CONTRACTS OUTLINE I. INTRODUCTION A.

Contract law involves the implementation of the expectation that legal rules in some way provide assurance that the agreement will be honored. 1. Thus, the expectation damage rule: in contracts, the injured party may recover from the party in breach only a dollar sum sufficient to put him in as good a position as he would have occupied had the contract been performed in full. B. What is a contract? 1. A promise, or a set of promises, oral or written 2. A legally enforceable agreementproviding a remedy for breach 3. Relationship that the parties voluntarily enter into 4. Involves an exchange b/t parties; a giving and a taking; a quid pro quo 5. Privateindependent of state imposition C. Why enforce contracts? 1. Without enforcement, promises are valueless 2. No enforcement leads to inefficiency 3. Enforcement creates a faith that the system will work 4. Maintain individual autonomy by respecting and enforcing the choice to enter into a contract 5. Protects reliance on a promise 6. Recognizes moral force of promising 7. Provides stability to society, predictability and continuity 8. Encourages efficient resource-allocation 9. Encourages accountability D. Hierarchy of Promise Enforcement 1. Promise plus consideration: bargained-for-exchange / mutual inducement 2. Promise plus detrimental reliance: promissory estoppel 3. Promise plus antecedent benefit: moral obligation / past consideration 4. Promise plus formality: nominal consideration or seal 5. Naked promise
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When do the following contractual events become effective? Offer when received Acceptance when sent Counteroffer when received Revocation when received Difference between bilateral and modern bilateral: see UCC 2-206: Creating a Modern Bilateral Contract return promise or commencement of performance.

THE BASES OF PROMISSORY LIABILITY II. INTRODUCTION A. What is CONSIDERATION? 1. A thing (what each party is bargaining for) PLUS a process (the bargaining process) 2. Thus, consideration says nothing about who the parties are, or what they are exchanging. B. Holmes Bargain Theory of Consideration 1. Mutuality of obligation (each side must be equally obligated) AND 2. Reciprocal conventional inducement (must make sure that the promises given could induce one another) Bargained-for-exchange C. Restatement 3: an agreement to exchange promises or to exchange a promise for a performance or to exchange performances. Restatement 71: (1) To constitute consideration, a performance or a return promise must be bargained for. (2) A performance or return promise is bargained for if it is sought by the promisor in exchange for her promise and is given by the promisee in exchange for that promise. D. Finding consideration 1. Why was the promise made? 2. Why was the supposed consideration given? 3. What was the inducing cause of a persons action/promise/performance? E. Eisenbergs Rationale for Bargain Theory 1. Substantive: (a) protects reliance and (b) encourages exchange. 2. Administrative: (a) evidence to the extent performance has been started and (b) evidence even if executory. 3. Mixed: (a) deliberative process. F. Eisenbergs Critique 1. Ignores give me a chance bargainsdeemed illusory 2. Discards nominal consideration III. BARGAIN CONTRACT: PROMISE PLUS CONSIDERATION A. Kirksey v. Kirksey (Ala. 1845, p. 57) D brother-in-law writes letter to P, widowed Mrs. Kirksey, offers her a place to stay on his property if she moves over 60 miles to his home. After a couple of years, he kicks her out. 1. Issue: is a gratuitous promise legally enforceable after one party has suffered loss and inconvenience in reliance on the promise? 2. Holding: Nono inducement on part of brother-in-law in making his promise; thus, no consideration to fulfill bargained-for-exchange requirements. Court doesnt think Mrs. Ks uprooting herself and moving 60 miles sufficient consideration. Rather, the moving was just a necessary pre-condition of her accepting his gift. 3. Rule: generally, we want to look for symmetry in the contract, in the form of mutual inducement. B. Langer v. Superior Steel Corp. (Pa. 1932, p. 58) P, long-time employee, offered pension plan once he retires, conditioned on him remaining loyal to D and not working for anyone else. P complied, but after 4 years D stops making payments.

1. Holding: bargained for exchange exists: P induced into not seeking other employment by Ds promise of money; D induced into giving the pension by Ps agreeing not to work for another company. 2. Alternatively: court points to the detriment P suffered in not seeking elsewhere when, presumably, he was still able to work. This does not necessarily guarantee a binding and enforceable agreement, but contributes to finding inducement, and thus consideration. 3. Willistons approach: whether the happening of the condition will be a benefit to the promisor. If so, then consideration. Or, if the promisee has suffered a detriment by following the promise, the courts should not consider the promise as a mere gratuity. 4. Restatement 90: Promissory estoppel: A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person a. and which does induce such action or forbearance b. is binding if injustice can be avoided only by enforcement of the promise. c. remedy limited as justice requires. Could Kirksey have been decided in favor of the widow on promissory estoppel? C. Sidebar: NOMINAL CONSIDERATION 1. While nominal consideration, or form, provides a somewhat tangible piece of evidence that shows an agreement was made, beyond this there is no real purpose for nominal considerationit has no impact at all on the underlying transaction. Moreover, the law has moved to a more pragmatic and realistic view of everyday exchanges, and form just doesnt fit into this view. Thus not recognized by courts. D. Sidebar: ADEQUACY OF CONSIDERATION 1. Generally, courts will not inquire into the adequacy of consideration; so long as the necessary bargain element exists, courts will enforce. 2. Restatement 79: If the requirement of consideration is met, there is no additional requirement of (a) a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or (b) equivalence in the values exchanged; or (c) mutuality of obligation.
IV. BARGAIN CONTRACT: SUFFICIENCY OF EXCHANGE IN GENERAL A. Hamer v. Sidway (N.Y. 1891, p. 18) Uncle offers nephew $5,000 if he refrains from drinking, smoking, etc. until hes 21. Nephew does; note passes to 3d party, uncle dies, estate refuses to pay note, says no consideration for agreement. 1. Holding: contract is enforceable through benefit-detriment theory of consideration. Here, nephews good behavior was a detriment, since he had a legal right to drink, smoke, etc., but which he voluntarily gave up. a. Detriment: promisee must do something he does not have to do, or refrain from doing something that he had a right to do. Detriment only means giving up a legal right. 2. Alternatively, court could have upheld through regular bargained for exchange: uncle induced by promise of good behavior, nephew induced by promise of money. Restatement 71: (1) To constitute consideration, a performance or a return promise must be bargained for. (3) The performance may consist of (a) an act other than a promise, (b) a forbearance, or (c) the creation, modification, or destruction of a legal relation.

B. BENEFIT-DETRIMENT v. Bargained for exchange 1. No mutual inducement in benefit-detriment. 2. Bargain theory focused on the process of the exchange; benefit-detriment focused on what each side gets or gives up. C. UNCONSCIONABILITY: Jones v. Star Credit Corp. (N.Y. 1969, p. 90) door-to-door salesman sells $300 freezer to welfare couple for what will amount to $1400. 1. Issue: no question about whether K supported by consideration. Rather, was it unconscionable under UCC 2-302? a. 2-302: (1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. 2. Holding: Yes; two types of unconscionability (generally both must be found): a. Substantive something in the contract itself that is so unfair. b. Procedural that the process of bargaining was so unfair. 3. How to reconcile substantive part with rule that adequacy of consideration not supposed to matter? Courts have resolved by making it very difficult to successfully make an unconscionability claim. D. In re Greene (S.D.N.Y. 1930, p. 95) man and woman have affair, then break it off. Executed a written agreement obligating Greene to make certain payments to her. He goes bankrupt, she makes claim for her share, $375,000. $1 and other good and valuable considerations given. 1. Issue: valid consideration? a. Prior relationship no; could not be induced by former existence of relationship. b. Ending relationship no; no requirement/obligation/performance on her part. c. Moral obligation but its an immoral relationship. d. $1 just nominal. e. Word consideration on its own, doesnt mean anything; but if w/in context of valid contract does signal willingness of parties to enter into a K. f. Release of marriage claim as society, dont value promise to marry highly. g. Release of home expenses but not his responsibility/obligation. Thus, no valid consideration, no K.
V. PRE-EXISTING DUTY RULE A. General rule: the performance or the promise to perform a pre-existing duty under a prior contract does not constitute consideration. A pre-existing duty is something a party is already legally obligated to do. 1. Sale of goods: when a K is for a sale of goods, and thus is governed by the UCC, an agreement modifying that K needs no consideration. ( 2-209) B. Levine v. Blumenthal (N.J. 1936, p. 104) P leases store property to D for 2 year-term; at end of 1st year D says wont be able to pay full amount per month for 2d year. P and D agree that D can pay lesser amount. At end of 2d year P demands D pay amount in full; D refuses. 1. Issue: was modified K supported by consideration? 2. Holding: must be new and independent consideration to support a modified contract must treat it like an ordinary K; promise to do what you were already obligated to do is not consideration.

C.

D.

E.

F.

3. Policy concerns: we want to avoid bad-faith agreements, and when same service/good purchased at lesser price, then perhaps process is contaminated. 4. Note: in dictum, court stated that had D done something even slightly more than was called for in the K (say paying a little on the first of the month instead of it all at the end of the month), then consideration would exist and the new K valid. Alaska Packers v. Domenico (9th Cir. 1902, p. 107) fisherman agree to K in San Francisco, but when they get to Alaska they refuse to work until the supervisor agrees to pay them a higher wage. Upon returning to SF, company refuses to pay new salary. 1. Holding: court says this situation is example of the old hold-up game; also falls under pre-existing duty since no extra work done; policy concern of bad faith. Construction contracts: oftentimes the pre-existing duty rule will come into play when a contractor agrees to build a building for a fixed sum. Midway through the building, however, he will demand an increased payment, and threaten not to complete the building if he doesnt get the extra money. Most courts would hold that because the contractor was already obligated to complete the house, the contractors promise to continue building is not consideration for the owners promise to pay more money. Angel v. Murray (R.I. 1974, p. 110) garbage collector agrees to contract w/city for 5 years; after 3 years company asks for increase in pay b/c of substantial increase in number of housing units. After public hearing, city agrees to new, higher payment. 1. Primary purpose of pre-existing duty rule is to prevent the hold-up game. 2. (Note: not really pre-existing duty rule) Restatement 73: Performance of a legal duty owed to a promisoris not consideration; but a similar performance is consideration if it differs from what was required by the duty in a way which reflects more than a pretense of bargain. 3. Cf. Restatement 89: A promise modifying a duty under a contract not fully performed on either side is binding: (a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made 4. Thus, law is moving away from pre-existing duty toward a more realistic and pragmatic view; was modification fair and equitable? prompted by unanticipated circumstances? Then likely enforceable. 5. Also recognizing changes in social setting and environment; also a shift from local economy into a national/global one businessman are driving the law. 6. UCC 2-209: (1) An agreement modifying a contractneeds no consideration to be binding. (only that it was made in good faith) Have also waived the pre-existing duty rule when statute of limitations has been waived and promise is made, and when in bankruptcy proceedings and make promise (see below, moral obligation).

VI. MUTUALITY OF OBLIGATION A. Introduction under the context of bilateral contracts. K is w/o consideration if no mutuality of obligation: both parties must make promises that somehow bind them. Thus, if one party has made an illusory promise, there is no mutuality of obligation, and the K is not enforceable. 1. Illusory promise: statement which appears to promise a performance that would constitute consideration, but doesnt really do so. 2. Three situations: an expectation of good faith or best efforts a. Requirements or Output Contracts

b. Exclusive Dealing Arrangements c. House-Selling Agreements B. Rehm-Zeiher v. F.G. Walker p. 118; P and D enter into K for sale of whisky. D, as distiller, was to sell to P, a distributor, a certain amount of whisky each year b/t 1909-1912. K called for 2,000 cases to be sold in 09; 3,000 in 10; 4,000 in 11; and 5,000 in 12; all at a set price. K allowed, however, for either side to pull out of it under certain conditionsD if a fire destroyed the whisky it was to provide, P if for any unforeseen reason it would not be able to use the full amount of whisky called for in the K. 1. Issue: in 1909 P only purchased 786 cases; 1,200 in 10. In 1911 price went up and D only provided 1,044 of the cases; P sued for remaining 2,596. a. Did K mutually obligate both parties, such that it would be enforceable? 2. Holding: Nocourt says that if situation were reversed and D was suing P to buy all 4,000, then P could just say unforeseen reason and not buy. Thus, P not obligated to buy the amount specified in K no mutuality of obligation. 3. Note: courts do uphold Ks where one party agrees to purchase from the other all of some item that he will need. Thus, a hotel may enter into K with ice-maker where hotel will buy all the ice it needs for the upcoming season. Courts will uphold, even though it may be somewhat indeterminate on exactly how much ice will be needed. In these cases, the parties are capable of an approximately accurate forecast of their needs and requirements. C. Wood v. Lucy, Lady Duff-Gordon p. 124; D is a fashion designer and enters into K with P, whereby P is to have the exclusive right to place Ds endorsement on fashion designs. In return, P is to pay D of any profits from the sale of those endorsed items. D goes out on her own and places endorsements; P brings suit for breach of K. 1. Issue: consideration? did P obligate himself to sell endorsed designs? 2. Holding: Cardozo: A promise is fairly to be implied. a. P had an exclusive right to sell Ds endorsements; with that right came an assumption of duties. b. Ps promised to split the profits 50-50, and to take out all patents and copyrights necessary to protect Ds endorsements. c. Thus, his was a promise to use reasonable efforts to bring profits and revenues into existence. In this way, the agreement was instinct with obligation. d. D could have sued P if he had failed to use reasonable efforts to sell the endorsements. 3. Cardozo is dismissing the old formalism of the law as too inflexible and arcane. He wants to enforce the parties intentions. D. Old and New 1. Old party has to make an explicit promise to perform; otherwise, no K. 2. New consideration is implied in promise of good faith/best efforts. 3. UCC again, good faith/according to commercial standards of fair dealing. (2-306) VII. PROMISE PLUS ANTECEDENT BENEFIT; MORAL OBLIGATION A. Introduction 1. When can a party obtain reimbursement for a. A benefit previously conferred b. Without any promise to pay. 2. Should the law recognize this right of reimbursement a. If benefit followed by promise?

B.

C. D.

E. F.

F.

b. If benefit not followed by promise? Wades Statement of QUASI-CONTRACT p. 136 1. A confers on B a measurable benefit with expectation of payment. 2. A provides an opportunity to B to decline, or had excuse for failure to do so. 3. B retains benefit or had duty to secure benefit. 4. Then, B must pay value of benefit. QUASI-CONTRACT: Bailey v. West p. 18 Mills v. Wyman p. 139; sick son, good Samaritan P takes care of him (at least until he dies). D, sons father, writes to P saying he will pay for the care, but then reneges. 1. Issue: any sort of enforceable K? a. Bargained-for? no consideration for care, since already done; nor under benefitdetriment, since no additional care can be performed. b. Moral obligation? but son was 25; father no longer responsible. c. Quasi-contract? could argue: i. maybe not benefit for father, but detriment to P. ii. opportunity to decline, or failure to do so? too hard to locate father (1825) iii. father retains benefit? P attempted to save sons life; dont want to discourage those efforts iv. value of benefit? just costs P expended. 2. Restatement 86: (1) A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice. (2) A promise is not binding under Subsection (1) (a) if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or (b) to the extent that its value is disproportionate to the benefit. MORAL OBLIGATION ALONE: Issue: is moral obligation, by itself, sufficient to constitute consideration? 1. Holding: Noif a contract to be legally enforceable need be anything other than a naked promise, something more than mere moral consideration is necessary. a. Rather, each party must be bound to give some legal consideration to the other by conferring a benefit upon him or suffering a legal detriment at his request. 2. BUT SEE: Restatement 82(1): A promise to pay all or part of an antecedent contractual or quasi- contractual indebtedness owed by the promisor is binding if the indebtedness is still enforceable or would be except for the effect of a statute of limitations. (Thus, it is binding w/o consideration.) a. And further: many States also require that such a promise be made in writing. b. Bankruptcy: if debt has been discharged in bankruptcy, the debtors later promise to repay the debt nonetheless is binding without consideration. c. Rationale: at some point there was a consideration-based agreement; all thats changed is an act of law (also happens w/ statute of limitations). Webb v. McGowin p. 145; P, a lumber worker, dropping 75 lb. blocks of wood from upper level to lower level; sees boss down below, about to be hit by block. P decides to go over w/ the block, thereby saving boss from injury, but P is permanently injured and cant work. Boss agrees to pay P $15 every 2 weeks until P dies. Boss dies, though, and executors refuse to honor agreement. 1. Issue: enforceable under promise plus antecedent benefit?

2. Holding: Yescourt recognizes that saving a persons life is sufficient consideration for the promisors subsequent agreement to pay for the service. P saving Ds life created moral obligation, which D recognized by promise to pay. Material benefit of his life sufficient consideration. a. Also: Benefit to the promisor or injury to the promisee is a sufficient legal consideration for the promisors agreement to pay.
VIII. PROMISSORY ESTOPPEL: PROMISE PLUS UNBARGAINED-FOR RELIANCE A. Introduction 1. Courts use doctrine of promissory estoppel to enforce promises which, although not supported by consideration (no bargained-for exchange), induce detrimental reliance on the promisees part. 2. Restatement 90: (1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires. (2) A charitable subscription or a marriage settlement is binding under Subsection (1) without proof that the promise induced action or forbearance. B. Contract or Tort? 1. PE as Tort a. Quasi duty of care essentially creates a duty of care for the promisor to make sure his promise is not misunderstood, and if it is he will be responsible for any loss/harm suffered by the promisee in reliance on the promise. b. Reason to know, or foreseeability when an actor has reason to know that her actions may cause harm, she is responsible if that harm occurs. c. Compensation for harm want to put the person who suffered the harm where he was before the accident/harm. 2. PE as Contract a. Promise requirement still requires that a promise has been made (thats the first question to be asked, of course). b. Bargain-like must have: i. a known relying party ii. the action was anticipated by the promisor (promisor not responsible if harm/loss was something other than could be expected). 3. PE and Autonomy a. Traditional K law and individual freedom want to allow people to make their own decisions; relation to and furtherance of autonomy. b. Reliance theory and individual responsibility the other side of autonomy; holding the other person responsible for reliance which was foreseeable based on his promise. C. Ricketts v. Scothorn (Neb. 1898, p. 24); distressed grandpa gives granddaughter $2,000 so she doesnt have to work anymore; she quits her job, but goes back after one year; Gpa dies and estate refuses to pay. 1. Issue: detrimental reliance? 2. Holding: Yesalthough no consideration (money was a gift). But granddaughter justifiably and foreseeably relied on Gpas promise of money in giving up her job. Thus, estate is estopped from claiming K invalid for lack of consideration..

D. Contracting/Construction Bids often, promissory estoppel will be used when a general contractor accepts bids from sub-contractors for a construction job. If the general contractor relies on a bid from a sub to determine the overall bid, then many courts will treat the subs bid as temporarily irrevocable (he will be estopped from taking it back). Thus, the holdings are based on the theory that the general contractor has reasonably relied on the subcontractors bid, and would suffer a loss if the sub backed out and a new one had to be found.
MUTUAL ASSENT: OFFER AND ACCEPTANCE IX. INTRODUCTION A. Objective theory of contracts the existence and terms of contracts must be determined from the manifestations made by each of the parties, rather than by each partys subjective intention. To measure objectively a partys intention, the question is what a reasonable person in the position of the other party would conclude the objective manifestations of intent meant. 1. Thus, must look at the parties expressed intent, not their secret intentions. a. Historical test: meeting of the minds (literally); subjective b. Modern test: reasonable persons understanding; objective (fact/context sensitive) 2. Protects Ps expectations: if trier-of-fact finds that Ps expectations, based on what was said or done were reasonable (and the other requisites for K formation are present), those expectations will be protected. 3. Cf.: meeting of the minds. 4. Restatement 17: The formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration. 5. Restatement 18: For a contract to be valid, the parties must manifest a mutual assent to be bound. 6. Restatement 22: (1) The manifestation of mutual assent to an exchange ordinarily takes the form of an offer or proposal by one party followed by an acceptance by the other party or parties. (2) A manifestation of mutual assent may be made even though neither offer nor acceptance can be identified and even though the moment of formation cannot be determined. B. Embry v. Hargadine, McKittrick Dry Goods Co. (Missouri 1907, p. 228) P is in limbo about his employment status; asks his boss, D, about it; D says Go ahead, youre all right; get your men out and dont let that worry you. P thinks that means hes got a job for the next year, but D fires him a few months later. D claims he did not intend to give P a new contract. 1. Issue: was the oral statement by D enough to create a contract, irrespective of the intention or purpose of D? 2. Holding: Yesthe inner intention of parties to a conversation subsequently alleged to create a contract cannot either make a contract of what transpired, or prevent one from arising, if the words used were sufficient to constitute a contract. a. Thus, if what [D] said would have been taken by a reasonable man to be an employment, and [P] so understood it, it constituted a valid contract. b. Context: in order to ascertain parties intent from their words and/or acts, must look at the context in which they were spoken: i. Grices relation maxim: should interpret a statement in light of the preceding statements. So, Ds statement in response to Ps demand that he be given a new K or else he would quit must be taken to have meant a new K existed.

C. Lucy v. Zehmer (Virginia 1954, p. 230) P and D are having an evening of drinking; P asks to buy Ds farm for $50,000. D writes an agreement for the sale on a napkin, he and his wife sign it. D later claims it was all a joke, that he never intended to sell the farm. 1. Issue: Did P reasonably believe, from the outward expressions of he and D, that they had a contract for sale of the farm? 2. Holding: Yesthe mental assent of the parties is not requisite for the formation of a contract. Rather, courts look to those expressions of their intentions which are communicated between them. a. Also, If his words and acts, judged by a reasonable standard, manifest an intention to agree, it is immaterial what may be the real but unexpressed state of his mind. 3. Conflicting evidence? a. Support for K: 40 minute discussion, written down, changed I to We b/c both D and wife had to sign, P had an attorney examine the title. b. Support against: Wife only signed b/c assured it was a joke, setting of a night out drinking, parties had argued (in a friendly way) before about exchanging the farm. 4. Note: if P knew D was bluffing, there would be no K.
X. OFFER Introduction Restatement 24: an offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude [the bargain]. 5. So, an act whereby one person confers on the other the power to create contractual relations between them. 6. So, a proposal that the parties exchange promises (bilateral contract). 7. Or, to exchange a promise for an act (unilateral contract). 8. Characteristics a. Offeror is master of the offer. b. Offeror gives offeree the power of acceptance, but can limit this power in any way. c. Offeror can destroy the offer at any time (unless option K). d. Offers are destroyed by: i. Revocation by offeror ii. Unreasonable lapse of time offer may have gone stale iii. Death of either party iv. Rejection by offeree v. Counteroffer by offeree, on terms different than offerors 9. Discerning an offer a. What kind of act creates the power of acceptance? i. Must be an expression of the will or intent of the offeror. ii. Must lead offeree to reasonably believe that a power to create a contract is being conferred on her. b. Thus, excludes an invitation to bargain, or preliminary negotiations. i. But how to distinguish? Thats the challenge. c. Ultimate question: i. Would a reasonable person in the position of the offeree believe that her assent is all that is necessary to create a contract? d. Note: default is against finding an offer; dont want people to become so guarded in their everyday conversations b/c theyre afraid simple bargaining language.

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1. Restatement 26: A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent. 2. Want to look at a. Terms of any previous inquiry b. Completeness of the terms of the suggested bargain c. Number of persons to whom a communication is addressed B. Lefkowitz v. Great Minneapolis Surplus Store (Minn. 1957, p. 247) Store places ad offering stole worth $139.50 for $1, first come, first served; P showed up but was denied ability to buy the stole. 1. Issue: did the stores ad constitute an offer? 2. Holding: Yeswhere the offer is clear, definite, and explicit, and leaves nothing open for negotiation, it constitutes an offer, acceptance of which will complete the contract. (But this is the exception) 3. Note: ads are not offers generally; rather, they are viewed as an invitation to bargain. a. Benefits: greater communication b/t buyers and sellers, w/o fear that seller will be automatically bound; encourages negotiation, deliberation, and bargaining b/t the parties; reinforces peoples expectations that ads are not offers. b. Costs: sometimes misplaced reliance on an ad; incurring expenses in expectation of accepting the offer; losing out on one ad b/c tried to get another.
XI. ACCEPTANCE Introduction the last step in contract formation. Acceptance is the offerees manifestation of assent to the terms of the offer, made in a manner invited or required by the offer must be consistent w/ offer. 1. Who: an offer may be accepted only by a person in whom the offeror intended to create a power of acceptance. 2. Restatement 50: (1) Acceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer. (2) Acceptance by performance requires that at least part of what the offer requests be performed or tendered and includes acceptance by a performance which operates as a return promise. (3) Acceptance by a promise requires that the offeree complete every act essential to the making of the promise. 3. Corbin on Contracts: an acceptance is: a. a voluntary act b. of the offeree (Restatement 52: An offer can be accepted only by a person whom it invites to furnish consideration.) c. whereby she exercises the power conferred upon her by the offer d. and thereby creates the set of legal relations called a contract. 4. Sale of Goods: UCC 2-206: Creating a Modern Bilateral Contract: (1) Unless otherwise unambiguously indicated by the language or the circumstances (a) an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances; (b) an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the

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prompt or current shipment of conforming or non-conforming goods, but such a shipment of non-conforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer. (2) Where the beginning of a requested performance is a reasonable mode of acceptance an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance. Note: the latter half of (b) concerns a situation in which Seller ships to Buyer goods that dont exactly match Buyers offer. If Buyer decides to accept the goods nonetheless (in effect, Seller is making a counter-offer), then there is still a contract; or Buyer can reject the shipment, and no contract will have ever existed (and thus no breach occurred either). B. HOW TO ACCEPT: since the offeror is the master of his offer, he may specify the method of acceptance: 1. A mode of acceptance varying from that required does NOT constitute acceptance. 2. But, if the offer does not specify a mode of acceptance, it may be given in any manner and by any medium reasonable in the circumstances. (Rest. 30) 3. LaSalle National Bank v. Vega (Ill. 1988, p. 271) purchase contract required that the contract shall be presented to the trust for full execution. Upon the trusts execution, this contract will then be in full force. D and his agent signed the document and presented it to P. Ps trustee, however, did not execute (aka sign) the document. a. Issue: is the contract in force? b. Holding: Nothe document (aka the offer) specified a certain mode of acceptance thus, after being signed by D it was still merely an offer; it had to be accepted by D before it became a contract. 4. Hendricks v. Behee (Missouri 1990, p. 273) real estate transaction; Seller mails written offer to Buyer on 3/3; on 3/4 Buyer signs the offer, but before notifying Seller of the acceptance (doesnt mail it either), Seller withdraws the offer. a. Issue: did Buyers signing the offer create a K? b. Holding: Nono K exists until acceptance of the offer is communicated to the offeror. i. An uncommunicated intention to accept an offer is not an acceptance. 5. Ever-Tite Roofing Co. v. Green (La. 1955, p. 276) P enters into agreement with Ds to re-roof their house. The agreement form states that it shall become binding only upon written acceptanceor upon commencing performance of the work. D signs the work order, gives to P, who doesnt sign but begins doing a credit check of D. Credit check comes back fine, P loads the truck, drives over to Ds house, but finds that D has hired another company. D says We revoke; has P already accepted? a. Issue: has P commenced performance? b. Holding: Yesby getting the materials together and then sending the workers over to Ds house, the company began performance, and thus accepted Ds offer. i. Time: but, of course, acceptance had to be w/in reasonable time; did P meet that requirement? Took 10 days to do credit check, get materials together and send workers out; court doesnt think this an unreasonable amount of time. ii. Notice?: Under Restatement 56, notification was satisfied when the workers drove up to Ds house.

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Damages: court assessed damages as the amount of profit P expected to make, plus the expenses related to getting the materials together and sending the workers overwhy? Maybe b/c P could have sent those workers elsewhere that day if had known of Ds breach; w/o compensation, then, those hours worked would have been completely lost. 6. NOTIFICATION: is the offeree required to give notice of his acceptance? (which, for unilateral Ks, means after he has completed performance) a. UNILATERAL Ks: (notification only after performance is complete) Restatement 54: (2) If an offeree who accepts by rendering a performance has reason to know that the offeror has no adequate means of learning of the performance with reasonable promptness and certainty, the contractual duty of the offeror is discharged unless (a) the offeree exercises reasonable diligence to notify the offeror of acceptance, or (b) the offeror learns of the performance within a reasonable time, or (c) the offer indicates that notification of acceptance is not required. UCC 2-206(2): Where the beginning of a requested performance is a reasonable mode of acceptance an offer who is NOT notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance. Thus, although in a unilateral K situation acceptance is made through (complete) performance, after full performance the offeree must still give the offeror notice that he has performed, unless the offeror has reason to know of the performance; otherwise, the offeror will be absolved of his contractual duty, so that he will not be bound indefinitely when unaware of the acceptance. Side Note: Creating an Option Contract: Restatement 45: (1) Where an offer invites an offeree to accept by rendering a performance an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it. (2) The offeror's duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer. b. MODERN BILATERAL Ks: i. Restatement 56: It is essential to an acceptance by promise either that the offeree exercise reasonable diligence to notify the offeror of acceptance or that the offeror receive the acceptance seasonably. ii. (in the gray area b/t unilateral and bilateral) UCC 2-206: (2) Where the beginning of a requested performance is a reasonable mode of acceptance an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance. 7. Carlill v. Carbolic Smoke Ball Co. (Eng. 1893, p. 285) D puts an ad in the paper, says that a 100 lb. reward will be given to anyone who takes the carbolic smoke ball in accordance with the directions and contracts the flu or another disease. P uses the ball, but contracts the flu; notifies D of her performance (since unilateral K), but D refuses to pay. a. Issue: did the ad constitute an offer, or was it mere puffery? b. Holding: Yes, the ad was an offer b/c it contained an express promise to pay on Ds part. Court points to fact that D had deposited 1,000 lbs. in bank as proof of sincerity in the matter. Also, since unilateral K, P had no duty to notify D of her

iii.

13

acceptance; her performance (following the conditions set forth in the ad) constituted acceptance. c. Other bases?: i. Benefit-detriment: P taking/using the smoke ball everyday. ii. Mutual inducement: P induced into using ball by promise of 100 lb. if it didnt work; D induced into promising money in order to get people to buy. 8. Glover v. Jewish War Veterans (Dist. of Columbia 1949, p. 291) D posts ad in newspaper offering reward for information leading to arrest and conviction of persons responsible for a murder. P was mother of suspects girlfriend; police come to talk to her, she tells them daughter and suspect left town, gives names of relatives where they might have gone. Police investigate, arrest suspect. Later P finds out about reward offer and tries to collect. a. Issue: must a person know of a reward offer to be able to collect on it? b. Holding: Yesthe advertised reward was definitely an offer: it was clear, definite, and explicit about what was required and what was offered. But since P was not aware of the offer, she couldnt accept it. i. Mode of acceptance?: Since unilateral K, acceptance/performance satisfied by giving info. leading to arrest and conviction. ii. Intent/knowledge?: It is impossible that there should be an acceptance unless the offeree knows of the existence of the offer. Also, there can be no contract unless the claimant when giving the desired information knew of the offerand acted with the intention of accepting such offer. c. Note: Partial performance of unilateral K: what if found a wandering dog, then saw sign saying it was lost and offering reward? Under Rest. (2d) 51, partial performance w/o knowledge NOT a ban on K-formation. Thus, if saw sign, called owners (thus completed performance), still intended to accept, and so owed the reward. Restatement 51: Unless the offeror manifests a contrary intention, an offeree who learns of an offer after he has rendered part of the performance requested by the offer may accept by completing the requested performance. 9. SILENCE: Restatement 69: (1) Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases only: (a) Where an offeree takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation. (b) Where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction, and the offeree in remaining silent and inactive intends to accept the offer. (aka equitable estoppel) (c) Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept. Note: also, retention of goods (UCC 2-606). a. Ammons v. Wilson (Miss. 1936, p. 309) P has frequently purchased items from D through one of its traveling salesmen. Although each sale is subject to approval by Ds home office, each time the order has been promptly shipped by D w/o notice to P. On this occasion P orders from Ds salesmen, but D fails to ship or notify P it will not be shipping. After 12 days, P inquires with the salesman, who informs him that his order has been declined. i. Issue: did D, by its silence, accept Ps order?

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Holding: Yesfor the reasons stated in Rest. 69(1)(c)previous dealings gave P reason to believe K had been formed. (and also (b)) B. MAILBOX RULE: Adams v. Lindsell (Eng. 1818, p. 301) 1. Timeline - 9/2 Seller of wool sends misdirected offer 9/5 Buyer receives offer, sends acceptance 9/7 If not for misdirection, Seller should have heard back from Buyer 9/8 Seller sells wool to someone else 9/9 Seller receives Buyers acceptance 2. Issue: when does acceptance become effective? 3. Holding: Acceptance is effective when the offeree drops his acceptance in the mail. 4. Restatement 63: Unless the offer provides otherwise, (a) an acceptance made in a manner and by a medium invited by an offer is operative and completes the manifestation of mutual assent as soon as put out of the offeree's possession, without regard to whether it ever reaches the offeror; 5. Note: this is a default rule (as opposed to immutable), and thus can be changed or altered by the offeror, but he must do so explicitly. i. Battle of the forms Buyer sends purchase order to Seller, with lots of fine-print language favoring Buyer; Seller responds with its own acknowledgment form, which includes lots of language favorable to Seller. Seller ships the goods, Buyer receives, and either b/f or after payment the goods turn out to be bad; only then do Buyer and Seller consult their forms, and find out that the forms dont agree on many of the non-negotiated terms. ii. Enter UCC 2-207: Additional Terms in Acceptance of Confirmation: (1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. (1) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless: (a) the offer expressly limits acceptance to the terms of the offer; (b) they materially alter it; or (c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received. (3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act. (e.g. gap-fillers) E. Termination of the Power of Acceptance 1. Ways to do so Restatement 36 a. Rejection by offeree, or counter-offer: i. Restatement 59: A reply to an offer which purports to accept it but is conditional on the offeror's assent to terms additional to or different from those offered is not an acceptance but is a counter-offer. b. Revocation by offeror

ii.

15

Direct: Restatement 42: An offeree's power of acceptance is terminated when the offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract. ii. Indirect: Restatement 43: An offerees power of acceptance is terminated when the offeror takes definite action inconsistent with an intention to enter into the proposed contract AND the offeree acquires reliable information to that effect. (Thus, usu. if offeree learns that offeror has simply made an offer to another party, not enough to constitute revocation; or if only rumors of existence of another contract, not usu. enough either.) c. Lapse of time i. Reasonable amount Restatement 41(2); look to: 1. subject matter 2. speculative nature of 3. mode of communication 4. manifest purpose of offeror ii. Specified amount Restatement 41(1) iii. Usu. clock starts running when offer is received. Objective test, look at surrounding circumstances to determine reasonable time: speculative nature of item, subject matter, mode of communication, purpose of offeror, etc. d. Death or incapacity of offeror or offeree; notice of? i. Majority view: none required (Rest. 48) ii. Minority view: offeree must be aware of death (gaining strength) 2. Revocation by type a. Unilateral before completion/full performance b. Bilateral before return promise is effective (when promise sought as acceptance) c. Modern Bilateral before return promise is effective, or before commencement of performance 3. Effects of Late Acceptance a. Treat as counter-offer b. Offeror can treat as acceptance by waiving tardiness (doesnt have to inform offeree of doing so) c. Can treat as acceptance by informing offeree 4. Dickinson v. Dodds (Eng. 1876, p. 339) D offers to sell P some property, and writes up an offer. Ends by stating that This offer [is] to be left over until Friday P decided to accept Thursday morning, but did not notify D of his intent b/c he believed he had until Friday morning. P heard from his agent, though, that D was offering or agreeing to sell the property to another individual. P went to Ds house to leave his acceptance with D, but it was never communicated to D. Friday morning both P and his agent handed Ps notice of acceptance to D, but D replied that it was too late, he had sold the property the night before. a. Issue: was Ds offer to P revoked? b. Holding: Yeswhen once the person to whom the offer was made knows that the property has been sold to some one else, it is too late for him to accept the offer. Thus, D can revoke at any time b/f acceptance: until both parties are bound, neither party is bound. c. Notes: revocation is effective upon notification, but if not direct then must come from someone offeree has reason to believe is in the know (is reliable). Since basis for

i.

16

acceptance is that offeree believes he has the power to create a K, whenever offeree has reason to believe he no longer has that power, revocation is effective. 5. Exception to Mailbox Rule: Rejection Sent Before Acceptance a. Restatement 40: Rejection or counter-offer by mail or telegram does not terminate the power of acceptance until received by the offeror, but limits the power so that a letter or telegram of acceptance started after the sending of an otherwise effective rejection or counter-offer is only a counter-offer unless the acceptance is received by the offeror before he receives the rejection or counter-offer. (In other words, the acceptance will not be effective unless it overtakes the previously-dispatched rejection.) XII. INDEFINITENESS A. Introduction even though two parties who are negotiating may intend to make a contract, and indeed think they have made a contract, there is no contract if the terms of their agreement are unduly indefinite. A proposed agreement whose terms are too uncertain to form a K is said to be void for indefiniteness. 1. Thus, a K must be sufficiently definite as to its material terms that performances to be rendered by each party are reasonably certain. a. Governing presumption?: Contracts are definite enough to enforce. Courts should construe contracts to overcome defect(s) in the terms of the agreement. b. Indefiniteness versus mutual assent?: Can have external mutual assent, measured objectively (parties intended to enter into K), and yet still have indefiniteness over the meaning of the contract (see Peerless). B. Restatement 33(2): the terms of a contract are sufficiently definite if they provide a basis for determining the existence of a breach and for giving an appropriate remedy. C. UCC 2-204(3): Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract, and there is a reasonably certain basis for giving an appropriate remedy. D. Gap-fillers: when the parties agreement is silent on a particular term, courts will use gapfillers, which are based on the assumptions that these are the terms that most parties would have agreed on if they had focused on the issues in advance. 1. Courts may look to (and use as default rules): industry custom, course of dealing, preliminary negotiations, subsequent behavior, etc. 2. Fixing price under the UCC: see 2-305(1). E. Misunderstanding although both parties think that they are agreeing to the same terms, each has a different subjective belief about what the deal is. 1. Restatement 20: (1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and (a) neither party knows or has reason to know the meaning attached by the other; or (b) each party knows or each party has reason to know the meaning attached by the other. 2. Raffles v. Wichelhaus (Eng. 1864, p. 377) P offers to sell D cotton shipped from Bombay on the ship Peerless. B accepts. But, there are two ships Peerless in Bombay at the time of contracting, due to leave at much different times. A subjectively intends to ship on the later Peerless; B subjectively intends to accept on the earlier Peerless. B expects the earlier shipment, doesnt get it, and then refuses to accept the later shipment. a. Issue: mutual assent as to the terms of the agreement?

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b. Holding: NoP and D were in subjective disagreement as to the meaning of the term Peerless, and neither had reason to know of the disagreement. Thus, no mutual assent, or meeting of the minds, and thus no contract.
REMEDIES XIII. REMEDIES A. Function in contract law, we ONLY want to compensate the non-breaching party for any loss resulting from the breach. 1. Thus, the goal is NOT to: a. deter breach (some breaches are efficient) b. punish breaching party (no punitive damages) c. ensure performance B. Types 1. Equitable specific performance and injunctive relief; must show that money damages are inadequate. (also declaratory judgment) 2. Money damages (compensatory and non-compensatory) a. Expectation damages want to put P in position she would have been had D performed. P is awarded out-of-pocket costs PLUS lost profits. i. Restatement 347: expectation damages measured by: (i) loss in value of performance (contract price) (ii) PLUS incidental or consequential damages (caused by the breach) (iii)LESS avoided costs (any amount that P would have paid or expended if other party had performed) b. Reliance damages want to put P in as good a position as she was in prior to making the contract (so, as if K was never entered into). Thus, P is awarded out-ofpocket expenses incurred in performing. (if expectation damages hard to calculate, then often will award reliance) i. Restatement 349: reliance damages calculated by: (i) expenditures made in preparation or in performance (ii) LESS loss (other expenses) avoided by breach (must be proved with reasonable certainty by D) c. Restitution damages want to prevent the unjust enrichment of D by giving P the value of performance rendered to D (thus, puts D in position he was b/f K) i. Restatement 373: restitution damages measured by: (i) any benefit conferred on breaching party by non-breaching party by way of part performance or reliance C. Sullivan v. OConnor (Mass. 1973, p. 32) P, a professional entertainer, entered into K with D, a physician, for a nose job. D promised to enhance her beauty and improve her appearance, but he messed up the surgerytwice. 1. Issue: what recovery/remedy is available to P? 2. Holding: Court is very skeptical about the validity/enforceability of promises made in a medical setting. Hard for physicians to be able to make, in good faith, such promises and carry them out. In the end, court says that P may recover mix of reliance and expectation damages: a. doctors fee (reliance) b. her out-of-pocket expenses (reliance) c. the worsening of her condition (from original nose to post-op nose) (expectation)

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d. pain and suffering involved in 3d operation (b/c D had said would only take 2) (reliance or expectation b/c wasnt part of original K) D. NOMINAL DAMAGES 1. Type of non-compensatory damages; not intended to reflect/compensate for harm. 2. Awarded when there has been a legal wrong (breach) but no harm (monetary). 3. Trifling sum is awarded; usu. $1. 4. Ps expect to prove damages, but are unable to do so. a. Specific performance court orders breaching party to perform its contractual obligations. i. UCC 2-716: (1) Specific performance may be decreed where the goods are unique or in other proper circumstances. b. Declaratory judgment P seeks statement from court that it hasnt breached. c. Injunction court orders a party not to do something (i.e. singer refuses to perform in Chicago; court will prohibit her from performing in Detroit). 2. Ability to order a. Money damages must be inadequate (often b/c too speculative to calculate, or b/c P cant find an adequate substitute) b. Terms of K must be definite enough to allow court to fashion appropriate order c. Court must be able to enforce and supervise its order B. BOTTOM LINE ON SPECIFIC PERFORMANCE COMPENSATION is the standard remedy; everything else is an exception, and extremely rare.
XV. LIMITATIONS ON DAMAGES A. 3 basic doctrines or principles 1. Mitigation (aka avoidability) non-breaching party cannot recover increased losses resulting from her own irrational or unfair behavior (cant pile on damages). Thus, if injured party unreasonably or dishonestly worsens the loss following a breach, damages will NOT include compensation for the aggravated loss. 2. Foreseeability (the rule of Hadley v. Baxendale) extent and scope of damages should be consistent with what was reasonably contemplated by the parties at the time of contracting. Loss that was not reasonably foreseeable as an outcome/result of the breach is NOT recoverable. 3. Certainty plaintiff must prove the fact of financial loss and the amount of such loss. Damages for breach are recoverable ONLY to the extent that the injured partys loss can be established with reasonable certainty. 4. Mitigation 5. Restatement 350: (1) damages are not recoverable for loss that the injured party could have avoided without undue risk, burden, or humiliation. But, (2) the injured party is not precluded from recoveryto the extent that he has made reasonable but unsuccessful efforts to avoid loss. 6. Cf. UCC 2-704(2): seller may, in exercise of reasonable commercial judgment, either: complete manufacture and sell to someone else, or cease manufacture and sell for scrap. B. FORESEEABILITY: Hadley v. Baxendale (Eng. 1854, p. 915) Ps were millers whose crankshaft broke; took it to Ds to have it delivered to the manufacturer for a new one. Ds had promised that if they got it by noon from Ps then they would deliver it to manufacturer the next day. Through neglect Ds failed to deliver at scheduled time and Ps business was shut down for a number of days.

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1. Issue: how much in damages can Ps recover? Can they recover lost profits b/c of the breach? 2. The Rule of Hadley v. Baxendale a. Damages should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, OR, b. Damages such as may reasonably be supposed to have been in contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. 3. So, 2 prongs: a. according to the usual course of things expected loss in a typical case of this kind; losses foreseeable to reasonable persons similarly situated; not idiosyncratic. b. special circumstances injured party must share the information about their special circumstances with the other party; otherwise consequential damages are not foreseeable. 4. Did Hadley communicate the special circumstances? Arguably, yes. 5. Posners analysis: least-cost avoider: Rule of Hadley induces party with knowledge of risk to: a) take appropriate precautions (i.e. have spare crankshaft); or b) disclose risk to other party. 6. Restatement 351: (1) Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made. (2) Loss may be foreseeable as a probable result of a breach because it follows from the breach (a) in the ordinary course of events, or (b) as a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know. 7. UCC 2-715: (2) Consequential damages resulting from sellers breach include (a) 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 (b) injury to person or property proximately resulting from any breach of warranty. A. CERTAINTY 1. Introduction: if expectation damages are uncertain (i.e. jury cant determine), then alternative remedy is reliance. 2. Substantive context: usually only with lost business profits (see Hadley and Bisko). 3. Requirements a. Damages must be proven w/ reasonable certainty b. Reasonable certainty? i. Requires higher caliber of evidence than preponderance (so, more than just greater than 50% sure) ii. Usually hard to achieve if K is: 1. entertainment-related 2. new business 4. Hypo: sugar contract in class; established bakery better able to estimate lost profits than a new bakery. B. CALCULATING DAMAGES: THE UCC 1. Buyers remedies (UCC 2-712 & 2-713): 20

direct damages + incidentals + consequentials expenses saved a. Direct: buyer may choose (cover price or market price) contract price b. Incidentals: UCC 2-715(1): reasonable expenses incident to the delay or other breach c. Consequentials: caused by breach, that are foreseeable, that must be mitigated (i.e. covered), and must be reasonably certain. 2. Sellers remedies (UCC 2-706 & 2-708(1)): direct damages + incidentals expenses saved a. Direct: contract price (resale price or market price) b. Incidentals: cost for finding substitute buyer c. NO consequentials 3. Lost Volume Seller Exception UCC 2-708(2) a. Were assuming in the above calculations that Seller is selling the exact same item to someone else. But thats not the usual situationmost companies have the capacity to make another sale as well (so, would have made 2 sales, and the other buyer is not merely a substitute). Enter the lost volume seller exception: i. If both sales would have been profitable for Seller ii. And Seller would have made the additional sale regardless of breach iii. Then damages are net profit lost (so, not diff. b/t K price and resale price) MISCELLANEOUS XVI. DEFAULT RULES: MAJORITARIAN AND PENALTY A. Analyzing the Rule in Hadley 1. Traditional Justification a. Majoritarian default rule b. Least-cost avoider (Posner) 2. Challenges/Criticisms a. Cross-subsidization concerns (Quillen car wash) b. Parties contract around consequential recovery (Epstein) c. Penalty default rules (Ayres & Gertner) B. Default Rules 1. Premise: in an ideal world, everything would be negotiated on and contracted into. But that just cant happen. Thus, all but the simplest contracts are necessarily incomplete. Challenge, then, is to fill the gaps. And economic efficiency has dominated the debate on how to do so. 2. Majoritarian default rules a. Transaction costs concern i. Coase theorem bargain to efficient allocation if costs 0 or low. If costs high, then there is no bargaining around inefficient default rules. ii. Set default rule to that selected by the majority if no transaction costs. iii. Foreseeability rule? Either all consequential damages, or only those foreseeable have chosen the latter (Hadley rule) 3. Penalty default rules should care about information, not transaction costs. a. Majoritarian rule doesnt recognize that parties are strategic. b. And its inefficient: i. Parties want to retain gains of their private information. ii. Thus, they need an incentive to share info.

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c. So, set the rule to encourage information exchange. d. Foreseeability rule? Again, Hadley.
XVI. FINAL NOTE: OPTION CONTRACTS A. Definition: not only an offer to contract, but at the same time it is a contract in which the offeror promises that she will keep the offer open for a certain time (the offer is therefore irrevocable). 1. The promise to hold the option open must itself be an independently enforceable K. a. Under the common law approach, this meant the offeree had to give the offeror consideration for his promise to hold the offer open. i. Restatement 25: An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor's power to revoke an offer. b. Under Restatement 87(1)(a), though, the common law approach has been done away with; all that is needed is a signed writing plus some form of nominal consideration given to the offeror by the offeree. i. (Note: all the writing has to say is In consideration for the $1 given me but no requirement that the money actually have been given.) c. UCC 2-205: Firm offers: signed writing PLUS explicit assurance that the offer will be held open for a period of time (if not specified, then for a reasonable time but maximum of 3 months). (also Rest. 87(1)(b)) d. Part performance or detrimental reliance: some courts have also begun to hold that commencement of performance under a unilateral K creates an option K. i. Restatement 45: (1) Where an offer invites an offeree to accept by rendering a performancean option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it. (2) The offerors duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer. ii. Also, pre-K reliance under a bilateral K: Restatement 87(2): only one situation: subcontractor bids used by a general contractor; subs wont be allowed to revoke once bid has been used by the general in its overall bid. e. Acceptance of option K is effective upon receipt.

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