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GENERAL NOTES

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x To prove a breach of contract, the plaintiff must
prove: (1) contract formation, (2) breach, and (3) damagesx Sometimes it¶s a good idea to break
a promise: efficient breachx This scheme influences the incentives of a contract breaker or
someone considering breaking a promisex A unilateral contract is one where only one party has
made a promisex That is, a promise has been exchanged for performancex A bilateral contract is
one where a promise is exchanged for a promisex This is now the most common type of contractx

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ax?
as there an offer?
bx? f there was an offer, was it terminated?
cx? f not terminated, was it accepted?
dx? ilateral or Unilateral?
ex? Option Contract/Firm offer formed?
fx? Output/Requirements contract formed?
gx? s there consideration, reliance or ok past consideration?
G ?

 
ax? Are there any defenses to formation?
A ? 
   
ax? f written K, does the Extrinsic Evidence Rule apply?
bx? nterpretation issues?
cx? Are there any Omitted Terms?
dx? Are there any
arrantees?
ex? as the seller disclaimed any warranty?
fx? as the seller limited remedies for breach of contract?
gx? ave any terms been modified or waived?
X ?
 
 
ax? Conditions regarding time and type of performance was due?
bx? Excuse by
rongful Prevention?
cx? Excuse by
aiver?
dx? Excuse by Forfeiture?
ex?
as there anticipatory repudiation?
fx? Can the promisor retract?
gx? ave changed circumstances made performance impracticable or frustrated
contract¶s purpose?
 hx? mpracticability?
ix? Frustration of purpose?
† ?    
ax? RST:
as there a reach?
bx? UCC:
as there a reach?
 ? 
 
ax? Remedies Available at Common Law?
bx?  Money Damages
cx? uasi-Contract Restitution
dx? Specific Performance and njunction
ex? UCC Remedies

Chapter 2
REMEDES FOR REAC OF CONTRACT

%!

e are compensating the plaintiff¶s lossx There are no punitive damagesx

Three interests: - 
, 


 , and   

The expectation interest, the  

 in contracts, puts the plaintiff in the position
he/she    been in if the contract had been carried outx The expectation interest is the
«it has the least ³tug on our heartstrings x The  
  is a cost that came out
of the plaintiff¶s pocket but didn¶t go into the defendant¶s pocket; it might have gone to a third
partyx The   is the strongest because the plaintiff has a ³minus and the
defendant has a ³plus x
ith restitution you¶re merely taking the benefit away from the
defendant that the plaintiff gave him, usually at
 
x Sometimes putting someone in the
position performance would have done means awarding restitution  expectation, or even all
threex

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nitial considerations² often general contracts law and the UxCxCx will be the same, however
sometimes, Article 2 of the UxCxCx applies and offers specific rules of protectionsx

u? Does NOT cover real property, services, or intangibles (ixex, stock)x

u? ybrid Cases² these are the sales of goods and servicesx
#?
hether the predominant purpose is the sale of goodsx
½#?
hether the services are merely incidentalx
u? Relevant UxCxCx Provisions [for you to reference on your own!]x e sure to always read
the comments, as sometimes your questions are addressed in the commentsx
#? UxCxCx §2-102: Applies to transaction in goodsx
½#? UxCxCx §2-105: Definition of Goods
ix? Goods are movables
 iix? ncluded: specially manufactured items, unborn young of animals and
growing crops, and items identified which are to be severed from realty
iiix? Excluded: money, investment securities, things in action, real property,
services
#? UxCxCx §2-107: Goods to be Severed from Realty
0#? UxCxCx §2-501:

u? The mportance of Language

#? Ambiguity² we often look at what the parties intendedx f that differs the
court looks at the most reasonable definition in light of all the circumstancesx
#? - 
 0 0 ²seek to put non-breaching party in the position it would have
been in had the contract been performedx
u? They focus on economic lost not punishment for breachingx
u? Two typical, basic remedies granted:
#Specific Performance
½#Award of Damages
1x? The Substitute Contract
ix? Policy: The court wants to encourage the aggrieved party to enter a
substitute contract with a new partyx
2x? ncidental Damages, Attorney¶s Fees, and nterest² those damages that are expenses
reasonable incurred by the plaintiff after the breach in an attempt to deal with the breachx
ix? These are cost incurred in making arrangement to obtain substitute
performance and to mitigate damagesx
3x? Limitations on Expectation Recovery
ix? Reasonable certainty- the evidence must be such to persuade the fact finder that it
is more probable than not that (1) an injury did actual occur as a result of the
breach (2) and must also provide enough information to calculate a monetary
award x
iix? Foreseeability- Damages are foreseeable at the time of contracting the party who
ultimately breached the contract (1) should have reasonable realize that those
damages would be a likely consequence of the breach or (2) was expressly
informed of the potential damagesx
iiix? Mitigation ± f the plaintiff has (1) through bad faith (2) unreasonable action
aggravated her damages, the defendant is not held responsible for the increase in
loss cause by the plaintiffx The plaintiff (3) must give notice that he intends to sell
the itemx
u? Resale² Seller is required to mitigate the damages by acting in good faith and in some
cases this will include resale
ax? There must be good faith; and
bx? t must be commercially reasonable
ix? Public auction or a reasonable market place where the good is
usually sold; and
cx? Notice to the original buyer

# 1 




onerbake vx Cox (8th Cirx 1974) ± The test for inclusion or exclusion [in Article 2 of the UCC]
is not whether they [goods and services] are mixed, but granting that they are mixed, whether
their predominant factor, their thrust, their purpose, reasonably stated, is the rendition of service,
with goods incidentally (exgx contract with artist for painting) involved or is a transaction of sale
with labor incidentally involved (installation of a water heater in a bathroomx)

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ax Rule: can¶t recover for damages which could have been avoided thru reasonable diligence and
without incurring undue risk, expense or humiliation (exgx accepting an inferior job)x
bx uyer §2-175(2)(a) ± must reasonably attempt to mitigate by cover or otherwise
cx Seller §2-709 ± must use reasonable effort to resell goods before he is entitled to recover
contract price
dx f an offer in mitigation is an inferior offer it cannot be used as defense to recovery of damages
for failure to make good on a contractx nferior substitutes cannot be used to satisfy or bridge the
expectation interestx
ex Subsequent jobs entered into or jobs that should have been entered into offset damages due
fx f subsequent employment would or could not be performed in addition to
contractemployment, then it¶s a ³mitigating type which reduces injured party¶s claim against
the defaulter

2345

 0 0 
6



here buyer fails to make payment or wrongfully rejects acceptance of goods
(a)
ithhold delivery of such goods
(b) Stop delivery by any bailee as hereafter provided
(c) Proceed under the next section respecting goods still unidentified to the contract
(d) Resell and recover damages as hereafter provided
(e) Recover damages for non-acceptance or in a proper case the price
(f) Cancel

2347

 


0

1  

The only condition precedent to the seller¶s right of resale under subsection (1) is a breach by the
buyer within the section on the seller¶s remedies in general or insolvencyx

2348

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3 
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The provision is followed generally in setting the current market price at the time and place for
tender as the standard by which damages for non-acceptance are to be determinedx

2349 ³if the seller is unable after reasonable effort to resell [the goods] at a reasonable price or
the circumstances reasonably indicate that such effort will be unavailing, then the seller may
recover the contract price from the buyerx

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 1?#The measure of damages owed to a wrongfully discharged employee is the amount
of salary agreed upon for the period of employment reduced by the amount the employer proves
the employee has earned or with reasonable effort may have earned from other employmentx

#Plaintiff contracted with Defendant to play the female lead in the movie ³loomer Girl
for a salary of 750,000x owever, Defendant decided not to produce the film and offered
instead for Plaintiff to play the lead in another film, ³ig Country, ig Manx Unlike ³loomer
Girl, which was to be a musical filmed in California, ³ig Country, ig Man was to be a
dramatic western filmed in Australiax Also, the contract for ³ig Country, ig Man did not
grant Plaintiff the same control over the choice of directors and screenplay that her ³loomer
Girl contract didx Plaintiff declined to act in ³ig Country, ig Man and sued to recover her
guaranteed salaryx

 # Should Plaintiff¶s recovery be limited by her failure to accept substitute work in
mitigation of damages?


0
# Nox A wrongfully discharged employee¶s recovery of her full salary must be reduced
by the amount the breaching employer can prove she earned or with reasonable effort might have
earnedx mportantly, the employer must show that the other employment was comparable or
substantially similar to that employment of which the employee was deprivedx The employee¶s
rejection of or failure to seek a different or inferior kind of employment may not be consideredx
For the factual differences stated above, acting in ³ig Country, ig Man constituted inferior
employmentx Thus, Plaintiff¶s refusal to accept the female lead in ³ig Country, ig Man will
not reduce her recoveryx

! 
#t has never been the law that the mere existence of differences between two jobs in the
same field is sufficient to excuse an employee from accepting an alternative offer of employment
in order to mitigate her damagesx The inquiry in this case should be whether the present
differences are substantial enough to constitute differences in kind of employment, or whether
the substitute work is x

! 
# A wrongfully discharged employee is entitled to his lost salary, but he must mitigate
damages by seeking alternative employmentx owever, he does not need to accept different or
inferior employmentx
hy is the dissent relevant here? ecause cases involving offers of
employment found not to be appropriate are normally very vivid and extremex Dissent here is
like a majority in most casesx

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here trial court found that GP breached its contract to Constance but reduced her damage
award by amounts received for two radio broadcasts in NYx The court of appeals upheld the
reduction quoting from another case ³less the amount which the servant has earned or with
reasonable effort might have earned from other employmentx

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Court of appeals held that employee failed to mitigate damages after he didn¶t accept another
school bus driver position with only a few cents pay difference in the same locale but where
employer did not have a merit based pay systemx

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Court found it was insufficient that an employer expert witness testified there was an extremely
low rate of unemployment for professional technical managers in the FL marketx Citing Parker
courts said employees damages are reduced only if the employer proves with reasonable
certainty that employment was available in the specific line of work in which the employee was
engagedx

 
          

 
     




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Damages for breach by either party may be liquidated in the agreement but only at an amount
which is reasonable in the light of the anticipated or actual harm caused by the breach, the
difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an
adequate remedyx A term fixing unreasonably large liquidated damages is void as penaltyx
(1)?
here the seller justifiably withholds delivery of goods because of the buyer¶s breach,
the buyer is entitled to restitution of any amount by which the sum of his payments
exceedsx
ax? The amount to which the seller is entitled by virtue of terms liquidating the
seller¶s damages in accordance with subsection (1), or
½#? n the absence of such terms, twenty per cent of the value of the total performance
for which the buyer is obligated under the contract or 500, whichever is smallerx

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 1?#A retail dealer may recover loss profits and incidental damages where a buyer
repudiatesx

#Neri paid a 4,250 deposit on the purchase of a 12,600 boat from Retail Marinex Neri
repudiated the sale one week later due to an upcoming operationx Neri requested a refund of his
deposit and Retail refused because the boat had already been delivered from the factoryx Neri
sued to recover his deposit and Retail filed a counterclaim for 4,250 for lost profits and
expensesx Retail sold the boat four months later to a different customer for the same pricex Retail
proved that its expenses and expected profit was 3,250xRetail showed it would have earned
2,579 profit and that it incurred 674 in other fees, and sought to retrieve 1250 in attorneys¶
feesx

 #Can Retail recover loss of profits and incidental damages?


0
#Yesx A volume retail seller of standard priced goods may recover lost profits when a
buyer defaults on a purchase if market damages are inadequate to put the seller in as good a
position as he would have been had the contract been performedxecause Retail has multiple
boast Retail can recover the profit because had Neri not breach the contactx Retail could have
sold two boatsx Give Retail a profit and incidental damages, 2,579 + 674x (no attorney fees
here because NY law says no)xNerigets his 997 back totalx UxCxCx §2-708 governs this case:
The seller is essentially entitled to lost profitsx Section 2-718 establishes that the buyer¶s right to
restitution is subject to offset to the extent that the seller establishes a right to recover damages
under the provisions of this Article other than subsection (1)x UCC 2-708(2) provides that if
UCC 2-708(1) is inadequate to put the seller in as good a position as performance would have
done then the measure of damages is the profit, including reasonable overhead, which the seller
would have made from full performance plus incidental expenses and damagesx n this case the
buyer¶s right to restitution and the seller¶s rights to offsets under UCC 2-718 were established on
the motion for summary judgmentx The measure of damages provided in subsection (1) is
inadequate to put the seller in as good a position as full performancex Under 2-708 (2) the seller
is entitled to its profit including reasonable overhead along with incidental damages, due
allowance for costs reasonably incurred and due credit for payments or proceeds of resalex Due
credit for payments or proceeds of resale is inapplicable to this retail sales contract as this
provision pertains to the privilege of the seller to realize the junk value of the items if it was
manifestly useless to complete the operation of manufacturex Neri is therefore entitled to
restitution in the sum of 4,250 less 3,250 for lost profits and incidental expensesxThe court
basically says that UCC § 2-708 (2) is novel enough that the trial court sort of overlooked it and
applied the old rule (exemplified by § 2-708(1)) appropriatelyx The court says that UCC § 2-708
(2) is the right rule herex The court mentions that, of course, Neriget restitution, but these
damages are reduced by the losses to the defendantsx The court finds that the Retail proved
sufficiently in trial court that they lost profits and also incurred expenses in storing and keeping
up the boat while they were waiting to sell it to somebody elsex ?

! 
#Lost volume seller² the seller has made one less sale than he would have if the
buyer performedx Usually the seller has an exhaustible supply of the goodx ³Due credit for
payments or proceeds of resale ² the manufacturer who learns of a buyers breach before he has
finished the product, the manufacturer then decides it is better to sell what has been complete so
as scrapx The manufacturer is the entitled to lost profits he would have made less the amount of
the sale of the scrapx

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#? The seller is a lost volume sell if he would have made two sales instead of just onex A
lost volume seller is defined as a dealer who has unlimited supply of standard-priced
goodsx
½#? Generally must have unlimited supply or similarly priced goods (exgx tires at a Goodyear
dealership)x As of 1994 courts have not required proof of unlimited supply of standard
priced goodsx Some courts seem willing to presume that if one is a retailer, one is a lost
volume sellerx
#? §2-708(1) ± allows difference between the market price at the time and place for tender
and the unpaid contract price plus incidental damages less expenses saved in consequence
of buyer breach
0#? §2-708(2) entitles a ³lost volume seller to recover for Gross Profit orLost Profit +
ncidentalsx This remedy is available if 2-708(1) is inadequatex
Gross Profit = Net Profit + Overhead
Gross Profit = Revenue ± Direct Costs
 Gross Profit ± Net Profit = Overhead
#? A seller can recover gross profit but not gross profit + overhead which would ³double
recovery x

Ë 
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Gross profit is the difference revenue and direct costsx Another definition is the sum of net profit
plus overheadx So net profit is gross profit minus overheadx

hen legal rules award profit is it gross or net? The UCC provides for profit (including
reasonable overhead)
The formula in §2-708(2) is to remember that normally ³profits (including reasonable overhead)
± that is, gross profits ± is the same as contract price less direct costsx


  
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 1?#The duty to mitigate damages bars recovery for losses suffered by the non-
breaching party that could have been avoided with reasonable effort and without risk of
substantial lossx

# MC and Jordan entered into an endorsement agreementx Jordan was to receive 2 million
a year plus his 5 million signing bonusx The contract was from 1995-2005x Jordan could still do
most other endorsementsx MC declared bankruptcy in 2002x Jordan sued for 8 million²the 2
million annual payments remaining in the contractx MC argues Jordan failed to mitigate and the
amount should be reduced to 4 millionx Jordan argues he is a lost volume sellerx

 #
hether Jordan had an obligation to mitigate damages and whether he was or was not a
lost volume seller?


0
# Yesx Jordan failed to look for other work and thus he failed to mitigatex
Lost Volume Seller² Nox Jordan argued because he could enter into other endorsements, and
thus additional endorsements would not have haven substitutes and not mitigationx
Courts do NOT focus solely on the seller¶s capacityx Must also show you would have entered
into a subsequent agreementx x Jordan does not qualify as a lost volume sellerx Although he could
have entered into unlimited agreements, there is no evidence that he would have entered into
those agreements (Jordan must show he could and would have entered into subsequent
agreements) if it were not for the breach, especially because he was trying to trim down his
endorsements so as to not dilute his brandx Jordan lacked a nearly limitless supplyx Thus, he does
not qualify as a lost volume seller and had a duty to mitigate damagesx
Mitigation Efforts² Jordan failedx MC must show the absence of reasonable efforts by Jordan
to minimize the damagesx

.  
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The test the court applies is sometimes called the ³objective/subjective testx Placing the burden
of proof on the seller, it requires that the seller demonstrate first a ³capacity to be a lost volume
seller by showing that it was possible to undertake additional businessx This is considered the
³objective part of the testx ut the seller is also required to show that it would have tried and
would have been able to obtain additional business even if the defendant had not breachedx This
is the ³subjective branch of the test is often met by showing that the seller was seeking
additional business prior to the breach, and that there is no reason to suspect that the ultimate
purchaser would not have closed a sale with the plaintiff in the absence of breachx

;0
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On mitigation issues, the burden of proof is normally on the defendantx This means that the
defendant must offer some credible evidence that the plaintiff could have mitigated damages
before the plaintiff is required to offer evidence about other than breach and lost wagesx

 
½
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f an issue about reasonable search opportunities had risen in the Parker case, the question arises
whether the defendant would have carried the burden of showing both that the plaintiff had not
made reasonable efforts and that such efforts would have uncovered mitigating opportunities that
were ³substantially similarx

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  1 ) 1 0
 ²
hen there is inadequate relief in the normal process awarding of
monetary damages, then specific performance is appropriatex
#One cannot contract for specific performance but you could include in the contract why it
would make sensex
½#Examples
1x Contracts for sale or lease of property
ix The seller typically wants specific performancex
2x Cases in which damages would be very difficult to prove with a reasonable
certaintyx
3x Cases in which the defendant is finically incapable of satisfying a money
judgmentx
4xDistinctly inferior substitute
5x Difficulty in finding a permanent alternative substitute

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 1?#State law controls in concerns about injunctive relief, but state law may require
refined interpretation or application to the facts of the casex As a rule, specific performance in
long-term relationship situations is to be avoidedx §2-716 allows for specific performance when
product is uniquex You must measure the unique ness or degree of covering against the
difficulties of enforcement, which have caused courts to refrain from granting specific
performancex (court is not a babysitter)x

#Defendant (Memorex) had a contract with plaintiff (Copylease)x Plaintiff would sell
defendant's toner, and would be the exclusive vendor in some regionsx Defendant unilaterally
altered the business relationship breaching the contractx Plaintiff sued both for damages for
losses, and for specific performance of the exclusivity agreementx
 # s specific performance a remedy available to diversity jurisdiction plaintiffs when the
substantive law governing the case eschews it?


0
#Maybex Certainly there is a breach of contract herex Also, although it's not settled
whether federal court can grant equitable relief in a diversity case in contravention of state
substantive law, the state law should governx n this case, however, there may be an exception
that allows an injunction for specific performance, and more testimony (about the difficulty of
covering) is needed to determine whether that would be appropriatex f specific performance is
out of the question, there can still be recovery of damagesxSpecific performance will not be
ordered for contract requiring a continuing series of acts in cooperation between the parties for
the successful performance of those actsx owever if copy lease has no adequate alternative
source of toner, specific performance may be necessary UCC 2-716x


2347;/  .   1 ) 1 0
   
>

(1)?Specific performance may be decreed where the goods are unique or in other proper
circumstancesxn a contract other than a consumer contract, specific performance may be
decreed if the parties have agreed to that remedyx owever, even if the parties agree to
specific performance, specific performance may not be decreed if the breaching party's
sole remaining contractual obligation is the payment of moneyx
(2)?The decree for specific performance may include such terms and conditions as to
payment of the price, damages, or other relief as the court may deem justx
(3)?The buyer has a right of replevin for goods identified to the contract if after reasonable
effort he is unable to effect cover for such goods or the circumstances reasonably indicate
that such effort will be unavailing or if the goods have been shipped under reservation
and satisfaction of the security interest in them has been made or tenderedx
(4)?The buyer's right under subsection (3) vests upon acquisition of a special property, even
if the seller had not then repudiated or failed to deliverx

E?F
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hen will courts award specific performance? (1) A court will almost always order a defaulting
party to carry out a contract to convey landx (2) A court will also almost always order specific
performance when a contract calls for a seller to deliver a ³unique good such as a painting by a
famous artistx (3) On the other hand, an employer will almost never be able to compel an
employee to carry out a contractx An employer may sometimes be able to convince a court to
order the employee not to compete with the employer by performing the same services for
another, or by opening a competing businessxCalifornia Courts had decided two important cases
before the UCC went into effect that showed a great reluctance to award specific performance of
a continuing contract of any complexityx


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The parties entered a contract in 1909x Plaintiff was to be the exclusive distributor of defendant¶s
product as long as it performed to terms, and one of the most important was that it sell only at
prices established by defendantx Defendant started doing business with another company which
had four stores in plaintiff¶s exclusive territoryx Plaintiff sued for injunctive relief that defendant
stop supplying the other companyx The California Supreme Court held that CA Civil Code
provided that ³an injunction cannot be granted to prevent breach of contract, the performance of
which would not be specifically enforcedx Second, specific performance of this contract would
not be properx ³Equity will not decree specific performance of contracts which by their terms
stipulate for a succession of acts whose performance cannot be consummated by one transaction,
but will continuous and require protracted supervision and directionx The court left plaintiff to
seek whatever damages it could provex

./00 . .
  1  1 0
  0/
There are three major possibilities: (1) no one cares enough to bother to make any charges; (2)
the practice has continued because it serves the interest of someone or some group that counts; or
(3) the practice serves some larger social interestx

. ;/ !0  0 0 $
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§2-711 uyer¶s Remedies in General; uyer¶s Security nterest in rejected Goods
-asically mirror image to seller¶s remedies in §2-703x The law seeks to influence both
aggrieved sellers and aggrieved buyers to find substitute contracts; this minimizes lossesx
Difference measures are used to compensate for having to sell at a loss or buy above the contract
pricex More particularly, a buyer may cover its needs (that is, buy them from someone else) and
get the difference between the contract price and the cover price under §2-712x A buyer also may
recover the difference between the market price and the contract price under §2-713x Section 2-
714 deals with the buyer¶s remedies where it has accepted the goods but something is wrong
with the seller¶s performancex Sections 2-712, 2-713, and 2-714, in turn, all say that a buyer can
recover consequential damages in a proper case as defined by §2-715(2)x The term
µconsequential damages is not defined in the UCC, but it would include Copylease¶s reduced
profits on its resales because of Memorex¶s breachesx

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A provision in the contract that in case of breach, the breacher would pay a certain sum of money
to the non-breaching partyx (Can be only on one of the parties if specified, does not have to be
both)xMust look at whether the provision amount of damages is reasonable in light of anticipated
or actual harm caused by the breachx Court will refuse to enforce liquidated damages if they are
nothing more than a penalty for breach, because contracts law is based on compensation not
punitive damagesx

#? Restatement §356 ± «Amounts must be reasonable in light of anticipated lossx The loss
must be difficult to provex Any term fixing unreasonably large damages is void as a
penaltyx
½#? §2-718(1) ± Same as above but includes provision which requires ³inconvenience or
non-feasibility of otherwise obtaining an adequate remedyx [194]
#? reaching party must still pay actual costs of breachx Only the high penalties are
objectionable
ix? Are more likely to be enforceable where damages are hard to estimate
 iix? Stipulate damages are a good faith estimate of actual anticipated damages
0#? Damage provision that is too small in comparison to actual damages is seen as a valid
limitation of liability UNLESS found to unconscionablex
#? Efficient reach: A breach where the non-breaching party is compensated for his loss and
is no worse off than if the K had been performed, while the breaching party is actually
better off because of the breachx
1#? Policy against Penalty Clauses: discourage people from entering into Ksx Penalty clauses
raise the cost of a breach, thus increasing the risk of the breaching partie¶s other creditorsx
Discourages efficient breachesx Penalty clauses may award to the non-breaching party,
damages in excess of their actual lossx
#?
indfall:
.#? Valid party chosen remedy = liquidation clause
ix? ave to show at the time of contracting the reasonable estimation of the
anticipated or actual loss caused by the breach, and (AMOUNT)
iix? That at the time of contracting we knew there would be difficulties in measuring
the lossx(MEASURE OF DFFCULTY)
#? nvalid party chosen remedy clause = penalty clause
ix? Term that fixes an unreasonably large liquidated damages in unenforceable on the
grounds of public policy as a penaltyx

Pareto Optimality is still the base of refusal of law to enforce penaltiesx n a situation where you
can pay the expectation damages to the breached party they should be indifferentx The breaching
party pays less than they would have paid had they not breached [they effectively lose less than
they would have otherwise]xThe effective policy is breaking a promise is oxkx where it is efficient
and this is not immoralx

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 1?# A liquidation of damages must be a reasonable estimate at the time of contracting
of the likely damages from breach, and the need for estimation at that time must be shown by
reference to the likely difficulty of measuring the actual damages from a breach of contract after
the breach occursx
hen a contract specifies a single sum of money without the gravity of the
breach the specification is not a reasonable effort to estimate damagesx

xCarborundum manufactures Ferro Carbo an abrasive powder used in making steelx Carb
entered into a contract with Lake River by which Lake River agreed to provide distribution
services in its warehouses in llinoisx Lake River would receive Ferro Carbo in bulk, bag it and
ship it to Carborundum¶s customersx Carborunduminsisted that Lake River install a new bagging
system to handle the contractx t cost 89,000x To cover the cost and make a 20% profit Lake
River insisted on a minimum guarantee clausex The clause stated: Lake River can charge
Carborundum the difference between quantity bagged and the minimum guaranteed if not met f
the full minimum quantity was shipped Lake River would make 533,000x Carborundum only
shipped 12,000 of the 22,500 tons of the Ferro Carbo when the contract expiredx
Carborundumhad paid for the amount billed and baggedx The clause left Carborundum owing
241,000, 533,000 (ferro shipped) minus what Carborundum had paidx Lake retained 500 tons
of bagged Ferro (31,000)xPlaintiff argued the guarantee clause discourages willful breaches and
³guarantees, that the non-breaching party is able to make its profit, minus mitigating costx This
clause insures against non-credible parties entering into contractsxDefendant argued the provision
is greatly disproportionatex The fixed sum greatly exceeds the actual damages inflicted by a
breachx

 x
hether the formulae in the minimum guarantee clause imposes a penalty for breach of
contract or is merely an effort to liquidate damages?


0
x This clause is a Penalty ClausexThe court reasoned that the damages formula in this
case is a penalty and not a liquidation of damages, because it is designed always to assure Lake
River more than its actual damagesx
hen a contract specifies a single sum in damages for any
and all breaches even though it is apparent that all are not of the same gravity, the specification is
not a reasonable effort to estimate damages; and when in addition the fixed sum greatly exceeds
the actual damages likely to be inflicted by a minor breach, its character becomes a penaltyx
From the face of the contract the damages provided for by liquidated damages are grossly
disproportionate to any probable loss and penalizes some breaches more heavily than other
regardless of costxThe unpaid contract price (241,000) minus the costs saved by not having to
complete the contract (the variable costs on the other 45 % of the Ferro that it never had to bag)x

  
0Ë 

Compare UCC §2-718(1) with Restatement (second) of Contracts §356 on penalties and
liquidated damages which provides: Damages for breach by either party may be liquated in
threagreement but only at an amount that is reasonable in the light of the anticipated or actual
loss caused by the breach and the difficulties of proof of lossx A term fixing unreasonably large
liquidated damages in unenforceable on grounds of public policy as a penaltyx

The formula the Court in Lake River suggests for calculating expectation damages in contract
price less costs saved by the breachx This formula is basically the same as lost profits plus
overhead, for reasons discussed in Note 9 following Nerix

Ë 
½ 11 
; .

hat about persons interests of persons other than parties to the contractx Pareto Optimal- Given
an initial allocation of goods among a set of individuals, a change to a different allocation that
makes at least one individual better off without making any other individual worse offx

E)/ )
/F
 
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   0 .
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#
Contracts are sometimes interpreted as calling for ³alternative performances, one of which is
the payment of money, rather than a single performance together with stipulated damages for
breachx f the contract is interpreted as providing for the former, then the suit for the agreed
amount is not subject to the penalty rule, and the prevailing freedom of contract principle
prevailsx f the contract is interpreted as providing for a single performance together with the
stipulated damages for breach then the stipulated amount will be reviewed by the court for its
reasonableness and will be labeled a penalty if excessivex
Termination Clauses / Employment penalty clausesx usiness Practice has moved ahead of legal
form related to Termination clauses in employee Ksx n
isconsin these clauses have been
upheld by the Supreme Courtx


>#)

1x
hether the injury cause by the breach was difficult or incapable of accurate estimation when
the parties made the Kx 
2x
hether the stipulated damages were a reasonable forecast of the harm caused by the breachx
Provided that the damages provided for in the K are not grossly beyond original expectations the
termination clause likely would applyx

Compensation is for: 1x Emotional Distress 2x Damage to Reputationx oth of these are hard to
fix in terms of dollar recoveryx The difficulties of proving damages are used as a rational for
enforcing the clausex owever, they are damages that would not have been recoverablex

Posner argues: we must allow penalty clauses to be valid; by refusing to enforce them, this
prevents efficient breach (ixex the breaching party will pay the penalty clause, get a better deal
and nobody is worse offx

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u? Relevant UCC provisions

ix? UCC §2-712
iix? UCC §2-713
iiix? UCC §2-714
ivx? UCC §2-715(2)

Recovery of ³consequential damages by a buyer is provided by UCC §2-715(2), and the same
term is also often used in common law casesx One type of potential injury to a buyer upon
breach that is always considered consequential damages is lost profits resulting from
nonperformance by a seller of goods or servicesx

UCC Rejects the rule developed in adley vx axendale: t is now almost universally
recognized that in the words of the UCC, if at the time of the making of the contract the seller
has ³reason to know of possible consequential damages, that is enough to make him liable for
recovery of those damagesx

0
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0



 1?# The damages to which a nonbreaching party is entitled are those arising naturally
from the breach itself or those that are in the reasonable contemplation of the parties at the time
of contractingxA plaintiff can recover consequential damages only if they were reasonable
foreseeable at the time of contractingx
? 
 0
: 1) aggrieved party may recover damages that are fairly and reasonably
considered as naturally arising (general damages) OR 2) recovery is allowed for damages that
may be reasonably contemplated by both parties at the time contract is made as the probable
breach of it (special damages)x
0
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FG you do not get consequential damages based on plains
and projections that you keep secret from the other partyx ncentivizing disclosurex

# Plaintiffs operated a mill, which they were forced to shut down when the crank shaft of
their steam engine brokex They contacted the manufacturer of the engine,
x Joyce & Cox
(Joyce), and Joyce agreed to make a new shaft from the pattern of the old onex Therefore, a
servant of Plaintiffs went to the office of Defendants, common carriers, to have the crank shaft
taken to Joycex Plaintiffs¶ servant told Defendants¶ clerk that the mill was shut down and the
shaft must be sent immediatelyx The clerk informed Plaintiffs¶ servant that if the shaft were given
to them by twelve o¶clock any day, it would be delivered by the next dayx Plaintiffs took the
shaft to Defendants the next day before noonx Due to Defendants¶ neglect, the delivery to Joyce
was delayed, and Plaintiffs did not receive the new shaft for several days after they should have
received itx

 # Are Defendants liable to Plaintiffs for damages suffered by Plaintiffs due to lost profits?


0
# Nox A nonbreaching party is entitled damages arising naturally from the breach itself or
those that are in the reasonable contemplation of the parties at the time of contractingx ere,
while the breach by Defendants was the actual cause of the lost profits of Plaintiffs, it cannot be
said that under ordinary circumstances such loss arises naturally from this type of breachx There
is a multitude of reasons for a miller to send a crank shaft to a third partyx Defendants had no
way of knowing that their breach would cause a longer shutdown of the mill, resulting in lost
profitsx Further, Plaintiffs never communicated the special circumstances to Defendants, nor did
Defendants know of the special circumstancesx

! 
# Damages are limited to those that arise naturally from a breach and those that are
reasonably contemplated by the parties at the time of contractingx
______________________________________

$ 0
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/#

here 2 parties have made a contract which one of them has broken, the damages which the
party ought to receive in respect of such breach of contract should be such as

#May fairly and reasonably be considered either arising naturally, from such breach of contract
itself OR # Special circumstances as may reasonably be supposed to have been in the
contemplation of both parties, at the time they made the contract, as the probable result of the
breach of itx
F AND ONLY F communicated by Plaintiff to Defendantx
Further though the right to limit liability by agreement was disputed at the time of the case, the
entrepreneur now has the undoubted capacity to set a ceiling on his liability by a contract clause
of disclaimerx §2-719 ± says consequential damages may be limited unless limitation is
unconscionablex

. ½/  0 0 
0 . $cc: Section 2-217, 2-713, and 2-714 all say that a buyer can
recover consequential damages in a proper case as defined by §2-715(2)x One requirement is that
the consequential loss ³could not reasonably be prevented by cover or otherwisex
. 


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00 
0 . $cc: There is no provision in the UCC giving
sellers a right to consequential damagesx Normally, when a buyer breaches a contract the seller
loses the gains it would have made from receiving moneyx ad the drafters of the Code written a
consequential damages section for sellers, sellers would seldom recover under any provision that
incorporated the ideas of adley vx axendalex
The typical common law approach was to award an aggrieved seller the difference between the
contract price and resale or market pricex
Amended Article 2, in §2-710(2) and (3), provides for sellers to recover consequential damages
from non-consumer buyers if ³resulting from general or particular requirements and needs of
which could not reasonably be prevented by resale or otherwisex

. E  0
F
: ³
e know of no other test than the loose one that the loss must be
such that, had the promisor been originally faced with its possibility, he would have assented to
its inclusion in what he must make goodx Courts following the tacit agreement rule often
balanced the benefits of the contract against the burdens of the damages soughtx
Official comment 2 to UCC §2-715 states ³the tacit agreement test for the recovery of
consequential damages is rejectedx

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Consequential damages must be reasonably certain in that 1) damage was caused by breach and
2) amount claimed is amount actually suffered; if not certain adley will not be enforced, even if
foreseeablexOfficial Comment 4 to UCC §2-715 provides: The burden of proving the extent of
loss incurred by way of consequential damage is on the buyer, but the section on liberal
administration of remedies rejects any doctrine of certainty which requires almost mathematical
precision in the proof of lossx Loss may be determined in any manner which is reasonable under
the circumstancesx Official Comment 1 to UCC §1-305 says: ³Compensatory damages often are
at best approximate: they have to be proved with whatever definiteness and accuracy the facts
permit, but no morex On the other hand, most states once followed a ³new business rulex As
one court put it: ³Prospective profits are not recoverable for a newly established business or for a
business which has operated at a lossx


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§ 2-715x uyer's ncidental and Consequential Damagesx

1)? ncidental damages resulting from the seller's breach include expenses reasonably
incurred in inspection, receipt, transportation and care and custody of goods rightfully
rejected, any commercially reasonable charges, expenses or commissions in connection
 with effecting cover and any other reasonable expense incident to the delay or other
breachx
2)? Consequential damages resulting from the seller's breach include
ix? any loss resulting from general or particular requirements and needs of which the
seller at the time of contracting had reason to know and which could not
reasonably be prevented by cover or otherwise; and
iix? injury to person or property proximately resulting from any breach of warrantyx

> 
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 0
Contract breach delayed theater opening from June to mid-Augustx This is a new businessx
At trial appellant sought damages based on opinion expert testimony as to profits lostx
Testimony was not allowedx Loss profit is a measure of damages for an established businessx
The damages in such an enterprise can be established with a reasonable degree of certaintyx
Restatement of Contracts, §331 states the law to be that damages are recoverable for profits
prevented by breach of contract µonly to the extent that the evidence affords a sufficient basis for
estimating their amount in money with reasonable certainty,¶ and that where the evidence does
not afford a sufficient basis, µdamages may be measured by the rental value of the propertyx¶

  #Most recent cases reject the once generally accepted rule that lost profits damages for a
new business are not recoverablex

c.
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. c
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Jury found breach of contract and awarded 50k in damages (ordinarily not recoverable from
breach of contract) and 175k in loss of future profitsx Court rejected the rule barring proof of lost
profits of a new businessx t said µit would be grossly unfair to deny Plaintiff meaningful
recovery for lack of a sufficient µtrack record¶ where the Plaintiff has been prevented from
establishing such a record by Defendant¶s actionsx The trier of fact ³must be guided by some
rational standard in making an award for loss of future profitsx¶ t allowed for expert testimonyx
Expert testimony has much more speculationx A single restx Operator is operated for a few days
then projects what Plaintiff would makex Focus should be on whether a plaintiff can prove lost
profits with reasonable certaintyx

  #Recovery for emotional loss: The awaii Supreme Court has explicitly overruled Chung
with respect to the recovery for emotional injury arising from ³wanton/ reckless breach of
contractx

-  -          
 

  

 


       
  
 
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The goal of expectation damages is said to be to put the non-breaching party in as good a
position as performance would have donex

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The duty to mitigate loss works because the mitigation rules give the claimant a great incentive
to take reasonable steps to minimize his or her losses because failure to do so will result in the
court refusing to award compensation for those avoidable but unavoided, and therefore
excessive, lossesx

  #A seller has an obligation to resell the product (UCC §2-706) and can rarely sue for the
price (UCC §2-709), if the seller is a lost volume seller can sue for lost profits (UCC §2-708(2))x

c
Contract remedies could, and sometimes do, seek to protect the reliance interestx Rather than
trying to put aggrieved parties where they would have been had their contracts been performed,
judges applying contract law might seek to compensate victims of breach for out-of-pocket
lossesx That is, rather than trying to approximate the situation had there been no breach, a court
could instead seek to compensate for losses caused by reliance on the contractx

The Reliance nterest² f expectation damages are not available because they are uncertain or
non-existent, the Plaintiff may be entitled to reliance damagesx They compensate the Plaintiff for
his detriment in changing position in response to the promise

? /  1

 
  

1x? Reliance interest

2x? Reliance of lost opportunities-cost of chance to find another supplier

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?

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here expectation damages do not exist or are not in the contemplation of the
parties, damages can be awarded for expenditure made in contemplation of performancex ³in
some instances, the injured party may recover expenses incurred in relying upon the contract,
although such expenses would have been incurred had the contract not been breachedx 

# Plaintiff developed a new stove that it wanted to showcase at a conventionx Plaintiff used
American to ship the stovex The stove was broken down into 21 packages however one of the
packages went to the wrong cityx ecause of this, Plaintiff was not able to show off the new
stove at the convention and sued for reliance damagesx Plaintiff sought shipping costs, cost of
rental space at the convention, railway fares for himself and employee, hotel costs, presidents
wages, employees¶ wages (total of 800)x

 #
hether the expenses are recoverable?



0
#Yes, the general rule is that the party suffering the loss can recover only that which he
would have been able to if the contract had not been brokenx owever, Stove was not seeking
lost profits for American¶s failure to deliver the furnace in time because he would end up with
nothingx This is an injustice that is not supportedx Plaintiff did not ask for any special price on
the shipmentx The price it paid was the normal price that anyone wouldx All the Plaintiff asked
was that the stove be delivered within the ordinary delivery timex American knew about the
Plaintiff¶s circumstances regarding the conventionx Plaintiff never would have had those
expenses if the contract had never been formedx Plaintiff made those expenses in reliance on the
contract with Americanx

  # This lawyer chose not to sue for expectation damages because new businesses may not
sue for the profits that they would have made in their first yearx The company would argue that
they expected to impress people and have great marketing and free advertisementsx owever
they can¶t prove with reasonable certainty what they would have earned or if any sales would
have been madex So they sue to recover their reliance damagesx e got damages based on
expenses performed before and afterx The only reason they get the reliance interests is because
they don¶t try to prove the expectation interestx asically, the company went to the trade show at
a lossx Sue for reliance when you are in a losing contractx ack then it would have been difficult
to prove the reasonableness of what they would have madex Now experts are involvedx

#
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 1?#
hen the value can be ascertained with "reasonable certainty as of a definite
time," interest is appropriatex Also, a promisee may recover his outlay in preparation for
performance, minus whatever amount the promisor can show that the promisee would have lost
had the contract been performedx

#Lx Albert & Son (P) agreed to sell and deliver to Armstrong Rubber (D) four refiners that
were designed to recondition old rubberx The contract of sale was dated December, 1942x Albert
delivered two of the four machines in August, 1943 and delivered the remainder two years laterx
ecause of the delay in delivery of the other two Armstrong refused to accept all four in October,
1945x The court gave judgment to Albert for the value of the equipment deliveredx uyer
appealed for the expenses it incurred in reliance upon Albert¶s promisex

 # Does a promissor¶s default on performance make him a guarantor and insurer of the
promisee¶s venture?


0
#Nox A promissor¶s default on performance does not make him a guarantor and insurer
of the promisee¶s venturexowever, the promisee may recover his outlay in preparation for the
performance subject to the privilege of the promissor to reduce it by as much as he can show that
the promisee would have lost if the contract had been performedx
e will also not put a plaintiff
in a better position than he would have occupied had the contract been fully performedx The cost
of the pad (3,000) for the machines should be allowed as an offset as this was performed in
anticipation of Albert¶s delivery of the machines, and Albert may deduct from that sum any loss
upon the contract had the machines been shipped before May 1, 1945x The counterclaim for
reliance damages seems specious, except for the foundationx They never really did much with the
department, and they quickly sold off the scrapx Making a contract doesn't make you an insurer
of the other party's venturex The only difference with recovering the foundation costs is between
recovering monies paid to the promisor (accepted) and paid to other people in expectation of
promisor's performance (not normally done)x ut we're not mandated to decide otherwise, and
this seems justx Seller owes for the foundation, buyer owes for the motor plus interestx


  #

The Restatement (Second) appears to embody the Learned and limitation on recovery of
reliance as set out in the Lx Albert case:

  0
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25C9#!0 ½ 0


 
  #
As an alternative to the measure of damages stated in §347 [essentially, protection of the
expectation interest], the injured party has a right to damages based on his reliance interest,
including expenditures made in preparation for performance or in performance, less any loss that
the party in breach can prove with reasonable certainty the injured party would have suffered had
the contract been performedx 


#
A contracts to sell his retail store to x After  has spent 100,000 for inventory, A repudiates
the contract and  sells the inventory for 60,000x f neither party proves with reasonable
certainty what profit or loss  would have made if the contract had been performed,  can
recover as damages the 40,00 loss that he sustained on the sale of the inventoryx

Reliance damages, the UCC, and the paucity of cases: f the Court decided Lx Albert today,
Article 2 of the Uniform Commercial Code would applyx
hat result would it reach? Perhaps the
first question that should be asked is whether reliance expenditures that the buyer sought to
recover could be considered ³consequential damages under §2-715(2)? There is no explicit
definition of ³consequential damages in Article 2, but it is hard to image what else they could
bex t would not be appropriate to consider reliance damages like those claimed in Lx Albert to be
incidental damages, as incidental damages are generally limited to post-breach expenditures for
purposes of minimizing lossx Furthermore, UCC §2-715(1), allowing recovery of incidental
damages, does not establish any adley vx axendale limitations on recovery, whereas UCC §2-
715(2), allowing recovery of consequential damages, does contain such a limitationx t is clear
there should be a foreseeability limitation on the recovery of reliance damagesx
?

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Restitution damages are used when expectation damages aren¶t available because they are
uncertain or nonexistentx They give back or restore the Plaintiff to his previous positionx t¶s used
to prevent unjust enrichmentx

#? Common when there has been a misrepresentation or a mistakex

½#? Ask yourself: what is the unjust enrichment the other party is receiving?
Y ? Restitution is often a component of reliance damages but the reverse is not the casex Can
make the breaching party pay for money you paid to a third partyx That¶s reliancex?
Restitution means, roughly ³to give back or ³restore to a previous positionx llustration of the
interplay between the expectation, reliance, and restitution interests with a simplified examplex
Suppose Seller contracts to deliver 3000 bushels of apples to uyer for 8000x uyer pays 1000
as a down paymentx n anticipation of delivery uyer hires two laborers to unload the apples,
paying them 100 each in advance for their timex At the time for delivery, uyer is ready and
willing to pay the remaining 7000 to seller, but Seller breaches the contract by refusing to
deliverx The market price when uyer learned of the breach is 9000x uyer has no other work
for the laborers to do, and sends them homex uyer then arranges for purchase of more apples (at
9000), to replace those she did not obtain from Seller, and makes new arrangements to have
unloaded, but this time must pay two laborers 125 eachx uyer sues Sellerx

#?
hat recovery would protect uyer¶s expectation interest? er reliance interest? er
restitution interest? Are the interests mutually exclusive? Cumulative?
½#?
hat would uyer recover under the UCC? See §§2-711(1); 2-712

The common law of contracts has long embraced a substantial performance rule, limiting a non-
breacher¶s right to cancel a transaction and refuse a performance to situations in which the
deficiency in the other party¶s performance is ³substantial or ³materialx

The provisions of the UCC as enacted are a compromisex n general, no distinctions here are
made between merchant and consumer buyersx Under §2-601, A buyer may reject goods that
³fail in any respect to conform to the contractx owever, after a rejection, §2-508 gives sellers a
right to cure defective tenders of goods, subject to a number of qualificationsx Once a buyer
accepts goods, then §2-608 says that the buyer may revoke his acceptance only in certain limited
situationsx One important limitation is that the ³non-conformity [of the goods] must substantially
impair [their] value to himx Different rules apply to installment contractsx Under §2-612, a
buyer may reject an installment « ³A buyer may call off the entire installment contract when a
default ³substantially impairs the value of the whole contractx


0;
 1  

Plaintiff performed and handed over goods to Defendantx Defendant fails to payx As a result of breach
Plaintiff may rescind the contractx Once contract out of the way, then Defendant has Plaintiff¶s property to
which he is not entitledx n order to prevent unjust enrichment law offers restitutionary remedies,
commonly Plaintiff seeks fair market value of what he handed over to Defendantx

Once contract is rightfully rescinded, contract ceases to existx

Acceptance Rejection §2-

§2-606 601, 602, 513
Revocation No Right to uyer Right to Cure Seller has not Seller does
of Revoke §2- Chooses to Exercised (no Right to cure not Exercise
Acceptance 608 Keep Goods breach) §2-508 Right to cure
§2-608
uyer uyer §2-508 uyer uyer
uyer Remedy Remedy Remedies §2- Remedies §2-
Remedies §2- §2-714 §2- §2-714 §2- 711, §2-715 711, §2-715
711, §2-715 715 715

c


! 0 >#%




 1?x The buyer may revoke his acceptance of a lot or commercial unit whose non-
conformity substantially impairs its value to him if he has accepted it on the reasonable
assumption that its nonconformity would be cured and it has not been seasonably curedx
Revocation must occur within a reasonable time after discovery of the grounds for it and before
alterationx

# Miller ordered a Dodge station wagon from Dodge which included a heavy-duty package
with extra tiresx Miller picked up the wagon, met his wife, and exchanged carsx
hen she got
home she noticed the spare tire was missingx The following morn Miller notified Dodge and
insisted on having the spare tirex e was told there was no tire available; he informed the
salesman that his check would be stopped for payment, and the wagon would be in the front of
his houses for them to pick it upx e parked the car and ten days later it was towedx Dodge
applied for license plates, registration, and title in defendant¶s name, Miller refused the license
platesx The tire was not included because of a nationwide shortagex

Plaintiff¶s Argument: The missing spare tire did not constitute a substantial impairment in the
value of the automobile and is only a trivial defectx Defendant¶s Argument: The value of the car
was substantially decreased to Defendant as a result of the nonconformityx

 #
hether failure to include spare tire with new automobile constituted a substantial
impairment in value of automobile entitling buyer to revoke his acceptance of the vehicle?


0
#(First Case) Yesx Failure to include spare tire with new automobile constituted a
substantial impairment in value of that automobile entitling buyer to revoke his acceptance of the
vehicle, where defendant had ordered special package which included special tires and
defendant's occupation demanded that he travel extensivelyx Defendant¶s concern with safety is
evidenced by the fact that he ordered the special package which included the special tiresx

ithout a spare defendant would be helpless on the freeway until the morning hoursx The
dangers to attendant motorist are common knowledge and defendant¶s fears are not
unreasonablex Defendant notified plaintiff of his revocation the morning after the car was
delivered to himx The Defendant did not discover the nonconformity before he accepted the
vehicle, which does not preclude his revocationx The spare was under a fastened panel,
concealed from viewx Defendant had no duty to hold the goods other than with reasonable care
for a time sufficient to permit the seller to remove themx (Second Case)Goes the other wayx
! 
# The requisite impairment of the value of the goods to the buyer must be substantialx t
is not sufficient that the nonconformance be worrisome, aggravating, or even potentially
dangerousx t must be a nonconformity which diminishes the value of the goods to the buyer to a
substantial degreex Not the mere possibility of a flat in the early hoursx

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#Jacobs were unhappy with construction work done by Plantex The most important defect
is the installation of a wall a foot off from the plansx


0
# Trial court found there was no damage to the Ds based on the testimony of two real-
estate agentsx The Supreme Court affirmed holding that moving the wall would involve an
unreasonable economic wastex The P is entitled to recover the difference in the value of the
house as it stands with faulty and incomplete construction and the value of his house if it had
been constructed in strict accordance with the plans and specificationsx


> >#c0½


 1?# That one who has been injured by a breach of contract has an election to pursue
any of three remedies, to wit: (1) e may treat the contract as rescinded and may recover upon a
quantum meruit so far as he has performed ; (2) or he may keep the contract alive, for the benefit
of both parties, being at all times ready and able to perform; or, (3) he may treat the repudiation
as putting an end to the contract for all purposes of performance, and sue for the profits he would
have realized if he had not been prevented from performingx /?. .½

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# Plaintiff [attorney] and client [Campbell] entered into a written contract for the attorney to
represent him in a divorce casex The contract stated that the plaintiff agrees to represent
Campbell in the separate maintenance and divorce action which has been set for trial for a ³total
fee of 750 plus court costs and other incidentals in the sum of 100 making a total of 850x
After the trial [which lasted 29 days] ended the court indicated its intention to give Mrsx
Campbell a divorcex ut while her proposed findings were under consideration by plaintiff and
the court, defendant Campbell substituted himself instead of plaintiff and thereby the
representation by plaintiff of Campbell was ³terminated x The reasonable value of the services
was 5,000 dollarsx Campbell paid 450x Campbell died after the serves were rendered by
plaintiffx Plaintiff sued his estate for the sum of 10,000 dollars, the reasonable value of services
rendered as attorneyx Campbell told him after defendant [wife] had offered proposed findings in
the divorce action that he was dissatisfied with plaintiff as his counsel and would discharge him
and asked him if he would sign a substitution of attorneys under which Campbell would
represent himselfx Plaintiff replied that he recognized Campbell had a right to discharge him but
that the was prepared to carry the case to conclusion; that he expected to be paid the reasonable
value of his services which would be as much as defendant¶s counsel in the divorce action
received, 9,000, to which Campbell replied he was not going to pay ³a cent more x There upon
the substitution was signed and Campbell took plaintiff¶s file in the divorce case with himx


0
# The court said that plaintiff had performed practically all of the services he was
employed to perform when he was dischargedx The trial was at an endx The court had indicated
its intention to give judgment against Campbell and all that remained was the signing of findings
and judgmentx The full sum called for in the contract was payable because the trial had endedx
ere plaintiff alleged indebtedness on defendant¶s part for services performed by plaintiff of a
reasonable value of 10,000 of which only 450 had been paidx
hile it may have been more
appropriate for him to have alleged that the price of such services was the contract figure, any
deficiency of the pleading is eliminated by defendant¶s answer setting forth that factorx Plaintiff¶s
action can thus be said to be common count indebitatusassumpsit, and there being no dispute as
to the amount called for in the contract, the services having been in effect fully performed the
court should have rendered judgment for the balance due on the contract which is conceded to be
300x

! 
# The dissent argued that Oliver should be entitled to the 5,000 dollarsx That is that no
reasonable conclusion can be drawn from the evidence other than that the discharge amounts to a
clear repudiation and abrogation of the contract in its entirety, in which case plaintiff is entitled
to recover the reasonable value of the services performedx

)
/#f a party could always file suit for the fair value of services, without regard to the K, a
party who¶s performance turned out to be more expensive than wasthought at the time of
contract could make up for his disappointment by filing suit for restitutionx
_________________________________________
 u? Getting your restitution interest is the disgorgement of unjust enrichment, not the
enforcement of a promisex Restitution interest is the benefit that the injured party gave to
the breaching partyx This will not be reduced by any losses the injured party would have
incurred upon performancex

u?
hat is the measure of restitution interest? t¶s the replacement value for the other party
for the stuff they got, that is, the market pricex You can get back your restitution interest
even if that would put you in a better position than performance would have donex
Expectation interest does not limit restitution interest when the contract breaker has
gained value from the injured party¶s part performancex Notice that when you get your
restitution interest, there may not be any real promise being enforcedx nstead, it is the
disgorgement of unjust enrichmentx Making restitution is not the same as enforcementx

u? Ë
00   is more or less means a recovery that doesn¶t aim at enforcing a
promise, but rather recovering the value of performance rendered as restitutionx Usually,
this term indicates a restitution claim, but not always, so be carefulx

  
0Ë 


hat¶s a benefit? Traditionally, one recovers ³benefits conferred in a restitution actionx
e
could say that you benefit me when you do what  want you to dox
e then could value my
benefit by what it would cost to get someone else to do what  asked you to dox On the other
hand, we could insist on finding an actual increase in my assets before concluding there is a
benefitx Do we focus on what it cost you or what  got from your efforts? Put another way, how
far are we interested in compensating your reliance loss and how far are we interested in making
sure that  am not unjustly enriched?

254#%   1  

  

f a sum of money is awarded to protect a party¶s restitution interest, it may as justice requires be
measured by either:

u? The reasonable value to the other party of what he received in terms of what it would
have cost him to obtain it from a person in the claimant¶s position, or
u? The extent to which the other party¶s property has been increased in value or his other
interests advancedx

! 11 
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The law offers restitution as an alternative remedy for breach of contractx Restitution can put an
aggrieved party in a better position than had the contract been performedx t is not available if the
defaulting party has substantially performedx Also the aggrieved party cannot have performed
fully, as Oliver holdsx
here those limitations do not apply, in the name of restitution the
aggrieved party is entitled to receive ³the reasonable value to the other party of what he received
in terms of what it would have cost him to obtain it from a person in the claimant¶s position,
what is commonly called the quantum meruit value of the work performedx 

-0
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00 #

Does rescission mean the contract really vanishes? Rescission is a valuable remedy for any
aggrieved party to a contractx t means that the aggrieved party is no longer bound to perform her
side of the contract, and is free to look for others to perform defaulting party¶s obligationsx n
both oomer and Oliver cases, the CA courts wrote as if the logic compelled the conclusion that
once a plaintiff exercises his right to rescind the contract, it ³ceases to existx Then nothing exists
to limit recovery to the contract price or contract rate for work performedx The situation is
exactly as if the Owner had asked the uilder to build, but the parties said nothing about the
pricex n that case, uilder could recover the fair market value of his workx A contract is not a
tangible thing but an ideax f we say that plaintiff has a right to rescind, this does not mean the
contract never existedx Rather, the courts are saying that they will treat the contract as if its
limitations were not controllingx

Does restitution fully protect reliance? At this point, some might be tempted to downgrade the
importance of the Lx Albert & Son casex Judge and said that a defendant could reduce the
recovery by showing plaintiff had made a losing bargainx owever, a plaintiff can sometimes
avoid being held to the contract¶s allocation of gains and losses by taking the restitution routex
Oliver vx Campbell, shows one important limitation on restitution: plaintiff has no such right if
he has completed his performance and is entitled to the contract sumx

  
1 . )

 11
! 1

UCC §2-718 and 2-708 [194]

u?
hen the Promisor defaults, he can recover restitution only based on equity (the amount
recoverable is the amount by which the non-breaching party would be unjustly enrichedx)

u? A party in default must pay damages to the other partyx Obviously when a party to a
contract risks forfeiting what he has done trying to perform; this is an incentive to
complete performancex

u? reaches of contract are not always the result of morally bad contractx n long-term
contracts one may encounter unexpected trouble only remotely related to one¶s own
actionsx

! 
>#
0  


 1?#
hether the vendor who rescinds an executor contract for the sale of land shall
return the purchase money paid depends upon the equities of each casex f it would be inequitable
for such rescission to occur without restoration of money paid, then it must be restoredx

#Aldrete agreed to buy property from the De Leons for 1,500x e made payments but they
were always latex The final payment was supposed to come July 6, 1961 but at that time Aldrete
had only paid 1,070x De Leon agreed to sell his house to someone else for 1,300x Aldrete sued
for his money plus 250 that he had spent on an architectx
 #
as the trial court correct in granting plaintiff damagesx


0
#Nox ecause the plaintiff¶s failure to make the payments called for in the contract, the
defendants had the right, and they did, ³rescind the contract of salex owever, plaintiff had paid
in excess of 70 percent of the purchase pricex The damages which defendants suffered as a result
of plaintiff¶s breach are definite and ascertainable from the evidencex
ould have made 1500 but
had to sell for 1300x Plaintiff gets his money minus 200 in damages for defendants for losing 200
on the sale of the propertyx Additionally plaintiff is allowed to collect interest on his moneyx

) >/.  >#6

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 1?# Damages for breach of contract cannot be so excessive that they cause economic
wastex .  .  > 
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# Plaintiffs leased their farm to Defendant, a mining company for five yearsx Defendant
performed strip miningx The contract included a provision where Defendant would do remedial
work to fill in the holes caused by Defendant¶s mining after the mining was completex This work
involved moving substantial amounts of dirtx Defendants did not do the remedial workx The trial
court established that the remedial work would cost more than 29,000x00 and that the value of
the farm would increase by 300x00x The court awarded Plaintiffs 5,000x00x

 # s Defendant liable for the costs of the remedial work?


0
# Nox Case law, statute and Restatement of Contracts limit damages to those that do not
cause economic waste or to those damages where the costs involved are not disproportional to
the end obtainedx Plaintiffs may not gain more in damages for a breach of contract that actual
performance is worthx t is unlikely that a reasonable landowner would spend 29,000x00 to
increase the value of a piece of land by 300x00x f breach pertains to a matter only incidental to
the main purpose of the contract, and performance would be disproportionately costly, the proper
measure of damages is the diminution in value measurex Garland Coal argued that the work
would add only a few hundred dollars to the value of Peevyhouse¶s land and that damages should
be limited to that amount because that was all Peevyhouse had lostx The court noted that the
majority followed the diminution in value rule when the cost of performance greatly exceeded
the diminution in valuex The court looked to the purpose of the contract and concluded that it was
for the mining of coal and the restoration was incidentalx Even in building and construction
contracts there is consideration of unreasonable economic waste when determining damagesx The
Restatement and other authorities consider waste and relative economic benefit when assessing
damagesx The measure of damages in a contract involving land is: the cost of performance
limited to the total difference in the market value of the land before and after the work was
performed, if that contract provision is merely incidental to the main purpose of the contract, and
the cost of full performance is grossly disproportionate to the increase in valuex
here such a
result is in fact contemplated by the parties and is a main or principal purpose of the contract,
however, the measure of the breach would be the cost of performancex
! 
# Garland Coal has received all of the benefits of the contractx The element of remedial
work was an essential part of this agreement and it was a condition to the right for Garland to use
Peevyhouse¶s landx f the value of the performance should be considered in determining
damages, the value of the benefits received should also be consideredx The law cannot make a
better contract for the parties than they have made for themselves and should not alter it for the
benefit of one party and to the detriment of the othersx The judicial function of a court of law is
to enforce a contract as it is writtenx

å   
 
   
   
 
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?=
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 1?# The plaintiff was entitled to expectancy damages plus incidental losses resulting
from the breachx Expectancy damages are damages sufficient to put the plaintiff in the position
he would have been if the contract had been performedx The correct measure of damages for a
failure to perform a contract as promised is the difference between the result that was promised
and what was actually providedx Plaintiff should be as good of a position as if defendant would
have kept his contractx
ithout a promise you don¶t get to contract and without contract you
don¶t get to contractual liabilityx Good for Offer and Acceptance analysisx

#awkins (P) underwent surgery to repair scar tissue on his hand resulting from burns he
sustained from contact with an electrical wirex Drx McGee (D) gave awkins a 100% guarantee
that he would be able to repair the scar tissue by grafting skin from his chest to his handx The
surgery was unsuccessful and awkins was left with a hairy handx At trial, awkins sought
damages for breach of contract due to McGee¶s failure to perform including pain and sufferingx
The jury entered judgment for awkins but the judge ordered remittiturx awkins refused and
brought this appealx awkins' hand was scarred from contact with an electrical wirex e was
approached by McGee, a doctor, about having the scars removedx McGee guaranteed to make the
injured hand a "one hundred percent good hand"x McGee used a technique of "skin grafting" that
he was unfamiliar with and failed to remove the scarsx ecause McGee used skin from
awkins's chest area, the graft caused the palm of awkins' hand to grow thick hairx

 #The true measure of damages as applied to this case would be the difference ³between the
value to [awkins] of a perfect hand such as the jury found the defendant promised him, and the
value of his hand in its present condition« Did the lower court follow this rule correctly?


0
#The court held that the amount of damages awarded should be equal to the difference
between the value of what awkins was promised to receive²a "one hundred percent good
hand"²and what he in fact received²a hairy palm²as well as any incidental losses he incurred
as a result of the breachx This is known as expectation interest (or expectation damages), which
attempts to put the plaintiff into a position where they would have been had the contract not
breachedx The court made a point of dismissing the argument towards damages for the pain and
suffering because pain and suffering were an implicit part of the contract for surgeryx The case
does not stand for the principle that expectation damages are the only proper measure of
damages ² there are many other measuresx Another, for example, would be the cost to fix the
hand, and another would be what it would be the difference between what awkins got and what
he had beforex The court found only that this was the proper measure of damages in a case of this
kind in New ampshirex

! 
#The Supreme Court in N restated the rule for damages in a contract breachx More
specifically, the measure of damages is the difference between the value of the contract as
carried out and the value of the contract as brokenx

>
>#c




 1?# Expectation interests, restitution interests and reliance interests are used in
measuring damages to put the promisee in the position in which she would have been had the
promise been performedxClear proof of a doctor¶s promise of specific medical results may give
rise to an enforceable contractx

# Sullivan (P) entered into a contract with O¶Connor (D), wherein D promised to perform
two surgeries on P¶s nose to enhance P¶s appearancex After three surgeries on P¶s nose, D failed
to achieve the promised resultsx The surgeries performed by D actually worsened P¶s appearance
and further surgery would not improve P¶s conditionx The judge instructed the jury that: (1) P
was entitled to recover her out-of-pocket expenses; (2) P could recover damages flowing
directly, naturally, proximately, and foreseeably from the D¶s breach; and, (3) P could be
awarded pain and suffering on the third operation, but not the first two operationsx The jury
verdict awarded P 13,500x D appealed, claiming that the judge erred in allowing the jury to take
into account anything but P¶s out-of-pocket expensesx

 # s P entitled to recover for the worsening of her condition and for the pain and suffering
and mental distress involved in the third operation?


0
# Yesx Judgment affirmedx Some courts view the promise by a physician like an ordinary
commercial promise and permit a successful plaintiff to recover expectancy damagesx
Expectancy damages are measured by an amount of money intended to put the plaintiff in the
position he would have been in had the contract been performedx nstead of expectancy damages,
a successful plaintiff may elect restitution damagesx Restitution damages are measured by an
amount of money corresponding to any benefit conferred by the plaintiff upon the defendant in
the performance of the contract disrupted by the defendant¶s breachx ere, the court found
restitution damages to be too meagerx Other cases have indicated that reliance damages are to be
applied in patient-physician actions on breach of alleged special agreementsx Reliance damages
are measured by an amount of money to put the plaintiff back in the position he occupied just
before the parties entered upon the agreementx Reliance damages compensate the plaintiff for the
detriments she suffered in reliance upon the agreementx There is no general rule of law that
recovery for pain and suffering or mental distress under reliance damages is barred, particularly
when under the circumstance those damages were foreseeablex The mere fact that P agreed to go
through some pain and suffering because of the initial operation does not change the fact that she
went through additional pain and suffering in attempts to fix the problems created by D¶s breach
of contractx P was not confined to the recovery of her out-of-pocket expensesx P was entitled to
recover for the worsening of her condition and the pain and suffering and mental distress
involved in the third operationx These items were compensable on either an expectancy or a
reliance viewx

! 
# The promisee is often said to receive ³the benefit of the bargain and the interest
that is protected is called the expectation interestx The promisee has a reliance interest if she has
changed her position to her detriment in reliance on the promisex The promisee has a restitution
interest if she has not only relied on the promise but has conferred a benefit on the promisorx

Ordinary principles are that it is hardly a defense to a breach of  that the promisor acted innocently and
without negligencex Measure of damages allows P to recover any expenditure made and for any
detriment following proximately and foreseeably upon the D¶s failure to carry out his promisex Tendency
of formulation is to put the P back in the position he occupied just before the parties entered upon the
agreement, to compensate him for determents he suffered in reliance upon the agreementx

There is not rule barring recovery from breach of  for psychological as well as physical injuryx
Suffering or distress resulting from breach going beyond that which is envisaged by treatment as agreed,
should be compensable on the same ground as the worsening of the patient¶s condition because of the
breachx

Reliance Compensation = )¶s Payments + Value before Operation ± Value after Operation + (Expectation
Mixed in Additional Pain Endured) + Psychological and Physical njury

uestion: ow does court predict which category a statement falls in: Promise = cc$
Liability for reach  Prediction = No reach

Purpose of expectation damages is to encourage reliance on sx The test is therefore what the one who
relies believedx

The rule is [the basic test] that in this dichotomy classification of future sounding statements between
predictions and promises, the general test is what a reasonable person in the position of the listener would
have understood which side of the line it was onx t is therefore not dependent on what the speaker really
intendedx

The first major policy point:

hat is the Rationale for Expectation Damages ± You may safely rely on the promise of promise or
damages will put you in the same positionx
The conventional rationale, the purpose for expectation damages it to encourage parties to s to rely on
s to rely on s and plan their affairs consistent with the promisex Fuller and Perdue are cited as the
developers of

hy aren¶t Reliance Damages the primary principal?

e so much want to encourage reliance that we don¶t require people to prove their reliance damagesx
Clearly expectation damages protect reliance in any instance of a profitable x

Some reliance is hard to prove ± Reliance of missed opportunitiesx f no  the other party would be
looking for other dealsx
ould they have found?
Efficient reach: t is related to efficiency relatedx
e want to encourage reliance but breach in
circumstances where benefits exceed cost of benefitx

Mitigation rules require mitigation of damages to lessen cost of breach, only to the extent that mitigation
does not interfere with expectationx

Realists realize you don¶t know where a non-breaching party would have beenx Ascertaining precisely is
a guesstimatex The law frequently has to choose between expectation and efficient breachx You must
balance between over and under compensationx

Tilt toward efficient breach at perhaps cost of expectation interest:

New usiness reach

Peevy ouse vx Garland Coal

Plante vx Jacobs

Tilts in favor of expectation away from efficient breach:

Neri vx Retail Marine -- Loss Volume Seller

Reliance Recover with and Principle limitation

Restitution

A whole new set of policy objectives [efficiency won¶t justify] exgx Recovery of down payment of buyer,
not necessary to protect expectation interestsx

Policy is moral philosophy basedx t¶s just morally wrong to have seller keep the down payment and
breachx Unjust enrichmentx

Chapter 3
Contract and Continuing Relations

There are three clusters of parties to contracts and each cluster exhibit distinct features: Deals
can be (1) person to person; (2) person to organization; and (3) organization to organizationx

u? ³discrete contacts are one time deal where the parties have never done business before
and don¶t plan on doing business againx
u? ³relational contracts are long term deals that involve people who know each other have
plan on doing business for an extended amount of timex
n relational contracts ³Parties treat their contracts more like marriages than like one night
standsx Obligations grow out of the commitment that they have made to one another, and the
conventions that the trading community establishes for such commitments; they are not frozen at
the initial moment of commitment, but change as circumstances change; the object of contracting
is not primarily to allocate risks, but to signify a commitment to cooperate« and the sanction for
egregiously bad behavior, is always, of course, refusal to deal againx



 0
 . 

 111 
0 
 
Classical lawyers say that a contract requires (1) an offer; (2) an acceptance of the terms of that
offer; and (3) considerationx Lawyers and Judges wanted to develop rules that would fix the
exact moment that parties created a contractx efore this instant, the parties were still completely
free to alter their negotiating positions or back out entirelyx After formation, they list this power
and were bound to a contractx

Contracts scholars said that offer- and-acceptance law served to (1) enable the court to mark off a
dividing line between ³preliminary negotiations toward a deal and closing of a bargain; (2)
ensure that the parties had agreed on some minimum quantity of sufficiently defined terms so
that a court could find that they actually had made a deal; and (3) give the court a reliable
method to determine the content of their dealx

UCC §2-204 repeals rules that require courts to find a precise instant when parties made a
contract it says: (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 contractx
(2) An agreement sufficient to constitute a contract for sale may be found even though the
moment of its making is undeterminedx (3) Even though one or more terms are left open a
contract for sale does not fail for indefiniteness if the parties have intended to make a contract
and there is a reasonably certain basis for giving an appropriate remedyx

. 
00 1
  
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#Judges said contract rested on the ³intention of the parties, and there had to be a
³meeting of the mindsx The requirement that there be a subjective union of the wills of the
parties became not just a metaphor representing an idealized vision of agreement but a legal
standardx

½I  > . / 1c


That actual intention and real choice are irrelevant; liability rests on outward objective
manifestationsx Courts interpret contracts in context in terms of what a reasonable person should
understand from the communicationx Secret reservations and private meanings of words do not
controlx



 
. 1  1
 11 #
Silence in response to an offer is not an acceptance, except when it isx Suppose S writes to ,
³Unless  hear from you in two days, you will be deemed to have accepted my offerx Doing
nothing does not create contractual liabilityx This rule protects free choice and avoids what could
be a burdensome commercial practice ± responding to ward off liabilityx owever, in a
continuing relationship, the parties can agree that renewals of their arrangement will take place
automatically unless one party gives notice of desire to cancel itx This agreement can be implied
from custom and past practicex This means that if S and  had often done business in the past,
and  had accepted that it was reasonable for S to treat ¶s silence as an acceptance, then 
could be bound to a contractx
. !
 111 
People must accept offers to create conventional contracts, but they cannot accept them after
they have expiredx An offer lasts only to any limit specified in its termsx Offer that specific no
expiration time, but are on their face unlimited, are, nevertheless, open only for a reasonable
timex ow long is reasonable depends on the circumstancesx n a rapidly fluctuating market this
might be as short as the time to place a phone call or send an emailx On the other hand, an offer
to sell a business or a vacant lot might remain open for weeksx

Generally, an offeror can revoke an offer until it has been acceptedx An offeror can revoke even
if he promises to keep the offer open until a certain time because a promise not to revoke lacks
consideration (and so is not binding) since the buyer gave nothing for it, and so that promise was
not enforceablex There is a way for the offeree to secure an irrevocable offer under classical
doctrinex The offeree could buy an option giving the offeror consideration for the promise not to
revoke, and then the promise would be enforceablex

Some courts have applied Restatement of Contracts §90 to irrevocable, or ³firm offersx Once
there is reliance on the promise not to revoke, the offeror loses his power not to revokex UCC
§2-205 explicitly repudiates the common law rule requiring consideration to create irrevocable
offers and says that a merchant can make an irrevocable offer in writing, which will stay open
despite the absence of consideration or any proof of actual reliancex The statute limits the
duration of such an offerx

. %

 1 
 

u? One must use a reasonable means to communicate his or her acceptancex For example, it
usually is safer to accept by fax when an offer was made by fax, since the use of a fax
suggests the need for quick actionx
u? Under classical doctrine, one must accept the precise offer made to create a contractx
³The offeror is master of the offerx For example one cannot accept to sell a five year old
Ford for 10,000 by saying ³ accept your offer to sell a four year old Chevy for 5000x
u? Distinguish between recovaction of an offer, which is what an offeror does to terminate
one that she has made, and a rejection, which is what an offeree does when she refuses to
go along with a deal that the offeror has proposedx The offeree rejects an offer by
expressly or impliedly commutating a lack of interestx And, importantly, a counteroffer is
treated as a rejectionx Once a counteroffer is proposed the offeree has terminated his
power to accept offer even on the original termsx
Under UCC §2-207, if there is a ³definite and seasonable expression of acceptance, there is a
contractx

.  
 .
%

0

The general rule binds the offeror once the offeree deposits the letter of acceptance in the
mailbox, since the offeree is likely to rely from that pointx Acceptance occurs once the
acceptance is mailedx
)
/:
hen the offer is accepted, the offeree may act in reliance of that acceptance
%

:
ould a person who is the offeree be reasonable in assuming that their acceptance
is invited and that their acceptance will conclude the dealx

.  A  0
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/

Contracts must be reasonably certain to be enforceablex
UCC §2-204(3) expresses the standard as ³a contract does not fail for indefiniteness if the parties
have intended to make a contract and there is a reasonably certain basis for giving an appropriate
remedyx Section 2-305 governs ³open price terms and provides that ³ the parties if they so
intend can conclude a contract for sale even though the price is not settledx n such a case the
price is a reasonable price at the time for delivery if (a) nothing is said as to price; or (b) the price
is left to be agreed by the parties and they fail to agree; or (c) the price is to be fixed in terms of
some agreed market or other standard as set or recorded by a third person and it is not so set or
recorded «x Subsection (4), however provides; ³
here, however, the parties intend not to be
bound unless the price be fixed or agreed and it is not fixed or agreed there is no contract«x

A Policy Approach to Judicial ntervention

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(1)?. 


0)
/x Sometimes a relationship is so important to the parties that
changing it or leaving it would have unusually serious consequences for their livesx t is
not easy for them to ³exit if the relationship goes wrongx They can¶t pack up and go
elsewherex Examples include worker expelled from unions, doctors from medical
societies, or brokers from stock exchangesx n such cases, only outside intervention may
prevent or compensate what we see as serious harmx The fact that ne party holds the other
in a stranglehold is a reason for interventionx
(2)?. ! 0
?0)
/# The agency may be getting in over its head, t may not be
able to sort out conflicting claims of right and wrong in a complex relationshipx The
relationship has its own unique history, specialized vocabulary, power hierarchies,
personal animosities , and implicit understandingsx ( The obvious example is the
difficulty faced by courts asked to decide contending claims to church property among
schismatic factionsx Each asserts that it, and it alone represents the true religion of the
churchx t is easy to see why courts are reluctant to intervenex
(3)?.  )  )
/# f most of the parties think that the outside intervention is
undesirable and would be an uncalled for interference in their affairs, the agency¶s
attempt to intervene may simply cause resentment and resistancex This is particularly true
if the legal agency operates as a court and uses adversarial procedurex Such procedures
invite parties to show their opponents in the worst possible lightx
hen a plaintiff charges
a defendant with wrongful conduct, it may aggravate an already difficult relationshipx As
a result, parties may not cooperate in fact-finding, settlement, or enforcement processx
(4)?.  >
 )
/x The autonomy of the relationship itself may be independently
valuablex Chafee says that the ³health of society will usually be promoted if the groups
within it which serve the industrial, mental, and spiritual needs of citizens are genuinely
alive « Legal supervision must often be withheld for fear that it may do more harm than
goodx f parties ³legalize their relationship, and structure it with a view toward invoking
outside legal regulation to enforce their demands, they may sacrifice cooperationx
c

. 0
/ 


hich Promises Should the Law Enforce?

Courts and Contracts between usband and
ife

usbands and wives can make contracts with each otherx The wealthy often agree to keep their
property separatex One spouse may wish to buy the land, or artwork, or automobile of the other
spousex One agrees to buy the other agrees to sellx

;
1 >#;
1 


 1?# There is a rebuttable presumption against an intention to create a legally
enforceable agreement when the agreement is domestic in naturex
# usband and wife lived together in Ceylonx They went to England during the usband¶s
leave from workx Once the usband had to return the wife stayed due to her illness (rheumatoid
arthritis), and husband agreed to send her 30lbs per monthx Their marriage deteriorated and she
sued for the 30lbs per month to be enforcedx
 #
hether there are some types of agreements were the parties do not intend legal
consequencesx


0
# The court reasoned that arrangements between husband and wife do not constitute a
contractx This is because, according to the court, it is quite common and it is the natural and
inevitable result of the relationship of husband and wife, that the two spouses should make
arrangements for allowancesx Moreover, they are not contracts because the parties did not intent
that they should be attended by legal consequencesx At the inception of the arrangement, the
parties never intended that they should be sued uponx Agreements such as these are outside the
realm of contracts altogetherx

% .
>#!



 1?#Post marital agreements are unenforceable if they violate statutory policy favoring
no-fault divorcex

# usband appeals an order upholding the validity of a post marital agreementx n the
agreement he promised to grant the wife all of his interest in certain of the parties¶ community
property should he use illicit drugsx Unfortunately, the husband did not keep his promisex
Thereafter his wife filed for divorcex

 #
hether statutory regulations pertaining to marriage would be frustrated if the agreement
was to be enforced?


0
# Yesx Therefore the agreement between the parties is unenforceablex Marriage itself is a
highly regulated institution of undisputed social value, and there are many limitations on the
ability of persons to contract with respect to it, or to vary its statutory terms, that have nothing to
do with maximizing the satisfaction of the parties or carrying out their intentx The conduct of one
spouse would affect the divison of community property, the agreement frustrates the statutory
policy favoring no fault divorce « as such, its objective is illegal under Civil Code section 1667,
which renders a contract unlawful if it is ³Contrary to an express provision of lawx Contrary to
the policy of express law« or otherwise contrary to good moralsx Additional the contract fails
for lack of considerationx

  

n Miller vx Miller, the husband and wife signed a contract stating the husband will give the wife
money every month for her to perform the duties of a wifex Additionally they agreed to live
together and maintain a faithful marriagex Mrsx Miller¶s petition alleged and for purposes of the
demurrer it was taken as true, that Mrx Miller was spending money on other women and refused
to furnish Mrsx Miller with necessary clothingx The Supreme Court of owa found that enforcing
this contract was against public policyx t explained that in order to enforce the husband¶s
promise, a court would have to decide whether the wife had carried out her part of the bargainx
³Judicial inquiry into matters of that character, between husband and wife, would be fraught
with irreparable mischief, and forbidden by sound considerations of public policyx

Did the Millers actually intend their agreement to be legally enforceable?

Cultural norms:
e suggest that ³living tree and ³dismal swamp polices are not value-neutral
in their impactx Consideration and public policy doctrines are not simply technical exercises in
applying general rulesx They reflect assumptionsx Scholar point out the indirect discriminatory
effectx t may confirm social practices that appear neutral and nondiscriminatory, but n fact
perpetuate the exclusion of a particular group that has been subject to discrimination in the pastx

omen in contracts with husbandsx A legal tradition evolved which recognized a world split into
public and private spheres and segregated women into the private sphere where such legal ideals
did not applyx

Premarital agreements: Until the 1960s, courts found premarital contracts that encouraged
divorce to be against public policyx Court believed divorce would be encouraged by enforcement
of agreements purporting to protect income and property of one spouse from the other spouse¶s
claims upon divorcex This view refused to allow the parties to use a contract to undercut
legislation that protected the woman¶s economic positionx

n Posner vx Posner, decided in 1970 the court decided that premarital agreements that dealt with
property division upon divorce were no longer necessarily against public policyx The Court
pointed to no-fault divorce and the changing roles of womenx

Court now enforce premarital agreements as long as they are not unconscionablex Substantive
review of premarital contracts typically is justified on ideas of cognitive limitations and bounded
rationalityx These ideas often are criticized as paternalisticx t can be argued instead that
substantive review of these contracts is more effectively defended on the grounds of the public
interest in marriagex
Post marital agreements: Ultimately, postnuptial bargaining is likely to result in one of three
outcomesx First, if both parties spouses have high outside options, they will divorce and seek
happier lives outside of the marriagex Second, if the value of the husband¶s outside option is low,
the wife will not sign a postnuptial agreement and the spouses will continue to split the marital
surplus equallyx Third, if the value of the husband¶s outside option is high, and the value of the
wife¶s option is low, he will receive his reservation price but nothing morex

%  
0c .½ 
c


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>#%>



 1?# The California court found that partners in nonmarital relationships may bring
claims for property division based on both express and implied contractsx

# Plaintiff and defendant lived together for seven years without marrying, with all property
acquired during this time taken in defendant¶s namex Plaintiff avers that she and defendant
entered into an oral agreement where the parties would combine their efforts and earnings and
share equally all property accumulated as a result of their effortsx Plaintiff agreed to give up a
lucrative career as a singer and entertainer and assume the role of homemaker, with defendant
agreeing to provide for all of plaintiff¶s financial supportx Defendant compelled plaintiff to leave
his household in May of 1970, and continued to provide support to her until November of 1971x
Thereafter, he refused to provide further supportx Plaintiff brought suit to enforce the oral
agreement, claiming that she was entitled to half the property and to support paymentsx The trial
court granted judgment on the pleadings for the defendantx

 # Did the trial court err in granting defendant judgment on the pleadings?


0
# Yesx The court held that (1)The provisions of the Family Law Act do not govern the
distribution of property acquired during nonmarital relationship; such a relationship remains
subject solely to judicial decisionx The courts should enforce express contracts between
nonmarital partners except to the extent that the contract is explicitly founded on the
consideration of meretricious sexual servicesx (3) n the absence of an express contract, the
courts should inquire into the conduct of the parties to determine whether that conduct
demonstrates an implied contract, agreement of partnership or joint venture, or some other tacit
understanding between the partiesx The courts may also employ the doctrine of quantum meruit,
or equitable remedies such as constructive or resulting trusts, when warranted by the facts of the
casex The trial court erred in granting defendant judgment on the pleadings because the plaintiff¶s
complaint states a cause of action for breach of an express contract, and can be amended to state
a cause of action independent of allegations of express contractx Defendant first and foremost
claims that the alleged contract should not be enforced because it violates public policy due to its
close relationship to the immoral character of the relationship between plaintiff and defendantx
owever, a contract between nonmarital partners is unenforceable only to the extent that it
explicitly rests on the consideration of meretricious sexual servicesx Courts should look to the
consideration underlying such agreements to determine their enforcementx Defendant secondly
claims that the contract violated public policy because it impaired the community property rights
of etty Marvin, his lawful wifex owever, there is no reason that enforcement of the contract
between plaintiff and defendant against property awarded to defendant by the divorce decree will
impair any right of the lawful wife; therefore it is not against public policyx Defendant next
contends that enforcement is banned by civil code requiring all contracts for marriage
settlements to be in writingx owever, a marriage settlement is an agreement in contemplation of
marriage, and the present contract does not fall within this definitionx Previous precedent has
held that the Family Law Act suggests that property accumulated by nonmarital partners in an
actual family relationship should be divided equallyx Although courts have generally not
recognized the fact, common law principles hold that implied contacts can arise from the conduct
of the partiesx Courts have allowed partners to retain a proportionate share of funds or property
contributed to a relationship, but have disallowed such an interest based on contribution of
servicesx ecause the Family Law Act is intended to eliminate fault as a basis for dividing
marital property, implied contractual claims should be allowed in nonmarital relationshipsx

! 
# The judicial overreach, the majority perform a nunc pro tunc marriage, dissolve it, and
distribute its property on terms never contemplated by the parties, case law, or the legislaturex

! 
# The Court examined how the distribution of property acquired in a non-marital

relationship should be governedx The court allowed not only plaintiff¶s claim that an express
contract existed and should be enforced, but also found that implied contracts may be found in
such situations

  
0Ë 


mplied contracts between those who cohabitate: the Marvin case held that the parties who
cohabited could make express or implied contracts dealing with property or other matters
involved in their relationshipx owever, Michelle Marvin was unable to prove that there was an
implied contract to share income based on how the parties lived togetherx

Not all states follow Marvin: The Supreme Court of llinois held in ewitt vx ewitt, The issue
of unmarried cohabitants¶ mutual property rights « cannot appropriately be characterized solely
in terms of contract law, nor is it limited to considerations of equity or fairness as between the
parties to such relationshipsx There are major public policy questions involved in determining
whether, under what circumstances and to what extent it is desirable to accord some type of legal
statutes to claims arising from such relationshipsx The issue is whether it is appropriate for this
court to grant legal status to a private arrangement substituting for the institution of marriage
sanctioned by the Statex The court holds that plaintiff¶s claims are unenforceable for the reason
they contravene the public policy implicit in the statutory scheme of the llinois Marriage and
Dissolution of Marriage Act, disfavoring the grant of mutually enforceable property rights to
knowingly unmarried cohabitantsx

Contrast Marvin and ewittx

n re aby Mx

The Court was asked to determine the validity of a surrogacy contractx The court invalidated the
surrogacy contract because it conflicts with the law and public policy of this Statex Essentially,
the court said that the surrogacy agreement was an attempt to evade the adoption and child
custody laws of the statex

hich Promises Should the Law Enforce? ± The Response of Contract Doctrine and the Role of
Form

³ait : Promises by a Family Member with Money to nfluence the Lives of Those
ithout t

This section is a look at promises made to family members to induce them to do things desired
by the one with moneyx These are not commercial situations, but courts often use contract law as
a tool to resolve problems that do not fit into family or property lawx A disproportionate number
of well-known contract cases follow this pattern, and so it is a useful paradigm for the study of
contract doctrine, the limits of judicial capability, and the advantages and disadvantages of
thinking of agreements as creating relationships rather than transactionsx

To make a gift the law insists on donative intent plus delivery of propertyx
The Restatement of Trusts, §2 defines a trust as ³a fiduciary relationship with respect to
property, subjecting the person whom the title to the property is held to equitable duties to deal
with the property for the benefit of another personx

s transaction between father and son for law school a contract/ This raise the question of
whether there was ³consideration for the father¶s promisex
as this ³a bargained-for exchange
between the parties, or rather, was it no more than ³a statement of intention or a promise to
make a gift to the son on a certain condition? A completed gift requires no consideration to be
enforcedx owever, a promise to make a gift in the future ± or, for that matter, a promise to make
a will or create a trust ± typically will be unenforceable without itx There are some exceptionsx
Often it is difficult to distinguish a conditional gift from a bargainx

Legal formality:
e can view the requirements for making a legally enforceable will, gift, trust,
or contract as formsx That is, there is a necessary pattern of conduct or ceremony which people
must follow to trigger a particular legal relationshipx For example, wills require a writing
witnessed by two peoplex Gifts require intent plus deliveryx Trusts require a declaration to hold
specific assets for another, and contracts require an exchange (and often, but not always, a
writing as well)x
e can ask about the costs and benefits of formal requirementsx

The costs of legal form are obviousx One person may clearly intend to transfer property, and the
other may expect to get it and even rely on the transactionx owever, if they have not met a
formal requisite, the attempted transfer of rights failsx

The functions of benefits of form may not be obvious to everyonex The persistence of formal
requirements in many legal systems suggests, but does not prove, that there may be some, or a
great deal of utility in themx Professor Fuller says that legal formalities have three functions ±
cautionary, evidentiary and channelingx

Cautionary: f people must go through a formal ceremony to create legal relationships, it may
warn them that they are doing something serious and importantx Such a warning should serve to
prompt thought about the commitment being madex nsofar as people view exchange-based
bargains as serious and as slightly dangerous, a contract also serves as a formx argaining warns
people not to be carless in the promises they makex

Evidentiary: some forms give us evidence that a transaction took place while others also tell us
what the terms of the transaction arex
ritten contracts serve the evidentiary function nicely,
provided the parties understand what they have signedx Oral contracts are less usefulx

Channeling: A legal form is important to people who want to do something with legal
consequencesx The law says that you have no gift if there is no intent or deliveryx t also says that
you have no gift if there is no intent or deliveryx t also says that you can make a gift successfully
if you do intend to make one and hand over property or a token representing itx f you want to be
sure that you have a legally enforceable contract, it is useful to find a blueprint telling you how
to build onex

Courts need channels toox The more objective the formal requirements, the easier it is for judgesx
Consideration, Fuller says may serve some of this channeling functionx n planning a contract, a
lawyer knows that she is taking far fewer risks if she cats the arrangement as an exchangex The
courts can quickly sort clear cut exchanges from all other promissory transactions, and they may
refuse to act or demand strong reasons for enforcement of non-exchangesx

0 ># 0?/


 1?#n general, a waiver of any legal right at the request of another party is sufficient
consideration for a promisex argain-for legal detrimentx Changing your legal statusx The
nephew was forbearing his legal rightsx

#
illiam Ex Story and his nephew,
illiam Ex Story , agreed that the uncle would pay
his nephew 5000 if the nephew would refrain from drinking, using tobacco, swearing, and
playing cards and billiards for money until he turned 21x
hen the nephew turned 21 his uncle
sent him a letter that indicated that the nephew had earned the 5000 and that he would hold the
money with interest until the nephew became capable of taking care of it responsiblyx The
nephew accepted the termsx The uncle died twelve years later without having transferred the
funds to his nephewx

 # s forbearance from permissible legal conduct sufficient consideration to create a valid and
enforceable contract?


0
# Yesx The mere abstention from a permissible legal conduct is sufficient consideration
to make a promise based on that forbearance a valid contractx Consideration is not measured as a
benefit to the promisorx
hen an offer is ambiguous regarding whether acceptance shall be in the
form of performance or an exchange of promises, determining if the offeror was indifferent to
whether acceptance be by performance or promise is accomplished by interpreting the language
of the offer under the circumstances in which it was madex The court held that in this case, the
language of the offer made it clear that the uncle sought acceptance by performance and not by a
promise to performx Defendant contended that the contract was invalid because it lacked
consideration and that there is no consideration unless the promisor is benefitedx The court stated
that consideration may consist in either some right, interest, profit, or benefit to one party, or
some forbearance, detriment, loss, or responsibility given, suffered, or undertaken by the otherx t
is immaterial whether the consideration does in fact benefit the promisee or a third party or is of
substantial value to anyonex Refraining from something that one is entitled to do is a sufficient
detriment to create an enforceable contractx Disposition: Reversed in favor of amer (P)x

! 
# Under Restatement 2nd 32 if an offer is ambiguous it can be accepted by a promise

or actual performancex f acceptance is through performance the contract is unilateral, if through
promise the contract is bilateralx

Consideration is defined as a valuable consideration, in the sense of the law, may consist ethier
in some right, interest, profit, or benefit accruing to the one party, or some forbearance,
detriment, loss, or responsibility given, suffered, or undertaken by the otherx

Courts will not ask whether the thing which forms the consideration does in fact benefit the
promise or a third party, or is of any substantial value to anyonex t is enough that something is
promised, done, forborne, or suffered by the party to whom the promise is made as consideration
for the promise made to himx

Notes and uestions

hat is ³consideration and how is it different from a contingent gift?

Restatement of Contracts §71x Requirement of Exchange; Types of Exchange

(1)?To constitute consideration, a performance or a return promise must be bargained forx

(2)?A performance or return promise is bargained for if it is sought by the promisor in
exchange for his promise and is given by the promisee in exchange for that promise
(3)?The performance may consist of
(a)? An act other than a promise, or
(b)?A forbearance, or
(c)? The creation, modification, or destruction of a legal relationx
(4)?The performance or return promise may be given to the promisor or to some other personx
t may be given by the promise or by some other person

illiston¶s tramp casex f a benevolent man says to a tramp: 'f you go around the corner to the
clothing shop there, you may purchase an overcoat on my credit,' no reasonable person would
understand that the short walk was requested as the consideration for the promise, but that in the
event of the tramp going to the shop the promisor would make him a giftx Yet the walk to the
shop is in its nature capable of being considerationx t is legal detriment to the tramp to make the
walk, and the only reason why the walk is not consideration is because on a reasonable
construction it must be held that the walk was not requested as the price of the promise, but was
merely a condition of a gratuitous promisex t is often difficult to determine whether words of
condition in a promise indicate a request for consideration or state a mere condition in a
gratuitous promisex An aid, though not a conclusive test, in determining which construction of
the promise is more reasonable is an inquiry whether the happening of the condition will be a
benefit to the promisorx f so, it is a fair inference that the happening was requested as a
considerationx On the other hand, if, as in the case of the tramp stated above, the happening of
the condition will be of no benefit to the promisor but is obviously merely for the purpose of
enabling the promisee to receive a gift, the happening of the event on which the promise is
conditional, though brought about by the promisee in reliance on the promise, will not properly
be constructed as considerationx n case of doubt where the promisee has incurred a detriment on
the faith of the promise, courts will naturally be loath to regard the promise as a mere gratuity
and the detriment incurred as merely a conditionx ut in some cases it is so clear that a
conditional gift was intended that even though the promisee has incurred detriment, the promise
has been held unenforceablex
An ntroduction to the Doctrine of Consideration

Consideration ± a promise for an act: Seller promises to deliver a car if buyer will pay 1,000x f
the seller refused to deliver the car although the buyer had paid the seller moneyx One way to
validate the promise is to show that buyer gave consideration for the promisex The 1,000 buyer
paid seller would be consideration to support enforcement of the seller¶s promise to deliver the
carx This is the easiest casex uyer paid the money, and this was the price for the promisex
Contact¶s scholars call this a ³half-completed exchangex

Consideration ± a promise for a promise: Suppose the buyer had never paid the 1,000 as
promisedx owever, buyer was ready, willing, and able to do so when seller refused to deliver
the carx There would still be consideration for seller¶s promisex uyer¶s promise to pay would
serve as consideration for seller¶s promise to deliverx Consideration can be either an action or a
promise to actx owever, instead of promising to act,  can also promise not to act when  had a
legal right to do sox That, too, works as considerationx My promise not to do something is
consideration for your promise to payx A promise is consideration, however, only if performing it
would be considerationx Suppose, in exchange for your promise to pay me 1,000,  promise not
to smash the windows of your storex Since  had no legal right to smash your windows, my
promise is not consideration for yoursx Of course, this does not mean that my promise might not
be valuable if  had the power to smash your windows and the police were unlikely to protect
youx Consideration is not just something you want or valuex t must be something  have a legal
right to withhold from you if you do not payx

Consideration ± bargained for and given in exchange: Not just any act or promise will serve as
considerationx This is ture even if the action or the promise was or would be very valuable to the
one getting itx Consideration must be bargained for and given in exchangex Examplex ill gives
his sister 5,000 for schoolx The sister now has a good job and has a sports carx The sister out of
gratitude promises to give ill the car once she gets a new onex owever before the sister gets a
new she gets into a big fight with ill and refuses to carry out her promisex f ill wishes to
pursue the matter, is the sister¶s promise to transfer title to the car supported by consideration?
Nox The 5,000 given by ill to sister is not consideration for her promise to give him the carx t
was not ³bargained for and given in exchangex ³argained for does not mean ³haggled over
but rather means that paying 5,000 would have to be the inducement for her promise to transfer
title to the carx ill¶s kind act in the past prompted her promise, but he gave her the money as a
gift with no strings attachedx
Consideration ± transforming gifts into bargains to make them legally enforceable: Suppose June
wants to promise to give her car to billx owever, her lawyer said that promises to make gifts are
not legally enforceablex She asks ill to promise to give her a book in exchange for her promise
to deliver the carx Now is June¶s promise enforceable as supported by consideration? Some
courts have said things such as ³
e look for only the presence and not the adequacy of
considerationx Some courts have refused to look behind the form of the transaction to the real
transactionx The Restatement of Contracts follows the bargin theory of considerationx Since the
promise to deliver the book in no way induced June¶s promise, it says there is no considerationx
owever, it says that there would be consideration if June¶s motives were mixedx f she acted
both to get the book because she really wanted it, and to express her gratitude, then there would
be considerationx

Consideration ± policing bargains for equality? A promise and the consideration for it need not
be of equal valuex A prominent exception to this rule concerns an exchange of unequal sums of
moneyx A promise to pay 100 in exchange for 5 is unenforceable for want of considerationx
Courts often explain by reciting that while they will not investigate the adequacy of
consideration, they will not enforce a bargain which on its face can be nothing but an unequal
exchangex Despite the form of bargain, the transaction would be a gift of 95x
e have few tests
of a court¶s willingness to follow past declarations about disinterest in the adequacy of
considerationx So long as the consideration is sufficient to make credible the idea that it was
bargained for and given in exchange, courts do not ask whether one party made a good deal and
the other a very bad onex owever courts will refuse to enforce grossly disproportionate
exchanges on the ground that they were procured by fraud, are unconscionable, or were the
product of duressx

Consideration ± benefit or detriment? There is a contract if Ann promises to transfer title to car if
ob agrees to serve as the county chairperson for Red Crossx Although there is no financial
benefit for Ann, serving as chairperson is a legal detriment to obx

Consideration ± modifications of bargains and pre-existing legal obligations: One of the standard
consideration problems involves the modification of ongoing bargainsx Suppose Dan Architect
agrees to superintend a construction project for ruce uilder for 10,000 feex During the
project, Dan unjustifiably takes the plans and refuses to continue unless ruce pays Dan an
additional 2,000x ruce promises to do so because it is cheaper to buy off Dan than to do
anything elsex s there consideration for ruce¶s promise to pay Dan an additional 2,000x No,
because Dan demanded an additional amount to do no more than he originally promisedx
Consideration serves to protect reliance on bargains and blunt the leverage people in Dan¶s
position get when their trading partners cannot replace them easilyx

Examplex Suppose Angela borrowed 500 from Julia and agreed to repay the money on
December 1stx On December 1st, Angela had only 400x Julia needed money then, and so she
promised to discharge the debt if Angela paid her 400x Payment of 400 would not be
consideration for Julia¶s promisex Angela had a pre-existing duty to pay the debt in fullx She
promised nothing she was not already bound to givex owever, there must be a pre-existing legal
obligation to trigger the rulex Suppose Angela owes Julia 500, payable on December 1stx
owever, Julia needs money because of unexpected obligationsx She asks Angela if she could
repay her on November 25thx Angela says she only has 400, but is willing to pay that then in full
satisfaction of the debtx Since Angela¶s payment was early, she was under no pre-existing legal
obligation to pay thenx

uilder promises to build a house, but he finds that there is an underground stream on the
property, which he will have to divert for more moneyx Owner promises to pay the additional
costx This would seem to be an example of pre-existing dutyx Some courts say if a unforeseen
event causes a great additional expense, that this is an exception to the consideration doctrine and
will enforce the promisex

UCC §2-209 states: ³An agreement modifying a contract within this Article needs no
consideration to be bindingx The comments say that the parties must modify their contract in
³good faithx Leaves it to courts to work out which modifications are good and which ones are
badx

The Restatement of Contracts §89 says that a promise modifying a contract is binding without
consideration: (a) if the modification is fair and equitable in view of circumstances not
anticipated by the parties when the contract was made; or (b) to the extent provided by statute; or
(c) to the extent that justices requires enforcement in view of material change of position in
reliance on the promisex

Consideration ± illusory and alternative promises: whether a promise is illusory often turns on
how we translate itx ut it basically is a promise that is translated to ³¶ll perform, if  feel like
itx Not this easy to spot illusory promises because they are seldom as blatantx Example, A may
hire  to act as agent for three yearsx owever buried in the mass of clauses on their printed form
contract is one that provides that either A or  can end the agreement at any timex As you can
see, this gives either party the legal right to perform or not to perform the agency agreementx

ithout more, this would be an illusory promisex f the contract requires notice, then both parties
are bound at least until the period expiresx This would be enough to make the promises real and
not illusoryx

Promises to repay despite defenses to the debt: Suppose ob owes Jane 1,000, and he did not
repay the money when payment was duex Then ob discovers he has one of several defenses to
the debt: (1) e was a minor when he contracted the debt, it was not for the ³necessaries, and he
disaffirms the debt within a reasonable time after he reaches the age of majority; (2) The statute
of limitations runs before Jane files an action to collect the debtx Despite having one of these
defenses, ob promises Jane that she will be repaidx Jane gives no new consideration for the
promisex Nonetheless, common law courts would enforce itx

avier:
avier is one of the wild cards in the common lawx The term means that a person may
lose a right when she voluntarily gives it upx Of course she might be estopped if she misled the
other party into relying on her statements such that allowing her to assert the right would be
unjustx owever, a waiver does not require proof of reliancex

Consideration and anti-consideration ± Restatement §90: The major exception to the

consideration doctrine offered by the Restatement is §90x Courts can enforce promises without
consideration on the basis of reliance on a promise that the promisor should have expected to
induce reliance, to the extent required to prevent injusticex A court could use it to cancel a great
deal of the impact of consideration doctrinex The alternative reliance-on-a-promise doctrine is
meant to give courts a great deal of discretion, and thus its application in a particular case is
usually uncertainx Courts often talk about §90 before applying standard consideration and offer-
and-acceptance doctrinex
hile parties who assert reliance on a promise often lose, many states
have accepted the doctrine, and courts always could develop it much morex

. c
0 

6 1

 = /># = /


 1?#A mere gratuitous promise is without the consideration necessary for enforcement
as a contractx
 
#Plaintiff was the wife of Defendant¶s brother, but was now a widow with several childrenx
Plaintiff lived on leased public land and would have attempted to secure the land had she
continued to reside therex Defendant lived approximately sixty to seventy miles from Plaintiffx
After hearing of his brother¶s death, Defendant wrote Plaintiff and offered to provide her with
land to live on if she came to see himx Plaintiff left the public land she was leasing and moved to
Defendant¶s landx For the first two years, Defendant put Plaintiff and her family up in a
comfortable home and gave her land to cultivatex After the first two years, Defendant removed
Plaintiff and placed her in an uncomfortable house in the woodsx Defendant then required that
Plaintiff leave the house in the woodsx

 #s there consideration to enforce Defendant¶s promise?


0
# Nox Defendant¶s promise was gratuitous, and as such cannot be enforced due to lack of
considerationx Although the Justice writing the opinion would consider Plaintiff¶s inconvenience
of moving a distance of sixty miles, a sufficient consideration to enforce Defendant¶s promise,
the Court finds that the promise is merely gratuitous and lacks considerationx

! 
# The Court finds Defendant¶s promise to be gratuitous and will not enforce it due to
lack of considerationx t may be that the court was reluctant to interfere in a family disputex
Today, the facts presented in this case would likely be analyzed under promissory estoppelx

 = ># . 



 1?# Equitable estoppel bars a party from asserting lack of consideration where reliance
was induced by the party asserting there was no requisite considerationx

# Plaintiff, the maker of the note was Defendant¶s grandfatherx A witness recalled he came
in and gave her the note stating that he had fixed it so she did not have to work anymorex
Plaintiff died two years later having only paid one year of interest and never paid the full balance
of the note and has expressed regret regarding his failure to pay the note upon his deathx There
was no promise on the Plaintiff¶s part to do or refrain to from doing anything, although she did
abandoned the job in reliance on the notex One year after quitting her job as bookkeeper,
Defendant secured another position as a bookkeeperx

 # Does equitable estoppel preclude the defendant from alleging that the note is lacking
consideration?


0
# Since the grandfather, as maker of the note, intentionally influenced the granddaughter
into changing her position on the belief that note would be paid when due it would be inequitable
to permit him to escape payment of that note on the ground that there was no considerationx The
evidence conclusively established equitable estoppelx

! 
# Recognition of reliance may help solve injustice in cases where an agreement is

unsupported by considerationx

  
 1½
1 
1  0
0 
00 

1  ½

½/.   1
0#

Restatement §375 provides that one is not barred from restitution ³because the Statute of Frauds
unless the Statute provides otherwise or its purpose would be frustrated by allowing restitutionx

!> >#D ½/


 1?# An offer invites the formation of a bilateral K by an acceptance amounting in
effect to a promise by the offeree to perform what the offer requests, rather than the formation of
one or more unilateral K by actual performance on the part of the offereex

#lanche
hitehead and her husband Rupert enjoyed a close relationship with their niece
Caro Davis (P)x The
hitehead¶s suffered health and financial difficulties and Rupert asked
Davis to come to California to help take care of lanche and assist Rupert with his business
affairsx She was promised an inheritance in return for her assistancexOne week after Davis agreed
Rupert committed suicidex Davis moved to California to care for lanchex Upon lanche¶s death
Davis learned that Rupert had left his entire estate to two nephewsxDavis sued Rupert¶s estate
(Jacoby, D), asserting that her agreement with Rupert had created a contractual obligation for
him to make a will and bequest his estate to her and that she was entitled to quasi-specific
performancex Davis appealed the trial court¶s ruling in favor of the estate that no contract had
been formed because Rupert had made a unilateral offer that could only have been accepted via
performancex

 #
hat type of offer is presumed to have been made where the offer is ambiguous as to
whether it is unilateral or bilateral?


0
#The court pointed to Rupert¶s statement ³
ill you let me hear from you as soon as
possible« as a request for an immediate reply so that he could make arrangements and rely on
Davis¶s promise to come to Californiax Furthermore, since Rupert asked her to take care of them
until both of them had died, it was apparent that he had to rely on Davis¶s promise to continue to
care for lanche if she survived himxThe offer was an offer for a bilateral contractx Mrx

hitehead knew form his past relationship with Davis that if they promised to perform (taking
care of Mrs
hitehead) they would performx
hitehead expressly indicated the nature of the
acceptance desired by him, Davis¶ promise that they would come to California and do the things
requested by himx The Davis¶ immediately sent their promise back, and Mrx
hitehead received
the samex The Davis¶ moved to California, and despite Mrx
hitehead¶s suicide, they continued
to perform by administering assistance to Mrsx
hiteheadx

PL A: The letter was an offer to enter a bilateral K, dependent upon PL promise to perform as
acceptancex

Def A: (Jacoby) The letter of April 12, was an offer to contract, but that offer could only be
accepted by performance and not by a promise to performx The offer was revoked by the death
of Mrx
hitehead before performancex

Restatement §86x Promise for enefit Received

(1)?A promise made in recognition of a benefit previously received by the

promisor from the promise is binding to the extent necessary to prevent
injustice
(2)?A promise is not binding under Subsection (1)
(a)? f the promise conferred the benefit as a gift or for other reasons
the promissor has not been unjustly enriched; or
(b)?To the extent that its value is disproportionate to the benefit

1?  
 >
<. 0 0     



 
0. - 

  
. 0
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;=
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:
idow Sarah odgkin (D) wrote to her daughter and son-in-law (³rackenbury , (P))
and asked them to move from Missouri to Maine to care for her for the rest of her lifex n
exchange Mrx and Mrsx rackenbury were given the use of the farm and household goods and
were to receive the property upon odgkin¶s deathx Ps moved to Maine and lived on the farm
and cared for D until an argument ensued several weeks laterx D asked P to depart and executed
and delivered the deed to the property to her son
alterx P sued for a reconveyance of the
propertyx D appealed the trial court¶s judgment for Px

 :
hat are the legal consequences of an offeree beginning performance of a unilateral
contract?


0

0
: eginning performance of a unilateral contract creates an option contract
that renders the offer irrevocable until the offeree has had a reasonable time to complete
performancex
 #? V
#R wrote to the ʌs and asked them to move from Missouri to Maine
to care for her for the rest of her lifex n exchange ʌs were given the use of
the farm and household goods and were to receive the property upon
odgkin¶s deathx ʌs moved to Maine and lived on the farm and cared for
the R until an argument ensued several weeks laterx Rasked ʌ to depart and
executed and delivered the deed to the property to her sonx ʌ sued for a
reconveyance of the property (equitable remedy)x
#?  # eginning performance of a unilateral contract creates an option
contract that renders the offer irrevocable until the offeree has had a
reasonable time to complete performancex
#? i # The ʌ¶s were there and they were trying to performx Rwas
preventing the ʌs from performing so R is actually the one breachingx

 # This was a unilateral Kx The K was never completed but the court says it was so they
rule in favor of the ʌ, treating it like a bilateral Kx Rosen says that even though a unilateral K was
created, performance had begun so the offer should be irrevocable and that should be the
reasoningx odgkin was preventing the performance of the other partyx The result would be the
same under UCC sec 45x

An option contract is created when the offeree begins the invited performance under a unilateral
offerx n this case D¶s offer was in writing and there was no dispute regarding its termsx D¶s offer
was unilateral and P¶s act of moving and beginning to care for D was substantial part
performancex

11  >
 1% 0 


Mediation is a process in which parties to a dispute use a third party who, unlike an arbitrator,
does not have power to dictate the outcomex Mediators act in a number of ways: they can suggest
new solutions to parties; they can help parties recharacterize events; they can separate parties and
act as go-betweens, translating their concerns into less emotional languex


.  
00
/0




. 
.  

#?c 
. 

. 

u?Promissory Estoppel² Promises that induce a foreseeable detrimental
change of position by the promisex The party can enforce the promise even
if other essential elements of a contract are not presentx Promissory
estoppel is equitable reliefx Damages here would be equitable reliefx
Differs by jurisdictionx
#? f the contract lacks consideration is a fort or at will employment
you might be able to enforce under promissory estoppelx Go
through contract analysis then to promissory estoppel analysisx 
u?Equitable remedy² You might persuade the court to award damages
where damages aren¶t necessarily appropriatex n some cases expectation
damages can be achievedx Might not call it expectation damagesx
u?Look for the injustice² f injustice can only be avoid by awarding
damagesx Just one of the things they look atx f this is the only way then
appropriatex
u?Subsequent actions seen as independent choices and not motivated by
reliance on the promise do not give rise to promissory estoppelx f you are
notified by other party that there is no contract you cannot keep acting in
reliance to contract and try to collect damagesx
u?RSC §90 Promise Reasonably nducing Action or Forbearance
#?  
. #*+A promise which the promisor should
reasonably expect to induce action or forbearance on the part of the
promise or a third person and which does induce such action or
forbearance is binding if injustice can be avoided only by
enforcement of the promisex The remedy granted for breach may
be limited as justice requiresx 
½#? *+A charitable subscription or a marriage settlement is binding
under Subsection (1) without proof that the promise induced action
or forbearancex
u?O
   $ ,
isx 1965
#? :Lucowitza agent of red owl agreed with offman that red
owl would build a store and stock it for offman to operatex
offman agreed to invest 18 kx offman sold his bakery and
grocery store businessx offman then purchased the building site
then rent home for familyx offman sued for all these expense and
the families lost incomex
½#?  :Does promissory estoppel apply here?
#? 
0
:Yesx Lucowitz knowingly led the offmans to sell their
business to move etcx and should have reasonable known that his
promises would induce offman¶s reliancex No lost profitsx
Although the agreement was to indefinite to enforce the offman¶s
reliance on the agreement entitled them to reliance damagesx
ecause of all the conditions for promissory estoppel were
satisfiedx
#? The agreement was one that red owl should have realized
the offmans would rely onx
#? The agreement induced such reliancex
5#? The offmans suffered a loss and injustice could only be
avoided by compensating the offmans for their lostx
0#? $:) 0  /  
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#
#? . . 
0 :
#?
as the reliance really reasonable?
 #? Should they have gotten independent advice?
5#?
as good faith a factor?
C#? ow important was timing?

. 0   1  > /
 0  /  
#
offman vx Red Owl is often cited as limiting recovery in promissory estoppel to reliance
damagesx


0
. 

. 
c

!<
#>#

c #

x
algreen decides to get out of the franchise business in
isconsinx A bunch of
franchisees are uptight about thisx

 x Does the
 Fair Dealership Law permit a granter to cancel all dealership arrangements
for bona fide economic reasons?

olding: No: you have to have good causex No injunctive relief, only damagesx


 1?# Several different resolutions, depending on when the dealership

 

#The legislature wasn't trying to create a perpetual care responsibility for dealerships,
but dealers should be reimbursed for losses resulting from terminationx The law covers all such
circumstances, including non-discriminatory withdrawals from an entire geographic rangex The
court suspects that this law may not be a good idea, but acknowledges that it's not for them to
sayx

  # The Court explained its
algreens decision in Remusx

algreen does not stand for the proposition that the Fair Dealership Law forbids a
franchisor to make system-wide changes without the consent of every franchiseex
algreen we
found was trying to eliminate the dealers who had built its reputation in
isconsin, so that it
could open its own stores and appropriate the goodwill that the dealers had created « This was
just the sort of conduct that the
isconsin legislature had wanted to preventx

O ? 


#? % 0 
is a process in which parties to a dispute use a third party who does
not have power to dictate the outcome²as does an arbitratorx They can suggest
new solutions to parties, they can help parties recharacterize events, they can
separate parties and act as go-betweens, translating their concerns into less
emotional languagex owever, mediation does not always prove to be an effective
tacticx Many times, parties are not looking to settlex Sometimes the parties are
fighting for a causex Other times, mediation fails do to outside influences on the
partiesx Mediation is simply a tool that parties use to avoid litigation and
ultimately find whatever it is they are looking forx Problems arise when parties¶
 goals differx This is one of the weaknesses in the mediation processx Mediation
just requires that the parties get together in a room with a third party mediatorx
Nothing morex The parties are not obligated to reach an agreementx ROSEN says
that mediation works against the socially weak partyx
½#? ½ 
unlike mediation, creates a binding result in which parties forfeit
their rights to any judicial reviewx Many lawyers dislike arbitration because its
lack of discovery process may deny claimants the opportunity to prevail on valid
claimsx On top of that, some judges even allow arbitrators to impose punitive
damagesx Furthermore, a private arbitration process may fall short of the parties¶
reasonable expectations of fairness and have a dramatic impact on consumers¶
substantive rights and remediesx 

6 >
 )  $
0 c

 > ;



Three characteristics of unions are worth notingx First, the idea of unions is an expression of
confidence in democracyx
hether employees have a union and which union represents them
turns on a vote of the bargaining unitx Furthermore the membership elects union officials to
officex Second, we characterize union management relations as the product of a contractx
Organized workers gained bargaining power because of the right to strike, and that bargaining
power served to produce a collective bargainx Third, norms of industrial due process govern the
systemx f union members wish to challenge management action, there are procedures to resolve
disputes while at the same time the rights of management and the convenience of the public will
not be interfered with unnecessarilyx nstead of strikes we substitute orderly processx

The grievance arbitration process serves both the interests of the union and of managementx
Grievance systems enable unions to challenge the way management is carrying out the collective
bargainx Union officials can gain the support of members by handling grievances in a satisfactory
wayx Management avoids disputes that provoke strikes, and it gains information about problems

u? 

i, (1965) (Labor arbitration case)
#? : Stewardess was employed by T
A for a number of years
but T
A had a policy to have short hair and have regulationsx This
policy was clearly laid out in the manualx Stewarts failed to comply
with inspection and failed to report to a meeting to discuss her non-
compliancex Then, she did not report to supervisors superiorx She
was terminated for willful insubordination
½#? !  
: Management must be given the right to verify the right
of compliance with their regulations to ask the stewardess to admit
to inspection is neither improper nor unreasonablex
e do not
know why the stewardess refused to comply with inspection, but
there is no evidence that she was evading the hair length rulex Thus
we accept her argument that she refused because she was offended
by the requestx Perhaps future inspections could involve holding
the wig in her handx
#? Reinstatement without back payx
#? . . 
0 :
 #?
as the arbitrator substituting his view for the employer¶s?
#?
hat would T
A state as the cause of the stewardess¶
firing? Does this affect the decision?
5#? Did the view of women in the 1960s play a factor in the
arbitrator¶s decision?
u?á  !% Arbitrations are more privacy, flexible, expedient
and cheap than litigationx
#? c   0G Arbitration law is ill suit to protect against
questionable practices when making arbitration agreementsx They
might put travel and financial burdens on the individualsx 

0
/0




1x An Overview

Unless person has a K for a definite term he can be discharged at any timex

orkers exempt from µemployment at will¶ rule:

u? Unionized workers almost uniformly have in their collective bargaining agreement

dismissal only for cause clausex Often dismissal is an elaborate processx
u? Public employees almost uniformly can only be dismissed for causex

Note: Economic redundancy is considered causex f there is not a need for worker then under
union and public employment they can be dismissedx Note unemployment benefits are the
safety netx

1x? Fixed term Ks are afforded sports, entertainment, executive and school teachersx Under
fixed term Ks dismissal for cause allowed but redundancy is not causex

2x? Anti-discrimination rules ± protects against dismissal for membership in a protected class
(exgx
omen, minorities etcxxx) t is argued by corporations that this only provides for
cause or redundancy dismissal of minoritiesx Employee groups argue in the contrary ±
that it is not a for cause standardx Some protection against arbitrary groups is affordedx

3x? Largest unprotected class is white male professionalsx

4x? No specific performance of personal relationship Ksx The irony is reinstatement would
be automatic for a protected class employee (see above)x Some academic studies have
indicated that the employee might be bought out in lieu of being returnedx

5x? Statutory limits do exist that limit employer¶s right to fire employees at willx Examples
include those based on discrimination, jury duty and union activityx
DY
 D
 
 

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#?
 
3???

u?%
 .>#%./, awx 1970

#? : Mcntosh was an employee of Murphy¶sx Mac moved to
awaii to work for Murphy after Murphy interviewed him twice in
CAx They exchange telephone calls and Mac worked for two
monthsx This contract was not in writing despite the fact it could
not be performed within the year in violation of the statute of
fraudsx Mac sued to recover damages for breach of a one year oral
employment contractx Murphy defended that it was an at will
employmentx 
½#?  :contract exists even in violation of statute of frauds? (Or, is
promissory estoppel allowed?)
#? 
0
: Yesx Although the statute of frauds appliesx The statute
has been limited by judicial construction in order to reduce the
harshness of mechanical applicationx
e must also keep in mind
the policy behind the statute of frauds which is to prevent fraud or
unconscionable injuryx 
#? Should look to RSC § [139]x 
#? t was foreseeable to the defendant that plaintiff would
move to awaii which is 2200 miles awayx
5#? njustice can only be avoided if the contract is enforced
and damages are awardedx 
C#? t is clear that a contract existed because Mcntosh worked
for two and a half months and the jury found thisx 
0#? $:.  .0  
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0
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½

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#
#? ! 
: f the statute of frauds is too harsh then the legislature
should repel or amend but it is not the role of the court to legislatex 


 0 ) > 0 % 

1
)  
 0
/ 

0
/>#

  .1
0c #*98+
: Arco asks the ʌ to engage in some illegal price fixing activities in regard to its gas station
franchiseesx
hen ʌ refused to participate, Arco fired him and said it was because of
incompetencex Ȇ filed suit under tort law but Arco alleges that ʌ¶s remedy for the alleged
conduct is only in contract and not in tortx Trial court agreed with Arcox
 : Can an employer terminate an employee at will for refusing to partake in illegal activities?

: Employers traditionally have a broad power to fire their at-will employees, however that
power may be limited by statute or by considerations of public policyx
An employer may not discharge an employee if the motivation for the discharge contravenes
some substantial public policyx


/ : There is a huge public policy argument herex f we allow employers to fire their
employees for not contributing to and participating in criminal acts, we are basically encouraging
criminal conductx The discharge offends public policy by allowing employers to get away with
promoting criminal behaviorx The court says that the cause of action is   
, meaning that
the action arises out from a breach of duty growing out of the contractx An employer has the duty
to refrain from firing an employee who refuses to commit a criminal actx An employer¶s
authority over its employee does not include the right to demand that the employee commit a
criminal act to further its interests, and an employer may not coerce compliance with such
unlawful directions by discharging an employee who refuses to follow such an orderx
c


: The ʌ is allowed to sue under a tort action for a wrongful dischargex
)
/:
! 
: The legislature should be the one to decide on this issue and not the courtsx The
legislature has already spoken and given some exceptions so we must assume that they did not
intend for any other exceptions for the time beingx

Application of Tameny

  i

 i  (broad interpretation)
Cleary was fired under the guise of theft, poor performance, and threatening a fellow employee,
but it was really for his union activitiesx e had worked there for 18 years under an oral K for an
unspecified time (employment at will)x The court said that firing him after 18 years of good
performance would offend the implied in law covenant of good faith and fair dealingx

  & 
 (narrowinyterpretation)

See¶s employee at will for 32 yearsx Court found an implied contract limitation on termination at
willx Court said that ʌ needs to show fairly clear evidence that an employer had fired an
employee for refusing to do something illegal in order for the

   to applyx
6 0
0
/>#

  .1
0c 0
/(CA 1980)
Facts: ) worked for Arco as a retail sales representativex n this capacity it alleges he was pressured to
threaten and cajole independent service station dealers to cut their gasoline prices to a point at or below
the Arco designated level in violation of the Sherman Antitrust Actx

Reasoning:
!: rights to dismiss limited by statute or public policyx The court cites Petterman
where the court barred an employer from discharging an employee who had complied with a legal duty in
refusing to commit an illegal act    "x The court concludes that an employee¶s action for
wrongful discharge is ex delicto and subjects an employer to tort liabilityx The duty recognized in
Petterman that an employer must refrain from discharging an employee who refuses to commit a criminal
act is breached when wrongful dismissal occurs giving rise to a tort cause of actionx
n Petermann vx nternational rotherhood of Teamsters (CA) ± P fired for failing to commit perjuryx
Court rules that right to discharge employee at will is limited by statute or public policyx

Employee µat will¶ remedy in  is for loss wages, the issues becomes for how long would you
compensate an employee for loss wagesx Under tort, recovery for emotional distress, punitive damages
and lost reputationx

c
/>#0  
 

*c98+
Facts: Employee discharged allegedly for stealing but rebuts stating it was for union organizing activitiesx
D did not use its established process for adjudicating dismissalsx

Reasoning / Rules: Court recognized discharge after years of satisfactory performance as offending the
0
0

? >

 1 01 .
01 0 

x The D had obligation by its established
procedures for adjudicating situations as the one involved in the casex The court held that the preceding
factors operated as a form of estoppel, precluding any discharge of an employee without good causex The
court found that if P sustains burden of proof he would have established a cause of action in both  and
tortx

).># c
0 
#*c# 1 

98+
Facts: P refused to serve on union negotiating management team because of rumored sweetheart deal and
was subsequently dismissedx e had been employed for 32 yrsx and was in good standingx See¶s had
announced policies of job security for those who did their workx

Reasoning: Court found an implied  limitation and allowed compensatory and punitive damage
recovery for breach of implied  limitation, premised on announced policies and the P good standing
with companyx


/>#
  > !c #*c988+J 0
  1c#

Facts: P had worked for D for 7 yrsx P told Rx Earnest an DC official that Kuhne Foley¶s new supervisor
was under F investigation for embezzlementx Kuhne transferred P from CA to MAx Earnest told
Foleythat he was not doing a good job and one week later fired himx

Reasoning: Court affirms Tameny a tort cause of action for the termination of an employee in a situation
where the termination would violate public policy which is substantial, fundamental and basicx owever,
cause of action not present when only private interest of employer is served by employee duty to disclose
informationx

Court upholds Pugh allowing cause of action for breach of implied-in-fact  (parties by there behavior
acknowledge commitment) which limited D right to dismiss P arbitrarilyx Compensatory and punitive
damages for breach of the implied  limitation are allowedx Suggests that allegation of breach of written
 can be premised on any content found within an employee manualx

Court rejected Cleary, refusing to recognize a wrongful termination action based on tortuous breach of
implied covenant of good faith and fair dealing (different from implied in fact obligationx t is an implied
in law obligation set by law)x t held such covenant give rise only to a  action, necessary because there is
a need for predictability to promote commercial stabilityx Count dismissed because pled in tortx
 Foley Rules:

1x? An employee may recover emotional distress and punitive damages if his or her dismissal
was in violation of substantial public policyx Emotional distress and punitive damagesx

+? An employee may recover for bad-faith breach of the covenant of good faith and fair dealingx 
damages recovery only

½+? An employment  may be implied from the totality of the circumstances protecting employees
from discharge where there is no evidence of µgood cause¶x Compensatory and punitive damages
allowed

#? There is no special relationship between employers and employeesx Effectively this bars using
wrongful discharge as springboard to establish a tort actionx

      

  ! ! 
 
 ' 

'  

(
 ! !  !  !
  
 
    


 ?0
>#0 
0 c *c989+ ± Court decided that Foley decision was to be applied to
all claims filed both before and after Foleyx


 >#$ .
#*c995+ ± Employee alleged that employer represented job would be

eliminatedx Employer said he could resign or be firedx e resigned and then brought action when it was
determined no decision to eliminate job was madex Court ruled employee can recover for
misrepresentation only if it is separate from termination of the employment  so that )¶s damages cannot
be said to result from the termination itselfx




># 0
% 0  
  


: Plaintiff was an ³at-will employee at Scottsdale Memorial ospitalx For more than four
years, Plaintiff and her supervisor maintained a friendly, professional, working relationshipx
They joined a group consisting of personnel from other hospitals for an eight-day camping and
rafting trip down the Colorado Riverx Plaintiff said that an ³uncomfortable feeling developed
between her and her supervisorx This was the result of the behavior that her supervisor was
displaying, such as public urination, defecation, and bathing, heavy drinking, and ³grouping up
with other raftersx Plaintiff did not participate in any of these activitiesx She also refused to join
in the group¶s staging of a parody of the song ³Moon River , which allegedly concluded with
members of the group ³mooning the audiencex Furthermore, Smith and others allegedly
performed the ³Moon River skit twice at the hospital following the group¶s return from the
river, but plaintiff declined to participate there as wellx er refusal to engage in these activities
caused her relationship with her supervisor to deteriorate and as a result, plaintiff suffered
harassment and abusive language from her supervisorx Furthermore, up until the time of the river
trip, plaintiff had received consistently favorable job performance evaluationsx After the trip,
however, her performance evaluations were poorx She was fired when she refused to resignx

)  0
)  : Trial court erred in granting judgment against the plaintiff on the ³public
policy theoryx Trial court erred in granting summary judgment against plaintiff on the count
alleging breach of implied-in-fact provisions of the contract, because this should be a jury
questionx Supreme Court affirmed the grant of summary judgment on the count seeking recovery
for breach of the implied covenant of good faith and fair dealingsx

D00
 !   
: reversed in part and remanded

 :
hether the plaintiff could be terminated, even though she was an ³at-will employee,
based upon bad cause?


0
: n the absence of contractual provision such an employee may be fired for good cause
or no cause, but not for ³bad causex



: The court looked into the history of the at-will employee and found that there was a
public policy exception that had been developed over time, since courts have allowed a cause of
action for violating of public policy, even in the absence of a specific statutory prohibitionx The
key to an employee¶s claim in all of these cases is the proper definition of a public policy that
has been violated by the employer¶s actionsx ere, plaintiff refused to participate in activities
which arguably would have violated the indecent exposure statutex The court held that
rumination for refusal to commit an act which might violate a statute may provide the basis of a
claim for wrongful dischargex n regard to the issue of the implied contract, the court reasoned
that the employee manual could be regarded as a contractx They cited a previous case they
decided — x The court reasoned that the hospital established a four-step disciplinary
procedure, subject to 32 listed exceptions, prior to being terminatedx These include (1) verbal
warning, (2) written performance warning, (3) a letter of formal reprimand, and (4) notice of
dismissalx The court reasoned that it should be up to a jury to determine whether or not that
manual is an implied contractx Lastly, the court rejected the argument about an implied covenant
of good faith and fair dealings, because it does not protect an employee from a no cause
terminationx The Good Faith exception is not applied here but the good faith and fair dealings
protects the right of the party to an agreement to receive the benefits of the agreement they
entered intox


.  . ½

/

rockmeyer vx Dun & radstreet
 ± court held that cause of action for wrongful discharge was
one in  and damages were limited to concepts of forseeability and mitigation, the P alleging the
discharged has the burden of proving dismissal violates a clear mandate of public policyx Unless
the employee can identify a specific declaration of public policy, no cause of can be statedx
Court found against P stating that the case was devoid of facts that proved the D asked
rockmeyer to liex

0
0
½ 0

 0
/0
.
0½ =0 0
/0
33?

#

Toussaint vx lue Cross + lue ShieldM - Court required that employer adhere to the provisions for
dismissal in its employment x The court held that a policy to dismiss for cause only, published to
personnel cannot be departed from on a whim simply because the employer was under no obligation in
the first placex ) was fired by employer for suspected dishonesty but they did not adhere to stated
procedures which required warnings, notice, hearings and proceduresx
Pine River State ank vx Mettille MN ± Court found an offer to  in distribution of an employee manualx
The court held that the firms had to follow procedures announced to employeesx

. c >

 16 0 .- 


Fortune vx National Cash RegisterMA ± Found for employee who was fired after a big sale so
employer could avoid alleged large payoutx The court found that action was in bad faith and
finding of breach of  was warrantedx Note: court qualified decision not implying a good faith
requirement in every  and avoided adopting full theory of Monge casex

  0
29 .   


 >#/ *c94L+:) claim for 2 months loss pay upheld based on promissory estoppel because
D¶s agent told P to quit her job which she did in reliance on a job offer madex

Most Americans at employees at willx The doctrine assumes that employment is a private relationship
subject to its own internal sanction system plus the discipline of the marketx Undesirable consequences
are possible:

0
/0



0. 1 %= 

01>#
.*$c# 1 

98L+

Facts: Kumpf alleged that Steinhaus had wrongfully in interfered with his prospects for
receiving certain feesx Kumpf was an executive who was an at-will employeex

olding: The privilege to manage corporate affairs is reinforced by the rationale of employment
of willx The lack of job security motivated him to do well; security of the position would
diminish the incentivex A  at will may be terminated for any reason or no reason without
judicial reviewx

Disposition: Lower court ruling upheld on finding that Kumpf did not bargain for legal rights
against Lincoln Life and judge proper declination in allowing the jury to convert moral and
ethical claims into legal dutiesx

Effectively the private sector will correct itself, thus no need for judicial intervention into
employment sx

@  )  O 
: she is an employee at willx She left old company to come to this onex They loved herx She
was given an employee handbook that said what procedures the company would have to take in
order to fire herx She told her employer that she was unhappy with a few things and complained
that her commission was given awayx She gets fired without the company following the
handbook proceduresx
ssues:
[Employee at will, reliance interest, duty to mitigate, was her firing against public policy or just
in bad faith, they didn¶t follow their own handbook procedures]

Although Vale had a written contract, the terms were for an indefinite period of time, making her
employment with the multinational corporation an employment at willx Under traditional
common law, employment at will was subject to termination by either party and at any timex
owever there has been a shifting trend that serves to protect the rights of the employee to a
greater extentx This new modern common law implies that an employer does not enjoy an
absolute or totally unfettered right to discharge even an at-will-employeex Looking at the rule in
Tameny, an employer may not discharge an employee if the purpose or reasoning behind that
discharge offends some substantial public policyx The facts of this case seem to point towards an
act of bad faith, rather than a violation of some substantial public policyx Ellen expressed
concerns about the companies actions during a convention and its treatment of women in the
officex The company never asked her to do something that goes against any public policy, rather
they fostered an uncomfortable environment for some of the female employeesx
omen entering
the corporate world should realize that they are at quite a disadvantage and will have to deal with
things such as office jokes that may offend themx n terms of violating a substantial public
policy,  do not believe that MC has done anything to that extentx owever, there are more issues
regarding Ellen¶s casex
2 months ago Ellen was approached by 2 competing companies who praised her ability
and skillx oth companies offered her jobs and large raises in base salary and commissionx
owever, Ellen relied on her supervisor who assured her a bright future with the companyx This
has created some reliance interest in Ellenx Ellen may have a cause of action for reliance
damagesx Ellen relied on the words and praises of her company and turned down multiple job
offers that offered lucrative futuresx Ellen relied on her current employer to her detriment and
because of that, she missed out on guaranteed moneyx Ellen has an action for the money that she
missed out on by relying on her contract with MCx

ELLEN ARGUMENT: There is a hostile work environment under federal lawx There was an
implied in fact Kx They gave her good performance reviews and they committed themselves to
follow certain proceduresx
MC ARGUMENT: She was given handbook after she started working there and they can be
changed whenever the company wants tox There are 2 diff K¶s involvedx One for her
employment and one to follow certain proceduresx A breach of one should not affect the other Kx
The employee did not expect these procedures because they did not know they were coming,
thus they are not in the Kx
.   > 0. .
0½ =1 .  0? =
#
They are daring you to sign it and keep workingx The K was not performed until after you sign itx
The consideration is your continuing to workx

Damages:
Expectation: she expected to be paid bonus because she did the workx uestion of fact? She
wasn¶t supposed to make that sale because it was out of her districtx
Restitution: other employee got paid for not doing anythingx
Reliance: She relied on the statements by her supervisor and gave up the offersx She is going to
argue that it is reasonable for them to know that she would rely on those statements and stay with
the current companyx MC is going to argue that we didn¶t expect her to turn the jobs down, we
just hoped that she would turn them downx

Chapter 4
SOCAL CONTROL OF FREE CONTRACT

#
 0


Policy Statement: Each of the following policing doctrines is intended to limit the abusive nature of
parties in forming s yet balance the autonomy of individuals to make their own decision and the
market¶s reliance on x

Freedom of 

1x? Free to  and the making is not a crimex A great deal of freedom including between married couplesx
Not complete thoughx

2x? t will be argued by the !s that it is the obligation of the state to enforce the expectation interest (like
protecting property interests and is the proper role of state)x Anytime they don¶t it is infringement of x
Limiting to restitution of interest is considered infringementx

Section : Regulation of s in interest of externalitiesx

ndividualistic Position Distributional Position

Any  you wish Make or applies rules for equal distribution of
ad deal price of freedom wealth
onor choices regardless Rules should ensure bargains are fair
Relieving of bad deals is an attack on Regulate terms of 
competence

#6



COURTS AVE LONG REFUSED TO ENFORCE MOST LLEGAL S OR TOSE AGANST
PULC POLCYx

A PARTY TO AN LLEGAL  OFTEN CANNOT RECOVER RESTTUTON TO GET ACK

AT E AS PAD TO AVE ANOTER REAK TE LA
, UNLESS DENAL OF
RESTTUTON
OULD CAUSE DSPROPORTONATE FORFETUREx

Promise unenforceable if the interest in its enforcement is clearly outweighed in the circumstances by a
public policy against enforcement of such terms

>  >#

0JE .?/0
c F*c  1-. A 4L+

Case involved agreement to share expenses and proceeds highway robberyx There was a breach of said
agreementx The court dismissed the claim with costs to be paid by ) counselx
COURT LEAVES PARTES
ERE TEY
ERE FOUNDx
 #?


c
²xCourts will not enforce illegal contracts, but a court will
not always deny relief to both parties if a court finds a contract illegalx 
u?llegal Object² A contract to laundry money, contract to run illegal
gambling, contract to murder
u?Assists llegal Activity² f you rented a house to a known drug dealer
with the payment agreement that was 20 % of renters monthly incomex
u?A court can do the following:
#? Deny relief to both parties
½#? Enforcement one parties promise and not the other
#? Enforce part of the contract
0#? Allow restitution to the party who
#? s excusable ignorant of the facts or of legislation that
makes the promises enforceable
#?
as not equally in the wrong with promisor
u?Examples through Cases
#?   å, Montx 1963
#? : Carroll and eardon entered a contract to sell
property with a monthly mortgage paymentx earden
defaulted on the mortgage and foreclosure proceedings
were institutedx eardon argued that the mortgage was
absolutely void as contrary to express law and public
policyx eardon said the house was to be used for sole
prostitutionx oth parties aware of prostitutionx
#?  : can this contract be upheld? 
5#? 
0
: Yesx n the absence of activity participation, the
defense of illegality is ordinarily not available to the party
who has breach the contract where the fault in legality are
unilateral on her side of the transactionx 
C#? $:. ½ =
?
0  1.    1?. .
.   / 
0 

.   . >
0
0 1
  1


/#
L#? . . 
0 :
#? s this a contract to sell a house or to sell an illegal
business? Good will? This house has a good will
attached to it because it was a successful
whorehouse or was it because it was a nice housex
 ? s this merely a technical illegality?
c

>#; 0
*%975+

Facts: oth ) and ! were µMadames¶x The mortgage was for 42K for the illside Ranchx

Reasoning: Court held that where the sale of property which may or may not be used for illegal
purpose, no defense that the seller knew purpose of the buyer exists in the absence of active
participationx The illegality is unilateral on the !¶s part, more active participation would be
necessary than what is shown herex
Disposition: Judgment in favor of ) affirmedx

COURT FNDS CONTRAC S EXTRNSCALLY LLEGALx TS MEANS 
AS VALD

ON TS FACEx

5#E 
 0
 
F

Court invented ways to make adjustments for parties not in equal bargaining positionx


c

0c /

#? Mental ncapacity to contract:

1x? Secx 15 of the Restatementx A person incurs only voidable duties
"if by reason of mental illness or defect«he is unable to
understand in a reasonable manner the nature and consequences of
the transactionx"
#? K made under the influence of drugs:
1x? Restatement Contracts Secx 16x
#? K's made with minors:
1x? A K made with a minor is voidable at the minor's electionx t is
VODALE and NOT void
2x? The minor can assert "nfancy" as a defense
3x? Restitution if the minor breaches?
4x? The minor usually will not have to pay and is actually entitled to
get his money back as long as he returns as much of the goods as
possible
5x? Minors are usually liable if they misrepresent their age
6x? Necessaries: Minors cannot avoid liability on K's they make for
necessaries
½#? Policy Reasons to not enforce illegal K¶s:
#? Don¶t want people to enter in to these illegal K¶sx
#? itman example: don¶t want them to have a market and don¶t want to not
pay your hitmanx

L#)
/
Factors nvolved in Enforcement of llegal s
1x Deterrents - Rules to deter illegal behavior
2x Legitimate ± would remedy enforcement condone activityx
3x Seriousness of Crime
4x Extent of unjust enrichmentx

Profx Leon Trakman: n New Zealand  the court will do whatever in its discretion it thinks justx

ó? You can enforce a deal between thievesx t does not promote thievery or deter itx The public opinion
will not deteriorate by enforcing these dealsx

ó? There are real issues if the court does not jump into illegal  there is present unjust enrichmentx
ó? Should courts get involved in enforcing honor among thieves?

The law wafflesx Tobriner in Marvin vx Marvin ± The money can be severed from the sexx Severable was
the promise for the household services which was not illegalx There essentially illegality around or

There is only one exception µNot in Pari Delicto¶ and the court can grant a restitution type remedy:

1)? Exceptions
u? One party knew of illegality the other did not
u? Statute settles it in favor of recovery
u? Statute does not settle it but only one result is consistent with statutory purpose
u? Repentance principle

c 0c  
>#
! 0
 1½ 


 1?#The K
PA applies to earned, but unpaid, wages of an undocumented workerx The
employee can collectx

# An illegal immigrant sued a company for unpaid wagesx The company argued that the
since the employee was an illegal the contract was illegal and goes against law and public policy
are therefore is unenforceablex

 #
hether an employee can collect unpaid wages on an illegal contractx


0
# First must look at the meaning of the legislatures intent behind the statutex The think
anout equity and fairnessx The employer who knowingly participated in an illegal transaction,
should be permitted to profit thereby at the expense of the employee is a harsh and undesirable
consequence of the doctrine that illegal contracts are not to be enforcedx This result so contrary
to general considerations of equity and fairness, should be countenanced only when clearly
demonstrated to have been intended by the legislaturex Third, since the purpose of this section
would appear to be the safeguarding of American labor from unwanted competition, the
employee¶s contract should be enforced, because such an objective would not be furthered by
permitting employers knowingly to employ excludable aliens and then, with impunity to refuse
to pay them for their servicesx ndeed, to so hold could well have the opposite effect from the one
intended, by encouraging employers to enter into the very type of contracts sought to be
preventedx Additional ³an undocumented alien performing construction work is not an outlaw
engaged in illegal activity, such as bookmaking or burglaryx Rather the work itself is legitimate;
it simply happens to be work for which the alien is ineligible or disqualifiedx

! 
#

c 
c 0 John Gx Gates vx Rivers Construction Cox (Alaska 1973)

Facts: Gates ed with Rivers to do public relations work without a work permitx is payments
were to be banked in trust and payable if we were able to secure a visa as a landed permanent
resident or alienx e was dismissed 7 days prior to his becoming a landed residentx
Reasoning: Court finds that  should be enforced because:

1x? The statute does not specifically declare labor or service s of aliens seeking entry in UxSx
for purposes of performing labor or services voidx (Rather this new statute replaced one that
specifically did so and only provides a deterrent of ineligibility for the illegal actx)
2x? The party who knowingly participated in an illegal transaction should not profit at the
expense of another

 0 
- 

The court will not grant a remedy to parties for an illegal x @
 : The exception is to
someone who is repentant before illegality is accomplished is allowed restitutionx

6
½ >#>

) 
#

Court held that it was consistent with sound public policy to encourage prompt repudiation of
illegal and immoral s by permitting, under such circumstances, the recovery of money paid
upon an illegal or immoral considerationx The plaintiff must back out before the other party acts
to put into effect any part of the illegal or immoral designx n this case court awarded money
paid by Greendberg to Evening Post agent for rigging of a contest in which a car was the prize
returned

NOTE TS S A RESTTUTON REMEDY ONLY

á      

        
 

'  

    
 


 ? `   

1x? V
# The worker was unauthorized to work in the UxS but the
company made a K with him to work herex Then they don¶t pay
him and say to force them to do so would be against public policyx
Should we encourage the enforcement of these K¶s?
2x? i # Rivers knew it was illegal to hire these people but they
did it anywaysx Gates is suing to get his earned wagesx

 ? `     

3x? V
# Fitch tells Greenberg that if he pays 300 that he will make
sure that Greenberg wins the prize of a 2500 automobile at a local
contestx A week later, Fitch demands another 100 and Greenberg
refusesx Greenberg sues Fitch wants his money backx Court rules
for Greenbergx
4x? i #
hy are we giving Greenberg his money back? e
wanted to continue the deal and only backed out once Fitch raised
the stakesx
5x?  : A plaintiff may recover money being paid to carry out an
illegal or immoral design if the arrangement was repudiated with
reasonable promptnessx The ʌ must back out before the other party
acts to put into effect any part of the illegal or immoral designx
: Greenberg is seeking equitable/restitution damagesx They have repudiated the K and
now say that he has ³clean handsx The court may be saying that either Greenberg now has clean
hands or his hands are ³cleaner than Fitch¶s hands

#? £    , 1st DCA Calx 1967

#? :Karpinski sued Collins to recover rebates which
Karpinski had to give Collins to secure a grade A contract
for Karpinski¶s milkx Karpinski agreed to pay Collins a
kick back of 4 and ½ cents a gallon during the life of the
contractx Karpinski said he accepted the offer because there
was no other offer for grade A milk and he said had to, to
stay in the businessx Collins told Karpinski a year later that
he was going to cancel the contract unless Karpinski loaned
him moneyx So Collins agreed to lower his kickbacks to 1
and ½ cents a gallon until the loan was repaidx Karpinski
fell behind in his loan payments and Collins terminated
their contractx e was not meeting the 1 and ½ percentx
#?  :can this contract be upheld?
5#? 
0
: Yesx Collins asserted an illegal contract cannot be
enforced in law or in equityx ere though it is not a case of
two parties equally in fault entering an illegal contractx
Karpinski was a small dairy man who had to enter this
agreement in order to survivex 
C#? $:




?

½ 
1  0

/?. ?0  1
.
.  . #
L#? . . 
0 :f a contract violates a law intended
to protect a group of persons the contract cannot be
enforced against a party who is a member of the protected
groupx ut such member may never the less enforce the
contract against the other partyx 
 ?
hy couldn¶t Karpinski do something else instead
of entering an illegal contract?
u?  * 
 (not equally at fault)² knowing that a contract is illegal
but still engaging in the performancex


= >#c

*c974+

:Kapinski entered into a  for Grade A milk with the Santa Clara Creameryx To gain the
Kapinski had to kickback an apportionment of the creamery payment to Collinsx


:
here the parties are not in equal bargaining position there is an allowed exception to µin
pari delicto¶ allowing the ) to recover what he has rendered as performance of the executed
illegal transactionx
 

: The court found that because of his position P was not in pari delicto with !sx The
P depended on D for his economic survival; he was peculiarly vulnerable to the exertion of
economic coercion by a person such as the Dx

NOTE COURTS ±
LL NOT ENFORCE EXPECTATON DAMAGE RECOVER, NSTEAD

TEY ARE LMTNG DAMAGES TO MLK DELVEREDx TE LLEGALTY
PRECLUDES EXPECTATON RECOVERYx

cc6)$;c)cM
Restatment §§178-199

cc;M%)Mc%)


n General Courts carefully police covenants and they must be Necessary to protect:
u? Trade secrets
u? Manufacturing processes
u? usiness Strategy
u? Characteristics of Potential Customers
u? Customer Relationships
AND

Reasonable in — (Time), +  (Space) &i
 
 (Scope)

f covenant fails either requirement, the contract is VOD as against public policyx

 ? ! "
      
6x? V
: The plaintiff hired the defendant to work as a manager at
one of their lumber yardsx Their contract said that if the defendant
stopped working for the plaintiff for any reason, he couldn¶t work
for any other lumber companies within a 15 mile radius for 10
yearsx The defendant quit and opened his own lumber yard in the
same townx The plaintiff sued for an injunction against the
defendant to make him stop working in that townx The trial court
dismissed the complaint and the plaintiff appealedx
7x? +  : Contracts in restraint of trade are void as against
public policy if they deprive the public of the restricted party¶s
industry or injure the party himself by precluding him from
pursuing his occupation and thus prevent him from supporting
himself and his familyx
ax? A covenant not to compete must be reasonable in reference
to place and timex
bx?
hen their purpose is contrary to public policy and there is
evidence to say that they are deliberately unreasonable and
oppressive, then they are invalidx
8x? å , 
 
:
hen a K¶s terms are divisible and that such
portions as were void by reason of being in restraint of trade could
be separated and the K enforced as to the proper territoryx
 9x? : Torborg agreed to it but it was unreasonable and thus
should not be enforceablex Also, it is a negative covenant and thus
restricts competitionx owever, ʌ suffered irreparable loss when D
quitx The court says that the 10 year time limit is excessive but
suggests that a 3 year time limit would be adequate because it took
the defendant three years to build up the plaintiff¶s lumber yardx
The covenant not to compete is reasonable and necessary for the
ʌ¶s protectionx
#? Notes:
10x?One may not agree to sell one¶s self in to slaveryx
11x?One can agree to something that is unreasonable but it is NOT
enforceablex
12x?ut what about ntellectual Property?
ax? Courts cannot rewrite K¶s for partiesx They only decide
whether to enforce or notx
13x?
hy will Fullerton not alter their general K?
ax? Some of the other employees may actually follow it and if
they challenge it, at the worst, Fullerton will get a
reasonable decision on what they can dox


0½ c #># ½ 

:Torborg was the lumberyard manager working in Clintonville
x e voluntarily
terminated his employment with Fullerton Lumber to open his own lumber yardx e was party
to an employment K which contained a 10yrx non-compete clausex


: Restrictive covenants are lawful and enforceable if they meet the test of necessity and
reasonablenessx The court adopts a new rule: Partial enforcement of an indivisible promise will
be allowed restraining the party insofar as it is reasonable and not oppressivex

 

:
hile the facts do not support a 10 yr restraint for the P¶s protection, 3years
appears reasonablex

c 00
? ± Allows for covenant to be enforced whether employee voluntarily departs or is

asked to leavex owever, it remains unexplored whether an employee at will who claims to be
wrongfully discharged can avoid a restrictive covenantx Discharge however might change the
reasonableness considerationx

§516 Restrictive covenants in employment Ks

A covenant by an assistant, servant or agent not to compete with his employer or principal during
the term of the employment or agency, or thereafter, within a specified territory and during a
specified time is lawful and enforceable only if the restriction imposed are reasonably necessary
for the protection of the employer or principal, Any such restrictive covenant imposing an
unreasonable restraint is illegal, void and unenforceable even as to so much of the covenant or
performance as would be a reasonable restraintx
;


.  A  : The Court in Johnson vx Salmen, listed factors to balance in judging
whether or not to enforce the covenant not to competex A Court should consider: (1) the degree
of inequality of bargaining power, (2) the risk of the employer actually losing customers as a
result of the competition; (3) the extent of respective participation by the parties in securing and
retaining customers; (4) the good faith of the employer; (5) the existence of general knowledge
about the identity of the customers; (6) the nature and extent of the business position held by the
employee promising not to compete; (7) the employee¶s training, health, and education, and the
needs of his or her family; (8) the current conditions of employment; (9) the necessity of the
employee changing his or her residence if the covenant is enforced; and (10) the correspondence
of the restraint found in the contract with the need for protecting interest of the employerx

M#$ 

u? The employer creates a deferred compensation plan so key employees have future
contingent claims to benefitsx An employee who quits and competes loses all claims to
accrued benefitsx The employer does not have to seek an injunction to enforce the
covenantx
1x? Pension rights that are vested are excepted from these provisions they cannot be denied
under Federal Lawx
2x?
 courts still apply rule of reasonableness to the bad-boy provisionsx f unreasonable
they are cut offx

@
0    > c >

  c 0  

Restrictive covenants also appear in the vendee / vendor Kx n business purchases the purchaser
wants from the seller is a covenant that would prevent opening a business down the streetx One
of the things purchases is the value of the on-going businessx This is subject to the same rule of
reasonableness but the interpretation in the courts is broader with more leewayx There is
sympathy for an employee that is not had for seller of a businessx Note that usiness Sales still
likely apply under the Fullerton Rulex

n a vendor vendee K, signing on a covenant it much more immediate since it kicks in

immediately vsx the employee in beginning a relationship does not focus on the restriction for an
endx

! 
 1 > ½

/
Allows a restrictive covenant to be unenforceable but the unreasonableclause is severed from the
balance of the employment or seller  remains which remains validx

istoric Rule: lue Pencil Test - The courts say its oxkx to divide a covenant and invalidate only
the excessive part, provided that a pencil could be used to cross words in the language of the
covenant and leave a grammatically coherent sentence that makes sense in the context
afterwardsx You can¶t add words though, a striking phenomenonx
Court overruled and substituted
Free Divisibility Rule: No restrictions on ability of court to rewrite the covenant provide that the
covenant as rewritten is lesserx f intentionally oppressive then covenant has no divisibilityx

  
c


0c.  
1x ntroduction
deally K coordinates choices so that both parties are better offx The values of free choice and
free K demand some social control of the processx Some argue that the fruits of bargaining
belong to them regardless of whether someone gets an inordinately good deal someone gets an
inordinately bad onex

Concern is K is exploitative as between the partiesx Freedom of K also encompasses that no one
shall be bound unless they have agreedx Once there is agreement court should enforce
expectation interestx as there been a proper agreement to the Kx Recurring theme, the idea that
many of these cases from a legal realist perspective, court may have been more concern about
fairness of Kx The court avoids enforcement by claiming not K at the beginningx

1 Consent is from the viewpoint of the listenerx The question is what a reasonable listener
would have interpretedx
2 Capacity deals with speaker¶s state of mindx f speaker is mentally ill, they have not
properly consented if there agreement is influenced by mental defectx
3 A system championing free choice must face those people who cannot choose in their
own best interest:

Sutliff ncx vx Donovan Companies ncx -
here Msx Sutliff was found to be mentally incapable
having sold gasoline cheap while buying it highx The court held µif you  with someone who
lacks the mental capacity; it is voidable on grounds of fraud, provided that the other party took
advantage of the mental incapacity when they made the x

#%


 / 
§15 Restatement Second:

(1) A person incurs only voidable contractual duties by entering into a transaction if by reason of mental
illness or defect:

ax? e is unable to understand in a reasonable manner the nature and consequences of the transaction or

bx? e is unable to act in a reasonable manner in relation to the transaction and the other party has reason
to know of his conditionx

(2)
here the  is made on fair terms and the other party is without knowledge of the mental defect, the
power of avoidance under Sub-Section (1) terminates to the extent that the  has been so performed in
whole or in part or the circumstances have so changed that avoidance would be inequitablex n such a case
the court may grant relief as justice requiresx

Traditionally if a person knew what he was doing at the time of signing the contract and later becomes
mentally ill his choices are binding:
 #?   0
c
2L#%



 ! 1 : A person incurs only

voidable duties "if by reason of mental illness or defect«he is unable to
understand in a reasonable manner the nature and consequences of the
transactionx"
#? Easier to void under mental illness than under intoxicationx
>#? People choose to become intoxicatedx People don¶t choose mental
illnessesx

5#%0 $
0 . 
1


  1!
Alcohol and other drugs can affect our capacity to make the choices involved in free x

§16 ± ntoxicated Persons

A person incurs only voidable contractual duties by entering into a transaction if the other party has
reason to know that by reason of intoxication

(a) e is unable to understand in a reasonable manner the nature and consequences of the transaction, or
(b) e is unable to act in a reasonable manner in relation to the transaction


?>#

*99+ ±
here P was intoxicated for 10 days and had run out of
money and exhausted his creditx The trial court held that by µreason of his debauch that P did not
act normally and he did not appreciate what he was doingx Grossly inadequate consideration
between value of property conveyed and consideration support the determination that at the time
the D fully realized the circumstance that he was obtaining a bargainx

1x?   0
c
27x ntoxicated Persons:

2x? Party has to know or must have reason to know that they are
intoxicatedx

½#? c)cMcc

>#? 
1
/! 
: K's made with minors: infant until your 18th birthdayx
1x? Restatement Contracts § 14x nfants:
2x? From the day a person is born until their 18th birthdayx
3x? A K made with a minor is voidable at the minor's electionx t is
VODALE and NOT void
4x? The minor can assert "nfancy" as a defense

 ? %
 "
&
1x? V
# albman, a minor, buys a car from Lemkex The car breaks
and albman takes the car to a garagex e does not pay the bill and
the garage takes a lien on the vehiclex The garage takes out the
engine and tows it back to albman¶s fatherx albman¶s father
then told Lemke to come get the carx The car was a total lossx
albman was entitled to the money that he paidx albman returned
only as much as he couldx
 2x? á# ut what about albman¶s unjust enrichment? The infant
got the money back but did not return the carx

O
  


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3??

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 '(
#? Physical duress: did something because someone has threatened your physical
beingx

½#? Economic duress:

#? EXx] n desert and dying of thirstx Vendor charges you 50 for waterx uy
it then sue vendorx
#? Price gouging is only illegal when a statute is passedx mmoral but not
illegalx
#? EXx] K with a company where the company is to drop you off in the
middle of the desertx
#? EXx] Snorkeling trip in which boat sells you water at exorbitant pricesx
0#? ! :The boundary between proper and improper advantage-taking
#? A threat to do what you are legally entitled to do is not duressx
#? $
0 
1

 : involves an application of excessive strength by a dominant
subject against a servant objectx
#? f will has been overcome against judgment, consent may be rescinded
#? ut when does the art of persuasion become oppressive?
1#? Overpersuasion characteristics:
#? Discussion of the transaction at an unusual or inappropriate time
#? Consummation of the transaction in an unusual place
#? nsistent demand that business be finished at once
>#? Extreme emphasis on untoward consequences of delay
>#? The use of multiple persuaders by the dominant side against a single
servient party
> #? Absence of third party advisers to the servient party
> #? Statements that there is no time to consult financial advisers or attorneys
#? The difference between legitimate persuasion and excessive pressure rests to a
considerable extent in the manner in which the parties go about their business

§175 ±
hen Duress by Threat Makes a  Voidable:

f a party¶s manifestation of assent is induced by an improper threat by the other party that leaves
the victim no reasonable alternative, the  is voidable by the victimx
Duress is more than the constraining of choicex Method of constraint and act that constrained is
importantx t has something to do with the conduct of the other partyx
ó? Generally accepted that threat must be improper or wrongful and the person threatened must
have no reasonable alternativex owever, this is not bright-lined and predictablex

ó? The exercise of superior bargaining power in an irresponsible or unreasonable or

inappropriate wayx To make an improper threat that leaves the other party with no reasonable
alternative than acquiescencex

 : A threat to do what you are legally entitled to do cannot be duressx

 ): Acts or threats cannot constitute duress unless they are wrongful; but a threat may
be wrongful even though the act threatened is lawfulx This is dealt with in terms of business
compulsion doctrine, with acts and threats that are wrongful, not necessarily in a legal, but moral
or equitable sensex
olf vx Marlton Corp (NJ 1959)

##% .

>#c#c#

c 0
/<
#*"978+

Facts: Mitchell brought action for damages caused by the negligence of Crane while in the
employ of CC Sanitation Companyx At the time of the incident Mitchell was on the job for
errin Transportation Companyx Mitchell signed two releases one for medical bills + damage to
company vehicle, the other for a medical bill he paidx Mitchell avers that he was informed by
agent of errin that either he signed the release or he would lose his jobx

Rule: Any coercion of another, either mental, physical, or otherwise causing him to act contrary
to his own free will or to submit to a situation or conditions against his own volition or interest,
constitutes duressx

Reasoning: The parties stood on no equal footingx The appellant undoubtedly was the weaker
party and the threat to discharge him was realx Even where the right of an employer to discharge
an employee is unquestioned, duress and coercion may be exercised by the employer by threats
to discharge the employee, where circumstances such are here present appearx

.#?  " )   *

#+( 
'**

#? Facts: Mitchell was a truck driver for errin Transportationx
hile on the
job, his truck was hit by a crane that worked for CxCx Sanitationx errin
wanted to secure a claim of damages for its truck but CxCx¶s insurance
would not pay until errin got a release from Mitchell for any claim that
might arise from the accidentx Mitchell says that errin said he had to sign
the release and accept 62x12 in damages or he would be firedx Mitchell
signed and then subsequently brought an action for damages and to set
aside the release based on DURESSx

#?  : K obtained through duress or coercion is voidable and this rule

applies to releasesx
 #? ! : ³Any coercion of another, either mental, physical, or otherwise,
causing him to act contrary to his own free will or to submit to a situation
or conditions against his own volition or interestsx

>#? O :
here there is such an inequality in the terms, sacrifice of

benefits, and rights on that part of the employer, inadequacy of
consideration, and advantage taken of the weaker party, we cannot
conclude that no fact situation of duress or coercion existsx
>#? i : The appellant was undoubtedly the weaker party, the threat to
discharge him was very real and he was fully justified in expecting that he
would be immediately dischargedx Furthermore, errin had a direct
economic interest in their employee signing the releases and this was the
sole reasoning behind the companies actionsx Duress and coercion existed
and are sufficient for the avoidance of the releases signed by Mitchellx
> #? Notes:
1x? Consideration is him giving up his right to suex
2x? K for indefinite duration is a K at will and can be extinguished at
any timex
3x? This CASE must be wrong because the holding makes everything
fall under DURESSx


1>#%

c  ± Give back down payment or else we will sell house to someone from a
racial minority groupx Undoubted P had right to resell house to anyonex Marlton attempted not
to return down payment return because of threat to sell house to minority, they
olf¶s won
because there threat was for something they had a right to dox


24L#!$;M%cc@!;
> #? (1) f a party's manifestation of assent is induced by an improper threat by
the other party that leaves the victim no reasonable alternative, the
contract is voidable by the victimx
> #? (2) f a party's manifestation of assent is induced by one who is not a party
to the transaction, the contract is voidable by the victim unless the other
party to the transaction in good faith and without reason to know of the
duress either gives value or relies materially on the transactionx
#? 247#%))
#? (1) A threat is improper if
1x? (a) what is threatened is a crime or a tort, or the threat itself would
be a crime or a tort if it resulted in obtaining property,
2x? (b) what is threatened is a criminal prosecution,
3x? (c) what is threatened is the use of civil process and the threat is
made in bad faith, or
4x? (d) the threat is a breach of the duty of good faith and fair dealing
under a contract with the recipientx (MPORTANT ONE)
#? (2) A threat is improper if the resulting exchange is not on fair terms, and
 1x? (a) the threatened act would harm the recipient and would not
significantly benefit the party making the threat, or
2x? (c) what is threatened is otherwise a use of power for illegitimate
endsx

I#? *
  &
#? V
: Selmer is a subcontractor on a project for which lakeslee is the
Genx Contractorx Selmer had a K with lakeslee to erect materials that
lakeslee supplies for 210kx lakeslee was late in delivering the
materials and agreed to pay an extra fee in order for Selmer to complete
the workx Selmer completed and demanded paymentx lakeslee offered to
pay only 67k and would not budgex Selmer was under financial stress and
accepted the dealx 2 ½ years later Selmer brings suitx

#? -@:
hether the settlement agreement is invalid because it was

procured by ³economic duressx
#? & & $$ 

: Fishermen agreed to set wages but
once they got out onto the ocean they refused to work unless they were
paid morex They lostx The decision did not have fresh consideration for the
modified agreementx The modified agreement had been procured by
duress in the form of threat to break the original Kx
1x? Fisherman argument: There was new considerationx
ork longer
hours, colder weather, anythingx ut have to show that the parties
treated it as considerationx Modification classically requires
considerationx
>#? O : The mere stress of business conditions will not constitute duress
where the defendant was not responsible for the conditionsx

>#? i : Selmer had the option of walking away from the original K but
decided to enter into the extended Kx Thus, Selmer was never forced to
remain on the job and it is not certain why Selmer could not overcome the
non-payment by lakesleex

> #? á:
1x? Practical argument against treating such a statement as a threat: it
will make an inference of duress inescapable in any negotiation
where one party makes an offer which it refuses to budge, for the
other party will always be able to argue that he settles only because
there was a figurative gun at his headx

2x? The issue in a duress case is not the victim¶s state of mind but
whether the statement that induced the promise is the kind of offer
to deal that we want to discouragex
 3x? ave to make a promise sound like a threat in order to win this
casex ³Every promise can be read as a threat and every threat can
be read as a promisex 

4x? § 74x Settlement of claims:

5x? The 2 types of fiduciary relationships that aren¶t a professional ±

client are« parent - child and husband ± wife

0 ! 
J
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0 
. 
0 c 0
/>#;
= 
3% 0? c 0
/*4.c #985+
Facts: Selmer subcced with lakeslee to erect prestressed concrete materials supplied
by lakeslee-Midwestx lakeslee failed to fulfill its contractual obligations resulting in an
alleged additional 120k of costs to Selmerx Selmer had verbally agreed early on to compensate
for the additional costs and on the demand from Selmer offered 67k in settlementx

Rule: Fundamental issue whether the statement that induced the promise is the kind of offer to
deal that should be discouraged, hence it was a threatx A threat not to honor a  cannot be
considered duressx Financial difficulty cannot by itself justify setting aside a settlement on
grounds of duressx

Reasoning: The court reasons that it would not be sound policy to preclude settlement between
parties without court actionx As such a threat not to make payment alone to force settlement
cannot by itself be duressx

    

  


 
 
 

'  
    
-  !      
  '  
   
     

       

c>#6  )#c *979+ ± Duress is present in this case where the D advised P that
though he was entitled to the sums demanded unless he signed a release P would receive no part
thereofx The confluence of P necessitous financial condition, the D acknowledged indebtness of
full 157k and the settlement of the indebtness for less than 3 cents on the  with no suggestion
that D did not have the money to pay debt in fullx


K>#
.0
*c##949+
Facts: Px
urtz was owner of otel Luzeren which he agreed to sell to
x Fleischmannx An
agreement was struck where by the transaction would be by the exchange of property between

urtz and Fleischman¶s Lakeside abitat ncx a limited partnershipx The properties to be
exchanged were agreed upon and pursued by Flieschmanx There was some delay in the closing
which the parties agreed would be compensated for at the rental value of the properties
urtz
would acquire for the delay periodx t appears that
urtz at some point made a demand for an
additional 50k which was to be satisfied by
urtz¶s interest in the Lakeside abitat ncx

Rule: Duress may be implied when payment is made or an act performed to prevent great
property loss or heavy penalties when there seems no adequate remedy except to submit to an
unjust or illegal demand and then seek redress in the courtsx

hen one party wrongfully threatens another with severe economic loss if he does not enter a
proposed , and the threatened party acquiesces solely because of the wrongful threat, the injury
to the threatened party may be redressed under the doctrine of economic duressx

The burden of proof applicable is a reasonable degree of certainty by evidence that is clear,
satisfactory and convincingx Damages only need be proven by the greater weight of the credible
evidencex
* å
  *

To exercise One must be
hether the Restitutionary remediesx
superior economic found to have victim would have
power reasonably used superior acquiesced in the Economic duress is
in a bargain bargaining absence of the available as a defense to a
situation position wrongful threatx suit on 
unreasonably
Superior The test is or
bargaining Actions must be in primarily
position = sole good faith and fair objective A separate cause of action
effect or source of dealing in trade or counterclaimx n
something needed The primary appropriate cases punitive
by the other party criteria is whether damages may also be
to avoid severe the victim had an awardedx
economic loss adequate legal
where relationship remedy available
not reciprocal at the time of the
threat

K>#
.0
*98+
ssue:
hether the court of appeals exceeded its authority by making factual determinations,
based on conflicting evidence, in lieu of, and in addition to, the findings made by the trial courtx

Court concluded that it clearly didx

asic Elements of Economic Duress

1x? The party alleging economic duress must show that the has been the victim of a wrongful or
unlawful act or threat and
2x? Such act or threat must be one which deprives the victim of his unfettered will

Duress is:
rongful acts that compel a person to manifest apparent assent without his volition or
cause such fear as to preclude him from exercising free will and judgment in entering into a
transactionx
Duress isn¶t: Threats to do what the threatening person has a legal right to dox

 #? $
0 
1

 
> #? Test for undue influence
1x? nvolves an application of excessive strength by a dominant
subject against a servient object«x f will has been overcome
against judgment, consent may be rescindedx
> #? Need to show that there was unfair persuasion of a party who is under the
domination of the person exercising the persuasionx
-#? And need to show that there was a fiduciary relationship

-#? UCC § 177x
hen Undue nfluence makes a K voidable

Œ ? › ,,
1x? V
: Odorizzi agreed to resign from his post at school one day
after he was arrested for gay activityx The principle and
superintendent came to his house after he had just been released
from jailx Charges against him were dismissed a month laterx Trial
court dismissed the claim but the court of appeals reversed thisx
2x? i : The lawyers should have claimed this to be duressx The
court is basically saying that he was under undue influence because
he could not resist the other men that asked him to resignx ROSEN
says that we need to argue for duressx Expand the fiduciary
obligations of employer/employee relationshipx

 ?)  ! 


#?  > %   



#? § 159 Misrepresentation defined: a misrepresentation is an assertion that is

not in accord with the factsx (A LE!)
#? § 160x
hen action is equivalent to an assertion
#? § 162x
hen misrepresentation is fraudulent or material

>#? Fraud means an intentional liex

>#? Misrepresentation means that intent does not matterx

> #? § 164x
> #? Misrepresentation ± statement not in accordance with the facts
1x? Misrepresentation is material (§ 162 subx 2)
> #? Next show that the recipient is justified in relying on the misrepresentation

½#? ) > %   



#? Statement facts ± one is not justified in relying on a statement of opinionx

#? § 168x Reliance on assertions of opinion
#? § 169x
hen reliance on the assertion of opinion is not justified
>#? %  11 /! Just some opinion about somethingx
 #? c> 0 :;/ ; ? 
#? ntentionally false
#? False statement must be material
#? Must be statement of fact
>#? Person must take reasonable steps toward self-protection
>#? Reliance must cause injury

4#%   

J$
 
0c 00
?
Classic Tort of Fraud: Relief where the D with scienter

‘ Fraudulently has made

‘ A material misrepresentation of
‘ Fact on which
‘ The P has a right to rely
‘ Then P must prove
‘ Reliance on the misrepresentation which
‘ caused injury

Courts have questioned softened or even abandoned almost all the elements of the classic tortx

Damages
ó? Most jurisdictions will protect the victim¶s expectation interest in fashioning remediesx
ó? A few limit recovery in tort actions to ³out of pocket¶ damages, roughly a measure of the P¶s reliance
lossesx
ó? t has become not uncommon for courts to award punitive damages for intentional misrepresentationx

Until mid 20th century rule was
 

x

@
  .: Sellers are responsible in some states for innocent misrepresentationsx Some states have
imposed liability with limited recovery for innocent misrepresentation, allow rescission but deny damages
(upon rescission, can sue in quasi- for restitution)x

alpert vx Rosenthal ± The court stated that simple justice demands that when both the vendor and vendee
are innocent, the one making the false statement should bear the loss of the benefits of the transactionx

@
  /: n some circumstances the seller will be liable today for failure to honestly state her
opinionx Vokes vx Arthur Murrayx

RCO ± allows for those injured by reason of racketeering activity can bring civil action for treble
damages costs and attorney¶s feesx

Sedima vx mrex ± Civil RCO actions do not require a criminal conviction nor an organized crime nexusx

0#? › *

# 
#? V
: Schlemeyer¶s purchased an apartment house in April 1954x Shortly
after, they discovered that there was a substantial termite infestationx R¶s
hired Senske to eradicate the termites and make some repairsx Sensketold
 R¶s that the job required extensive measuresx R¶s did not want to pay for
the entire treatment and so Senske gave them no assurance of successx R¶s
sold to ʌ (Obde) in November 1954x R¶s claim that at the time of the sale
they had no reason to believe that they had not completely fixed the
problemx

#? O # Defendants had a duty to inform ʌ of the termite conditionx

#?  : Concealed, dangerous, known to seller, not known to buyer, buyer
wouldn¶t have discovered it through inspectionx

>#? i : The purchaser had no knowledge of the alleged defect and that it
was a defect a reasonable inspection would not disclosex Schlemeyer knew
about the termites and knew that there was a chance that they weren¶t
entirely extinguishedx
e want to disclose things that are dangerous to the
people because we don¶t want them to get hurtx

>#? á#
1x? Assummption of risk: you assume the risk once you know about itx
2x? An owner selling an older house does not impliedly promise it to
be free from defectsx A builder selling a new house, however, is
liable for structural defects even without proof of knowledgex
3x? Even if you disclose, it does not matter if you have an implied duty
of warranty (builder)x uilder is liable for damages
4x? Many times, the seller of the property has moved to another state
or is hard to sue or no longer has the sufficient assets to satisfy a
judgment, so buyers sue the real estate agents for alleged
misrepresentations or failures to disclose what they knew or ought
to have knownx

½0 >#.
0 / *97+
Facts: Action is to recovery damages for alleged fraudulent concealment of termite infestation in
an apartment home purchased from Dsx P asserts D¶s were aware of termite condition but
fraudulently concealed it from the Psx

Rule:
here there are concealed defects in demised premises, dangerous to the property, health
or life of the purchaser, which defects are known to the seller when the lease is made, but
unknown to the purchaser, and which a careful examination on his part would not disclose, it is
the seller¶s duty to disclose them to the tenant before leasing, and his failure to do so amounts to
a fraudx
f either party to a  or sale conceals or suppresses a material fact which he is in good faith
bound to discloser then his silence is fraudulentx The object of the law in these cases is to
impose a duty to speak whenever justice, equity and fair dealing demand itx

Damages = Difference between the actual value of the property and what the property would
have been worth had the misrepresentations been true«
!  
  
i $! 
:
ughes vx Stusser ± No duty to disclose to purchasers conditions that sellers had no knowledge
ofx

Mitchell vx Straith ± The undisclosed fact was a material fact to the extent that is substantially
affected adversely the value of the property or operated to materially impair or defeat the
purpose of the transaction

ouse vx Thornton ± Court found that builder had an implied warranty guaranteeing that a new
house¶s foundation are firm and secure so the house is structurally safe for occupationx

Klos vx Gockel ± Court limited ouse doctrine limiting it to commercial transactions

contemporaneous with completion of the building of the housex

Texas Gulf Sulphur ± buyers in such cases would be less likely to invest in costly searches for
information if they were required to disclose that information to the sellerx Non disclosure is
upheld as consistent with efficient discovery and utilization of resourcesx

8#6 0 .
Fiduciary Doctrine of Good faith is a compact reference to an implied undertaking not to take
opportunistic advantage in a way that could not have been contemplated at the time of drafting, and which
therefore was not resolved explicitly by the partiesx

n fiduciary relations one party may be required to confer upon the other party¶s interests a weight greater
than upon his ownx n ordinary commercial s however the other party¶s interests can be treated as of not
account as long as the right holder remains within his zone of discretionary action

.
%=     ># /*4 c #99+
Facts: Market Street Associates has a JC Penney assigned leaseback agreement purchased wherein it sells
its property to Frey and by agreement it gets a lease term of 25 yearsx The parties will negotiate in good
faith on the construction and financingx f negotiations fail lessee shall be entitled to repurchase the
propertyx Market Street attempted to enforce the lease clause to repurchase property in Milwaukee that
GE Pension Trust declined to finance improvement for, after the property was offered to sale for it at
3milx t would under the lease be allowed to purchase for 1milx

olding: Doctrine of good faith forbids opportunistic behavior that mutually dependent cooperative
relations might enable in absence of rulex Tricking a party to an on-going contractual relationship is a
violate of the duty of good faith performancex n a good faith case one party is deemed to have breached
the x

 #
     
  O   ! 



#? ) &*  ! # 

#? V
: JC Penney entered into an agreement with GE Pension Trust to sell
GE its properties for capital and lease them back from GE for 25 yearsx
Paragraph 34 of the lease agreement entitles the lessee to request GE to
finance the costs of construction and improvements as long as they are
 over 250kx f the negotiations fail, the lessee can repurchase the property
at a price roughly equal to what Penney sold it for plus 6% a year, as
stated in paragraph 34x Penney doled out one of the properties to Market
Street Associatesx MSA needed additional funds to build a drug store in
the shopping centerx After trying to get financing from other sources, they
turned to GE for financingx The letter made no reference to paragraph 34x
GE refused to help MSA with financingx Later, MSA told GE that they
were exercising the option of buying the property under paragraph 34x GE
refused, so MSA sued for specific performancex
#?  : f information is readily available to both parties the failure of one to
disclose it to the other, even if done with the knowledge that the other
party is acting on mistaken premises, is not actionablex
#? 6 0 .: a compact reference to an implied undertaking not to take
opportunistic advantage in a way that could not have been contemplated at
the time of drafting, and which therefore was not resolved explicitly by the
partiesx
>#? i : The lease stated that the Trust must give ³reasonable
consideration to providing the financingx So, the lessor who fails to give
reasonable consideration and thereby prevents the negotiations from
taking place is breaking the contractx There is a difference between
capitalizing on knowledge that you have invested in and the deliberate
taking advantage of your contract partner¶s oversight (sharp dealing)x The
latter is more like a theft because it is not the exploitation of superior
knowledge, nor for the avoidance of an unbargained for expensex Thus it
serves no social productx n the end, it comes down to the fact that a
sophisticated enterprise simply failed to read the Kx MSA did not act in
bad faithx t acted honestly, reasonably, without ulterior motive, in the face
of circumstances as they actually and reasonably appearedx MSA may
have believed that the Trust already knew of paragraph 34 or that they
would surely find out about itx So, it was not dishonest or opportunistic to
fail to mention 34x

>#? á$
@:
1x? Generally you may freely assign your rights but you may not freely
delegate your dutiesx
2x? Can let someone live in your place but you can¶t just give up your
duties to maintain your placex
3x? ROSEN, calls paragraph 34 an option!
4x? The parties didn¶t think about it but if they had, they would have
put something in the K to deal with itx
5x?
AT
OULD TE PARTES AVE AGREED TO?

1#? NNNN2L#!/ 1 01 .
01 0 

NNNN
#? Every contract imposes upon each party a duty of good faith and fair
dealing in its performance and its enforcementx
#? Not in contract formation , but in performance and enforcementx
 #? Opposite side is caveat emptor! 

#? 27#.


30 

   A >

 
 


.#? Duty to disclose only in the following cases:

#?
here you know that disclosure in necessary to prevent misrepresentation
#?
here disclosure would prevent mistake and non-disclosure amounts to a
failure to act in good faith and in accordance with reasonable standards of
fair dealing

@ = >#.%/<
#*978+

Facts: P signed some 14 dance lesson s totaling some 31k all were procured by Davenport franchisee
of Arthur Murray ncx P¶s complaint seeks a decree the dance s to be null and void and to be cancelled,
and judgment entered for that portion of the payments made not charged against specific hours of
instruction given to the )x

olding: Generally a misrepresentation to be actionable must be one of fact rather than opinionx
here
there is a fiduciary relationship between the parties, or where there has been some trickery employed by
the representor or where the parties do not in general deal at arm¶s length or where the representee does
not have equal opportunity to become apprised of the truth or falsity of the fact representedx
A statement of a party having superior knowledge may be regarded as a statement of fact although it
would be considered an opinion if the parties were dealing on equal termsx Even in contractual situation
where a party to a transaction owes no duty to disclose facts within his knowledge or to answer inquiries
respecting such facts, the law is if he undertakes to do so he must disclose the whole truthx

$!  ) ± Law falls through the cracks between s and tortsx Extremely practical and important
part of the lawx Fraud is a common defense or ground for trying to invalidate x t¶s more attractive than
duress because it¶s factually easier to prove; people lie a lot and there is the potential for very good
remediesx

Obde vx Schleymer ± Fraudulent concealmentx The buyer one party is under certain types of assumptions
the other party knows it¶s wrong but does not tell themx n common with fraud parties have differing
knowledge about true facts one of which is wrong, anytime this occurs one party is at a bargaining
advantagex The information like economic power gives an advantage getting you a better dealx This law
is more controversial because behavior is in the formation stage, why shouldn¶t a person get to explore an
information advantagex

Duress and Misrepresentation have grown to attempts to regulate the misuse of bargaining advantagex
Economic Power ± Mitchell, Selmer,
oods vx FleischmannxMight arise from psychological pressure
undue and inducedx Any bargaining advantage must be used in a reasonable wayx

Concern about Mushy Lawx

A lot of lack of clarity exists about fraud and fraudulent concealmentx

right line rules are one solutionx They require tough choicesx


 10. 

A standardized contract, which, imposed and drafted by the party of superior bargaining power
strength relegates to the subscribing party only the opportunity to adhere to the contract or reject
itx (Graham vx Scissor Tailxncx)

 0


#)
/ 0


n general a court will refuse to honor a standard form  when non-negotiable standard forms
bear terms inherently unfairx n McCutcheon Lord Devlin approaches terms of adhesion, must
be ³clear, fair and reasonable

#? 
 - 

>#? V
#ProCD sold telephone directories on CD-ROMx Their product had a
shrinkwrap license on the non-commercial version of their software that
made the buyer agree not to resell the informationx Zeidenberg (D) bought
one of those non-commercial versions, created his own company and tried
to resell the same info to consumers via internetx
>#? i #ProCD is daring Zeidenberg to buy it and not return itx The K
was formed when he failed to return the product, not when he paid for
itx e had an opportunity to reject the terms once he had read them but he
failed to do sox That effectively means he accepted the terms

½#? % `.#

> #? V
# The ills ordered a computer over the phonex The order-taker did
not read the terms of the K over the phone to themx The terms included an
arbitration clause that said all the terms apply unless the computer is
returned within 30 daysx ills kept the computer passed the 30 daysx
> #? i # y keeping the product beyond 30 days, the ills accepted
Gateway¶s offer, including the arbitration clausex The buyer of the product
has a chance to accept or return the product once they read the terms of the
Kx t would be unreasonable to ask a salesperson to read contract terms
over the phone and it would be unreasonable to ask the customer to sit
there and listen to themx t is cheaper and more beneficial to have it on
paperx The K is formed when the terms are read and agreed to, not when
the product is soldx Furthermore, it doesn¶t matter that the box didn¶t
notify the customer that additional terms were on the inside of the box
because the ills knew when ordering the computer that the terms would
be insidex Customers can do 3 things to discover these terms:
1x? ave the vendor send a copy of the terms in advance
2x? Consult public sources
3x? nspect the documents after the product arrives

c
 10. 
± K¶s of the take-it-or-leave-it basis

C# 0
. ; -

Additional terms (in a box) at the time of the transaction bind customerx 
ó?
here customer have an opportunity after they have read terms to return product
ó? Keeping product after a reasonable period indicates assent to terms
ó? UCC does not require full disclosure at time of purchase
ó? t is in consumers best interest to avoid costly disclosure steps
ó? UCC does not require prominence of any arbitration terms

§2-209: Strong precedent, offer to modify which is not assented too means terms are not accepted by the
purchaserx


) c!<
#>#O
0
½ *997)

Facts: Zeindenberg utilized ProCD¶s software to create a website for his formed company Silken
Mountain
eb Services, ncx, that allowed customer¶s free access to the telephone number databasex
ProCD sold its software to the consumer and commercial customer base and dependent on its use the
pricing variedx

olding: That terms inside a box of software bind consumers who use the software after an opportunity
to read the terms and to reject them by returning the productx

Reasoning: The Appeals Court finds that it did have effect under the UCCx ts analysis is that the  isn¶t
made until the time the agreement shows up after the software is loadedx ts analysis follows:

1)? §2-204 ± A  may be made in any manner sufficient to show agreement, including conduct by parties
which recognizes the existence of such a 
2)? §2-606 ± A buyer accepts goods if he fails to make an effective rejection under §2-602(1)x
3)? §2-205 & 2-209(2) ± Under the UCC the ordinary terms found in shrink-wrap licenses require any
special prominence, or otherwise are to be undercut rather than enforcedx

Effectively then ProCd proposes a  a portion of which is not disclosed at the time of purchasex
owever, it allows a return after an opportunity for review of the termsx Finally, under the UCC there is
no prohibition under this type of x

>#6 ?/
#*4.c #994+

Facts: ill ordered a computer from Gatewayx They were unsatisfied with purchasex At issue is the
ill¶s filing of a suit contrary to an arbitration clause contained in Gateway¶s materialsx
ills say the arbitration clause did not stand out and as a result they should be allowed to proceed to court
with there claimsx

olding: Citing ProCD the court holds that terms inside a box can bind customersx Customers are better
off when costly steps are skipped, so no requirement exists that the terms should have been read when the
computer was purchased by phonex Further, the UxSxCx does not support that arbitration terms must be
prominentx The ills like Zeinberg in ProCD opted to inspect the documents after the product¶s deliveryx
y keeping the computer beyond 30 days, the ills accepted Gateway¶s offer, including the arbitration
clause

Note: Court upheld Gateway¶s arbitration under C rules which required 4k and sending papers to
France to begin processx

u? Arbitration will stop a class action suit from proceedingx

 u? Federal Arbitration Actx ± Seeks to promote arbitration and prevents States from imposing special
conditions on processx

c
>
c  
>#. ± The court upheld a forum selection clause requiring any
litigation be done in FLx The court held that federal law requires terms of Ks be fundamentally
fair, and the UxSx Supreme Court held there was no fundamental unfairness in requiring Ps to
litigate in FLx

00 K
 1
00 0c
:



  

Liability is based on consent of the contractx f they haven¶t consented they should not be boundx The
idea has difficulties in standard form contract implementation, given existing social practice, wherein
people don¶t read contractsx

McCutcheon ± People sign and don¶t readx ts no mysteryx The vendors know the contracts aren¶t readx

So what does consent mean?

ó? Traditionally (Lord lackburn), by signing or taking the document means consumer is manifesting a
willingness and hence there is consent, even thought is might be an unknowing consentx
ó? Llewellyn would present an alternative vision, there is no assent to the specificx Rather the dickered
terms and broad type of transactionx A blanket assent to unreasonable or indecent terms that do not alter
the dickered termsx

ritten standard form contract becomes much less important under Llewellyn¶s versionx Rather it is the
understanding between the parties that is of importx The contract can be used to maneuver and to specify
ambiguities but not to obviate or negate what was agreed toox A standard form contract can specify the
rules but only with the reasonable expectations of the partiesx

The law has sided with the lackburn viewx y accepting the document the consumer effectively consents
and is boundx The Parol evidence rule gives extra force, by not allowing evidence that there were
dickered terms to be consideredx The content of the standard from contract under Parol evidence is
Supremex ProcCD and Gateway ± The Traditional Rule is extended so that the standard form can come
later of be enclosed in the boxx

McNeil¶s view of relationships where they are volitional, once you enter though someone else dictates the
termsx (ixex Joining the military or coming to schoolx You decide to enter but then you follow the rules
handed to you)x McNeil argues that the standard form contracts are of the same naturex There is no
consent you join, while there are a control including the market, there still is lacking specific consentx

The law has tried to have legal remediesx

1x The disclosure rules ± requiring various terms to be conspicuously disclosedx UCC ± Disclaimer of
implied warrantiesx Statutory Regulations ± Truth in lendingx

2x Some standards that explicitly allow courts to interpose a substantive fairness reviewx Rather than
make consent true, the courts impose a fairness standardx Reasonable Expectations Standard, 2-719(2)
and 2-313 ± Non disclaimable implied express warranties, while handicapped by 2-202 it is not
emasculatedx
3x Creative misinterpretation casesx exgx Vokes vx Arthur Murray: Fraud, Mitchell vx CC Sanitation:
Duressx

? cHD 
K <
#>#

0%#
#c # (1975)

? V
: ʌ¶s warehouse was robbedx Ȇ¶s had purchased an insurance policy
from the D that protected him from burglaryx owever, the policy had its
own definition of burglary that was different from the statutory definitionx
The policies definition required a ³felonious entry therein by actual force
and violencex There was no visible forced entry so D said it was not
coveredx
? i : The burglary definition used in the policy comports neither the
concept a layman might have of that crime, nor with a legal interpretationx
Must take into account these 2 things when interpreting contract languagex
.? Revolution in formation of contractual relationships
/? Reasonable expectations - § 211
?  # customers are not bound to unknown terms which are beyond the
range of reasonable expectationx
? á# Do you REASONALY EXPECT to have it covered?
MPORTANT RULE OF LA
!!!!
.? This is true for insurancex nsurance is specialx Major question is
what is a reasonable expectationx
/? owever, if they put writing in the K stating otherwise and you are
supposed to read it, then you are bound to itx LACK LETTER
LA
x
!? CLASS NOTES: The UCC gives a hierarchy of language (§ 203x b: standards of
preference in interpretation)x O
EVER, Rosen believes that trade usage or
language, which is the last in the hierarchy, is actually the MOST important
languagex
? Logic ± parties write contracts for themselves, so if they meant something
they would have written it in the Kx t is the courts job to enforce, not
rewrite the K¶s that people enter intox
? Express terms ± strict construction of rules
? Course of performance: this K
? Course of dealing: any prior K¶s
? Trade language
.? Sometimes #¶s in a K are ambiguousx Somebody might ask for 300
of something, but in the trade, 300 may actually mean 290 to 310
of that thingx EXx] agelsx Asking for 12 or asking for a dozen
does not matterx
/? § 201x
hose meaning prevailsx
? Does one party have reason to know that the other party has
attached a different meaning to some term in the K?

cHD 
K 
#>#

0%


 c #*94L+
Facts: P purchased two insurance policies to cover facility from burglaryx Dickered terms included that
coverage did not include any µinsider jobs¶x Policy included terms that visible marks of physical damage
of the exterior of the premises must be present to recoverx

olding: Courts in construing and applying a standardized contract seek to effectuate the reasonable
expectations of the average member of the public who accepts itx n contracts of adhesion where P has
little choice in the offer judicial regulation is appropriatex The objectively reasonable expectations of
applicants and intended beneficiaries regarding terms of insurance contracts will be honored and
customers will not be bound by unknown standardized terms which are beyond the range of reasonable
expectationsx

Effectively the provision can be said to border on unconscionability

L#0½   c
1

) > 

n cases of ambiguous / conflicting provisions, they are construed against the drafterx

  c<
#>#Ë 
/*944+
Facts: P leased car which was in an accident due to negligence of one of his officers¶ wivesx Two forms
were provided, 1, single page summary of transaction 2, formal leasex The formal lease required payment
for loss or damage caused by negligencex Single page summary 100 deductible for accidentx

olding: Common knowledge that detailed provisions are seldom readx Plaintiff should have known that
single page summary would be relied uponx Ambiguity could have been avoided by noting exclusion of
negligence on leasing order fromx


7# 
½
- 
! 
 
 1c


½ states have adopted, rarely applied outside of AZ to anything other than insurance claimsx
§211 EXCEPTON to enforcement of adhesion contracts: ³reasonable expectations doctrine ± Ps are not
bound to unknown terms which are beyond the range of reasonable expectationsx

Courts determine meaning of contract provisions (µ doing a lot right by doing a little wrong¶ ±
Shakespeare)x
here contract terms are ambiguous the court tends to interpret to achieve what it views
as a fair resultx Llewellyn observed this and wrote critically about it 1x t creates an awkward precedent
when a legitimate contract containing a clause came alongx e hoped with the UCC to remedy this
situation by providing reliable toolsx

/0?

?
arranties as a tool to guard expectations (§ 2-313, 2-314, 2-315, 2-316, 2-317,
2-714(2), 2-719)
!?
arranties, express and implied
? lGOG Π #
+ 
+
 +
*

.? (1) n this section, " 00 0  ½/ " means a buyer that enters
into a contract with the sellerx
/? (2) Express warranties by the seller to the immediate buyer are
created as follows:
? (a) Any affirmation of fact or promise made by
the seller which relates to the goods and becomes part of
 the basis of the bargain creates an express warranty that the
goods shall conform to the affirmation or promisex
!? (b) Any description of the goods which is made part of the
basis of the bargain creates an express warranty that the
goods shall conform to the descriptionx

? (c) Any 
 
 that is made part of the basis of
the bargain creates an express warranty that the whole of
the goods shall conform to the sample or modelx
-? (3) t is not necessary to the creation of an express warranty that
the seller use formal words such as "warrant" or "guarantee" or that
the seller have a specific intention to make a warranty, but an
affirmation merely of the value of the goods or a statement
purporting to be merely the seller's opinion or commendation of
the goods does not create a warranty (Mere Puffery!)x
1? (4) Any remedial promise made by the seller to the immediate
buyer creates an obligation that the promise will be performed
upon the happening of the specified eventx
? Absent effective disclaimers, sellers are bound by affirmations of fact,
promises and descriptions of the goodsx They are not bound by opinions
and statements commending the goodsx
#? 235C#0
0
/:% .
½
/B$  1
0 #
1x? (1) Unless excluded or modified (Section 2-316), a
warranty that the goods shall be merchantable is implied in
a contract for their sale if the seller is a merchant (someone
who deals in goods of that kind) with respect to goods of
that kindx Under this section the serving for value of food
or drink to be consumed either on the premises or
elsewhere is a salex
2x? (2) Goods to be merchantable must be at least such as:
ax? (a) pass without objection in the trade under
the contract description;
bx? (b) in the case of fungible goods, are of fair average
quality within the description;
cx? (c) are fit for the ordinary purposes for
which goods of that description are used;
dx? (d) run, within the variations permitted by
the agreement, of even kind, quality and quantity
within each unit and among all units involved;
ex? (e) are adequately contained, packaged, and labeled
as the agreement may require; and
fx? (f) conform to the promise or affirmations of fact
made on the container or label if anyx
3x? (3) Unless excluded or modified (Section 2-316) other
implied warranties may arise from course of dealing or
usage of tradex
 >#? 235L#0
0
/: 
1 ) 
)  #
*(/"›"
+
1x?
here the 

at the time of contracting . 
 

=
? any particular   for which the goods are
required 
0.. ½/  
/

. 

P=


I00
 
 or furnish  ½
 0, there is
unless excluded or modified under the next section an
implied warranty that the goods shall be fit for such
purposex
? Disclaimer vx Remedy Limitation
.? Disclaimer: § 2-316
/? Limitation of remedy: § 2-719
? Test:
here circumstances cause an exclusive or limited
remedy to fail of its essential purpose, remedy may be had
as provided in this Actx
? This means that other remedies are available
? A limited remedy fails of its essential purpose when
there is not a  
 
 for breach of
obligations or dutiesx
!? People often try to phrase remedy limitations as warrantiesx
? Necessary steps:
.? Must decide whether, absent disclaimers, the seller gave any
warrantiesx
? Express or mplied?
? f implied then:
.? Merchantability or;
/? Fitness for a particular purpose
/? Must consider whether the type of warranty given has been
disclaimed successfullyx Test with § 2-316 (1)(2)(3)
? Express: 2-316(1)
!? mplied: 2-316(2) - (3)
-? as seller successfully limited remedies for the breach of any
warranties not successfully disclaimed under § 2-719

? NOTES:
arranties are simply promisesx That is itx

? Express warranty: they promised you something and you didn¶t get it
? mplied in law:
? mplied in fact:
? mplied warranty of merchantability:
? mplied warranty of fitness:
? As ±is: these do not exclude express warranties only implied warrantiesx
? Steps:
.? Decide whether it is express or implied
? Merchant: someone who deals in goods of that kind
 ? Merchantability: if you want to exclude merchantability, you must use the
word ³merchantabilityx
? PG 495 YPO:
?

? Conspicuous disclaimers and conscionable remedy limitations

? O   
 ' 
 .230"
? V
# unt, through Rideout (D¶s agent), purchased a new boat engine
from Perkinsx unt asked for specific modifications to be made to the
engine, which Rideout agreed tox The K that unt signed had a back page
that described that there were no warranties of merchantability or fitness
regarding the enginex unt did not see or read thesex After the engine was
installed a series of mechanical problems arose (coughed smoke)x 3
months after installation, unt removed the engine, told Perkins to come
get it, and bought a new onex
? #
as the disclaimer of the warranties on the back of the purchase
order conspicuous?
.? Can attention reasonably expect to be called to it?
?  # § 1-201(10)
? i #The language of the official comment on the front did not call
sufficient attention to the language on the back of the formx unt¶s only
reasonable opportunity to view the back of the form was when the
executed copy was sent back to himx
.? The smoking was caused by a breach of the warranty of
merchantability and warranty of fitnessx Perkin¶s was aware of
unt¶s requirements and purpose for buying the enginex unt
relied on Perkins to guide him in his selection
/? Conspicuousness: § 1-201(10) ± the person ought to have noticed
itx
vix? 
# The provisions on the front of the purchase order did not
make adequate reference to the provisions on the back of the form as to
draw attention to themx ence the provisions on the back cannot be said to
be conspicuousx The disclaimer is not effectivex
? á# Rosen says this K is unconscionable because seller of the clause
that said ³shall not be liable for any property damage or for any injuries in
connection with the enginex 2-719(3)
4#
 
§2-314, §2-315, §2-316 & §2-719
Any good where the seller is a merchant, code implies a warranty of merchantability and in certain cases
warranty of fitness for particular purpose

Courts regulate the quality of goods or services supplied by sellers through the legal device called
warrantyx s frequently fail to articulate express provisions about quality and usually say nothing of
buyer¶s rights and the seller¶s duties if there are problems with goodsx Usually warranties are for the sale
of goodsx

Rule: Courts have long held sellers of goods to some duty to provide products of at least minimal qualityx
#
 - 
00
033.   / 

ó? ! 0. 

 > ?
/


§2-313 ± Express
arranties

(1) Sellers create express warranties in a number of ways including;

a)? A fact or promise that !


    !   !
!"? A description of the goods that "

"? Any sample or model that "

” $ '


    
  

ó? Seller need not intend to make a warranty; an objective standard applies as to buyer¶s interpretation of
µwarranty¶x

§2-314 ± mplied
arranties Merchantability

a)? Merchantable goods are such as ³pass without objection in the trade under the  descriptionx
b)? Fit for ordinary purposes which such goods are intended

§2-315 ± mplied
arranty Fitness for Particular Purpose

a)? Sellers who know ³any particular purpose for which the goods are required
b)? uyer is relying on the seller¶s skill or judgment to select or furnish suitable goodsx
c)? Particular purpose is distinguished from ordinary purpose

§2-317 ±
arranties shall be construed as consistent with each other UNLESS such construction is
UNREASONALE, then the NTENTON of the parties shall control:
n determining NTENTON:

a)? Exact / technical specs, displace inconsistent general model, language and description
b)? Express warranties displace inconsistent implied warranties OTER TAN MPLED
ARRANTY
OF FTNESS FOR A PARTCULAR PURPOSE

ó? . /  1?
/ >
½
0 

 0 0

arranty Disclaimers and Remedy Limitations

Sellers must honor their buyer¶s reasonable expectations but are allowed to limit their obligations to
control costs allowing buyers to accept risks for lower pricesx

Rule: Sellers can tailor their liability but must do so conspicuouslyx

§2-316(1) Exclusion or modification of Express warranties

a)? Express warranties and negation / limitation of warranties shall be construed wherever reasonable as
consistent with each otherx
b)? ut subject to Parol Evidence negation or limitation is inoperative to extent construction is
unreasonable

§2-316(2) Exclusion or modification of mplied warranties

a)? To exclude must mention MERCANTALTY and in case of writing must be conspicuousx á


! 
 ! 
 ! 

b)? To exclude FTNESS exclusion must be in writing and conspicuousx

§2-316(3) ± As s Disclaimers
a) Circumstances indicate otherwise, all implied warranties are excluded by expression like µAS S¶
c)? Disclaimers ± must satisfy the same criteria as §2-316(2) requirements that the modification be
conspicuousx µAs is¶ or µwith all flaws and faults¶ ± Verbiage that disclaims all warranties, no express
guarantee about the quality of the item

ó? mplied warranty can be excluded by course of dealing, course of performance, or usage of trade

§1-201(10)

a)?
hen reasonable person against who it is to operate ought to have noticed
b)? Contains a µbrightline¶ or a safe harborx Disclaimers of mplied warranties must be in Capital Lettersx
Larger and contrasting printx
c)?
hether term or condition is conspicuous is ultimately a decision for the courtx

ó? ! 0. 


0  0 0 1 ; . 1
/

§2-719 ± Limitation of Remedy agreementsx They are authorizedx There are substantive limitationsx The
key ones are:

a)? The limited remedy must be stated as the exclusive remedy

     

       

 


b)? f a remedy fails of its essential purpose remedy must be had according to the actx

ó? There is no definition of µessential purpose of remedyx¶ Cases have interpreted as limited remedy
provides the buyer a remedy that preserves a core of value to the buyerx
ó? Limited remedies that fail of there essential purpose entitles to rescission and restitution at buyer¶s
discretionx owever, on consequential damages courts are split
 
   
 !  !   
   

c)? Consequential damages may be limited UNLESS UNCONSCONALE

ó? Limitation on consequential damages is prima facie unconscionable where injury is to person of

buyerx

Standards are qualitative vx rightlinex


>#) =
%.
/c #<
#*%974+

Facts: Mrx unt purchased, by Purchase Order which contained a modification of express and implied
warranties, an outboard motor for his boat from Perkins Machineryx The motor was µdefective¶ and
attempts to repair its excessive belching of smoke had failed on several occasions leading Mrx unt to
have it uninstalled whereupon who ordered another from a different manufacturerx

Rule: Under§2-316 to exclude or modify the implied warranty of merchantability where in writing such
writing must be conspicuousx The applicable test for conspicuous §1-201(10) µwhether a reasonable
person against whom« [The disclaimer] it¶s to operate ought to have noticed itx t is a question of law
for the court whether a provision is conspicuousx

The court determines that the provisions on the front of the PO did not make adequate reference to the
back of the PO to draw attention to the latterx ence the provisions were not conspicuous and the
consequently the disclaimer was not effectivex

0 
#># ?  K
! >

0
c # 1@
x - Court held because excluding language in
 is in larger type, as a matter of law that it is conspicuousx

µAS S¶ clause required to be conspicuous

6
0/%1#c #>#c0

=
c # ± Court held that an µAs s¶ disclaimer must be
conspicuous and that this was consistent with the purpose of the Codex The court held as reasonable to
avoid the implied warranties the requirement of subsection (2) must be metx

Consequential Damages Allowed

%/>#
0/0½

# ±
here Ps purchased a motor homex The trial could found that when
a buyer gives a seller reasonable opportunity to repair the vehicle and it fails to operate as a new vehicle
free of defects , the limited remedy of replacement or repair fails of its essential purpose under §2-719x
This meant that the buyers could revoke their acceptance under §2-608 and recover what they had paidx
They also recovered in consequential damages 2x5k for loss of use of the vehiclex

Consequential damages are recoverable under §2-715 when §2-719(2) fails to provide a fair quantum of
remedy for breach of obligations or duties outlined in the x

No Consequential Damages Allowed

c.
/ 0
#>#

c.   c  ±
here NCR sold a computer system to a
manufacturerx The court of appeals disallowed consequential damages while agreeing that the limited
remedy had failed its essential purposex t found that the consequential damages exclusion was valid
because it was not unconscionablex Chatlos was allowed to recovery a buyer remedy under §2-714(2) the
difference between value of goods at time accepted and the value they would have had if it was as
warrantedx

   ; 
># .1c x ±
here court found limited remedy of replacement or repair failed
of its essential purposex The failure invalidated the disclaimer of consequential damagesx The court
found that the parties in ing for the dump truck bodies could not be found to also include that the D be
enable to avoid all consequential liability for breachx

;# 


 
c
0 


—  
! 
 
The Magnuson-Moss Act ± Applies only where seller gives a ³written warranty covering a ³consumer
productx

ó? A supplier of a consumer product need not give any written warranty

ó?
here a written warranty is provided it must clearly and conspicuously designate that warranty as
either a full or limited warrantyx
Full warranty
‘ Must remedy any defect within a reasonable time without charge to customerx
‘ f cannot do this after reasonable number of attempt, then the customer can elect a refund of
what she paid or a replacement of the productx
‘ Cannot disclaim implied warranties nor limit their duration unreasonably

ó? Court may award attorney¶s fees to a consumer who prevails since all warranties are under the act a
suit in state courts can also have attorney fees awardedx

Most suppliers have offered only Limited warranties wherein they have wide freedom to write almost any
kind of warranty they desire if they call it a limited warrantyx Limitation of warranties must be
conspicuousx

ó? A supplier cannot disclaim any implied warranty imposed by statutes such as the UCCx

ó? A supplier may limit the duration of implied warranties to that of a written warranty of reasonable
duration, if such limitation is conscionable and is set forth in clear and unmistakable language and
prominently displayed on the face of the warranty

Limited warranty is on entire productx You can¶t express warranty a portion and have implied
warranties apply to another portionx

The FTC interprets the act to require exclusions or limitations of consequential damages to be
conspicuousx

1975 FTC Rules ±

arrantor

ó? Must state what it will do in the event of a failure to conform with the written warranty and what the
consumer must dox

ó? Supplier must disclose ³any exclusions of or limitation on relief such as incidental or consequential
damages

To act on either the FTC or Magnusson rules a consumer must sue for breach of warranty in state courtsx

Lemon Laws ± Passed by all 50 states

Generally deal in Rescission and Restitution like §2-719(2)x Additionally, you need to evince that repairs
not satisfactoryx Further, some prescribe a certain quantity of times a thing must be returnedx Sometimes
award attorney feesx

ó? Provide consumer with remedies including right to return the car if dealer¶s repeated efforts to solve
recurring problems prove to be ineffectivex
ó? Rights are in addition to rights granted under the UCC or pursuant to the terms of the  of salex
ó? Consumer must exhaust all remedies under private consumer dispute resolution

Studies have shown that consumers win much more in states where there are government-run lemon law
arbitration programs than in states where the auto makers run the arbitration programsx

. >#c./
Jx Ctx upheld a judgment of 74k+ when Chrysler failed to replace a
defective mini-van within 30 days after a consumer¶s demandx

8#)
> 0
 

0
 
23
The key to the parol evidence rule is finding that the parties intended a writing to be ³a final expression of
their agreement with respect to such termsx
here this is found evidence of prior agreement or
contemporaneous oral agreement MAY NOT CONTRADCT the writingx owever, a writing intended
by the parties to be the final expression of their agreement can be explained or supplemented   

!" by

(a) y a course of dealing, usage of trade or course of performancex 

  
 "

(b) Allows explanation or supplementation by evidence of consistent additional terms unless the
court finds the writing to have been intended also as a complete and exclusive statement of terms
of the agreementx


         
 

  
    

'    
   
  





>#%A  

*8.c #98+
Facts: uyer ordered the MUSE systemx t suffered after installation considerable and repeated down-
timex The central computer of the system was eventually replaced and some 8k was charged for a larger
disc that camx Problems continued prompting buyer to bring this actionx

mportance of case according to
hitford:

f  was signed the mplied
arranties would be displacedx This would leave the buyer to rely on the
Express
arranty §2-313 statements of capacity and environment operationx

Express warranties cannot be disclaimed by virtue of §2-316(1)x µnegation is inoperativex¶

§2-202: The disclaimer section of express warrantiesx Sometimes buyer cannot turn to oral discussion or
papers exchanged prior to final signing of , would be viewed as language tending to contradictx

23#

- 

  0:)
 
-
 > 0
 #

(1) Terms with respect to which the confirmatory records

of the parties agree or which are otherwise set forth in a
record intended by the parties as a final expression of
their agreement with respect to such terms as are included
therein may not be contradicted by evidence of any prior
agreement or of a contemporaneous oral agreement but
may be supplemented by evidence of:

(a) course of performance, course of dealing, or

usage of trade (Section 1-303); and
 (b) consistent additional terms unless the court finds
the record to have been intended also as a complete and
exclusive statement of the terms of the agreement x

(2) Terms in a record may be explained by evidence of

course of performance, course of dealing, or usage of trade
without a preliminary determination by the court that the
language used is ambiguousx

/0?@
@
   (AKA Parol Evidence Rule)

? ³
hen two parties have made a contract and have expressed it in writing to which
they have both assented as the complete and accurate integration of that contract,
evidence, whether parol or otherwise, of antecedent understandings and
negotiations will not be admitted for the purpose of varying or contradicting the
writingx
!? Does not apply to subsequent K¶s or separate K¶s!

? Class Notes:
? SOF:
.? Does the K fall under the statute?
/? s the writing sufficient to satisfy the SOF?
? The only party that has to sign is the party against who
enforcement is sought! The Defendant has to sign it!
? Extrinsic Evidence Rule:
.? s the K final and complete (integrated) with respect to the term
regarding which the evidence is sought to be introduced?
/? For what purpose is evidence to be admitted? [Not to contradict or
supplement]
? This is a substantive rule, not procedural
? Extrinsic Evidence: Evidence that is outside the 4 corners of the K
? 2 uestions regarding Parol Evidence:
? *+. 
  0*1


0 0
 +? .   .  0 
?. ..  -
  > 0
 

.? s it the1
l expression?
? s it a writing? (f not, ERR not apply)
!? s it intended to replace prior agreements?
/? s it a 0
 expression?
? s it intended to replace contemporaneous agreements that
are within the³scope of this agreement
? f not integrated, no ERR
? f integrated:
? *+ ?.   .  > 0
  ½ 00  0'  

0  
0
,
.? inadmissible if it is evidence of a prior agreement or a
contemporaneous agreement within the scope of this agreement
/? inadmissible to ³alter or ³contradict the writing
 -? Does it survive the ³laugh test?
? . .  0 .
 

 
 A 
 1
?#.0/. 
I0 
 0 
? ³4 corners approach - only the document itself
? Modified classical ± evidence of surrounding circumstances admissible
? UCC ± Trade Usage, course of Performance, Course of Dealing always
admissible
?  ?.    -
  > 0
 00  ½

? To show a defect in formation (Finger 2)
? To interpret an ³ambiguous: provisionx n most states, whether a term is
ambiguous is a question of lawx That question is usually decided using the
same three approaches used to determine if a contract is integratedx Some
courts allow the evidence to be admitted solely for the purpose of
determining whether the contract is ambiguousx

? ow do you get court to admit parol evidence?

? The test is whether the offered evidence is relevant to prove a meaning to
which language of the instrument is reasonably susceptiblex
? You could argue that there was fraud on the part of one party
4?
hat purposes may you offer parol evidence?
? f the writing was not intended to be finalx
?
here parties make a tentative written agreement but do not intend a K to
exist until a final writing is executedx
? f some language in the K is subject to interpretation
? To show a defect in formation (Finger 2)
?
hen may you NOT offer parol evidence?
? Merger Rule/Clause -
-YY 
 

 

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