: Genuine intent is not necessary for parties to signal willingness to enter into contract.

Rather, a contract may be initiated through words or actions from which reasonable person would infer intent to enter a contract. Objective theory.

NOTE: Δ should have argued that it was unreasonable for Π to not know Δ was joking given context (in a bar, written on informal )

Leonard v. Pepsico USDC, S. Dis. (1997) Facts: Π attempts to redeem commercial “offer” of a Harrier Jet in exchange for Pepsi points. Δ

refused to provide the jet, saying that the commercial and the “offer” of jet were obviously done in jest.

Holding: The court held that the commercial and offer were clearly being done in jest, and that a reasonable person would have the offer was not legitimate. Viewed in context, π’s position was absurd.

R2d §18: Manifestation of mutual assent to an exchange requires that each party either make a promise or begin or render a performance.

R2d §20: Effect of Misunderstanding(1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and (a) neither party knows or has reason to know the meaning attached by the other; or (b) each party knows or each party has reason to know the meaning attached by the other. (2) The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if: (a) that party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or (b) that party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party.

Default Rules: facilitative, majoritarian rules reduce costs of transaction and promotes contracting. Created by courts, best guess at what majority would want ex-ante Must be explicitly opted out of, with substitutes provider to not apply Fill gaps (1) allocate risk of performance, (2) provide measure of performance and (3)

specify consequences of non-performanceUCC

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GET IN:§2-102: Scope of transaction covered by UCC, only “goods”§2-105: Definitions of “Goods”- movable at the time of identification to the contract.

GET OUT:§1-103: Door out: Where the UCC is silent, common law applies

SUPPLEMENT TERMS:§2-208: Course of Performance within contract relevant to determine meaning of agreement§1-205(1): Course of Dealing – previous dealings between the parties can be used to interpret terms§1-205(2): Usage of Trade – general industry practice can be used

§2-103: Definitions of Terms (e.g. Good Faith)§2-104: Definition of Merchant

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Enforcing Promises

Consideration (R2d §71): Four-lane highwayPromissory Estoppel (R2d §90): Gravel roadMaterial Benefit Rule (R2d §86): Deer trail

Consideration

Consideration (R2 §71):1. Performance or return promise must be bargained for2. Bargain means promise/performance given in exchange of promise (reciprocal inducement)3. Promises to make gifts are not enforceable

R2d §73: Performance of legal duty doesn’t constitute considerationR2d §74: Settlement of legal claims – (1) invalid claim is consideration if claimant believes claim to be valid. (2) Is consideration if bargained for, regardless of belief of claimant or intentions to raise claim.R2d §79: Adequacy of Consideration is immaterial as long as the performance/return promise met (peppercorn is fine if it’s bargained for)R2d §81: Private motives of the promisor are irrelevant

Bargain vs. Gift

Why not enforce all serious promises? Non-gratuitous: Increase in Quality/Reliability > Decrease in quantity; enforcement is good

o Feedback loop of bargaining mitigates quantity decrease (offer more $) Gratuitous: Inherently high quality/reliability (often family members etc.); enforcement doesn’t

increase quality as much and decreases quantityo Non-reciprocal so no feedback loop to limit quantity decrease

Autonomy: No intent to be bound in gratuitous promise Instrumentalist: reduces number of promising without adding to quality/reliability

Enforcement of Nominal consideration: Pro: Autonomy - intention to make enforceable gift Con: might not be “deliberate” enough, fear of false claims, providence of legislature

Williston’s Tramp - actions incidental to the receipt of a gratuity or gratuitous promise do not constitute consideration (not bargained for).

Hamer v. Sidway NY (1891) Facts: Executor of Π’s uncle’s estate refuses to honor uncle’s promise to pay Π $5,000 if Π

restrained from vices until his 21st birthday. Π acted accordingly, and received a further promise from uncle that debt would be honored and paid once Π had matured. Δ alleges promises had no consideration and are thus unenforceable.

Holding: Π forfeited a legal right in consideration for his uncle’s promise. Therefore, the promise is enforceable.

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Black Letter Law: Consideration doesn’t depend on conferring of benefit upon the parties to a promise, but rather the forfeiture of a legal right as prescribed by a promise.

Kirksey v. Kirksey AL (1845) Facts: Π, the widow of husband’s Δ-brother, moved to land owned by Δ after receiving invitation to

do so. Holding: The invitation was a promise to give a gift and had no consideration by Π. Relocation was

incidental to receiving gift. Therefore, she may not recover. Note: background facts (∆ may have attempted to benefit from π’s presence); better argued under

promissory estoppel

In re Green USDC, SDNY (1930 Facts: Mistress seeks to enforce sealed contract containing promises to make payments on housing.

Consideration cited by claimant includes payment of $1, waiver of claims, and “other goods and consideration”.

Holding: The payments were made for past consideration, which is not valid. The other cited “considerations” in the contract were held to be invalid, and were made merely in attempt to frame a promise to give a gift as an enforceable contract; Nominality

St. Peter v. Pioneer Theatre 1940 SC of IA Facts: Δ offered “bank night’, for which Π stood outside the theatre. When Π’s name was called, Π

followed rules but was denied the prize. Π claimed there was lack of consideration to promise, incidental to receipt of gratuity.

Holding: Δ entered into a unilateral contract with Π, whereby the performance of a promise is made contingent on the other party doing some act. The act indicates acceptance of offer, and functions as consideration. Π performed necessary acts, so the promise must be enforced. Non-pecuniary consideration made it legal.

Adequacy

R2 §79: It is up to parties to determine value of consideration Peppercorn Theory Love and Affection can be valid consideration (Wolford)

Batsakis v. Demotsis C. of Civ. App. TX (1949) Facts: During WWII in Greece, Δ borrowed $25 from Π in exchange for a note promising $2000

after the war. Holding: The loan by Π was valid consideration for the promise to pay $2,000, regardless of the

lopsidedness of the arrangement. Both parties got what they bargained for. No fraud or duress. Note: Contextual influence; wartime contract impacts parties intentions

Wolford v. Powers IN (1882) Facts: Charles Lehman (CL) promised $10,000 to Π if he named his son CL. Π did as asked, and

brought suit when the administrator of CL’s estate refused to pay. HOLDINg: The name of the child was valid consideration for the promise to pay $10,000. Law: If an act is done in return for a promise, that act—no matter how minor—will function as

consideration.

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Promisory Estoppel

R2d §90: Detrimental Reliance + Calculated Inducement1) A promise made that should reasonably be expected to induce reliance (action or forbearance)2) Specifically induced reliance occurs – must be the reliance reasonably expected by the promisor3) There must be injustice

While no bargain exists (there’s no consideration!), enforcement only typical in general bargain context

All promises will induce a form of reliance, must be the expected reliance (dangling a promise in front of someone)

Charitable Promises: can be enforced under §90(2), but rarely litigated or adopted. Fear of chilling effect. Donees rarely sue (bad PR). Often, a bargain context exists (what will named after you etc.)

Intrafamiliar Context

Haase v. Cardoza DCOA, 3rd D. CA (1958) Facts: Π alleges that Δ stated in a conversation that her dead husband had desired that she leave

$10k to Π. Δ then asked if Π would accept $50/month, and then ceases payments when Π requested formalize promise in writing and that the balance on the $10k be paid.

Holding: No consideration by Π. Reliance itself insufficient, must be specific, “dangling”; insufficient grounds for promissory estoppel.

Ricketts v. Scothorn NE (1898) p. 164 Facts: Π-Scothorn received note from grandfather stating that she need not work and promised her

$2,000. Π then quit her job. Lack of funds prevented the payment of the gift, which the grandfather maintained that he would pay as soon as he sold off property. Upon his death, Δ-administrator refused payment to Π.

Holding: equitable estoppel because detrimental reliance + inducement. Promisor died without repudiating, form of promise (promissory note) shows deliberation

Allegheny College (p.180) Facts: Promise to donate after death and promise to name scholarship; estate refused to donate Holding: Cardozo found consideration from return promise by school. Recognized §90 as

alternative, but unnecessary when consideration is found. Better explained under §90

Employment Context

Feinberg v. Pfeiffer Co COA of MO (1959) p. 174 Facts: Board of directors of Δ-Company decided to give monthly pension to Π in gratitude for years

of employment. A change in management led to decision to revoke pension. Π brought suit, claiming reliance.

Holding: The contract is enforceable under promissory estoppel since the pension promise induced reliance to retire and not compete.

Hayes v. Plantations Steel Co. St. Louis COA, MO (1959) p. 174

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Facts: Π announced retirement, and then inquired about a pension. Δ promised Π “would be taken care of.” Π received pension for several years, and then brought suit when pension ceased.

Holding: Pension promise unenforceable since there was neither (1) consideration(from few weeks worked), or (2) evidence that the promise shaped Π’s thinking/induced change in position.

Case Haase Ricketts Feinberg HayesContext Gift Gift Gift GiftExplicitBargain

No No No No

Reliance Yes Yes Yes YesCalculated Inducement

No Yes Yes No

Form Oral Written Written OralRevocation Yes No Yes YesContract No Yes Yes No

Material Benefit RuleR2d § 86: Promise for Benefit Received

Material, non-donative benefit conferred Subsequent promise to reimburse – “completes” the incomplete bargain, fixes value of benefit

to initial recipient.

General form of exceptions to “Past Consideration = No Consideration” Enforceable promise; bar to recovery; subsequent promise to honor; enforceable Eg. R2d §82 – statute of limitations, §83 – Bankrupcy, §85 – Infancy

Why only non-donative benefits? Likely says something about the ‘donativity’ of the subsequent promise; performed with expected compensation (implicit bargain), not gratuitous (mere volunteer)

Webb v. McGowin: (Worker + falling block); §86 applies, non-donative, worker expected compensation, not revoked during promisor’s lifetimeMills v. Wyman: (Son ill at sea; cared for until death; father promises to pay for expenses); “Good Samaritan”, donative action.Booth v. Fitzpatrick: (escaped bull); business context; non-donative, expected compensation and kept recordsDesny v. Wilder: (screenwriter) Non-donative, done in bargaining/business context; unequal bargaining power

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Bargain Context

Offer and Acceptance

Offer

R2d § 17: Requirement of a Bargain: K = bargain w/ manifestation of mutual assent (MoMA) + consideration. Exceptions in §82-94.

§ 22: Mode of Assent: Offer and Acceptance: MoMA typically = offer + acceptance MoMA may be made with offer + acceptance unidentified and moment of formation undetermined.

§ 24: Offer Defined 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.

§ 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.

Mailbox Rule (R2d §63(a) and (b) + UCC §2-206) Acceptance is binding by mail once it is sent out (mailbox rule) If it’s a “firm offer” or an “option contract,” acceptance only triggered upon receipt by offeror (R2d

§63(b)). Revocation of offer is binding only upon receipt by the offeree (R2d §40)

Offer or Preliminary Negotiations? Offer only exists if it is complete and only acceptance is left CL does not like indefiniteness and errs towards preliminary negotiations if there are missing

material termso Overenforcement affects activity level and offerors will take extra costly precautionso Cheap talk is valuable (brings parties together) and don’t want to discourage it

UCC §2-204(3): UCC says indefinite terms are okay if parties intended to contract because of default rules in the UCC

Price quote + advertisements typ. not offers: seller would have no control of quality of buyer or quantity – unless clear, definite, explicit + leaves nothing open

Dyno Construction Company v. McWane Inc 6th Cir. (1999) Facts: Π and Δ enter into negotiations for piping. Δ sends Π a fax stating price plan. Π agrees, and

Δ sends package to Π containing credit terms, order form and waiver information. Π loses packages; Δ faxes order form, but forgets to send waiver. Piping goes bad, prompting suit.

Holding: The contract was valid on date fax formed was signed. The earlier fax was not an offer that Π was to accept since 1) terms were indefinite; and 2) no evidence Δ was done negotiating or intending to be legal bound. Purchase orders = invitation to a negotiation, ≠ offer or promise.

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Lefkowitz v. Great American Minneapolis Surplus Store MN (1957) Facts: Δ advertises on 2 consecutive weeks for special giveaway promotion. Π responds both

weeks, and is told that the sale applies only to women. Π brought suit; Δ alleges ad was invitation to negotiate.

Holding: Advertisement generally not offer unless clear, definite, explicit and leaves nothing open for negotiation, acceptance (by performance) completed contract.

Note: should π have notice of “house rule” on the 2nd week?

Acceptance

R2d §30: Form of Acceptance Invited(1): Offeror can invite acceptance by:

Affirmative answer in words Performance or forbearance May empower offeree to make a selection of terms in his acceptance

(2): Unless indicated by language or circumstances, offer invites acceptance in any manner and by any medium reasonable in the circumstancesUCC§2-206: UCC Equivalent

R2d §32: Invitation of Promise or Performance If in doubt, acceptance by promise or by return performance per offeree’s choice

R2d §35: The Offeree's Power of Acceptance (transferred from offeror to offeree after offer)1. An offer gives power to offeree to complete MoMA by acceptance of the offer2. No K by acceptance of an offer power of acceptance terminated via § 36.

R2d § 36 Methods of Termination of the Power of Acceptance 1) An offeree's power of acceptance may be terminated by

a) rejection or counter-offer by the offeree, or b) lapse of time, or c) revocation by the offeror, or d) death or incapacity of the offeror or offeree.

2) In addition, an offeree's power of acceptance is terminated by the non-occurrence of any condition of acceptance under the terms of the offer.

R2d §42 Revocation by Communication From Offeror Received by Offeree An offeree's power of acceptance is terminated when the offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract.

R2d §50 Acceptance of Offer Defined; Acceptance by Performance; Acceptance by Promise (1) Acceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer. (2) Acceptance by performance requires that at least part of what the offer requests be performed or tendered and includes acceptance by a performance which operates as a return promise. (3) Acceptance by a promise: must complete every act essential to the making return promise

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R2d §54 Unilateral Contract Notification: no notification req’d unless requested; if offeree knows offeror can’t reasonably find out, offeror duty only when: (1)notification reasonably attempted, (2) offeror learns of performance, (3)indicates no notification is req’d

R2d §56 Bi-lateral Contract Notification: Notification required for acceptance by promise

Bilateral vs Unilateral Notification: B wants plans + cares about quality of offereeU – don’t care who, just want it done.

Leval (in Tribune) Test: Type I Contract: most, if not all, terms agreed upon. Memorialization is contemplated, but

legally unnecessary. Fully binding agreement.o Four Factor Test:

Does language express an intention to be bound? “strong presumption against binding obligation with open terms.. and

expressly anticipate future…documents” Have all the terms been agreed upon? Has there been partial performance? Is this type of contract usually committed to written form?

Type II: leaves many terms open, agree to negotiate in the future to resolve open terms. Binding preliminary commitment: not a binding contract, but commits them to a duty to bargain in good faith.

o 5 factor test: Intention to be bound revealed by the language Context of the negotiations Existence of open terms Partial Performance Necessity of putting the agreement in final form

R2d§27: Agreement that are sufficiently definite can be enforceable even in written memorialization is contemplated

Ever-Tite Roofing Corp. v. Green COA of LA (1955) p. 252 Facts: Δ accepted offer for roof-repair from Π in contract that stated it was valid only if signed by

authorized person (never done) or if work is initiated. Π arrives at Δ’s property, but a different company is doing roofing.

Holding: Bilateral contract. The initiation of work began with the loading of the truck, not the arrival at Δ’s property. Further, the time between the acceptance and the initiation was reasonable.

Contra Proferentum – interpret form against interests of its drafter

Ciaramella v. Reader's Digest Association, Inc 2nd Cir. (1997) POSTPONING ACCEPTANCE Facts: During settlement negotiations, Π’s lawyer orally indicated that agreement was reached. Π

had insisted that agreement not valid until signed, and did not sign the agreement that his lawyer had indicated was complete.

Holding: Agreement not reached since Π insisted on signature (opting out of R2d § 30, agreement thru any medium); Not a Type I prelim agreement

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Revocation

General Rule: Offers are revocable prior to acceptanceOptions (§25, §87): Only way to make a promise irrevocable.2 exceptions1. Firm Offers (UCC §2-205): Merchant’s signed, written, and explicit promising open offer is not

revocable: during time stated OR (if unstated) for three months2. Construction Bids:

a. Traynor’s Rule (Drannan) §87(2) / Reliance Optioni. a sub’s promise implies promise: “I will not revoke if you use it in your bid”

ii. Generally adopted (counter arg – I won’t revoke if you don’t bid shop me)iii. Policy: subs in best position to avoid mistakes in their own bid not GCiv. Subs bear the risk of their own bid mistake

b. Old Rule (Hand in Baird) – subs offers are like other promises – revocable without additional consideration.

i. Policy: non-legal reputation factors already compel subs to avoid mistakes, GC can compare the bid to others and notice mistakes.

ii. GCs bear the risk of subs bid mistake

Revocation of Unilateral Contract: Rules have evolved Old rule: revocable at any time before completion of performance New Rule (R2d §45): irrevocable once requested performance begins (conditioned on

completion)

Pavel Enterprises, Inc. v. A.S. Johnson Company, Inc. COA of MD (1996) Facts: Π computed bid for government contract relying on Δ’s sub-bid. Π lost the contract, and then

regained it when the original winner was disqualified. It then met with Δ, sought further sub-bids, and then notified Δ that their offer had been accepted. Δ said the bid was in error, and withdrew their sub-bid.

Holding: A contract was never formed between the parties. A sub-bid is irrevocable if the sub should reasonably foresee the prime relying on the sub-bid. Here, the “reasonable time” between offer and acceptance had lapsed. Π’s behavior (bid shopping) indicates that Π was not relying on Δ’s offer.

GC / SUB Arguments:1) Sub’s sub-bid is an offer (Promise), GC’s use of sub-bid is partial performance: §50(2) Acceptance

Unilateral = Promise + Performanceo Sub’s offer: “we will do the job if you pay us”, they want promise to pay, not use of bido Use of bid is not a means of acceptance

2) Sub’s bid is an offer (Promise), Contractor’s use of offer is promissory act (§50(2) Acceptance) Bilateral = Promise + Promissory Act/Performance

o The use of the bid is not a promissory act b/c GC doesn’t want to be bound until it wins bid

o Not acceptable means of acceptance3) Sub’s sub-bid is an offer (Promise), Contractor mails “acceptance” conditional on final award of

project (Promise)

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Offer (Promise) + Acceptance (Promise) = Қo GC’s return promise was conditional;

4) 90 Argument: Sub-Contractor’s sub-bid is an offer (Promise), Contractor’s use of sub-bid is specific reliance Promise + Specific Reliance = Қ under §90

a. Sub’s offer is a conditional promise of “I will do the job if you promise to pay”b. Contractor cannot rely until he makes the return promise to pay

Offer and Counteroffer

Common Law View

Mirror Image Rule: Offer and Acceptance must contain identical terms (§38) If not identical, acceptance is a counteroffer: original offer terminated (§59) Offeree’s power of acceptance terminates upon counter offer. (§39)

Last Shot Doctrine: Different written terms, yet performance is rendered and payment is received Terms of contract are the terms of the last counter-offer, acceptance by performance/conduct Seller friendly

§ 59. Purported Acceptance Which Adds QualificationsA reply to an offer which purports to accept it but is conditional on the offeror's assent to terms additional to or different from those offered is not an acceptance but is a counter-offer.

§ 61. Acceptance Which Requests Change Of TermsAn acceptance which requests a change or addition to the terms of the offer is not thereby invalidated unless the acceptance is made to depend on an assent to the changed or added terms.

Dataserv Equipment, Inc. v. Technology Finance Leasing Corp. MN (1985) Facts: “Indepth installation clause”. Π makes offer, Δ counters; initially rejected by π, π later

attempts to accept. ∆ stated it was too late and offer was revoked. Holding: Π initial rejection of Δ offer eliminates their ability to accept an offer. Since subsequent

counter-offers by Π were never accepted by Δ, a contract was never formed.

UCC §2-207

Battle of the Forms:Route 1: First Clause of 2-207(1) + buyer friendly

a. Acceptance not expressly conditional on assent and contains additional or different termsb. Different terms are EITHER (courts undecided):

i. UCC governs (knock-out both parties): Scott says majoritarianii. Dropped out – leaving offeror’s terms govern

c. Add’l Termsi. Merchants (§2-207(2)) Additional terms become part of the contract UNLESSo offer expressly limited expressly to the terms of original offero they materially alter the contract (most terms mat. Alter)

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o offeror objects to them within a reasonable timeii. For Consumers: terms are just proposals – fall out.

Route 2: Second Clause of 2-207(1) a. Acceptance expressly conditional and contains add’l/diff. terms, AND b. Offeror expressly agrees to the additional and different terms of the counterofferc. Seller’s terms dictate – both different and additional terms.

Route 3: §2-207(3) + buyer friendlya. Acceptance includes different and/or additional terms but the contract is initiated through

performance (writings disagree, w/ no express assent to new/different terms). All different and additional terms are discarded via the Knock-Out Rule Contract terms: those agreed upon + defaults of the UCC Comment 6: when terms directly conflict, assumed that both parties disagree to their use

Additional terms v. Different Terms - §2-207(2): Some courts interpret this to mean that “different terms” are not covered by this section. Scott believes otherwise drafting error.

Primary means of dealing with this is to apply Knock-Out Rule, (both sets of different terms knock each other out, leaving §2-207(3)-style contract.)

UCC Default Terms:- delivery at buyer’s place of business (§2-310)- delivery in “reasonable time” (§2-308)- Specific Performance (§2-716)- Seller pays buyer’s incidental and consequential damages (§2-715)

Step Saver Test of conditional acceptance:1. States a term that materially alters deal solely to offeror’s disadvantage2. Contains key words or phrases (only terms upon which we are willing etc.)3. Demonstrate an unwillingness to proceed without term

Ionics, Inc. v. Elmwood Sensors, Inc. 1st Cir. (1997) Facts: “Battle of the forms”. Π and ∆ had conflicting forms. Dispute involving liability for

exploding radiator Holding Last Shot Doctrine doesn’t apply; UCC 2-207(3) governs as forms directly conflict. Terms

= agreed to terms + UCC provisions. Conduct or silence are not a means of accepting a counteroffer’s terms (can accept offer’s terms that way, Gateway)

Step-Saver Data Systems, Inc. v. Wyse Technology, Inc. 3rd Cir. (1991) Facts: Π purchased copies of Δ’s software via telephone. The software contained a box-top

warranty disclaimer. Holding: Order = Acceptance. Delivery = performance. The box-top disclaimer was an additional

term brought after the parties had contracted over the phone. The box-top doesn’t meet the test for conditional acceptance as the parties had an ongoing history of transactions that indicated the seller was willing to proceed even without some express warranty terms as part of the transaction. 2-207 Route 1 contract, terms materially alter contract, fall out.

Hill v. Gateway 2000, Inc. 7th Cir. (1997)

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Facts : Π charges racketeering against Δ for product defects. Δ tried enforcing arbitration clause contained in List of Terms delivered with computer.

Holding: Transactional efficiency dictates that order = offer, delivery = conditional acceptance. The contract here was formed upon Π’s receipt and acceptance of the computer, and Π are thus bound by the arbitration clause.

NOTE: UCC 2-207 applies only where there are multiple writings.

Rolling Contracts: initial transactiona. Consumer-friendly

i. Phone conversation/submission is the offerii. Acceptance is delivery

1. If shipment is expressly conditional on customer’s acceptance, then the conflicting terms are knocked out, and the UCC governs the void

2. OR, if the shipment is not expressly conditional, than the buyer’s terms prevail

iii. Less transactionally efficient, but supported by Autonomy and consumer choiceb. Business-friendly (Easterbrook in Gateway)

i. Phone conversation is invitation to negotiateii. Shipment is an offer. Acceptance is promissory act. Previously “add’l” terms are

part of initial offer and stay in contract.iii. Transactionally efficient: avoids having to read entire contracts over the phone

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Relational Contracts

Uncertainty

Relational Contract: parties are incapable of finalizing contract terms due to uncertainty and complexity. Few default rules exist.

Filling Gaps + Open Price Terms Enforcement is common if there’s intent to contract and agreement on a basic minimum terms UCC §2-204 (3) open terms are okay if parties had sufficient intent UCC §2-305: Open Price Terms

The Puzzle of Incomplete Contracts – Parties often leave incomplete terms because:1. Costs of complete contract are onerous:

a. Negotiations + writing costsb. Cost of identifying all contingencies

2. Maintain asymmetrical information private (not worth telling them a business secret)

Why write incomplete K’s? (1) too remote to be worth dickering (2) failure to foresee (3) might block negotiation (4) assume courts will fill gap in its favor (5) intention to rely on non-legal mechanisms

Why is P time of delivery, not time of agreement? Maintains pre-contract price risk on part of B + S.

R2d §33: Manifestation of intention to offer = contract only if terms are reasonably certain (2) Requires basis to determine existence of breach + remedy (3)Open/uncertain terms may = no intention to make an offer/acceptance No agreements to agree Bright line rule

UCC Broad, flexible standard based on intention to be bound Examines context: prior dealings + custom (2-208, 1-205) Provides default rules to fill in open terms

§2-204 Formation in General(1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.(2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined. (3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for given appropriate remedy.§2-305: Open Price Term – filled in as “reasonable at time of delivery”§2-309: Absent time of deliver – default is “reasonable time”§2-310: Absent time of payment – default is payment upon delivery

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Varney v. Ditmar Facts: Employer and employee verbal agree that employee will receive a bonus of a fair and

reasonable share of profits. Holding: Terms must be definite enough for court to enforce. Parties must be certain and explicit so

that their full intention my be ascertained to a reasonable degree of certainty for K to be enforced. “Fair and reasonable share” of profits = too uncertain.

J. Martin, Jr. Delicatessen v. Schumacher NY (1981) Facts: Π leased retail space space from Δ; renewal clause stated that renewed rental price would be

“agreed upon” at time of renewal. Δ would only do so at higher than market value price. Π sought specific performance at appraised market value.

Holding: The agreement to agree is unenforceable

Slammit v. Badshot Facts: Badshot signs purchase order for fixed number of gut-stringed rackets from Slammit at

“price to be determined.” Before delivery, the price of gut triples. Was there a contract? Holding: Badshot did not intend to be bound unless the price were fixed or agreed (under §2-

305(4)). Prior dealings show that neither party had intention to be bound to pay the price at delivery if the price of gut string had shifted markedly since the time of order. Prior dealings can give meaning to open terms and ambiguous contract terms

DR Curtis Co. v. Mathews ID (1982) Facts: ∆ sold grain promised to Curtis to another after failure to agree on price term. “Protein basis”

was left open for future agreement. Holding: Under UCC §2-305, 2-204(3), contract without price term is still valid as long as both

intended to enter into the contract. Court had reasonable market price to substitute.

Preliminary Negotiations

Can §90 be used to enforce representations made during Prelim Negotiations? Generally NO. Need a promise + calculated inducement. Most often fails due to lack of a promise (R2d §2) Scott: Typically need clear definite and unambiguous promise for enforcement Policy – Over-enforcement = activity level effect on prelim negotiations; encourages cheap talk

o Already usually truthful + in both parties best interests not to lie;o Usually fails due to a lack of intent to be bound due to uncertainty

Coley v. Lang AL (1976) Facts: Δ-Coley sent a letter to Π-Lang stating agreement to terms of stock purchase. Δ backed out,

and Π brought suit for specific performance based on reliance. Δ argued that the letter was part of negotiations and it contained incomplete terms.

Holding: The letter agreement is unenforceable since it lacked materials terms (court found indefinite agreement to agree, but more appropriate that there was no intent to contract.) It was unreasonable for Π to have relied on it. Waiting to be bound

Note: Discussions were too definite for Type II Leval contract; could instead make a ‘subject-to’ deal.

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Hoffman v. Red Owl WI (1965) p. 204 Facts: Π and Δ held negotiations for a franchise, but did not reach final agreement. Δ promised that

if Π met certain requirements, he would receive a franchise. Π relied on those representations, and realized damages when Δ failed to award franchise without further conditions.

Holding: Δ is liable for restitution damages because injustice would result, court found definiteness of promise less strict for §90 than §71. Only restitution (not profits) available under promissory estoppel.

Note: case is outlier, better explanation is under quasi-contract. Hoffman conferred benefit (info on business acumen) retention by red owl is unjust

Citigroup v. Wachovia & Wells Fargo: Reliance = interest on $5B loan Expectation = none, no obligation Quasi-Contract = best argument to obtain some of the $13B price increase due to the week loan

Binding Preliminary Agreements

Leval Test: Modern standard for determining nature of preliminary negotiations (see ~pg. 13) Typical context: MOUs, LOIs

Damages under Type II contract: Reliance expenditures are the appropriate damages to compensate a party where counterparty has violated “good faith” bargaining (strategic bargaining delay)

Policy – discourages strategic delays and promotes contractual investments

Brown v. Cara (US CC 2005) Facts: ∏ Developer had a MOU with ∆ property owner to develop property and reach formal

agreement. After investments + rezoning, ∆ refused to negotiate with ∏. Holding: The MOU induced performance and reliance. There was a binding Type II preliminary

agreement.

Output/Requirements/Exclusive Dealings

2 primary Relational contract purposes:1. Thick Market - “smooth the bumps” – volatile market can have spillover effects on business

Goal is to keep both parties ‘above water’ but offer flexibility Tools: Price index, Quantity discretion, exit opportunities

2. Specific (relationally specific) Investment Party wants to invest in contract to make it more valuable to both No opportunity to redeploy investments in other business ventures Goal is to provide framework that promotes investment and avoids “holdup” problem

UCC § 2-306: Output, Requirement and Exclusive Dealingsa) Requirements/Output Contract (Reasonable Quantity Demanded aka good faith) b) Exclusive Dealings (Best Efforts)

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UCC § 2-103(1)(b): Good Faith in the case of a merchant means honesty and the observance of reasonable commercial standards of dealing in the trade.

R2d §205: Good faith required in all contracts

Output/Requirement

Thick Market “Smooth the Bumps” Contracts: UCC § 2-306(a): Requires “good faith”, no requirements “unreasonably disproportionate” Custom can be a barrier to ‘bad faith’ attacks Tools: Peg contract price to a price index/escalator with:

a backup price escalator/index AND a circuit breaker / price ceiling / price floor

UCC §1-203: Obligation of Good Faith

Can requirements = 0? Posner thinks yes! Only if done in good faith. With fungible goods, always have market buyers to dispose of excess. Not supported by language of UCC §2-306. Can use prior dealings, industry practice to support/protect decreased requirements.

Good Faith: Typically requires exogenous variable dramatically altering business plan. (≠ reallocation of capital). Must be more than re-evaluation of merits of deal.

Eastern Airlines v. Gulf Oil Corp. USDC, SD of FL (1975) Facts: Embargo induced breakdown of contractual price index and leads to Π receiving oil at below

market price from Δ, who demanded Π pay a higher price than that contractually stipulated. Π then brought suit for breach of contract.

Holding: The contract between the parties is a valid requirements contract enforceable under UCC §2-306; not too indefinite; and thus is judged on the basis of “good faith” by the parties. Π had acted in good faith, “fuel freighting” was consistent with course of dealings and wasn’t “bad faith”

Orange & Rockland Utilities v. Amerada Hess Corp (p. 330) Facts: Δ supplied oil to Π, for whom it became more profitable to sell the oil than to use it for the

intended purpose. Π attempted to purchase double the estimated requirement, and Δ ceased delivery.

Holding: Π’s demands were “unreasonably disproportionate” to the estimates in the contract. Factors for “unreasonably disproportionate:”

a. Requirements exceed estimate by how much?b. Whether seller had reasonable basis on which to anticipate this increase c. Amount by which the market price increased contract priced. Was increase fortuitous?e. Reason for the increase: “Middlemen to the world?”

Empire Gas Corporation v. American Bakeries Company 7th Cir. (1988) Facts: Requirements contract where Δ would buy “approximately 3,000” propane gas tanks and all

accompanying propane from Π. Δ ordered none, prompting suit. Gave no evidence of reason for reduction of order.

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Holding: A buyer in an options contract can reduce his requirements to zero only if acting in good faith. Δ, which failed to provide any justification for its zero requirement decision, did not act in good faith.

o Buyer may not overdemand but may underdemand if in good faith Probably not supported by text of UCC 2-306. If estimate provided, it’s a “center” Problem of underdemand: buyer will find substitute goods that work just as well,

violate exclusivityo Contractual purpose: “Off the shelf indicates requirements contract, non-fungible indicates

specific investment

Exclusive Dealings Contracts

Purpose: Capture additional marginal utility by taking advantage of one party’s relative advantage in distribution/marketing etc.

Exclusive Dealings: Encourages relationally specific investment by distributor; by preventing “freeriding” by competing distributors who don’t participate in investment(the “Karl Problem”)

UCC §2-306(2): requires “best efforts in exclusive dealings to maximize joint value (optimal sales level if same entity owned both production and distribution rights

Thick Market “Specific Investment” Contracts: Options for K structure1) Explicit, fully defined K

Has firm numbers for Q(units) and P($) No way to know optimal P/Q ahead of time; limits flexibility; generally contextually

inappropriate 2) Net Profits (Woods v. Lucy)

Parties split profits according to agreed upon rate. Aligns parties’ interests. Problem = distributors with multiple products can spread costs amongst many products and

distort actual profits (Hollywood example) Works best: distributor w/ single product; easier to monitor costs.

3) % of Gross Revenue (Bloor v. Falstaff): Avoids distortion from net profits Problem = royalty shifts optimal level of sales compared to other products with no royalty;

distributor may not be motivated to sell your product (dist. Max profit ≠ seller max profit)

P1: Marginal Cost

P1+P2: Marginal Cost

Marginal Revenue

QP1 QP1+P2

Q

P

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Solutions: Incentives! Publishing - advance stimulates party to recover sunk initial costs

4) Benchmarking (McDonald’s): Operate a few vertically integrated outlets, to which all franchises are compared; franchise

agreements have mechanism to terminate in the event of trailing benchmark 5) Full Vertical Integration (Starbucks):

Own outlets so there is no spread in incentives6) Extra-Legal Enforcement:

Parties are interested in goodwill and continued business

Wood v. Lucy Lady Duff-Gordon NY (1917) Facts: Δ entered into Exclusive Dealings contract with Π, who alleges Δ broke the agreement by

dealing with others. Π charges the contract is invalid since it obligates Π to nothing. Holding: An implied promise to act in good faith has been made by Π. Therefore, the contract is

valid. Implied promise to act in the best interest of the parties as an aligned unit in exclusive dealing

Bloor v. Falstaff Brewing Corp. 2nd Cir. (1979) Facts: Π entered into Exclusive Dealing contract with Δ. Π alleges that Δ violated good faith clause

in agreement by reducing sales and marketing of Π’s beer. Δ maintains that it need not do anything to market Π’s beer that would result in substantial losses.

Holding: Δ violated best efforts. After saving company from financial peril, Δ was obligated to at least consider sales and marketing options for Π’s beer that wouldn’t have incurred bankrupting financial losses. Compared sales to comparable fully integrated beer producers.

Reducing Conflicts of Interest

Agency Costs: costs of hiring someone else to do business and sharing in profits; potential for moral hazard (agent acts in own best interest, not in mutual interests). 2 options for limiting:

Supervision: ensures agents act in your best interests; works well for routinized work (assembly line). Costly, not appropriate for many high skill/service jobs

Bonding: Agent provides performance guarantee to reduce need for supervisiono Termination Clause o Covenants not to Compete

Termination Clauses

At will employment: provides bond for employee performance At-will: Low monitoring costs, incentivizes employee performance + productivity, no adverse

selection problem (avoids attracting lazy employees)

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QP2 QP1

P

Q

∆PRoyalty

For Cause: employee morale, more employee dialogue, non-salary benefit lower labor costs

Common Law: Can terminate at will for any reason or no reason; not a bad reason, violation of public policy (failure to violate public policy, whistle blowing)

Employee handbook: If termination procedure is listed, must disclaim ability to deviate from procedures. Be explicit, make it conspicuous, get initials!

Wagenseller v. Scottsdale Memorial Hospital (AZ 1985) Facts: At-will employee fired after failing to violate statute (mooning!) Holding: Absent a contractual provision, an at-will employee can be fired for good or no reason,

but not bad reason. Since the termination violated public policy and was bad faith. There are implied in fact and in law contract terms. Good faith and fair dealing are implied.

Consumers International v. Sysco Corporation (AZ 1997) Facts: Distribution at-will contract. ∆ terminated without “good cause”. Π argued similar to

franchisee relationship with severe bargaining imbalance (some courts found “good faith” = “ good cause” in that context)

Holding: both parties were aware of the termination clause and had access to counsel and had bargaining power. No evidence of bad cause. No cause need not be for good cause, autonomy theory, free to make contracts.

Covenants not to Compete

Purpose: Protect specific investment in employee’s skill/knowledge Courts prefer incentives rather than limits b/c of autonomy, competition + consumer choice

‘Blue Line’ Rule: Court may strike objectionable terms while keeping others enforceable.

R2d §188 + 205: Restraints on Competition + Duty of Good Faith

Limits to Covenants to not Compete (from Gaglardi):1) Existence of consideration

≠ continued employment must involve a change of status

2) Reasonable in time and place (too long, too broad?)3) Related and supplemental to the employment contract4) Necessary to protect interests

Gagliardi Bros. Inc. v. Caputo: USDC, Eastern. D. of PA (1982) Facts: Π alleges violation of Δ’s non-compete clause. Steak-ums manufacturer Holding: The non-compete clause is unenforceable since (1) it is not supported by consideration,

(2) was not reasonably limited in time & space, and (3) unnecessary to protect Π. Subsequent employees not under same obligations

Amtech v. Harkness Hypo: How to avoid “did someone try hard enough” litigation?1. Montoring

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2. Benchmark/deliverables3. Incentivize:

a. Stock options (combined with fee or not)b. Termination clause

Modification of Existing Agreements

Hold-up Problem w/ Relational K: Strategic behavior to compel renegotiation in monopolistic or specific investment situation (“over a barrel”);

Re-allocate the pie instead of grow the pie

Pre-existing duty rule (common law): no modification to a contract is binding unless it is supported by fresh consideration; can’t get more for the same duties. no obligation to renegotiate. 2 ways around:

Fresh consideration (risks sham consideration) Rescind initial contract prior to entering new contract

Good Faith/Fair + Equitable (UCC§2-209 + R2d §89): all good faith modifications are enforceable without without requiring separate consideration.

Verifiability issues in proving “bad faith” (Emmitt Smith, wants to retire early or more money?)

Rules v. Standards:

Alaska Packers' Ass'n v. Domenico 9th Cir. (1902) Facts : Δs demanded modification of existing contract (flat rate + royalty per catch) claiming faulty

nets; Π accepted, no other options due to isolated work camp. Holding: The modification to the contract had no new consideration since Δs new deal had identical

duties. Trial Ct found nets were sufficient.

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Regulating the Bargaining Process

3 Requirements of Expanded Choice + Contract Theory:1. Voluntary 2. Informed3. Mentally competence

Autonomy: Must have free will in decisionInstrumentalist:

Without 3 req’s, can’t assume that parties are making a socially beneficial exchange Society shouldn’t subsidize bad behavior Denying enforcement allows parties to avoid excessive precautions that reduce total social gain

Line drawing problem: encourage “cheap talk” while protecting against negative behavior

Duress

Proto-Typical cases:1. Ex-ante Duress (’48 Morgan): “Hard Bargaining” ≠ duress

Simply stating price and sticking to it isn’t duress, even if other party is desperate Poor choices are better than no choices! No good faith required

2. Ex-post Economic Duress: (§176(1)(d)) (Wolf +Austin) Good faith required once a contract exists Games of chicken

3. Ex-ante Economic Duress (Mojave Dessert Hypo) Exploiting perilous situation ≠ duress unless ∆ creates peril Why? Poor choices are better than no choices! We want to incentivize services to those in peril. Need a rule; uncertainty of standard would deter service providers Situational monopoly

Elements § 175: 1. Improper threat (§176(1))

Commit a crime or tort Criminal prosecution Bad faith civil action Breach of good faith once under a contract (ex-post economic duress)

2. Induce Assent3. No reasonable alternative

Subj/ Obj: Would a ‘reasonable’ person with those subjective chars. act that way?

Efficient breach in Ex-Post Econ. Duress context: Must show no hold-up + no a game of chicken Rationale: Cost of performance > Damages (≠ duress per UCC §2-209(c2); production cost) Efficient renegotiation: (Value of Performance > Damages) Value of Performance > Damages: often due to lack of recovery for goodwill losses, legal costs etc.

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Wolf v. Marlton Corp. Superior Court of NJ, App. Div. (1959) Facts: Π sues to recover deposit on house they claim they were ready, willing and able to purchase

at all times prior to breach. Δ says breach was due to duress by Π’s lawyer, who threatened to ruin Δ’s career.

Holding: If Π can be shown to have made a threat reasonably likely to induce duress, then Δ may recover from any damages resulting from the breach of the contract. Threat of sale to undesirable = bad faith, no reason besides to induce assent, bad motivation.

If a party causes duress to other side, it has breached the contract.

Austin Inst., Inc. v. Loral Corp. NY (1971) Facts: Π sought recovery for payment owed on a subcontract that Δ claims was accepted in duress

caused by Π. Holding: Π’s threat (to withhold delivery of materials under the first contract unless Δ accepted

higher prices in the 2nd contract) constituted duress. Scott disagrees and felt it may be covered under §2-209 (good faith)

Chouinard v. Chouinard 5th Cir(1978) Facts: Owner(π) desperately needs loan during ownership dispute, at bank’s insistence buys out

partner at high price Holding: Duress was caused by π’s mismanagement, ex-ante economic duress≠apply; hard

bargaining by co-owner

Post v. Jones: Admiralty doctrine of salvage should’ve applied to “auction sale” by salvaging boat. No common law equiv.

Fraud

R2d §164: 4 prongs1. Misrepresentation of fact

§168: Opinion = expression of belief/judgment w/out certainty as to a fact §169: Justification for relying on opinion

i. Special relationship of trustii. Reasonable belief in special skill/judgment/objectivity

iii. Π particularly susceptible to misrepresentation of the type involved (Borat woman)2. Fraudulent

§162 (1): knowingly/recklesslyo knows/believes to be falseo does not have confidence stated/impliedo knows to not have basis stated/implied

Courts are split on ‘material’ misrepresentation; §162 (2). Don’t use as reason in this class. 3. Induces Assent

§167 – not ‘but-for’ causation, ‘substantially contributes’4. Justifiably relied upon – (collapsed subjective/objective test)

Would a ‘reasonable’ person with those subjective characteristics have acted that way

“Fraud vitiates Contracts”: Strong general policy preference against fraud due to social costs

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Contracting around Fraud: Can get around policy with specific disclaimer combined with merger/waiver clause, Danann & Borat

Can lose ability to rescind K without prompt action in the event of discovery of fraud (Snyder p. 425)

Willfull + Negligent

Spiess v. Brandt MN (1950) Facts: Π purchased resort, relying on Δ’s claims of profitability. Didn’t make money, Δ canceled

the contract as Π fell behind on payments. Holding: Π relied on Δ claims of previous revenues (resort success and past revenues), justifiable

b/c seller didn’t turn over books. “especially susceptible” to Δ claims b/c of their special relationship (“trust and friendship”)

Dissent: ∏ failed to prove damages; sale price was fair and youth does not constitute a valid excuse. Should’ve checked the books!

Danann Realty Corp. v. Harris NY (1959) Facts: Π relied on misreps of op costs by Δ and signed lease. K included a disclaimer that Π hadn’t

relied on any representations by Δ in entering into the contract. Holding: Language of disclaimer was sufficient to bar recovery for fraud misrepresentations by Δ. Dissent: Fraud vitiates agreement and ∆ should not be protected by contractual terms. Notes: contract was between businesses; oral representations

Streit v. 20th Century Fox Borat lawsuit, while π was particularly susceptible to misrepresentations, specific disclaimer +

merger/waiver sufficient Misrepresentation was in written contract itself, not previous discussions, wrongly decided?

Disclosure + Concealment

Concealment (§160): party taking affirmative action that makes it harder to discover the defect (papering over walls etc.) = concealment/assertion (Obde).

Duty to Disclose – (§161) (a) Prevent previous assertion from being fraudulent, a misrepresentation or material(b) Other party mistake; 3 parts:

1) Correcting a mistake (defect)2) That is a basic assumption of the other party (material); Market conditions ≠ basic assumption

(§152 comment b)3) Failure to do so is a breach of good faith + reasonable standards of fair dealing

Good faith = latent, true facts are hard to discover(c) Correct a mistake in the writings(d) Special trust relationship

Why compel disclosure? reduce contracting costs; More efficient to have buyer disclose than to have buyer pay for all possible inspections

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Why no disclosure for extrinsic info? Proprietary: encourage private research + gives property interest in information that is acquired. General info: speeds dissemination of proper pricing info (Disney orange groves)

Caveat Emptor – common law rule of “Buyer Beware”; opposes concealment + duty to disclose Policy: disclosure risks info overload and invites false claims of disclosure for all disappointed π’s

Obde v. Schlemeyer WA (1960) Facts: Π bought a termite-infested house from Δ, took only superficial remedial actions and didn’t

disclose to Π. Holding: Damage was latent, undiscoverable defect posing a safety risk to Π. Δ had a duty to

disclose.

Reed v. King COA, CA (1983) Facts: Π purchased a home, site of a mass-murder. Δ did not disclose this fact, and took positive

action to prevent disclosure by neighbours(moderately discounted). Holding: Sellers have a duty to disclose material facts about real estate. A jury could find that the

occurrence of the murders is a material fact, and summary judgment is thus reversed.

Stambovsky v Ackley Facts: ∆ promoted perception that her house was haunted, sold to π without disclosure of Holding: Seller creating a material condition that is peculiarly within its knowledge has a duty to

disclose

Laidlaw v. Organ Facts: ∆ negotiated with π’s agent (Girault) for purchase of tobacco. π unaware of news that prices

were up, asked ∆ if aware of any news affecting prices, ∆ declined to answer and purchased for half price.

Holding: no obligation to disclose extrinsic circumstances

Unconscionability

Pre-conditions of ability to promise: (1) Voluntary (precludes duress), (2) informed (precludes fraud) and (3) rational (precludes infancy)

Unconscionability: extension of fraud doctrine. Contracts are unenforceable if (both req’d):1. Procedural: Absence of meaningful choice (absence or inequality of bargaining power)

- No opportunity to bargain on terms, or understand terms of K- Leads to disclaimers, conspicuous terms + initialing - Doesn’t just mean poor vs. rich or no one would contract w/ poor people

2. Substantive: Unreasonably favorable terms- “Shocks the conscience” compared to standard business practice- Can be used as evidence of procedural (who would ever sign that?); burden shifting

to ∆ to show procedure was acceptable

UCC §2-302: if a court finds a portion of a contract unconscionable it may not enforce a portion or entire contract

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Should a substantively unconscionable but fully disclosed clause be enforced?YES. (1) Free choice + autonomy, don’t limit options, (2) Would drive up price and exclude some buyers, (3) Too paternalistic, don’t tell people what to do.NO. (1) we tell people what to do all the time, especially when there are spillover social costs (think motorcycle helmet laws), (2) Cognitive error, people underestimate likelihood of their own default.

Unconscionability is broadly defined but narrowly applied by courts

Williams v. Walker-Thomas Furniture (I) DC COA (1964) Facts: Π-Williams entered into installment-plan contract for items purchased from Δ. The contract

maintained a balance that aggregated all subsequent purchases so that ownership of all purchases remained with Δ until last payment by Π. Π defaulted, and appellee filed a complaint in replevin. Contract signed within the home.

Holding: Π’s failure to read contract (unilateral mistake) was not ground for preventing enforcement. However, court found that contract was unconscionable, but that it lacked statutory power to prevent enforcement.

Williams v. Walker-Thomas Furniture (II) USCOA, DC Cir. (1965) Holding: Citing UCC, court finds that lower court was able to prevent enforcement of contract if

determined unconscionable. Case remanded (not enough facts in record to determine unconscionability).

Statute of Frauds

Formal defense where ∆ can keep trial from jury and avoid judgment on meritsCommon Law:

1. Sales of land2. Suretyship (answering for others debts)3. Contracts that cannot be performed within a year of signing4. UCC §2-201 – Sales of goods for an amount >$500

R2d §131: General requirements of writing sufficient to surpass barrier of SoF1) Identifies subject matter2) Indicates a contract has been made b/w parties3) States w/ reasonable certainty essential terms

Requirements for enforcement:1. Writing 2. Signed; §1-201(39): broad definition3. Needs quantity term (UCC only)

a. Doesn’t need to be accurate but recovery is limited to terms stated, sufficient to indicate a contract has been made

4. ≠ contract has to be in writing; but provide solid evidence of the existence of a contract

Exceptions:1. Reply doctrine§2-201(2):

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a. Two merchants where one party fails to reply to a letter within 10 days2. Special or custom-made goods §2-201(3)(a)3. Admissions (in court etc.)§2-201(3)(b)4. Partial Performance §2-201(3)(c); limited to goods received

Partial Performance: substantial partial performance in common law not limited to amount performed Lower bar than UCC

Policy for SoF: Encourage deliberation and preserve evidence in “significant” contractual matters Public subsidy of litigation costs creates undervaluation of reducing litigation cost (facilitating

adjudication by providing more evidence); SoF mandates considering those costs

Predominant purpose test – to classify ‘mixed’ contract (sale of goods + service/distribution rights), look to “predominant purpose of transaction”

Monetti, S.P.A. v. Anchor Hocking Co. (US CC 1991) Facts: Π entered into discussions to sell itself to ∆. Two writings existed which are not signed by

both parties but embodied their verbal agreement. ∏ took actions in preparation for sale Holding: The writings anticipate a contract and agree to the offeree’s terms, so they satisfy the

UCC/IL statute of frauds requirements. Both the UCC and IL statute apply, and the partial performance supports the existence of a contract.

Writings before executing contract can satisfy SoF.

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Identifying + Interpreting Terms

Goal: Find interpretation that the parties intended a court to reach in the event of dispute (subjective + prospective)

2 Questions of interpretation:1. What are the terms of the contract?2. What is the meaning of those terms?

Parol Evidence Rule: prevents a party to a written contract from presenting oral evidence that contradicts or adds to the written terms that have been agreed to.

Identifying Terms

Step 1: To what degree were contractual terms committed to language, what is level of integration? Unintegrated: no evidence of agreement or intent to commit terms to language; any evidence is

admissible to prove if a term is or isn’t part of the contract. Partially Integrated: Parties agree to some but not all terms. Writing is final to those terms (PER

bars evidence to the contrary); however, evidence allowed for other terms Totally Integrated: Intention for writing to be final and exclusive. No external evidence

allowed under PER. Intention = explicit (merger clause) or implied (certain/natural omission)Step 2: What do terms mean? Contextual vs. Textual.

Common Law: Hard Parol Evidence Rule

“Four Corners” presumption: If document looks facially complete, presumption of total integration

Natural Omission Doctrine: Exception to four corners, evidence of additional terms allowed if parties would have naturally omitted them.

“Plain Meaning” rule: Words interpreted by plain, unambiguous meaning, independent of the context. Uses “majoritarian language”. Extrinsic evidence only allowed if meaning is ambiguous or vague.

Hard PER = Textual interpretation, New York

Policy Hard PER: Ease of adjudication; encourages summary judgment; foster business transaction

Policy: Why shift transaction costs Ex-ante by requiring explicit contracts through PER? (NY State) Parties know their purposes + intrinsic values better than a court ex-post. Reduce litigation costs by facilitating use of summary judgment at trial. You can opt-out of hard PER rules to softer standards, but very difficult opt-into hard PER

UCC: Soft Parol Evidence Rule

R2d§209+210: Level of integration; rejects four corners.

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UCC §2-202: Abandons many common law rules (four corners, natural omission, plain meaning) for contextual approach to interpretation.

Partial Integration - 2-202(b): Additional terms may not contradict, and allowed if consistent Hunt: Consistent = doesn’t directly contradict (apply same test: D only barred if D =≠C) Snyder: Consistent = in reasonable harmony (term allowing unilateral cancellation ≠ harmony)

Contextual meaning: UCC (2-202 comment 1(b)+(c)) and R2d (§212) reject “plain meaning” and allow contextual evidence (usage of trade, course of dealings, subject matter, preliminary negotiations)

Certain Omission: Evidence supporting terms under UCC allowable unless the parties would have certainly included the terms in the writing. Increases barrier to proving integration (2-202 comment 3).

Soft PER = Contextual interpretation; UCC, R2d, California

Mitchill v. Lath NY (1928) Facts: Δ sold property to Π through contract. Purchase was conditioned on ∆ oral agreement to

remove shed on adjacent property. Δ refused to remove shed after sale of property. Holding: An oral agreement may vary the terms of a written contract when (1) collateral, (2) oral

terms don’t contradict written terms, (3) term would not naturally be embodied in agreement. Due to close connection to sale of land, this deal doesn’t meet 3rd requirement. Evidence should be excluded

Dissent: Four corners inappropriate, shed removal was a collateral contract.

Masterson v. Sine CA (1968) Facts: Π sold property to Δ in contract containing repurchase clause. Π went bankrupt, and the

trustees sought to repurchase the ranch. Δ objected, saying there had been an oral agreement that Π wanted the ranch to stay in the family.

Holding: Unsophisticated buyer, natural to exclude “family” term in written contract. Partially integrated contract & terms don’t contradict the written terms, the trial court should’ve allowed parol evidence about the family term.

Dissent: Decision deprives creditors and undermines the doctrine, and the agreement contradicts the written contract by severely reducing the value (can only be sold to family members)

Hunt Foods & Industries v. Doliner SCNY, App. Div. (1966) Facts: Following an offer by Π in negotiations to enter into a contract, Π stated that a recess could

be taken provided that they be given option to purchase stock(to prevent leveraging negotiations into 3rd party deal). This was agreed to in writing, with an oral agreement that option only exercised if Δ sought outside bids. Negotiations ended, Π moved to purchase stock.

Holding: Stipulation did not contradict or negate a term in the writing, and was not one that certainly would have been put into writing had the parties agreed to it. Consistent = does not contradict.

Mistake + Excuse

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Performer’s Risk Rule: Promisee should bear all risks of performance b/c generally best suited to reduce risks as they have most control; cheaper K-default insurance policy, benefits social welfare

Tries to recreate the ex-ante bargain that would’ve occurred

Exceptions: Excuse for impossibility when a specific performance with no substitute (paint a portrait, specific crop, specific theatre)

Information Forcing Policy: Foreseeable events (people die, floods, bldgs. burn down) compels promisee to disclose subjective value and consequences of breach (value of specific oranges)

General Policy: Unallocated risks (not part of the bargain!) should fall on promisee, as they should stay where they would be borne were it not for the contract

Autonomy: no voluntary assent to shift burden to promisor Instrumentalist: perhaps that party is cheapest cost avoider because they typically bear it?

Stees v. Leonard MN (1874) Facts: Δ contracted with Π to erect building on Π’s property. The building collapsed twice during

construction, and Δ abandoned the job. Π brought suit. Δ charged that (1) collapse occurred due to soil, (2) Π had duty to ensure adequacy of soil, and (3) Π failed to honor oral agreement to keep soil drained.

Holding: The party entering into a contract is responsible for losses incurred during the performance for which he contracted; could have contracted around liability.

Difficulty in performing a contract not valid grounds for voiding

Mistake

Mistake: Discharge of party’s performance due to incorrect belief about endogenous fact, not contemplated by the agreement material affects the contract.

Mistake – R2d § 151: A belief not in accord with the factsMutual Mistake - R2d §152:1) Mistake 2) By both parties3) Basic Assumption (Corbin: “No Risk” attributed to it)4) Material effect = “adversely affects party”5) Risk not Allocated (R2d§154) to party asserting mistake

a. Expressly allocated by parties (or by necessary implication, ALCOA arguments)b. Speculative: limited knowledge/conscious ignorance, treats knowledge as sufficient

(gambling)c. Default allocation = reasonable in the cicumstance

Unilateral Mistake - R2d §153: Mistake by only by one party. Add’l requirements:1. Enforcement = Unconscionable, OR2. “Last clear chance”: Other party had reason to know of the mistake or caused the mistake

Double precautions at the margin: encourages both sides tot to take care; promisee with last clear chance will inform or bear risk; promisor doesn’t know whether promisee is in position to bail out.

Last Clear Chance Policy: Autonomy ~ “harm principle”, one ought not to exploit others

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Instrumentalist: seller would have to take costly ex-ante precautions to avoid all such mistakes

Aluminum Co. of America v. Essex Group, Inc. (USDC 1980) ∏ - §152 (Mutual mistake)

o Mistake by both parties: WPI ≠ reflect production costs w/in reasonable boundo Not allocated; too remote to be worth adding floor

∆ – (no mistake; if mistake, not mutual; if mutual allocated to ∏)o Not endogenous fact, no mistakeo Only assumption was that escalator would set price, not that it wouldn’t failo No material effect ($9M profit)o Allocated = expressio unis + contra preferentum; by accepting a contract with an

escalator, they expressly assumed risk of no floor; should be interpreted against them as drafting party

Holding: In favour of ∏; court can renegotiate the contract terms.

Modern Excuse of Impracticability

Excuse: Discharge of party’s performance due to exogenous risk, not contemplated by the agreement renders performance impossible, impracticable, or pointless. “not on the table” when deal was made

R2d §261 Supervening Impractability:1) Performance is made impractical

Must be “severe disappointment”: magnitude speaks to unforeseeability, party wouldn’t have taken such a risk

2) Without the party’s fault (exogenous event)3) By the occurrence of an event (causation)4) Non-occurrence was a basic assumption of both contracting parties (unforeseeable)

Continuing financial markets aren’t a basic assumption

R2d §263 – Destruction of Necessary Item which was a basic contractual assumption Excuse if a necessary item is destroyed or doesn’t come into existence

UCC §2-615 Supervening Impractability:1) Performance is made impractical 2) Without the party’s fault (exogenous event)3) By the occurrence of an event4) Non-occurrence was a basic assumption of both contracting parties

Doctrine of frustration: focuses on a party’s severe disappointment which is caused by circumstances which frustrate a party’s principle purpose for entering the contract

R2d §265: Frustration of Purpose Requires:1) Performance is substantially frustrated (becomes worthless) 2) Without the party’s fault(exogenous event)3) Caused by the occurrence of an event4) Non-occurrence was a basic assumption of both contracting parties

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Taylor v. Caldwell King’s Bench (1863) Facts: Δ entered into contract Π to rent music hall for a concert. Hall was destroyed by fire, an

event which Π and Δ did not anticipate or plan for. Holding: Π and Δ are excused from contract. Performance impossible.

Eastern Airlines (Pt. II): events in Middle East and price regulation by government were foreseeable Majority Rule

ALCOA v. Essex (Pt. II) ∏ - §261 (Service contract) Severe Impractability - lose $60 million in performance OPEC embargo + EPA policies led to higher costs: Confluence of events = unforeseeable Both parties confirmed escalator against history to ensure it would work ∆ – no excuse No severe disappointment ($9M profit) Many foreseeable factors could’ve caused price to rise (inflation = 16%); burden on ∏ to prove

causationo Excuse would grant ∏ the benefit of factors that were already allocated in price

(inflation etc.) Parties predicted variation, potential extreme increase was foreseeable to Essex = circuit

breaker Court finds for ALCOA, but reset the price terms to cost + Court, with the benefit of hindsight, is well suited to replicate the initial purpose of the parties

(Cost +) Issues: courts confuse ends with means; parties never would’ve agreed to that approach Parties should be able to choose b/w rules + standards for optimal contract, judge infringed on

autonomy

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Remedies

Basic Remedies

Seller Breach

Preconditions for Buyer damages availability – § 2-711:1. Failure to Deliver2. Repudiation3. Buyer rightfully rejects or justifiably revokes acceptance on a substandard good

Options for Breaching Seller:1. Perform + lose

a. Internal Performance: b. Cover with Market substitute (includes expending

2. Breach + Pay: Buyer’s options and potential damages below

Options upon Seller’s breach:1. Specific Performance - §2-716: Appropriate if:

a. Unique good (one of a kind – i.e. real estate, NFL teams)b. Other proper circumstances: Thin markets - inability to cover or “great expense, trouble loss

or delay”, Sedmak2. Expectation Damages

a. Cover – §2-712: reasonably purchase goods in substitution without unreasonable delay. Damages = (Pcover – Pcontract) + incidentals (§2-715(1)) + consequential damages (§2-715(2))

b. Market Damages – §2-713: Damages = (Pmarket - Pcontract) + incidentals (§2-715(1)) + consequential damages (§2-715(2)

Thick Market: Seller would breach if: (Costs of Cover Seller) >(Costs of Cover Buyer)

Buyer Breach

Options:1. Perform + Lose2. Breach: Triggers seller decision below

Options for Seller upon Buyer Breach:1. Specific Performance - §2-709: Action for the Price2. Expectation Damages:

a. Market Damages - §2-708: Damages = (Pmarket - Pcontract) + Incidentals (§2-710)b. Resell - §2-706: Good faith and commercially reasonable resale; Damages = (Pcover –

Pcontract) + incidentals (§2-710)i. Consequential damages not available b/c money should be available in liquid

market.

Malign Theory: Breacher seeks to take advantaged of situation that could force the other party to settle for less than full expectancy damages.

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Benign Breach: “Cry for help. Breacher determines that it would be cheaper to breach and pay π for the breach than it would be to perform and suffer losses.

Compensation 3 types of Damages:1. Expectation (R2d §344 (a) + §347): damages = put Π in the position had Δ performed

Factors why damages are worse than actual performance (non-ideal)o Damages must be calculable to “reasonable certainty” for compensation (Freund)o Mitigation – breaching party takes steps to cut promisee’s damages (Globe)o Foreseeability: consequential damages limited to those foreseeable (Hadley)o Cost of litigation born by promiseeo Time spent finding cover is often hard to calculate and uncompensated.

2. Reliance (R2d §344 (b) and §349): Undo harm of reliance, same position as if party had never entered into contract.

Position of next best option to contract Thick market: expectancy = reliance Often speculative inquiry into what promisee would have done

3. Restitution (R2d §344 (c) + §371): Value of the performance in terms of the benefits the promisee has already conferred on the promisor in order to secure the broken promise.

Fact-specific Only option for quasi-contract

Liquidated Damages(R2d §356 / UCC §2-718): opt-out for damages default rules, must be reasonable

Theory of Efficient Breach: promisors will breach if fewer losses or greater profits than performance Rules don’t compel performance, instead assure performance, or equivalent compensation Flaws: assumes no transaction costs

Globe v. Landa Cotton Oil US (1903) Facts: Π contracted to buy 10 tanks cars of cotton oil from Δ. Π sent cars to Δ’s facility in

Kentucky, but the cars were turned away. Other cotton oil plants were in the area, but the cars instead returned empty.

Holding: (Holmes) Π entitled to difference between market price contracted for and current market price, but not for costs of transporting. This best replicates the parties theoretical bargain.

Freund v. Washington Square Press NY (1974) Facts: Π entered into contract for hardcover publication of proposed book. Π delivered manuscript

as promised and received advance. After book rejection period had passed, Δ was acquired by another publisher who stopped publishing hardcover books.

Holding: Trial court erred in assessing damages as costs of performance to Δ rather than value of contract to Π. Π’s expectation interest in the contract was the advance and the royalties. The advance had already been received, and royalties are speculative for awarding damages.

Courts rarely assign value to lost goodwill, Too hard to calculate/speculative. NOTE : Freund’s best option would have been to find another publisher ASAP – to fix the value of

royalties – and then sue for expectancy damages, using the royalties as a barometer.

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Expectation Damages: Cost to Complete vs. Diminution of Value

Market Damages: Preferred means of measuring expectancy damages in thick market situation

Economic Waste Problem: Courts typically apply diminution in market value when costs to complete >> ∆ market value. Scott: Often ignores and undercompensates for prepaid services (often shadow price) Functionally a “mandatory” rule, as ‘penalty doctrine’ (UCC§2-718; R2d§356) threatens liquidated

damage clauses that insure idiosyncratic valuation

Perfect Tender (UCC § 2-601) vs. Substantial Performance (R2d §237) – stds of performance PT – buyer can reject goods for any defect no matter how minor

o Goods are typically fungible, avoiding unfairness on seller SP – if failure of performance is immaterial, difference in value is sufficient

o SP + damages (difference in value) = Performance o Default for construction contracts b/c cost of ensuring perfect completion to

idiosyncratic standard would drive up prices

R2d §237 (Dependent Promises) – performance only required if there has been Substantial Performance (no material failure) by other partyR2d §241 – factors of material failure: deprivation of benefit, inadequate compensation, likelihood of forfeiture, likelihood of curing failure, degree of good faith/fair dealingUCC § 2-601 – buyer’s rights on improper delivery (perfect tender)

R2d §348: Alternatives to Loss in Value of Performance Unfinished construction with uncertain loss in value allows damages in the form of:

o (a) the diminution in the market price of the property caused by the breach, oro (b) the reasonable cost of completing performance or of remedying the defects if that cost is

not clearly disproportionate to the probable loss in value to him.

Jacobs & Young v. Kent NY (1921) Facts: Π built house for Δ. Near completion of the job, it was discovered that Π used a type of pipe

other than that specified in the contract (equal quality and price). Δ refused to pay the balance owed to Π, prompting suit.

Holding: Innocent/trivial deviation in the performance of contract does not justify forfeiture of payment when the difference in value between the specifications and deviations is minimal and is far exceeded by the burden of remedying the deviation. Court order payment by Δ, minus the difference in value of the pipe (damages). Cost of completion would result in economic waste. Opt-out clause was too boiler plate and not specific enough.

American Standard v. Schectman (NY 1981) Facts: Demolition company failed to remove underground structures (K- ∆ paid $275K for salvage

+ demo) resulting in a $110,500 cost of completion but a $3000 diminution in value. Holding: The diminution in value measure of damages (ie Jacob & Youngs v. Kent) is only

appropriate where it was an unintentional mistake occurred which is unremediable without

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substantially tearing down the structure (if no “undoing” duty must be incidental to contract). ∆ chose to not perform solely for economic interest, must pay cost of completion.

Note: no idiosyncratic value, solely for resale. Wrongly decided?

Peevyhouse v. Garland Coal and Mining (OK 1962) Issue: Whether diminution in value or cost of completion is an adequate measure of damages for a

failure to fully perform a part of the contract that was bargained for especially by the plaintiffs? Court: Plaintiff’s behavior here is economically irrational. Relative economic benefit is the

consideration here. The agreement to repair the land after mining was incidental to the contract and the cost is grossly disproportional to the cost of the contract itself.

Dissent: This was a bad faith breach. The defendants are depriving the plaintiffs of their value of the contract. Should determine how the contractor values the performance.

Specific Performance

R2d §359: Damages inadequate to protect expectation interest R2d §360: “Inadequate” factors:

A difficulty of proving damages with reasonable certainty Difficult of procuring suitable substitute performance via damages Likelihood that an award of damages could not be collected

UCC §2-716: Unique or “other proper circumstances” – intentionally liberalizes CL standardUCC §2-709: Seller SP: “unable after reasonable effort to resell at reasonable price”

Market Thickness: Thick: availability of substitutes and ease of proving reasonability of “cover”; no SP Thin: buyer vulnerable in proving “reasonableness” of cover; exposed to undercompensation;

o More likely to be “other proper circumstance”, even if property is not uniqueo Limited as court doesn’t like to supervise performance of services

Klein v. Pepsico 4th Cir. (1988) p. 113 Facts: Δ breached a contract for the purchase by Π of a jet owned by Δ. Π sought specific

performance of the contract. Holding: UCC allows specific performance where (1) the good is unique, or (2) “in other proper

circumstances.” This case was neither since many like models of the plane were available for purchase. Failed to argue risk of undercompensation.

Note: π buying for resale and not end use; factor?

Sedmak v. Charlie’s Chevrolet, Inc. (MO 1981) Facts: Contract for limited edition Corvette. Δ appeals from order of specific performance. Holding: Market is sufficiently thin to present undue hardship to Π if they were forced to cover.

Limitations on Compensation

R2d §350: Duty to mitigate; cannot recover for losses that could be reasonably avoidedR2d §351: Foreseeability limitation of damages. Flow in ordinary course, or if ∆ had reason to know of special circumstance

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Trends: abandon “tacit agreement”; “ reason to know” not meeting of the minds Universal opt-out of this rule by sellers. Not effective insurer against loss of buyer profits Repair + replace clause: 1. disclaim all warranties (2-316); 2. express warranty; 3. explicit remedies Means to attack: 1. No means of effective repair §2-719(2); 2. Unconscionable

R2d §352: Uncertainty limitation on damages; need reasonably certain evidence

UCC §2-715(2): Incidental damages include any losses from needs that other party had reason to know at time of K. Uses “reason to know” instead of CL rule of “communication” or “tacit knowledge”

R2d UCC§2-719(2): Courts unclear as to whether lack of effective repair creates liability for (a) full consequential damages or (b) loss of bargain

Certainty

New Business Profits: Common Law rule against profits for new business due to speculative nature New view (Drews): Not a per se bar to recovery, evidentiary presumption, overcome with:

o Market study, Compelling expert; ≠ give gross receipts and state expected profits.

Old Approach to Foreseeability: Limits the extent of damages recoverable Special/unique circumstances only iff party was aware of the circumstances at the time of Қ Encourages information sharing to make other side aware of idiosyncratic values

Redgrave v. BSO: exception to lack of recoverability for loss of goodwill, court found sufficient evidence of loss of professional opportunities (appellate court greatly reduced initial award)

Drews Co. v. Ledwith-Wolfe Associates, Inc. (SC 1988) Facts: New business (contractor) seeks lost profits due to delay in construction of a restaurant Holding: Profits should not be automatically unavailable if π can provide sufficient proof. Π didn’t

meet evidentiary burden to establish certainty.

Hadley v. Baxendale Court of Exchequer (1854) Facts: Π sent mill crankshaft to Δ for repair. The repair was delayed because of neglect, and Π’s

mill remained shutdown as a result for longer than anticipated. Π sued for recovery of lost profits. Holding: Damages arising from contractual breach should be either (1) costs arising from the

breach, or (2) costs that are foreseeable to both parties given their knowledge at the time of entering contract; not reasonably foreseeable.

Note: two distinctions above have disappeared.

Duty to Mitigate

Duty to Deal with Breachertac: Typically doesn’t exist in thick markets; thin markets may exist but not if different or inferior (employment context)

Rockingham County v. Luten Bridge Co. (US CC 1929) Facts: Bridge builder(∆) kept building a bridge after county decided not to build road connecting

bridge π attempted to limit damages to costs incurred prior to breach

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Holding: ∆ cannot pile up damages, should have desisted further work, failed to mitigate damages

Parker v. Twentieth Century-Fox Film Corp. CA (1970) Facts: Δ breached movie contract with play-or-pay clause; offered part in different film; π declined,

∆ claims failure to mitigate by seeking other employment. Holding: Π under no obligation to accept “inferior” employment; duty to mitigate, but only with

“substantially similar” work. Further, as a general rule, a breached against party is under no obligation to mitigate by working with the breaching party.

Dissent: Similarity of roles is a factual matter for jury, summary judgment inappropriate. Note: Court likely applied wrong doctrine. Did π have any duty to mitigation with play-or-Pay

clause?

ADD Factors from Reed v. King

ACCEPTANCE UCC Provisions??

WHAT TO CITE FOR BREACH

Can you use mistake etc. in UCC

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