8/30/2011 12:18:00 PM REVIEW SESSION 9.27.11 jaimebourns@lls.edu Offer CL v.

v. Offer UCC Legal Detriment giving up some freedom of action (Hamer grandson having to refrain from drinking and gambling), Grandpa giving up money. For option contracts you can say Im selling you X for consideration. Nominal contracts work in option contracts. Restatment 87 (Option Contracts) has to be in writing, has to be signed by offeror, has to be agreed on within a reasonable amount of time, Drennan limiting the offerors power to revoke.

Bargain theory

CONTRACTS READING NOTES

WEEK 2 READING PP. 44 -51 N+Q 1,3,4,

8/30/2011 12:18:00 PM

NORMILE V. MILLER Facts: Def. Hazel Miller, Plts: Normile + Kurniawan. Plts look at prospective real estate, and w/ help of real estate broker, Byer, made written offer to def. Important note in offer, OFFER & CLSOING DATE which said offer must be accepted before 5:00 pm, Aug. 5. Def. made changes to offer and returned it to Byer. Unsure about terms, Pltf. Decided to hold off, neither accepting nor rejecting. At 12:30 am, Aug. 5, another buyer, Segal, purchased home. Same day, pltfs notified by Byer that the home was sold. However, that same day, pltfs delivered counteroffer to office w/ deposit. Both plts file motion for summary judgment. Court ruled to obey contract w/ Segal. Normile denied summary judgment. Summary Judgment: written request for a judgment in favor of moving party before a trial. Rules: Restatement (2nd) of Contracts says the offeror is the creator of power, and before the contract leaves him, he may make the contract under any conditions he likes. If he names a specific period for its existence, the offeree can only accept during this time. If seller agrees to accept but makes changes to the offer, he makes whats called a qualified or conditional acceptance (ricahrdson v. Greensboro Warehouse) This is a counter-offer and rejection of the original offer. (this is not a contract at this pt. A contract when the other person accepts.) According to Geockel v. Stokely, a valid contract only exists when parties assent to the same thing in the same sense, and their minds meet as to all terms o If terms of offer are changed or new ones added by the acceptance, there is no meeting of the minds, and therefore no contract. The counter-offer is seen as a rejection of original offer. WHY? Counter-offer is interpreted as statement by offeree not only that he will enter into agreement by terms of

counter-offer but also implies that he wont agree to terms of original offer. Option: a contract by which the owner of a property agrees with another that he shall have the right to purchase the property at a fixed price within a certain time. Time frame is an essential pt. of an option. Holding: NO Reasoning: (1) First, plts. Never accepted or denied the counter-offer. Thus pltf. Showed no intent to agree to the terms of the counter-offer, but instead mistakenly thought they had an option on the property and that it was off the market for the duration of time limit contained in original offer. Since there was no acceptance or rejection, there was no meeting of the minds or mutual assent b/w parties (essential element of contracts), thus NO CONTRACT. (2) Since counter-offers imply no agreement w/ provisions of previous offer and thus a new contract, the time limit of the 1st contract does not carry over to the counter-offer. There wasnt any time frame for acceptance even mentioned in the counter-offer, an thus no promise to hold her offer open. This is a necessary ingredient to an option contract, and since its not there, there wasnt an option agreement. (3) By def. accepting Pltf. Segals offer, it entered into a binding contract and manifested def.s intention to revoke previous counteroffer to plt. Normile. o Fundamental tenet: an offer is freely revocable and can be countermanded by offeror at any time before its accepted by offeree. o Byers statement You snooze, you loose, prop. Has been sold serves as a revocation of counter-offer. Must inform offeree if offerror decides to revoke offer, but it can be through a direct or indirect way. Question: Do you always have to give notice to make a revocation of offer valid? o Even if the counter-offer had terms that it would give original offeror until the deadline in original offer to accept, its still

not valid b/c offeror (appellee) did not respond w/ yes or no (lack of consideration). No meeting of minds, thus no contract. NOTES & QUESTIONS (1) Classical Principles of Offer & Acceptance (a) power of acceptance created by an offer will be terminated by the offereees objection (as well as by other events such as revocation by offeror or his death or incapacity). This means the timeline to accept an offer is invalid after a denial by offeree. (b) An acceptance must be unequivocal (obvious) and unqualified (unchanged) in order for a contract to be formed. (c) a qualified acceptance is a counter-offer and will equal a rejection as to the original power of acceptance is concerned. (3) Option Contracts Pltf. Normile believed that upon receipt of counter-offer, he had first option on property, that Miller had bound herself to no one else until Normile had accepted or rejected. But court shows that df. made no promise to keep the offer open for a stated period of time. Pltf. Normile wouldnt have had an enforceable option b/c they didnt provide consideration (response of yes) for Millers promise to hold the offer open. o Consideration: Is enforceable only if the promisee has given either a promise or performance in exchange for the promise that the promisee wishes to have enforced. (4) Possibility of Multiple Acceptances what if pltf. Normile had signed and returned Millers counter-offer before they learned from Byer that they had in the meantime contracted to sell the property to Segal. Would a binding contract b/w Miller & Normile have been formed? o Yes signing contract before a notice of revocation (which must be made in order for a contract to be legitimately invalid) shows promisee has displayed an exchange of performance, so promise must be enforced. o OK. Then what about the contract bw/ Segal + Miller?

-------------------------------------------------------------------------WEEK 2 READINGS PP. 51-53, 57-63 N+Q 1-3 OFFER AND ACCEPTANCE IN UNILATERAL CONTRACTS Bilateral Contract when parties exchange promises of performance to take place in future. Each party is a promisor and a promisee. Unilateral Contract offeror offers to exchange a promise of future performance in return for offerrees actual rendering of performance. Uni contracts give max. protection to offeror b/c he isnt bound until he has received performance. Offeree takes risks b/c offeror can revoke contract while he is in middle of performance. Ex. A gives B $100 if he walks across the bridge. Not until B has completed that act is a contract formed. Both A + B have the free will to withdraw offer at any time. Just as B can stop anytime and not complete performance, so can A withdraw at any point, regardless of where B is as long as he has not crossed. Restatements new rule: Provides much broader protection to the offeree. When an offeree begins requested performance under a unilateral contract, the offeror becomes bound and cant revoke his offer so long as the offeree completes performance in accordance w/ terms of the offer. Drafters of Restatements have tried to decrease the harsh results sometimes reached under the classical analysis by declaring that in cases of doubt, courts should conclude that the offeror intended to allow the offeree to accept EITHER by making a return promise or doing the performance requested. Offeree can make a return promise if he feels that he cannot complete the requested act for return of the promise. But this promise must be made before he starts the act. COOK V. COLDWELL BANK/FRANK LAIBEN REALTY CO. Facts: Plft., real estate broker, employee of df., real estate brokerage firm, Coldwell Banker/Frank Laiban Realty Co. 1st offer: Sales meeting, March 91, df. orally announces bonus program, where bonuses over $500 to be paid at the end of the year. There are 3 tiers to this bonus program.

2nd offer: another sales meeting, Sept. 91, df. says bonuses paid out next yr. March. Pltf asks does that mean she has to be here in March to collect bonus? Df. says yes. Plft at end of 91 year had earning of 75,638.47 meeting the highest tier for bonuses and deserving of 30%. She quits and joins another firm in 92. Before Sept. 91, plft had made over $30,000 in earnings, entitling her to 30% of that according to offer made in 1st offer. Issue: Did plaintiff accept df.s offer before it was revoked as to form a binding contract? Holding: Yes Rule: Unilateral Contract a contract in which performance is based on the wish, will, or pleasure of one of the parties. A primosor does not receive a promise as consideration for his or her promise in a unilateral contract but an act. A unilateral contract lacks consideration for want of mutality, but when the promisee performs, consideration is supplied, and the contract is enforceable to the extent performed. An offer to make a unilateral contract accepted when the requested performance is rendered. Generally, an offeror may withdraw an offer at any time prior to acceptance unless the offer is supported by consideration. o By having made actions of acquiring a certain earning, that proves pltfs consideration in taking the 1st offer. So df. cant say the pltf. did not tender consideration. Df. says it revoked the first offer and made a new offer to which pltf. did not abid by. o Coffman: However, an offeror may not revoke an offer where the offeree has made substantial performance. Thus for unilateral contracts, the offer may not be revoked where OFFEREE HAS ACCEPTED OFFER BY SUBSTANTIAL PERFORMANCE. o Corbin Main offer includes a subsidiary promise, necessarily implied, that if part of the request performance is given, the offeror will not revoke his offer, and that if tender is made it will be accepted.

Part performance or tender may thus furnish consideration for this subsidiary promises. Merely acting in justifiable reliance on an offer may in some cases serve as sufficient reason for making a promise binding. (rationales court uses to support plft Cook).

REASONING: At the March 91 sales meeting, a unilateral contract was made b/w def. and pltf. According to its terms, any participant would get promises (bonus) at end of the year. Df. displayed an act of substantial performance by electing to work with the firm until the end of the year. By having staying until and past sept. 91, plft. Displayed substantial performance to offer made in March 91. Before the offer was modified the pltf had remained with df. and earned over 32,4000 in commissions making her eligible for the bonus. By that time, she had finished the performance required of the first offer, and thus accepted the contract, making the df. binding to 1st contract. According to Coffman, for unilateral contracts, offer may not be revoked where offeree has acccepted by substantial performance. Thus df.s second (modified) offer in Sept. 91 cannot replace the March 91 offer b/c it was bound by pltfs substantial performance and thus a contract was entered prior to the Sept. 91 offer.

Judgment: Breach of unilateral contract. NOTES & QUESTIONS: (1) CONTINUING EVOLUTION OF UNILATERAL CONTRACT THEORY Prof. Llewellyn said there are few types of true unilateral contracts (offers of commissions to real estate brokers, offers of rewards), but most are aberrations. Some Issues: o The speculative nature of performance. This is a common feature of unilateral contracts. Lets say its not all certain offeree will be able to execute perfroamnce fully, even if she wants to, an offeror is unlikely to be interested in a mere promissory acceptance. The offeror wants the specificed performance, thats why hes willing to pay.

(2) yes it does. Exchange of $ promised in future, if you earn certain $ (performance) equals true unilateral contract. (3) MODERN USE OF UNILATERAL CONTRACT ANALYSIS nowadays these new-style unilateral contracts are not speculative performances, but simply cases where the offeree is not committed to performance. Can do a substantial amount of performance and get out of it and still get the promise. Hurts offeree. Loophole? REMEDIES FOR BREACH OF CONTRACT Conventional Approach to Contract Enforcement

To award relief that will protect pltf.s expectation interest, the net value that the pltf. expected to realize from due performance of the contract @ issue. Protecty restitution and reliance interest extent to which df. has been enriched by, or the pltf injured by, plts actions in reliance on the defendants commitment to perform. Simplest form of relief to protect the pltfs interest would be an award of specific performance ordering df. to cooperate w/ pltf. in exchanging performances as originally agreed to. o Sometimes df. is unable to perform what he promised. o Ex. Normile case. Normile might have found herself bound by 2 valid contracts to 2 different buyers. Both are enforceable, but only one buyer could have obtained specific performance; the other would have to be happy with damage award ($).

8/30/2011 12:18:00 PM WEEK 3 READINGS PP. 71-76, 78-87 N+Q 1,2, FOLLOWING HAMER; 1,3-6 PENNSY CONSIDERATION Making of a promise is not enough, consideration is necessary. HAMER v. SIDWAY (consideration can be benefit, loss, something done. Its necessary for contracts) Facts: William E. Story, promised his nephew, Will E. Story, 2d, $5000 if he didnt drink, gamble, play cards until 21. The nephew kept that promise, wrote his uncle a letter requesting money. Uncle writes back saying he will keep it for the time being, and when hes more mature will give it to him. He died before being able to do that. Issue: Was the contract w/o consideration Holding: No. Promisee did make consideration Reasoning: Df. argues that the contract was w/o consideration, and therefore invalid. Df. argues that the promisee benefited from abstaining from the vices, but since the promisor didnt benefit, the contract was w/o consideration. o Executor Chamber 1875 consideration may be some right, interest, profit, or benefit accruing to one party, or some forbearance, detriment, loss, or responsibility given or suffered by the other. The court wont ask if the thing which forms consideration benefits the promisee, but it is enough that something is promised, done, forborne, or suffered by the promisee as consideration the promise made to him. In general, a waiver of any legal right at the request of another party is a sufficient consideration for a promise. Consideration doesnt have to be that one party profits as the other abandons some legal right in the present or in the future. o The promisee gave up some of his lawful freedom of action within certain limits upon faith of his uncles agreement.

o By having given up his legal right, promisee made a sufficient consideration. o Df. argues that the promise passed its statute of limitation. So what if he did make consideration, its too late. Ct. however said the uncles letter served as a declaration of trust, making unle the trustee and the son the beneficiary, and not beholden to a time limit. Demurrer a pleading that challenges a pleading by other party. It requests for dismissal of other parties complaint. NOTES & QUESTIONS (1) Hypo (a) what if uncle said the offer was a joke that was meant to impress the guests at the wedding? Still have to pay b/c any reasonable person at that time would have taken the offer to be serious. Cant figure out if a contract is valid or not based on what the offeror intended it to mean, but what a reasonable person would have interpreted it as. (b) Suppose that the uncle make promise with nephew that if he stays away from drugs until hes 21, hell give $5000. But he dies before boy is 21. Should promise be enforced? No, the promise losses its validity once the promisor is deceased. PENNSY SUPPLY INC. V. AMERICAN ASH RECYCLING CORP OF PA Facts: Pennsy (subcontracted) hired by Lobar, Inc. to do paving of driveway and parking lot for Northern York High School. o For the work, Pennsy got material (aggregate), Aggrite, from American Ash, a supplier of Aggrite for free. o American Ash put out a notice to bidders of availability of Aggrite at no cost on first come first serve. Pennsy got 11,000 tons. o After a year of completion, pavement developed cracks which Pennsy repaired for 251,940 and 133,777.48 to remove Aggrite. o Pennsry requested from Aggrite the removal and disposal of Aggrite, but never happened. o Filed 5 complaints: (1) breach of contract; (2) breach of express warranty of merchantability; (3) breach of warranty of fitness for a particular purpose; (4) breach of implied warranty for merchantability; (5) promissory estoppel

o Dist. Ct dismissed all 5 counts

Issue: Was there a valid consideration established in the contract? Was Pennsys relief of (American Ashs) legal obligation to dispose of the hazardous material such that American Ash didnt have to take costs of the removal sufficient consideration to ground contract and warranty claims? Holding: Yes Reaosning: Breach of contract requires 3 things: (1) existence of a contract; (2) breach of duty imposed by contract; (3) resultant damages Trial ct. opinion: Said there was no contract b/c lack of consideration. o Also said the facts do not support any inference that disposal costs were part of any bargaining process or that American Ash offered Aggrite w/ intent to avoid disposal costs. o Said dismiss count I (Breach of contract) b/c (1) there was no consideration but rather that Pennsy received a conditional gift from Ash; (2) b/c no proof that AAs avoidance of disposal costs were part of any bargaining process b/w the parties. CONSIDERATION consist of a benefit to promisor and detriment to promisee. Consideration must be bargained as the exchange for the promise. o Its not enough that the promisee suffers a legal detriment at the request of promisor. The detriment must be quid pro quo, or the price of the promise and inducement (necessary) for it to be made. If promisor merely intends a gift to promisee upon performance of a condition, the promise is gratuitous and condition is not consideration for a contract. The promise must induce a detriment, and the detriment must induce the promise. If, however, the promisor had no intention to induce a detriment to promisee for the promise, if there is

detriment, its incidental and doesnt count as consideration b/c the offeror didnt seek detriment for exchange of promise. If a nice guy says to poor girl, if you walk around the corner to the dress shop you can buy a dress on my credit. No reasonable person would take the short walk requested as consideration for the promise. By going to the shop, the poor girl gets a gift, not a promise.

How to distinguish when theres a consideration or mere condition in a gratuitous promise. If the promisor benefits, assumed theres consideration. If he doesnt, its conditional. Appellate ct. Opinion Disagrees that AA made a conditional gift of the Aggrite to Pennsy. WHY? o B/c in the complaint, it was established that Pennsy takes the gift as long as it takes the costs for disposal (detriment), saving AA thousands of dollars for disposal costs (benefit). o The costs for disposal (getting rid of their mounds of AggRite which they didnt want and would be expensive to get rid of themselves) was the detriment and this induced AA to make the promise to give free Aggrite. o Now to df.s claim that AAs avoidance of disposal costs wasnt any part of the bargaining process. Bargain theory of consideration doesnt require the parties to bargain over terms of an agreement. In order for consideration to exist, the promise and consideration needs to be in relation of reciprocal inducement. Using Holmesian formula for consideration, all thats required for a valid bargain is that the promise and the consideration be in the relation of reciprocal inducement, each for the other. In this one, the taking of free Aggrite induces the right to take disposal costs.

o Using the Holmesian formula for consideration (reciprocal conventional inducement test), its determined that AAs promise to supple AggRite free induced Pennsy to assume the detriment of collecting and taking title to material, and it was this detriment that induced AA to make the promise to provide free AggRite. Judgment: Reversed and remanded NOTES & QUESTIONS (1) Disposal Costs its weird that Pennsy sough to recover costs from disposal when they never expected to have disposal costs. How could that count as consideration for the contract? Pennsy took the Aggrite b/c it was doing paving work, and it was supposed to be that there would be no disposal costs. But it was defective, and so they had to. Essentially Pennsy agreed to take AAs aggrite, but did not agree to dispose of Aggrite and incur disposal costs. They got costs b/c construction went wrong. Didnt expect that. (4) Some courts dont use the benefit/detriment test for consideration. Its actually not considered as consideration. But its part of the bargain theory of consideration. Its mostly required that consideration be bargained when making agreement. In Pennsy, the requirement that consideration be bargained for doesnt actually require actual bargaining b/w parties. Pennsy uses the reciprocal conventional inducement test was used. To some, like in Baehr v. Penn-O-Tex Oil Corp, a bargain where an actual negotiation b/w parties occurs is counted as consideration. Why? B/c its not accidental but has been uttered intentionally and clearly for exchanges of promises. This is the Bargain-for-exchange test which qualifies as consideration. Consideration thus insures that the promise enforced as a contract is not accidental, casual, or gratuitous, but has been uttered intentionally as the result of some deliberation, manifested by reciprocal bargaining or negotiation. (5) FUNCTIONS PERFORMED BY LEGAL FORMALITIES Evidentiary Function most obvious function of legal formality is to provide evidence of the existence and purport of the contract, in case of controversy.

CAUTIONARY FUNCTION A formality may also perform a cautionary or deterrent role by acting as a check against inconsiderate action. CHANNELING FUNCTION the seal (signature, contract) not only insures satisfactory memory of the promise but also induces deliberation in the making of it. It serves as enforceability of promise. -----------------------------------------------------------------------WEEK 3 READING N+Q 2 DOUGHERTY; 1,2,4,5 BATSAKIS; 14 PLOWMAN DOUGHERTY V. SALT (gratuitous gift has no consideration; if both parties dont believe theres a consideration, then theres no consideration) APPLYING THE CONSIDERATION DOCTRINE FACTS plft, boy, received a promissory note for $3000 from aunt ISSUE did the note have sufficient consideration? HOLDING No consideration, just a gift

REASONING from pltfs witness and her account of what the note meant, its clear to the court that the note was voluntary and unenforcible promise of an executory gift. Aunt wasnt paying a debt, it was just bounty The promise was neither offered nor accepted as anything else than a gift o If both parties dont regard the item as consideration, then its not. NOTES & QUESTIONS (2) Should donative promises be enforced? The aunt received no benefit for her promise Prof. Melvin Eisenberg believes enforcement of donative promise is not appropriate. Too many administrative problems. o (1) This type of promise raises serious problems of proof. Since these promises are informal and gratuitous, it would be too easy for pltfs to falsely convince a jury that a promise was made despite lack of proof. (perverse incentives)

o (2) informal donative promises is more likely to be uncalculated than deliberative they are usually made in highly emotional states brought on by surges of gratitude, impulse of display, or other transient emotions Also usually b/w relatives or ppl that are emotionally involved. A reason these fail to make a secure expectation is b/c the promisee usually realizes the promisor may take the promise back when hes his sober self. Hard for courts to judge and produce reliable results on such a subjective thing. o (3) Lastly, the obligation of a donative promise may be excused by acts of the promisee amounting to ingratitude, or by personal circumstances that make promisor unable to complete promise. Ex. promisee wrecks his uncles car, shouldnt expect a $20,000 promise. Or if uncles goes broke, or his daughter gets cancer (improvident reasons) Plus its too hard to determine for courts in intimate relationships what counts as a good excuse to not maintain promise Prof. Eisenberg added 2 more reasons to support that donative promises shouldnt be legally obligated to completion: (1) The world of gift would be impoverished if simple donative promises based on affective considerations like love and friendship were considered obligated contracts. No one would make promises b/c of fear of getting sued. (2) Where a donative promise is based on affective considerations, in the absence of reliance a donative promise is morally obliged to release a repenting promisor (if the guy repentingly says he cant keep promise, its morally right to let him go of the promise)

o COMMENT ON LAWYERs ROLE IN COUNSELING FOR LGL EFFECT Question: If the aunt wants to effectuate her gift to nephew, what legal devices could be used to accomplish that? (a) Promissory note mere written promise that recites consideration will most likely not create an obligation enforceable. (b) Promise under seal not that effective today, its value to hold promises as binding has decreased a lot (c) executed gift surest way to guarantee that nephew gets money is to give it to him at the time (executed) o in properly law, if the gift has been executed or given, its irrevocable. An exception is when the person gives gift thinking death is near, but recovers, then allowed to take gift back. (d) testamentary gift Aunt can make a will, a last testament, which upon her death will be executed. For this, person must sign the will and have a witness present. o 2 drawbacks (1) if she has unpaid debts, money first goes to enforceable promissory notes than testamentary gift. (2) A testamentary gift is ambulatory can be revoked by a later will. (e) Gift in trust like in Hamer, the aunt if she has money available @ time but doesnt want to give it to him yet, can set a trust on his behalf.

BATSAKIS V. DEMOTSIS (there is consideration not matter how inadequate the consideration is) FACTS Batsakis gave Demotsis $2000 w/ 8% interest to be paid back by end of war or maybe before then. Demotsis worte and signed a letter to this effect. Df claims that there was lack of consideration and the money owed back is only $25.00, not $1975.00. Said he only received $25.00 worth from pltf. Df. received $25.00 on April 2, 1942, and the letter he signed, which pltf sues upon, states he will return $2000

ISSUE Was there consideration in this agreement? HOLDING YES REASONING Df tried to say she only received $25.00 of the $2000, and since she didnt receive full amount that theres a lack of consideration. She should only have to pay 25. The transaction amounted to sale by pltf of 500,000 drachmas ($25) in consideration of the execution of the instrument (letter) sued upon. Plea of consideration not valid Ct. said mere inadequacy of consideration will not void contract. (Df. didnt receive all $2000, just $25, but contract is still binding) The appellate ct actually determined 500,000 drachmas was $750 at the time. The letter counts as a contract, df. got what she wanted from contract, so she has to pay on her end according to letter. A plea of consideration contends that the letter never became a valid obligation in first place. But its a consideration b/c pltf gave $25.00. Mere inadequacy of consideration cant void contract. NOTES & QUESTIONS (1) Courts will not usually inquire into the adequacy of consideration. However, gross inadequacy may be relevant to application of other issues such as fraud, mistake, lack of capacity, duress, or undue influence. (2) Exploring the Batsakis case if a different trial judge believed defendants contention that 500,000 drachas was $25, should it have made a difference in terms of consideration. I dont think so. There was a contract, there was consideration, so valid contract. (4) Illusory Promises One form of bargain-imbalance that may result in nonenforcement of a promise is if the promise is illusory. The bargain or promise will not serve as consideration.

Illusory promise is meant in words that promise nothing; they dont put any limitations on the promise, but leave his future action subject to his own will. o Ex. if b replies to a, I promise to do as you ask if I want to do the promise when the time arrives. These words dont put any limit on promisors freedom (no detriment), and dont lead the promisee to have an expectation of performance (no reliance). o This is not enforceable. Most common application of the illusory promise is when the agreement is at will, i.e. the promisor reserves the right to terminate the agreement with the promisee at any time w/o any period of notice to the promise. (Suppose the promisor must give notice a relatively short period of time before terminating the agreement, for ex. 7 days. Is this promise illuosry? o An illusory promise is not enforceable against the one making it b/c that person has not made any commitment. He still has the choice to terminate it. Also, an illusory promise cant serve as consideration for a return promise made by the other

party. Not enforceable. Illusory promises dont apply to unilateral contracts. In unilateral contracts, there is no return promise by promisee, just performance. o Second even when the principal aspects of a contract do not impose obligations on either parties, a court may find consideration present in the secondary commitments that the parties make. Ex. LARSON V. GREEN TREE FINANCIAL CORP Even though arrangement b/w pltf home dealer and f. financing co did not require df. to purchase contracts from pltf nor pltf to sell them to df., agreement did impose some obligation on each party to constitute sufficient consideration. Pltf had to conform to HUD regulations it otherwise didnt have to follow, and pltf in return

was allowed to hold itself out as a dealer approved by df. for customer financing. (5) Mutuality of Obligation courts sometimes subject contracts to a mutuality of obligation test, Both parties must be bound or neither is bound o but unilateral contracts lack mutuality. A promisee is free to perform or not, while promisor becomes bound once the promisee tenders a beginning of performance. o However, many promises are enforceable even though the party is not bound to performance in return (i.e. the promissory estoppel). o Restatements say absence of mutuality is not a requirement for contract enforcement; consideration is enough. PLOWMAN v. INDIAN REFINING CO (past performance doesnt count as consideration for a future promise) FACTS Pltfs claim that they were told they would receive of their salary for the rest of their lives by df. They were let go b/c refinery wasnt doing too well, but b/c of their many years of faithful service they would continue to be on payroll and paid for a lifetime. Df. sent letters about continued payments, but ltrs never say anything about payments for a lifetime. Df. denies that the agreement was so, and argues that he told pltfs that it could terminate at any time. Df. did not have the authority to make such arrangements and he was not on contract (VP & GENERAL MANGER). Payments stopped july 1, 1931.

ISSUE Was there a valid contract obligating df. to pay pltfs for a lifetime? HODLING NO REASONING the payments were gratuitous and not an obligation. There is no valid contract b/c there is lack of consideration on plfts part. (1) The arrangement was not made by a corporate officer who had authority to make such a contract.

o Under bylaws, there is no record of such authorization. Pltfs argued that the monthly payments should have made the arrangement enforceable. o No proof that plfts were just on the payroll receiving money and not working. (the agent to principal enforcement is not valid here. The principal had no way of knowing what the agent was doing, and because of this ignorance there is no way that they authorized the plan. So cant enforce through agent-principal relationship) (2) Plfts argue that their long and faithful service is consideration. o Ct. says past performance dont count. Must be doing something at the time promise was made. o If it has been delivered before the promise is executed, no lgl consideration. o Pltf argues there was moral consideration The morality of a promise doesnt suffice as consideration. o Pltf argues that them traveling to pick up checks is consideration Ct says its a condition of arrangement, not consideration. The pltfs are benefiting by picking them up, its not a detriment. They were detriments to df, not benefits. No consideration. o Just a gratuitous arrangement w/o consideration that df. could stop @ any time. No valid contract. Ct. believes it is fair and reasonable for industries to pay and guarantee a comfy living for its best workers. Its humane, and the industry should do it. But cant enforce it w/o contract.

JUDGMENT NO CONTRACT NOTES & QUESTIONS (2) Judge said love and respectaffection for another or desire to do justice counts as consideration but legal consideration is necessary. Theres a difference.

(3) Something already done doesnt count as consideration for a later promise. Nor does any moral obligation arising out of past faithful service count as consideration, unless moral duty was a legal one. Professor Fried believes moral obligation is consideration. Says individual is morally bound to a promise b/c he has invoked conventions whose function it is to give grounds, moral grounds, for another to expect the promised performance. COMMENT THE POWER OF AGENTS TO BIND THEIR PRINCIPALS Agency is a consensual relationship in which one person, the agent, agrees to act on behalf of, and subject control of, another person, the principal. The relationship is described as fiduciary b/c it involves a relationship of trust and confidence in which one person is bound to act in interests of another. Fiduciary a legal or ethical relationship of trust b/w 2 or more parties The relationship is usually a consensual one created by contract, but sometimes gratuitous. If an agent has actual authority to enter into contract on behalf of principal, then the principal is bound by the agents actions in the same way as if principal had engaged in those acts himself. Agent can have actual authority in several ways: o (1) Agent has actual authority to take actions designated in principals manifestations. (directly telling them what to do) Ex. if board of directors of the refinery passed a directive to its VP to send letters to plft, those letters in a sense are sent by the company. o (2) An agent has actual authority to take actions implied in the principals manifestations. (order is somewhat specific, and the agents actions dont fall out of the scope of the order) Ex. if board of directors tells VP to make a plan to reduce companys workforce then allowing partial salary to long-term employees, and VP sends a letter to

employees even though it wasnt expressly authorized, the act is implicity actions of the company. o (3) Agent has actual authority to perform acts necessary or incidental to achieve the principals objectives (a more general order where the agents action have more chance of falling under the order than a more specific one) if b. of directors gave VP authority to enter into contracts w/ long term employees, the VP then has actual authority to sign contracts and do whatever to make boards plans come true. Even in absence of actual authority, a principal may be legally bound by actions of its agent if the principal had done or said something that leads the party to reasonably believe the order came from the principal. Apparent authority forces obligation. If employees are led to believe the VP had authority by principal to make such a plan even if he had no authority. This is apparent authority. o (4) even when an agent has no authority to enter into contract on behalf of principal, and principal that later learns of its agents actions and approves is liable by virtue of ratification. (doesnt have approval, principal finds out, and okays it) In Plowman there was no ratification b/c there was no way the board would have known the employees were not working and receiving pay just by looking @ payroll. o (5) Estoppel. (had no idea, finds out, doesnt do anything to stop. They are not in agreement with the agents actions). If the VP had on his own w/o approval adopted the plan, and the board later finds out and fails to prevent him from going forward, then company would probably be estopped to deny that the VP acted w/o authority. Implied consent. Must admit that VP had authority then. (kinda like apparent authority)

8/30/2011 12:18:00 PM WEEK 4 READING PP.215-217, 222-228, N+Q 1 following Grenier but dont read it; 1-3 following Wright LIABILITY IN THE ABSENCE OF BARGAINED-FOR EXCHANGE: PROMISSORY ESTOPPEL AND RESTITUTION PROTECTION OF PROMISEE RELIANCE: THE DOCTRINE OF PROMISSORY ESTOPPEL Section 90 of the Restatement entitled Promise Reasonably Inducing Definite and Substantial Action. This is commonly called the promissory estoppel. A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. Also its binding if the promisee has acted with reliance to their detriment of the promise. NOTES & QUESTIONS FOLLOWING GRENIER (1) The evolution of Promissory Estoppel Promissory estoppel is different from equitable estoppel. Equitable estoppel is generally applied where one party has made a misstatement of fact, rather than a promise. WRIGHT V. NEWMAN Facts: Newman filed suit against Wright to seek to recover child support for her daughter and her son. Wright is not the biological father of the son, but is of the daughter. The trial ct. nevertheless ordered Wright to pay child support for the son b/c he had himself listed as the father on the boys birth certificate and given the child his surname and established a parent-child relationship. o These actions deterred the child of any reasons of finding his natural father, thus denying the child an opportunity to establish a parent-child relationship with the natural father.

Although hes not the biological or adoptive father, there still may be a legal obligation for child support if the argument is based on parentage or contract.

ISSUE: Can Wright be held liable for child support for Newmans son under this states contract law? ; Was a promissory estoppel entered into b/w the father and the son? HOLDING: Yes according to the promissory estoppel that he entered into. REASONING: o There was no formal contract. o But the statute on contract law states (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 and which does induce such action or forberance is binding if injustice can be avoided only by enforcement of the promise Also the promisee must rely upon the promise to their detriment. This is the principle of promissory estoppel In accordance with this principle a party may enter into a contract invalid and unenforceable, and by reason of the covenants therein contained and promises made in connection with the same, wrongfully cause the opposite party to forego a valuable legal right to his detriment, and in this manner by his conduct waive the right to repudiate the contract and become estopped to deny the

opposite party any benefits that may accrue to him under the terms of the agreement. So if you enter into an invalid and unenforceable contract, and you force the other party into foregoing some legal rights to their detriment based on the promises made in this invalid contract, then the first party is obligated to the promises made even if its invalid and must give the other party benefits it accrues.

Its argued that Wright presumed to know the legal consequences of listing himself as the boys father on his birth certificate and giving the child his last name. By doing so he assumed all of the obligations and responsibilities of fatherhood, including that of support. The promise is of him agreeing to pay child support and serve as the boys father. He undertook the commitment knowingly and voluntarily. Evidence also shows that Newman and her son relied upon Wrights promise to their detriment. Had they known that he would not fully commit, Newman could have searched for the boys natural father and sought emotional and financial support for the child. Its not right for Wright to skip out of his obligation when after 10 years of serving as the boys father can suddenly evade the consequences of his promise. This would be an injustice to Newman and her son. The duty to support which was made 10 years ago remains enforceable under the contractual doctrine of promissory estoppel, Wright must pay child support.

JUDGMENT: Pay that child support AFFIRMING JUSTICE SEARS This justice agrees with majority opinion, but wants to address the dissents opinion that Newman has not relied upon Wrights promise to her detriment. Promissory Estoppels prevents a promisor from reneging on a promise, when the promisor should have expected that the promisee would rely upon the promise, and the promisee does in fact rely upon the promise to her detriment. Sufficient consideration to enforce a contractual promise of promissory estoppels can be found in any benefit accruing to the promisor, or any reliance, loss, trouble, disadvantage, or charge imposed upon the promisee. Does the benefit or detriment have to be legal ones?

Its enough for promissory estoppels to have a detriment/benefit to one side, but not both?????? After having served as the father for 10 years, its pretty hard for Wright to say that I had no idea Newman wouldnt search for the natural father and get support from him. Wright is BSing if he says otherwise. Newman relied on Wright based on his promise that he would provide care and child support, and as a result detrimentally did so b/c she never sought after the biological father, and in the case they split and he stops providing, she definitely suffers. Promissory estoppel requires only that the reliance by the injured party be reasonable. it cannot be seriously argued that Newmans reliance was anything other than reasonable, she had no indication that Wright would renege. Also argues that contrary to the dissents implicit assertion, the promissory estoppel does not require that the injured party exhaust all other possible means of obtaining the benefit of the promise form any and all sources before being able to enforce the promise against the promisor Dissent thinks that if you cant find anyone or any other way to get financial aid for your son, THEN the promise with Wright can be enforced. But only until all other possibilities are gone. Against the dissent, the judge says there is nothing in the law that says you must exhaust all other possibilities. Second, its almost impossible for Newman to locate the father. This would penalize Newman for no reasons other than (1) her reasonable reliance upon a promise that was not kept and (2) for allowing herself to be dissuaded by Wright from seeking the identity

of the biological father. Also there will be so many injustices if Wright is not obligated to fulfill his promise Newman will find an almost impossible time trying to find the father Will not receive any support despite Wright saying he would do so An even greater injustice on the boy. He will suffer a great deal when who he thinks is his natural father breaks his commitment to

his son. Theres not only a legal obligation but a moral one by Wright. DISSENTING JUDGE Benham In addition to making a showing of expectation and reasonable reliance, a person asserting liability on the theory of promissory estoppel must show that she relied on the promise to her detriment. The record is completely lacking of evidence of how Newman met her burden of proof to the promissory estoppel. The majority fails to state how she is prevented from now instituting a child support acting against the natural father. How do you know she cant find him, no evidence that the father is dead or unable to be found. No evidence showing how she cant find the original father. Also it was Newman that broke up the relationship when the boy was 3 yrs old. For the next five years, until the kid was 8, Newman and Wright didnt communicate. Only for the past 2 years did Wright visit the child. Wright also contends that during the past 7 yrs he didnt support the child. So its not fair to say that Newman incurred detriment for the past 10 years since for the past 7 years she was in the same situation. Newman has failed to show that she or the child incurred any detriment by Wrights failure to fulfill his promise made 10 years ago. Looks like she was doing just fine w/o the payments for the 7 of the 10 years. Wright wasnt even there for 5 years, he was really only present as the boys father for 3 years. For the next 7 years we was either

never there, or only visiting, never paying child support. Then how was Newman able to support the child for 7 years. She did it fine until then, it was obviously not to her detriment. Judgment: Although Newman may be morally obligated to pay, hes not legally obligated. NOTES & QUESTIONS 1-3 (1) CODIFICATION OF COMMON LAW

The Georgia legislature has adopted the doctrine of promissory estoppel by statute. In most jurisdictions, promissory estoppel like other principles of contract law has been recognized by common law court decisions. What are the advantages and disadvantages of making the promissory estoppel a statute? o Advantages: You can now enforce promissory estoppels in court. It covers issues like child support and extends the law to cover issues of moral obligation that the law might never have covered. Also pensions. o Disadvantages: Someone can get sued for a promise when he

hasnt explicitly made it. His intentions might have never been there to fulfill a promise, but by law he has to when he never said it in words. (2) IMPLIED PROMISE AS BASIS FOR PROMISSORY ESTOPPEL Wright obviously did not make an express promise to support the child. His promise was implied from the fact that he had listed himself as the father on the birth certificate and the fact he had given the child his last name. Courts generally recognize that an estoppel, whether promissory or equitable, can be based on conduct as well as an express promise. DO YOU AGREE THAT PROMISSORY ESTOPPEL CAN BE BASED ON AN IMPLIED PROMISE? o YES. CHILD SUPPORT. THINK ITS MORALLY RIGHT AND GOOD ITS FORCED BY LAW NOW. CHRITABLE SUBSCRIPTION Courts have found the exchanges are enforceable but not gifts, such as charitable gifts. Said the promissory estoppel doesnt apply to charitable gifts.

WEEK 4 READINGS PP. 237-244; 249-253 N+Q 2 FOLLOWING KATZ; 4-5 SHOEMAKER (DONT READ SHOEMAKER) PROMISES IN A COMMERCIAL CONTEXT

In its early days, the principle of promissory estoppel was often viewed as appropriately confined to the noncommercial sphere, with one significant exception: employee benefit or pension plans. Employee bonus and pension plan cases made an important contribution to the genesis of section 90 (Plowman) Restatement 90 presented such a case: A promises B to pay him annuity during Bs life. B thereupon resigns a profitable employment, as A expected he might. B receives the annuity for some years, in the meantime becoming disqualified from again obtaining good employment. As promise is binding. Following case will examine how courts have employed the doctrine to enforce commercial promises even in the absence of consideration. KATZ V. DANNY DARE, INC. PROCEDURAL POSTURE Katz filed 3 suits in the Associate Division of the Circuit Court seeking pension payments for 3 separate time periods from Danny Dare, Inc. 2 suits resulted in judgment in favor of Katz, but a request for a trail de novo was filed and those cases were assigned to a circuit judge for trial. The other suit got consolidated with the other 2 for a trial without a jury. Judgment entered in favor of Dare. Katz appeals contending the promise of pension payments made to him by Dare is binding under the Doctrine of Promissory Estoppel. Reversed and remanded. FACTS Katz was a faithful worker for Dare, held many different leadership positions, and opened a store operated by Dare in 1973. One day he left a bag of money on the counter next to the cash register, a man walks in and grabs it, Katz followed to retrieve it, got hit, and was hospitalized. Returned to work but since the incident, his memory was not the same and made decisions that hurt the company. Dare decided it was best that Katz retire on a pension plan. Katz kept refusing to retire. One day while on vacation, he received a letter from the company outlining all the pay and benefits he would receive if he retired, and how he would earn $1,000 more

than if he was working. This was an effort to convince Katz to retire. Katz agreed to the pension offer of $13,000 year for life and board of directors of Dare approved the following resolution: o Pay Katz sum of $500.00 bi-weekly or a total of $13,000/year so long as he shall live. Katz testified that he wouldnt have retired, but he did b/c he relied on the promise of Dare to pay the pension. Katz began working for another company on 3 to 4 half-days per week. o At the end of the year Shopmaker asked Katz if he could do part-time work for Dare, and he did day per week. Soon after, Dare sent semi-monthly checks of $250 instead of $500, Katz sent them back saying he deserved the full sum promised. Shopmaker testified that he cut off the checks b/c he felt Katzs health had improved to the pt he could work, demonstrated by the part-time job. Katz testified that the decrease was made after Shopmaker told him

he would have to work day for 5 days a week for Dare or his pension would be cut in half. ISSUE Was there a promissory estoppel? HODLING - YES REASONING The court entered a judgment in which Katz based his claim on the Doctrine of Promissory Estoppel as applied in Feinberg v. Pfeiffer Company. Ct said Katz was not in the same situation as Feinberg b/c Katz faced the prospect of being fired if he didnt accept the pension offer whereas there was no such thing in Feinberg. Ct said Katz did not give up anything to which he was legally entitled to when he retired. They did not require him to do anything. He could still have worked at another company.

Ct said that since Katz had the choice of accepting retirement and a pension or being fired, that it could not be said that he suffered any detriment or significant change of position when he decided to retire. Ct. could not find any injustice resulting to Katz b/c at the time payments had been terminated, he had received about $40,000 plus a paid vacation. So courts argue that Katz didnt give up any legal benefit by retiring. He had a choice of getting fired or accepting retirement. Didnt suffer any legal detriment, could have found another job.

This is in view of the legal/detriment test of consideration for contracts. Katz argues that he falls within the holding in Feinberg and Dare doesnt. The ct however did argue that one of the illustrations of section 90 was strikingly similar to the facts in Feinberg. Ct. applied the Doctrine of Promissory Estoppel and held that Feinberg had relied upon the promise of the pension when she resigned a paying position and elected to accept a lesser amount in pension. The reliance by Feinberg was in giving up her job in reliance on the promise of a pension. Her subsequent disability went to the prevention of injustice which is part of the Doctrine of Promissory Estoppel. There are 3 elements to invoke the Promissory Estoppel: (1) a promise, (2) a detrimental reliance on such promise, (3) injustice can be avoided only by enforcement of the promise. Ct is not convinced that the alternative Shopmaker gave to Katz of either accepting the pension and retiring or being fired takes this case out of Promissory Estoppel. The pension plan was something that the company reasonably induced promisee to take, and to his detriment, thus the fact that there was an option of getting fired or resigning is irrelevant. Once Katz does retire with expectation of getting a pension, it becomes a promissory estoppel. o Katz retired only after the promise of a paid pension for life.

o Thus the same facts are present in this case as with Feinberg. o Katz elected to retire and give up earning of about $23,000 to aceept a pension of $13,000, he did so as a result of a promise made by Dare and to his detriment by the lose of $10,000/yr. o Katz cant hold a full-time job at 70, so injustice can be avoided only by enforcement of the promise. He relies on the pension. Dares argument that the threat of being fired removes this case from the operation of Promissory Estoppel is similar to an argument in Trexler v. Fisher. Dare is trying to argue that they didnt reasonably induce Katz to take any action but rather forced him into resigning. It wasnt a choice that induced anything, it was force, so it cant be a promissory estoppel. In Trexler, the depression forced General Trexler to decide whether he should fire several employee or place them on pension. The General decided to promise pension and the employees filed a complaint for the continuation of payments. Ct. said General could have fired them or gave them pension, and he gave them pension. Under section 90, General forced to pay. This case similar to Trexler. Shopmaker wanted to reduce costs and to do that he could have fired Katz or put him on pension. o But shopmaker gave Katz pension. Dare tries to argue that the threat of firing removed any legitimate choice on Katz, but the facts dont support this. Why does Dare keep trying to argue that Katz didnt have legitimate choice? Does that affect a promissory estoppel, the fact that you must have a choice? So if you force someone into something, its not a bargain, therefore you cant enforce it? The fact is Katz continued in his employment with Dare until he retired and such retirement was voluntary on the part of Katz. If Shopmaker wanted to fire him without pension he could have and Katz couldnt do anything about it. But Shopmaker didnt and made an effort to induce Katz to retire voluntarily on the promise of a pension. They kept negotiating with him and tried to convince him

to fire. Had they not, there might have been no inducement, thus no promissory estoppel. Dare tries to err the court by relying on Pitts v. McGraw Edison Co. o Pitt was forced into retirement and alerted after that happened. The company said it would pay him. o But the main distinction is that Pitts did not elect to retire on the promise of any payment, but was simply informed that he had been retired. o There was no promise made to Pitts on which he acted to his detriment. Pitts had not given up anything to which he was

legally entitled and was not restricted in any way in his activities after being placed on retirement. o B/c of these facts, Pitts would not be able to recover under Promissory Estoppel b/c there was no action taken by Pitts in reliance on a promise. o However for Katz, he retried on the reliance of the promise of a pension. Trial court was wrong to say that Katz was required to show that he gave up something to which he was legally entitled to (consideration) before he could enforce the promise. b/c the elements of a promissory estoppel the pension is enforcible. Cant apply the contract theory in this case. JUDGMENT Reversed and remanded.

NOTES AND QUESTIONS (2) WHEN IS RELIANCE DETRIMENTAL? The term detrimental reliance has been used to refer to section 90s requirement that the promise induce action or forbearance by the promisee. In many promissory estoppel cases, the pltf will have made actual expenditures in reliance on the promise. o But its not always necessary, as in the case of Katz. He didnt make any actual expenditures, he just changed positions, and that was enough to make reliance on the promise.

o Sometimes a change of position that might be viewed as financially beneficial can still support an action for promissory estoppel. Vastoler v. American Can CO. Vastoler accepted a promotion to a supervisory position b/c employer promised pension benefits. Employer denied making the promise, Vastoler sues. Ct decided that since supervisory positions often involve added stress and emotional trauma, this counts as detrimental reliance on the promise of the pension. COMMENT: THE STATUS AND FUTURE OF PROIMSSORY ESTOPPEL Critics of promissory estoppel have argued that the courts are enforcing promises seriously made in a commercial context even in the absence of reliance: Promises have been enforced with only the weakest showing of any detriment to the promisee. What is happening lately is the assent-based theories of liability It has become a means of enforcing promises differing in doctrinal detail from traditional contract law but sharing a common goal, that goal, which is to foster trust b/w economic actors. Trust is a moral good but also an economic asset. In one sense the assent-based scholars could be seen as strengthening promissory estoppel, by finding liability even in the absence of detrimental reliance. o But Professor Knapp argues that eliminating or reducing the focus on reliance undermines the equitable foundations that are at the heart of promissory estoppels. Second factor leading to the decline of promissory estoppel is the relative lack of success of the doctrine in the courts. o While almost every court has adopted it, promissory estoppel claims are rarely successful. Knapp says equity without law is tyranny, but law without equity it just as cold. Says promissory estoppels are necessary to counterbalance the weight of legal rules.

8/30/2011 12:18:00 PM WEEK 5 READING PP.108-109, 112-119, 138-141 N+Q 1,3 PRB 2-2 LIMITING THE OFFERORS POWER TO REVOKE: THE EFFECT OF PREACCEPTANCE RELIANCE Article 16 of the Convention on Contracts for Intl Sale of Goods: (1) Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance (2) However, an offer cannot be revoked: o (a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable (option); or o (b) if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer. If the offeree gives the offeror some consideration (sum of money) to hold the offer open for a period of time, under the classical system the offer will be irrevocable during that period, option contract The option contract has 2 promises by the offeror Landowner makes a promise (offer) to sell the land for a stated price Landowner promises to hold the offer open (i.e., not exercise the common law right to revoke) in exchange for some consideration. If the offeree decides to exercise the option, then the offeree accepts the offerors first promise to sell the land. The option holder could, if so desires, to allow the option to lapse and not exercise the right to purchase but loses the consideration paid for the option. In the absence of an option contract, classical contract law provides no protection to an offeree who relied on an offer she has not yet accepted. The offeror remained free to revoke his offer at any time until acceptance took place. Sometimes an offeree who has not specifically sought the protection of a purchased option will expend resources or substantially change her position in the belief that the offer will remain open for her to accept, only to have the offeror revoke

before she has made an acceptance. What effect should an offerees pre-acceptance conduct have on the offerors power to withdraw his offer at will????? DRENNAN V. STAR PAVING CO FACTS: P preparing a bid for Monte Vista School Job. He is general contractor and he accepts bids from subcontractors to do work that is of 1% or more of the construction work. D called Ps secretary bidding and saying he wanted to do the paving work, and his bid was $7,131.60. Ds was the lowest bid for the paving work. When P sent in his bid, he was accepted for the work on the school. P went to Ds office the next day, and D said that their bid was a mistake and it was actually higher. P said he already got the job for the prices he said in his bid, and he expected to finish the work at that price and expected D to hold up on his end at his price. D refused to do the work for less than 15,000. P then tried to get the lowest bid he could for the work and got L&H Paving Co for work at $10,948.60. Trial ct. found on substantial evidence that D made a definite offer to do the paving for 7000 and that P relied on Ds bid in computing his own bid for the job and naming D as the subcontractor for the paving work. Trial court entered judgment for P in the amount of $3,817.00, the difference in amount b/w Ds first offer and L&Hs offer at 10,000. D argues that there was no enforceable contract b/w the two on the grounds that it made a revocable offer and revoked it before P communicated his acceptance to D. There is no evid. that D offered to make its bid irrevocable in exchange for Ps use of its figures in computing the bid. o Nor is there evidence that would warrant interpreting Ps use of Ds bid as the acceptance, binding P, on condition he received the main contract, to award the subcontract to D. o In sum, there was no option supported by consideration nor a bilateral contract binding on both parties.

P argues however that he relied to his detriment on Ds offer and that D must therefore answer in damages for its refusal to perform.

ISSUE: Did Ps reliance make Ds offer irrevocable?? HOLDING: Yes. D must pay damages REASONING: Section 90 of Restatements states: A promise (bid) which the promisor (subcontractor) should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee (general contractor) and which does induce such action or forbearance is biding if injustice can be avoided only by enforcement of the promise. A promissory estoppel doctrine Ds offer constituted a promise to perform on such conditions as were stated expressly or by implication therein by operation of the law. D had reason to expect that if its bid proved the lowest it would be used by P. It induced action of a definite and substantial character on the part of the promisee. o Had Ds bid expressly stated or clearly implied that it was revocable at any time before acceptance we would treat it accordingly. But it was silent on revocation. When P used Ds offer in computing his bid, he bound himself to perform in reliance on Ds terms. o Its reasonable to suppose that D submitted its bid to obtain the subcontract. It had to realize the substantial possibility that its bid would be the lowest, and that it would be included by P in his bid. o D not only had reason not only expect P to rely on its bid but to want him to. o Given this interest and the fact that P is bound by his own bid, it is only fair that P should have at least an opportunity to accept Ds bid after the general contract has been awarded to him.

Its important to note that P cannot delay acceptance after he has been awarded the general contract in hopes of getting a lower price from someone else. Nor can he reopen the bargaining with the subcontractor. But these dont matter in this case b/c P immediately told D after the acceptance of his bid that D had been awarded the job. D argues that his bid was a mistake and therefore entitled to revoke it. But this only works if the offeree had reason to believe it was a mistake. o Here if P had reason to believe that Ds bid was a mistake, he could not justifiably rely on it, and section 90 couldnt be enforced. o P however, had no reason to know that D made a mistake. He committed himself to performing the main contract in reliance on Ds figures. o Ds mistake constitutes an additional reason for enforcing the promise, for it mislead P as to the cost of doing the paving. D had a duty to exercise reasonable care in preparing its bid. It presented its bid with knowledge of the substantial possibility that it would be used by P; it could foresee the harm that would ensue from an erroneous underestimate of the cost, and it was motivated by its own business interest. b/w the subcontractor who made the bid and the GC who reasonably relied on it, the loss resulting from the mistake should fall on the party who caused it.

NOTES & QUESTIONS 1,3 (1) INTRO TO PROMISSORY ESTOPPEL Justice Taylor in Drennan concludes that protection against revocation of an offer should apply in a situation when the offeree has reasonably relied resulting in foreseeable prejudice. Promissory estoppel doctrine (3) LIMITATIONS ON THE DRENNAN RULE

In several situations the general contractor would not be allowed to invoke the protections of promissory estoppel. o If Ds bid had expressly stated or clearly implied that it was revocable at any time before acceptance. But sometimes, this doesnt work as seen in Lyon Metal Products inc v. Hagerman Construction Corp. Lyon said it could retract its offer within 15 days, but the general contractor was bound to have his bid open for 120. The trial court could have inferred that Lyon did not intend the 15 day clause to be the controlling time period but the 120 period. o Also inequitable conduct by the GC may preclude the use of promissory estoppel: If the GC tries to find a cheaper bid, bid shopping but claims that the original bidder is bound. Or trying to renegotiate with the bidder to reduce the price, Bid chopping IRREVOCABILITY BY STATUTE: THE FIRM OFFER

UCCs Firm Offer provision, section 2-205: some offers will be irrevocable despite the absence of any consideration. This is a fundamental shift from traditional common law doctrine. (deals with merchants, goods, also applies to offers made by buyers as well as sellers). An offer is not revocable during period stated. Some important aspects in applying section 2-205 to a given situation. Length of the period of irrevocability that it creates. o Clearly if the offer merely states that it is firm, but without saying for how long, the reasonable period of irrevocability created might be less than 3 months, but would not exceed that time. o What if the offer does specify a period of firmness, but its longer than 3 months? Another note is 2-205s requirement that any term of assurance (i.e. of firmness) on a form supplied by the offeree must be separately signed by the offeror.

o This is to prevent the inadvertent signing of a firm offer. What is the relationship b/w UCC 2-205 and the principle of relianceprotection by Restatement 90? 2-205 imposes no requirement that the offeree demonstrate reliance on the offer in order to claim the right to accept despite an attempted revocation. o The offer is binding once signed, and offeree does not have to rely on it nor provide consideration. WEEK 5 READINGS PP. 63-64; 143-153 N+Q 2,3,5

OTHER METHODS OF REACHING MUTUAL ASSENT Article 2 does not cover contracts for the sale of real estate, contracts to provide services, or contracts to lease goods. It does apply to consumer and commercial sales of goods. If a customer buys a car from a dealer (a consumer merchant contract) If a hospital buys an MRI from the maker of the equipment (merchant-merchant contract) If a person buys a bric-a-brac from the owner at a yard sale

(consumer-consumer contract) To the extent that Article specifically deals with a problem, then Article 2 controls. But if Article 2 doesnt cover an issue, then courts must turn to common law. PRINCESS CRUISES, INC. V. GENERAL ELECTRIC CO. FACTS: This suit arises out of a maritime contract b/w GE and PC for inspection and repair services relating to a PC ship. In Dec. 94, PC requested that GE perform services and provide parts incidental to the ships inspection and repair. PC issued a purchase order and on the reverse side listed terms and conditions which indicated that PC intended the Purchase Order to be an offer. o These terms also stated that GE could accept the Purchase Order through acknowledgment or performance, and that it

would provide a warranty of workmanlike quality and fitness for the use intended. On same day GE sends a Fixed Price Quotation to PC, but since it didnt have all the all the work requested by PC, it had to send another one. On Oct. 94, sends its final FPQ and attached were GEs terms and conditio o (1) rejected the terms and conditions set forth in PC Purchase Order; (2) rejected liquidated damages; (3) limited GEs liability to repair or replacement of any defective goods or damaged equipment resulting from defective service, exclusive of all written, oral, implied, or statutory warranties; (4) limited GEs liability on claims to not more than the greater of either $5,000 or the contract price; (5) disclaimed any liability for consequential damages, lost profits, or lost revenue. o PC gave GE the permission to proceed. When the PC Princess arrived for inspection, GE noted surface rust on the rotor and recommended that it be taken ashore for cleaning and balancing. o Both parties agreed, good metal was removed, rendering the rotor unbalanced during the cleaning. o Although GE attempted to correct the balance, PC canceled a 10 day Christmas cruise as a result of delays caused by repair. PC filed a 4 count complaint against GE for breach of contract, breach of express warranty, breach of implied maritime warranty, and negligence. GE made a motion for judgment as a matter of law, was denied. The district court allowed the jury from principles of the UCC to imply the following terms as part of the contract: (1) warranty of merchantability; (2) warranty of fitness for a particular purpose; (3) warranty of workmanlike performance; (4) PCs right to recover damages for GEs alleged breach of contract(5) PC rights recover incidental and consequential damages, as well as lost profits, caused by alleged breach;

Jury returned a 4 million verdict in favor of PC. GE renewed its motion for judgment as a matter of law requesting that the court vacate the jurys award of incidental and consequential damages. District court denied. Now in appeals.

PROCEDURE: GE found liable for breach of contract and awarded PC 4 million in damages. On appeal, GE contends that the district court erred in denying its renewed motion for judgment as a matter of law, which requested the court vacate the jurys award of damages. GE argues that the district court erroneously applied UCC principles rather than common law. When a maritime or land-based contract is the rendering of services rather than furnishing of goods, UCC is inapplicable and must draw on common-law doctrines when interpreting the contract. In Appeals, the court looks at the evidence in the light most favorable to the nonmovant (PC).

ISSUE: Do you apply the UCC or CL in a maritime contract predominately for services? Was there a counteroffer made by GEs FPQ? HOLDING: CL; Yes that counteroffer was accepted and is controlling REASONING: (1) TO APPLY UCC PRINCIPLES TO A MARITIME CONTRACT FOR SERVICES WOULD HINDER ADMIRALTY LAWS GOALS OF UNIFORMITY AND PREDICTABILITY The district court found it unnecessary to determine whether the contract was one primarily for goods or services when it should have. Court says one of the primary concerns of admiralty law is uniformity and predictability, and to avoid creation of multiple and conflicting rules of decision in admiralty law, the court must adopt

rules in accord with, rather than diverge from, standard commercial practice. o Standard commercial practice requires that a transaction be predominantly for the sales of goods before the UCC applies. o Court is unpersuaded by district courts legal determination that UCC 2-207 applies to maritime transactions regardless of the nature of the transaction. o A court must first determine whether the predominant purpose of the transaction is the sale of goods. One this analysis has been performed, then the court may properly decide whether common law, the UCC, or other statutory law governs the transaction. Maritime contract for services not covered by UCC. (2) THE GE-PC CONTRACT WAS PREDOMINANTLY FOR SERVICES GE argued that district court erred in denying GEs renewed motion for judgment as matter of law and that the court was required to find that the sale of goods predominated in the GE-PC contract before employing UCC principles in its instructions. Whether a particular transaction is governed by the UCC rather than common law or other statutory law depends on the predominant purpose of the transaction, whether it was for furnishing of goods or rendering of services. Appeals court must determine whether the contract was for the sales of goods within the UCC. Court looks to Bonebrake v. Cox which states: o If services and goods are mixed, must find if its rendition of services with goods incidentally involved (contract with artist for painting) or transactions of sale with labor incidentally involved (installation of a water heater in the bathroom) that is the predominant factor, the thrust, the purpose of the contract. o Looks at Coakley and Williams and says you must look at these factors to determine: (1) the language of the contract; (2) nature of the business of the supplier; (3) the intrinsic worth of the materials.

Court says its obvious that the contract was for rendering of services with incidental goods and parts. o PCs actual purchase description requests a GE service engineer to perform service functions o GEs FPC also says service functions, each page even says its a Quotation for Services o GEs quotation further specifies that the particular type of service offered is Installation/Repair/Maintenance. o The Final Price Quotation lists the scope of the contemplated work opening, checking, cleaning, inspecting, disassembling in short service functions o Thus the language of both the Purchase Order and the Final Price Quotation indiciates that although it planned to supply certain parts, the parts were incidental to the contracts predominant purpose, which was inspection, repair, and maintenance services. For the second Coakley factor the nature of the business of the supplier although GE does manufacture goods, GEs correspondence and Quotations came from GEs Installation and Service Engineering Department. o they perform service functions for the last factor the intrinsic worth of the materials supplied cannot be determined b/c neither PC Purchase Order or GEs Final Price Quotation separately itemized the value of the materials. o The PO and the FPC blend the cost of the materials into the final price of a services contract, thereby confirming that services rather than materials predominated in the transaction. Also PC counsel admitted that the bulk of PCs complaint did not arise out of GEs furnishing of deficient parts, but rather out of GEs deficient services. (3) UNDER COMMON LAW, GES FINAL PRICE QUOTATION WAS A COUNTEROFFER ACCPETED BY PC whether the court should draw on UCC or common law doctrines when assessing the formation of a maritime services contract is undecided

Says when no federal statute or well-established rule of admiralty exists, admiralty law may look to the common law or to state law o b/c majority of states refer to common-law in assessing contracts for services, court says it will do the same. Under common law, an acceptance that varies the terms of the offer is a counteroffer which rejects the original offer. o Here GEs FPQ materially altered the PC Purchase Order by offering a different price, limiting damages and liability, and excluding warranties. o Thus GEs FPQ was a counteroffer rejecting PCs PO. o PC accepted the counteroffer by letting GE proceed with the repair and maintenance services and by paying the amount set forth in GEs FPQ and by not objecting to the confirmatory letter sent by GE. Assent by PC may be affirmed by the acts and conduct of PC Common law: an offeror who proceeds under a contract after receiving the counteroffer can accept the terms of the counteroffer by performance. Although both parties never discussed the conflicting terms and conditions, both PC action and inaction gave GE every reason to believe that PC assented to the terms and conditions set forth in GEs FPQ. Therefore court finds that the terms and conditions of GEs FPQ control liability and damages in the GE-PC transaction THE VERDICT DEMONSTRATES THAT THE JURY IMPERMISSIBLY RELIED ON A CONTRACT OTHER THAN GES FINAL PRICE QUOTATION Court says the jury could only have considered on contract in awarding damages: GEs FPQ. The district court verdict of 4 mill shows that the jury relied on PC Purchase Order or some other contract when awarding damages.

o Jury could have only awarded damages consistent with the terms and conditions of GEs FPQ and could not have awarded incidental or consequential damages. GE concedes that it did breach contract and that damages are consistent with its FPQ.

JUDGMENT: GE must pay $231,925; reversed and remanded.

NOTES & QUESTIONS 2,3,5 (2) Here the court used the traditional view on counteroffers, preventing the contract from being made on the terms of the original offer. Counteroffers are a part of whats called varying acceptances, but the court failed to mention a different aspect of varying acceptance in the Restatement (2d) 59: o first part is about a traditional counter offer. Second part is about how if you make a definite and seasonable expression of acceptance to an offer, the offer is operative despite the statement of additional or different terms if the acceptance is not made to depend on the assent to the additional terms. The additional terms are then to be construed as proposals for modifications of the contract and such proposals may be accepted by silence of the original offeror. o This makes it steer closer to the UCC than indicated in the majoritys opinion. (3) APPLICATION OF COMMON LAW LAST SHOT RULE Classical courts follow the last shot rule to determine when a counteroffer was accepted. Under this rule, a party impliedly assented to and thereby accepted a counteroffer by conduct indicating lack of objection to it (implied assent). This rule also tends to favor sellers over buyers because sellers normally fire the last shot (i.e. send the last form). But in PC the favored party was not the seller, but the buyer. The court in PC applies the classical last shot rule. o Having concluded that GEs response should be viewed as a counter-offer under the mirror image rule, the court then goes on to hold that PC accepted that counter-offer by

conduct: by not objecting to its terms; by accepting the services rendered; and by paying the price stated in GEs counteroffer. In common law, if a buyer and seller sends back forms, and they dont match mirror image each other, then the last person to send the form with different terms and conditions is the counteroffer. And if the person who receives the counteroffer performs some service or receives some goods and uses it, although not an explicit acceptance, its an implied acceptance and an acceptance to the terms of the counteroffer despite neither party having read it.

(5) CONTRAST WITH UCC ARTICLE 2 Read Restatement Second of Contracts 2-207

8/30/2011 12:18:00 PM WEEK 6 READINGS PP. 153-163; 165-167; PRB 2-4 N+Q 1-7 BROWN MACHINE INC. V HERCULES, INC. FACTS: in 76, BM sold appellant Hercules a T-100 trim press. Trim press was a piece of equipment used in manufacturing Cool Whip bowls. An engineer at H asked BMs district sales manager to send H a quote for a trim press. In early November, 1975, BM sent its original proposal No. 51054 which had 16 boiler plate paragraphs and description of the machine with an attached form with Terms and Conditions of Sale. o reverse trim, not forwad trim, o boilerplate includes no indemnity clause Hs purchasing agent reviewed the proposal and called Jim Ryan at BM on Jan. 7, 1976. o The call report says that H had prepared its purchase order No. 03361 in response to BMs proposal but that H had objected to the payment term requiring a 20% deposit be paid with the order. o H was again told that it had to paid the deposit. o That same day a work order was given on the trim press equipment followed by a written order the next day which said that customer (H) gave verbal P.O. (purchase order) for this stock machine. o Later that month, BM received Hs written purchase order No. 03361 dated Jan. 6, 1976, which said that the order was for a Trim press in accordance with BM quote 51054 with their own boiler plate language on the purchase order spelling out Terms and Conditions. One of the conditions stated that no oral agreement or other understanding shall in any way modify this order and that sellers action in (a) accepting this order, (b) delivering material; or (c) performing services called shall constitute an acceptance of the above terms and conditions.

BM got two of these sheets, one of which (acknowledgment) was to be signed and sent back, but never did. BM then mails on January 21 an invoice requesting payment of $4,882.00 plus deposit fee. they sent an Order Acknowledgment, not the form that they were given by H to send back on Feb. 7, 1976, which stated the specifications of the machine and that it would be manufactured to meet these specifications, and that if the terms and conditions of Sale are not cool, then let them know within 7 days of receipt or its going down. The specifications contained in BMs Order Acknowledgment had the same ones in its original proposal. H then replies by mail 4 days later saying that provision 6.1.1 should provide for reverse trim instead of standard regular forward trim followed by all other specifications are correct.

H never paid the 20% deposit and BM sent H an invoice dated April 14, 1976 requesting final payment of the total purchase price. BM eventually shipped the trim press to H and H paid the agreed-upon purchase price. o Later an employee of H and his wife sued BM b/c of injuries he sustained while operating the trim press. o BM demanded that H defend the employees lawsuit but they refused and BM eventually settled with the Millers. o BM later initiated this action against H for indemnification of the settlement amount paid to the Millers. o BM claimed that a condition of the original sales contract for the trim press required H to indemnify BM for any claims arising from operation or misuse of the trim press.

PROC: Trial court P, Brown Machine, wins an indemnification cause for $157,911.55 over Hercules, D. Appeals reverses

ISSUE: Whether the parties agreed to an indemnification provision in their contract for the sale of the trim press. HOLDING: No did not. REASONING: H first point disputes BMs contention that its initial proposal on November 7, 1975 constitutes the offer and that H verbally accepted the offer by the telephone call on January 7, 1976 followed by its written purchase order dated January 6,1976 which BM received January 19, 1976. Article 2 of the UCC govern transactions involving sales of goods, and b/c the term offer is not defined in the code, the CL definition is used. An offer is made when the offer leads the offeree to reasonably believe that an offer has been made. The Restatements defines offer as the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it. The general rule is that a price quotation is not an offer, but rather is an invitation to enter into negotiations or a mere suggestion to induce offers by others. However, price quotes, if detailed enough can amount to an offer creating the power of acceptance; to do so, it must reasonably appear from the price quote that assent to the quote is all that is needed to ripen the offer into a contract. Court argues that BMs quotation was not an offer, but rather an offer to enter into negotiations for the trim press. o WHY? b/c the cover letter accompanying the proposal mentioned that BMs sales rep would contact H to discuss this quote and that the quotation was submitted for Hs approval. o Also paragraph 3 of the terms and conditions attached to the proposal said: No order, sale, agreement for sale, accepted proposal, offer to sell and/or contract of sale shall be binding

upon BROWN unless accepted by BROWNon Brown standard Order Acknowledgment form. o The price quote was merely a proposal, not an offer, b/c of its provision that Hs acceptance was not biding upon Brown until BM acknowledged the acceptance. o EVEN IF it were true that the offer was a firm offer, the quote by its own terms and conditions expired 30 days after its issuance. Since Hs purchase order was one year later, so that even if the quotation were construed as an offer, there was no timely acceptance. The court believes that Hs purchase order and not the price quotation was the offer. As a general rule, orders are considered as offers to purchase. The question then becomes whether BMs acknowledgment containing the indemnity provision constitutes a counter offer or an acceptance of Hs offer with additional or different terms. The discrepancies of the two documents are addressed in section 400.2-207 of the UCC which states: o An offerees response to an offer operates as a valid acceptance of the offer even though it contains terms additional to or different from the terms of the offer unless the acceptance is expressly made conditional on the offerors assent to the additional or different terms. Where the offerees acceptance is made expressly conditional on the offerors assent, the response operates not as an acceptance but as a counter offer which must be accepted by the original offeror. o Restatement (2nd) of Contracts says same thing: An offerees reply which purports to accept an offer but makes acceptance conditional on the offerors assent to terms not contained in the original offer is effective as a counteroffer rather than acceptance. o Under the UCC, to convert an acceptance to a counter offer the conditional nature of the acceptance must be

clearly expressed in a manner sufficient to notify the offeror that the offeree is unwilling to proceed with the transaction unless the additional or different terms are included in the contract. o The conditional assent provision has been construed narrowly to apply only to an acceptance which clearly shows that the offeree is unwilling to proceed absent assent to the additional or different terms. The court finds nothing in BMs acknowledgment of Feb. 5, 1976 which reflects its unwillingness to proceed unless it gets Hs assent to the additional or different terms in BMs acknowledgment, which contained the indemnity provision. Court concludes that BMs order acknowledgment is not a counter offer under UCC 2-207 and that it operates as acceptance with additional or different terms from the offer. Under 2-207(2), additional terms become a part of the contract b/w merchants 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 given. Hs purchase order here expressly limited acceptance to the terms of its offer thus the indemnification provision failed to become part of the contract b/w the parties. Court also concludes that H intended the indemnity provision to become a part of the parties contract only if H, as offeror, expressly assented to the additional terms and thus effectively waived its condition that acceptance be limited to the terms of its offer, the purchase order. o Official Comment 3 to 2-207 states: whether or not additional or different terms will become part of the agreement depends upon the provisions of subsection (2) which says that if they are such as materially to alter the original bargain, they will not be included unless expressly agreed to by the other party. o The indemnification provision was clearly a material alteration to the parties agreement.

o But the evidence doesnt show that H expressly agreed to the additional terms in BMs order acknowledgment on Feb. 5, 1976. Then H then responds to the order acknowledgment 4 days later saying that one of the provisions is wrong, but all other specifications are correct. The court interpreted this letter as meaning that specifications is unambiguous and clearly refers only to the protocol for the machines manufacture and not an express assent to BMs additional terms and conditions of sale. Express assent under 2-207(2) cannot be presumed by silence or mere failure to object. Nothing in that letter can be construed as express assent to BMs additional terms and conditions of sale

JUDGMENT: Indemnification clause is not part of the contract, reverse decision.

NOTES & QUESTION (1) THE CODES TREATMENT OF THE VARYING ACCEPTANCE The UCC has rejected the strict mirror-image rule in 2-207(1) stating: A definite and seasonable expression of acceptanceoperates as an acceptance even though it states terms additional to or different from those offered The court is against there being acceptance when a contract that is exchanged back and forth has some changes that look identical to the first, and there being acceptance without there being expressed assent. Policy reason is that most people dont carefully read contracts, and for one to agree thinking that the contract doesnt have any changes when it really does without the condition of having to expressly consent to the new changes, that is bad policy. (3) TESTING THE RESPONSE Courts have differed on when an acceptance should be treated as expressly conditional and therefore function as a counter-offer.

o Roto-Lith v. F.P. Barlett held that an acceptance with terms that were materially different from the offer amounted to an expressly conditional acceptance. Courts criticized this view b/c it effectively reestablished the common law mirror image rule, contrary to the intentions of the drafters of 2-207. o Roto-Lith has been overruled, and it is now well established that an acceptance does not amount to an expressly conditional acceptance simply because it contains terms that materially differ from the terms of the offer. o Then when is an acceptance expressly conditional? Most courts have focused on the language of the acceptance. If the acceptance uses very clear language indicating that the offerees assent is expressly conditional on the offerors agreement to the terms of the offerees doc, then the acceptance will be treated as expressely conditional, even if the language is boilerplate. Something likesubject to the following terms and conditions is not sufficient to be acceptance as

expressly conditional. There must be something in the language indicating to the offeree that the terms have changed, and that you must expressly agree to these terms to accept to this conditional acceptance. Must alert the offeree of the changes somehow. (5) DO THE ADDITIONAL TERMS BECOME PART OF THE CONTRACT ANYWAYS If the additional terms have not been expressly assented to, might they nevertheless in some cases become part of the contract? Section 2-207(2) says sometimes yes, in a case where the parties are both merchants. o This happens if the terms in question have not been objected to (either in advance-through language in the offer or otherwise-or thereafter) AND if the terms in question are not material o How do you determine material?

If the clause will involve surprise or hardship (ex. clause in glass suppliers confirmation of contract excluding liability for consequential damages was a material alteration of contract with subcontractor) (6) HAS A COUNTER-OFFER (CONDITIONAL ACCEPTANCE) BEEN ACCEPTED? Can agreement be found in the offerors subsequent conduct to a counteroffer? Most says that conduct alone should not be sufficient to amount to assent to an expressly conditional acceptance. To allow this is to continue in effect the CLs last shot approach which the drafters of 2-207 clearly were attempting to abrogate. The policy is that there must be specific and unequivocal expression of assent. In the absence of real assent to the proposed additional terms, what then? o In that case, even if the docs of the parties have not formed a contract, their actions (shipment and receipt of the goods) may establish a contractual relationship under 2-207(3)

(7) WHAT ARE SUPPLEMENTARY TERMS UNDER 2-207(3) If an offerees response is deemed to be at most an expressly conditional acceptance and thus in effect a counteroffer, but the parties proceed to performance without an express acceptance of the counteroffers terms, what then? o Under 2-207(3) the contract will 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 (i.e. the UCC) Supplementary terms include implied terms under Article 2 as the implied warranties of merchantability and fitness and the damages provision, including seller liability for consequential damages, etc. o Mere receipt of forms without objection may not be held to constitute a course of dealing or course of performance sufficient to establish assent to the terms of the forms under

2-207, even where forms were repeatedly sent over time: WHY? A course of dealing may become part of an agreement, where one party if unable to object to the manner in which the other party performs under the agreement. But terms and conditions contained in a form continually sent by one party to another does not constitute performance and cannot become binding as a course of dealingWHY?...B/c a party will certainly become aware of the manner in which the other side continually performs under the agreement, and if theres no objection to that performance by the first party, over a sufficient period of time, the first party is assumed to have acquiesced to the second partys performance. BUT the same cant be said of forms continually sent by back to another b/c no one ever reads them until a dispute arises. COMMENT: BATTLE OF THE FORMS UNDER REVISED ARTICLE 2

Revised Article 2 made significant changes to 2-207. Article 2 like 2-207 deals with 2 issues: (1) Has a contract been formed when the parties exchange documents or use confirmations that have different or additional terms? (2) If a contract has been formed, what are the terms of the contract? (1) CONTRACT FORMATION UNDER ARTICLE 2 A definite and seasonable expression of acceptance in a record operates as an acceptance even if it contains terms additional to or different from the offer. o This revision rejects the CL mirror image rule for contract formation. Comment 2 to 2-206 which deals with expressly conditional acceptances and expressly conditional offers:

o The mirror image rule is rejected in subsection(3), but any responsive record must still be reasonably understood as an acceptance and not as a proposal for a different transaction. o Comment 3 to 2-206 makes it clear that to operate as an acceptance an offerees response must be a definite acceptance o If the offeree clearly states that it is only willing to do business if the offeror assents to the offerees terms, the offeree has not made a definite acceptance. o However, even if the exchange of documents does not result in the formation of a contract, b/c of the absence of a definite acceptance under comment 3, a contract may still be formed if the parties proceed to perform. UCC 2-204(1): A contract for sale of goods may be made in any manner sufficient to show agreement, including offer and acceptance, conduct by both parties which recognizes the existence of a contract (2) TERMS OF THE CONTRACT UNDER REVISED ART. 2 Revised 2-207 deals with the issue of the terms of a contract once a contract has been formed under either 2-204 or 2-206 o If (i) conduct by both parties recognizes the existence of a contract although their records do not otherwise establish a contract, (ii) a contract is formed by an offer and acceptance, or (iii) a contract formed in any manner is confirmed by a record that contains terms additional to or different from those in the contract being confirmed, the terms of the contract are: (a) Terms that appear in the records of both parties (b) Terms, whether in a record or not, to which both parties agree; and (c) terms supplied or incorporated under any provision of this Act. The intent of the new 2-207 is to avoid favoring either the first or the last shot in determining the terms of the contract: o When one party insists in that partys record that its own terms are a condition to contract formation, if that party does

not subsequently perform or otherwise acknowledge the existence of a contract, if the other party does not agree to those terms, the records insistence on its own terms will keep a contract from being formed under section 2-204 or 2206. o To summarize some conclusions that can be drawn from these provisions: If a party, whether offeror or offeree, wishes to refuse to enter into a contract except on its own terms, the party may do so by clear language in its document coupled with a refusal to perform or other acknowledgment of a contractual relationship. However, if a party insists in its document that it will not enter into a contract except on its own terms, but that party proceeds to perform even though the other party has issued a document with different or additional terms, a contract will be formed under 2-204(1) and the terms of the contract will be determined by 2-207.

8/30/2011 12:18:00 PM WEEK 7 READINGS PP. 167-77; 188-90; N+Q 1-4; 2 FOLLOWING QUAKE POSTPONED BARGAINING THE AGREEMENT TO AGREE Sometimes it will be the case that parties appear to have completed their bargaining, or at least to have reached an agreement with no conflicting forms, no different or additional terms, yet their agreement may appear to be incomplete, either because some matters usually dealt with in such agreements have not been explicitly covered or b/c the parties themselves have designated certain matters for postponed decision. These incomplete bargains have posed serious problems under the classical system Corbin: o Communications that include mutual expressions of agreement may fail to consummate a contract for the reason that they are not complete, some essential term not having been included. o As long as the parties know that there is an essential term not yet agreed on, there is no contract. o Further illustrations of this in so-called contract to make a contract. Quite possible for parties to make an enforceable contract binding them to prepare and execute a subsequent documentary agreement. In order that such may be the effect, it is necessary that agreement shall have been expressed on all essential terms that are to be incorporated in the document. The document is understood to be a mere memorial of the agreement already reached. If the doc or contract contains any material term that is not already agreed on, no contract has yet been made; and the so-called contract to make a contract is not a contract at all. WALKER v. KEITH

FACTS: P, appellee, sought an adjudication that he had effectively exercised an option to extend a lease, and a further determination of the amount of rent to be paid. In July 1951 appellants, the lessors, leased a small lot to appelle, the lessee, for a 10 year term at a rent of $100. The lessee was given an option to extend the lease for an additional 10 year term under the same terms and conditions except as to rental. The renewal option provided: rental will be fixed in such amount as shall actually be agreed upon by the lessors and the lessee with the monthly rental fixed on the comparative basis of rental values as of the date of the renewal with rental values at this time reflected by the comparative business conditions of the 2 periods Preliminary court proceedings said that it fixed the new rent at $125.

ISSUE: Whether the option provision in the lease fixed the rent with sufficient certainty to constitute an enforceable contract b/w the parties. RULE: (1) an agreement to agree does not constitute a binding contract. (2) A renewal option (like any other contract) requires there to be substantial certainty as to the material terms, and if there isnt, its not an enforceable contract, and its not the business of the courts to make that certainty as to the material terms. HOLDING: Judgment Reversed. REASONING: Court says this provision is ambiguous. Uses the basic principles to help: Its a necessary requirement that an agreement in order to be binding must be sufficiently definite to enable a court to give it an exact meaning. o The provision for a renewal must be certain in order to render it binding and enforceable. Indefiniteness, vagueness and uncertainty in the terms will render it void unless the parties,

by their subsequent conduct or act supplement the covenant and thus remove an alleged uncertainty. o The terms of an extension or renewal under an option therefore in a lease may be left for future determination by a prescribed method, as by future arbitration or appraisal; but merely leaving the terms for future ascertainment without providing a method for their determination renders the agreement unenforceable for uncertainty. o A renewal covenant in a lease which leaves the renewal rental to be fixed by future agreement has generally been held unenforceable and void for uncertainty and indefiniteness. An example of an appropriate method by which a non-fixed rental could be determined is in Jackson v. Pepper Gasoline Co. o The lessee, who operated an automobile service station, agreed to pay an amount equal to one cent per gallon of gasoline delivered to said station. o b/c this provision had certainty the court upheld the lease as against the contention that it was lacking in mutuality. On this case, the parties did not agree upon a rent figure, they left the amount to future determination and had not agreed upon a specific method to making that determination, such as by computation, the application of a formula, or the decision of an arbitrator. The rent provision had two ideas that will be looked at: (1) the parties agree to agree; (2) the future agreement will be based on a comparative adjustment in the light of business conditions. (1) First an agreement to agree cannot be a binding contract. o Williston on Contracts (3d): if an essential element is reserved for the future agreement of both parties, the promise gives rise to no legal obligation until such future agreement. Since either party may refuse to agree to anything the other party will agree to, it is impossible for the law to fix any obligation to such a promise. (2) The confusing language about comparative business conditions: o In Edward v. Tobin the court upheld and enforced a lease agreement which provided that the rent should be determined

at the time of the renewal, said rental to be a reasonable rental under the then existing conditions. The court reasoned in that case that since the parties had agreed upon a reasonable rent, the court would hold the parties to the agreement by fixing it. o The court says that in the Tobin case, that court said that rent is not a material form of a lease. This court totally disagrees and believes that in Tobin, there was no enforceable contract, but the court made one for them. Shouldnt have. o The court here feels that it must stick to the basic principle of contract law unless there are practical problems against that. Examines some of these problems: The phrase comparative business conditions affords no certainty and thus cannot enforce an unenforceable contract. What did it mean? Did it mean local conditions, national conditions, or conditions affecting the lessees particular business? Argues that a controversy rather than a mutual agreement exits in this case. At trial the lessor was trying to prove the change in local conditions and the lessee according to national conditions. Their minds to this day have never met on a criterion to determine the rent, and the court is lying when it enforces some figure as something both parties agreed to. Says that one aspect of this problem has been overlooked by courts which have extended themselves to fix the rent and enforce a contract. This is the Statute of Frauds. The purpose of requiring writing to evidence an agreement is to assure certainty of the essential terms thereof and to avoid controversy and litigation.

This very case is living proof of the difficulties encountered when a court undertakes to supply a missing essential term of a contract. o The court here says that in the first place, when the parties failed to enter into a new agreement as the renewal option provided, their rights were no longer fixed by the contract. The determination of what they were was shifted to the courtroom. There the court must determine the relevant evidence to establish that certainty which you obviously cant do from this contract. o The court here says that courts should not use their powers to establish contract rights that the parties have failed to do so. The court shouldnt make a provision as definite when both parties never though there was one. Thats wrong. In Morrison v. Rossingnol it said that the court can decree specific performance only if there is a degree of certainty from the terms of the contract. But this is not the case here. In situations such as these, the courts are called upon not to enforce an agreement or to determine what the agreement was, but to write their own concept of what would constitute a proper one. Says its wrong for judges to impose its concept of the parties intent just to validate what would otherwise be an invalid instrument. The basic principle of contract law requires substantial certainty as to the material terms upon which the minds of the parties have met and should be adhered to. A renewal option stands on the same footing as any other contract. Rent is a material term of a lease. If the parties do not fix it with reasonable certainty, it is not the business of the courts to do so. The renewal provision before this court was defective in failing to specify an agreed rental or an agreed method by which it could be

fixed with certainty, and b/c of the lack of agreement, the lessees option right was illusory, and thus not an enforceable contract. NOTES & QUESTIONS (2) Other decisions a number of courts have enforced lease-renewal option agreements despite the failure of the parties to agree on a rental figure in advance. (3) Open price term agreements under the UCC Although Walker involved leases, the CL has generally been resistant in all areas to the notion that an enforceable contract could result from an agreement in which the parties failed to agree on either a specific price or at least a method (specific formula, designated arbitrator, extrinsic market source, etc) by which price could be ascertained. On this point, the UCC takes a opposite position. Section 2-305 of the Code provides that an open price term will not prevent enforcement of a contract for sale, if the parties intended to be bound by their agreement. o Whether the parties leave price for their later mutual determination or agree in advance that one of them shall have the power to fix a price, the court in either case may enforce the contract. o If the parties fail to agree on price, the court may enforce a reasonable price. o If one party has the power to fix price, he must do so in good faith. o On the other hand, it shouldnt be supposed that the existence of UCC 2-305 makes every sale-of-goods agreement in which price is not fixed necessarily valid and enforceable despite that omission. The court may still conclude as contemplated by 2305(4) that the parties did not intend to be bound unless the price was fixed by agreement. In that event, failure to reach agreement on price will mean that no enforceable contract of sale has been made, and the court will not fix a reasonable price for the parties.

(4) Open price term agreements outside the UCC If 2-305 makes sense, should the courts apply similar principles to open price contracts of other types? Restatement(2d) in Comment e section 33 appears to endorse the notion that the principle of UCC 2-305 could be applied to contracts other than the sale of goods. Ex. Arbitron Inc v. Tralyn Broadcasting, Inc. court held that an escalation clause in a licensing agreement that allowed the licensor to adjust the monthly fee if the licensee acquired additional radio stations was not impermissibly vague even though it did not contain a definite price. The court held that the clause was not an unenforceable agreement to agree and that the licensor could set price when stated conditions arose. p.183 note 2 Incomplete Bargains: Intention to be bound 2 types: (1) The agreement to agree, the parties have reached agreement on a number of matters but have left for future agreement one or more terms (Walker v. Keith). (2) the formal contract contemplated the parties have reached agreement in principle on at least the major provisions of their agreement, but they contemplate the execution of a formal written contract. When parties contemplate the execution of a formal contract, they often reduce their agreement in principle to a written letter of intent. Both the UCC and the Restatement recognize that parties may be bound contractually when they have reached agreement in principle, even though they contemplate either future negotiations (agreement to agree) or the execution of a formal written contract (formal contract contemplated). UCC 2-204(3) Even if 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. Section 27, Restatement (2d) Manifestations of assent that are in themselves sufficient to conclude a contract will not be prevented from so operating by the fact that the parties also manifest an

intention to prepare and adopt a written memorial thereof; but the circumstances may show that the agreements are preliminary negotiations. Both the UCC and Restatements hold that whether a contract is formed in cases of an agreement to agree or formal contract contemplated turns on the factual question of whether the parties intended to be bound when they agreed in principle or only after further negotiations prove successful. WEEK 7 READING 195-204, N+Q 1,2,6 following Bower; 1-

2 following Register.com BOWER V. GATEWAY 2000 INC. FACTS: Appellants are among the consumers who purchased computers and software products from D Gateway 2000 through a direct-sales system, by mail or telephone order. o It was Gateways practice to include with the material shipped to the purchaser along with the merchandise a copy of its standard terms and conditions agreement and relevant warranties for the products. The Agreement provides that the document contains Gateway 2000s Standard Terms and Conditions and that by keeping the computer system beyond 30 days after the date of delivery, that the customer accepts these Terms and Conditions. Paragraph 10 reads as such: o Any dispute or controversy arising out of or relating to this Agreement or its interpretation shall be settled exclusively and finally by arbitration. The arbitration should be conducted in accordance with the Rules of Conciliation and Arbitration of the Intl Chamber of Commerce. The arbitration shall be conducted in Chicago, before a sole arbitrator and any award rendered in any such arbitration shall be final and binding. Ps commenced this action allegeing deceptive sales practice in 7 causes fo action, including breach of warranty, breach of contract, fraud, and unfair trade practices. o In particular, the allegations focus on Gateways representations and advertising that promise service when

you need it including around the clock free technical support, free software technical support and certain on-site services. o According to Ps, not only were they unable to avail themselves of this offer b/c it was almost impossible to get through to a technician, but Gateway continued to advertise this claim despite numerous complaints. Gateway moved to dismiss the complaint based on the arbitration clause in the Agreement. Appellants argue that the arbitration clause is invalid under UCC 2207 and under 2-302 and an unenforceable contract. o They said the provision was obscure; that a customer could not reasonably be expected to understanding its meaning and its effect; that the ICC was not a forum commonly used for consumer matters; and that b/c ICC headquarters were in France, it was really difficult to locate the organization and its rules. o Appellants also argued how burdensome and costly it was to deal with the ICC: for a claim of less than $50,000 and advance fee of $4000 was required with $2000 nonrefundable. Customers would incur travel expenses estimating to not exceed $1000/person.

PROCEDURE: The lower court dismissed the complaint and so did the appeals, except for the unconscionability of the designation of the ICC as the arbitration body. ISSUE: Is Gateways contract valid? Is the arbitration clause in Gateways contract valid? HOLDING: Yes/NO RULE: Under UCC 2-207(2), a material alteration constitutes proposals for addition to the contract that become part of the contract only upon appellants express acceptance.

REASONING: (1) Appellants argued that the arbitration clause was invalid under UCC 2-207 saying that when they placed their order they did not bargain for, much less accept to the arbitration clause in the agreement and that the clause was a material alteration of preexisting oral agreement. o UCC 2-207(2), a material alteration constitutes proposals for addition to the contract that become part of the contract only upon appellants express acceptance. o Court concludes that the clause was not a material alteration of an oral agreement but rather one provision of the sole contract that existed b/w the parties. o Court explained that the contract was formed and acceptance manifested not when the order was placed, but only with the retention of the merchandise beyond the 30 days specificed in the Agreement enclosed in the shipment of merchandise. o The lower court looked at the case Hill v. Gateway a class action suit contesting the identical contract in dispute here including the arbitration clause. The court said that the terms inside Gateways Agreement constitute the parties contract b/c the Hills had an opportunity to return the computer after reading them, and that the contract was not formed with the placement of a telephone order or with the delivery of the goods, but was formed only with the customers decision to retain the merchandise beyond the 30-day period in the Agreement. Thus the arbitration clause was enforceable. This conclusion was in keeping with the ProCd v. Hill case. o Court found that the detailed terms enclosed within the packaging of particular computer software purchased in a retail outlet constituted the contract b/w the vendor and the consumer who retained the product. o The 7th circuit held that the UCC 2-20 did not apply and was irrelevant to such transactions because that section is generally applied where multiple agreements have been exchanged b/w the parties in a classic battle of the form, whereas ProCd as well as Hill involves but a single form.

o Court agrees with the reasoning in the two previous cases saying that there was no agreement or contract upon the placement of the order or even upon the receipt of the goods. By the terms of the Agreement @ issue, it is only after the consumer has affirmatively retained the merchandise for more than 30 days within which the consumer has presumably examined and even used the products and read the agreement that the contract has been effectuated. o Court says the appellants use of cases that have a battle of the forms issue cant apply here b/c this case only involves one contract. o (2) With respect to the appellants claim that the arbitration clause is unenforceable as a contract of adhesion in that it involved no choice or negotiation on the part of the consumer but was a take it or leave it proposition, we find that this argument too was properly rejected by the lower court. Although the parties did not have equal bargaining power, that still does not invalidate the contract. The lower court said that the ability to make the purchase elsewhere and the express option to return the goods did not make the consumers position a take it or leave it positions. If the consumer didnt like the terms he could easily have bought a competitors product instead or reject Gateways agreement by returning the merchandise. The consumer had 30 days to inspect the goods, read the agreement, seek clarification of the terms, and the consumer has every right to return the merchandise b/c the goods or terms are unsatisfactory. (3) the appellants argued that the lower court should have declared the contract unenforceable pursuant to UCC 2-302 on the ground that the arbitration clause is unconscionable due to the unduly burdensome procedure and cost for the individual consumer. o Yes the court found that arbitrating in a class action suit such as this one instead of the alternative to the arbitration with the ICC is less costly, but that still doesnt alter the binding effect of the valid arbitration clause contained in the agreement.

o As a general matter, under NY law, unconscionability requires showing that a contract is both procedurally and substantively unconscionable when made. That is there must be some showing of an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party. this is to ensure that the more powerful party cannot surprise the other party with some overly oppressive term. o As to the procedural element, a court will look to the contract formation process to determine if in fact one party lacked any meaningful choice in entering into the contract, taking into consideration such factors as the setting of the transaction, the experience and education of the party claiming unconscionability, whether the contract contained fine print, whether the seller used high-pressured tactics and any disparity in the parties bargaining powers. Court said that none of these factors supports appellants claim here. Purchaser had 30 days to thoroughly examine the computers and review the Agreement. The Agreement itself consisted of only 3 pages, 16 paragraphs, all which appear in the same size print. The Arbitration clause is in no way hidden or tucked away within a complex document of inordinate length, nor is the option of returning the merchandise, to avoid the contract, somehow a precarious one.

o With respect to the substantive element, which entails an examination of the substance of the agreement in order to determine whether the terms unreasonably favor one party, the court doesnt find that the possible inconvenience of the chosen site (Chicago) alone rises to the level of unconscionability. The court does find, however, that the excessive cost factor that is entail in arbitrating before the ICC is

unreasonable and surely serves to deter the individual consumer from invoking the process; it bars the consumer from resorting to the courts by the arbitration clause in the first place, and second the expensive costs of arbitrating with the ICC bars consumers from a forum as well; consumers are thus left with no forum at all to dispute the claim. Court says that while it is generally true that both procedural and substantive elements are considered when deciding if a clause is enforceable, however, it says that the substantive elements alone may be sufficient to render the terms of the provision at issue unenforceable. Excessive fees such as those incurred under the ICC procedure are grounds for finding an arbitration provision unenforceable or commercially unreasonable.

JUDGMENT: Gateway offered to arbitrate before the AAA. But Ps argued that the AAA costs were also excessive and so the court remanded for appropriate substitution of an arbitrator. NOTES & QUESTIONS (1) OFFER AND ACCEPTANCE UNDER PROCD AND HILL The opinions in ProCd, Hill, and Bower are based on 2 propositions about offer and acceptance. o First when a purchaser places an order for either software (ProCD) or hardware (hill) in person, by telephone, or over the Internet, the purchaser has not made an offer. Instead the vendor makes the offer by shipping the product to the purchaser with the vendors terms of sale included. o Second, the vendor is the master of the offer. If the vendors offer states that the purchaser accepts the offer by retaining the product beyond the period of time set forth in the vendors terms of sale, the purchaser is bound by the

vendors terms if he does not return the product within that period. o UCC 2-204(1) says: A contract for ale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract. A vendor, as master of the offer, may invite acceptance by conduct, and may propose limitations on the kind of conduct that constitutes acceptance. A buyer may accept by performing the acts the vendor proposes to treat as acceptance.

(2) OFFER AND ACCEPTANCE UNDER KLOCEK v. GATEWAY INC the leadings case against Judge Easterbrooks reasoning (that a vendor can make an offer to buyer or the master of the offer) is in Klocek v. gateway where the court held that it was the purchaser rather than the vendor who made the offer. o The court said that 7th circuit provided no explanation for its conclusion that the vendor is the master of the offer. In typical consumer transactions, the purchaser is the offeror, and the vendor is the offeree. o Based upon this, the shrinkwrap terms found in the box containing the vendors product were proposals for additions to the contract goverened by UCC 2-207(2). o In a transaction involving a consumer purchaser and a merchant seller, the merchants terms would not become part of the contract unless agreed to by the consumer. o It the transaction were b/w 2 merchants, the terms would not become part of the contract if any of the tree situations set forth in 2-207(2) applied. In particular, any terms by the vendor that materially altered the contract would not become part of the contract. (6) DOES THE UCC APPLY? Contracts for the sale of consumer durables, such as refrigerators or washing machines, that come with shrinkwrap terms are clearly subject to the UCC b/c such products are goods under the Code. The status of software, on the other hand, is unclear.

o For many years softwares were sold on disks; and disks were goods, but the disk itself was not the product and its value was an inconsequential portion of the overall value of the transaction. o Today most software is downloaded over the internet so disks may not be needed in some cases. o Computers constitute goods under Article 2 b/c they are tangible moveable things, but computers typically come loaded with software, producing uncertainty regarding the application of the UCC. o Most courts have dealt with the issue have either applied the UCC to all of these transactions or have indicated that the result would be the same even if CL was applied. o With regard to the issue of whether Article 2 of the UCC applies to shrinkwrap, clickwrap, and browsewrap transactions, revised Article 2 had the following definition of goods: goods means all things that are movable at the time of identification to a contract for sale. The term includes future goods, specially manufactured goods, the unborn young of animals, growing crops, and other identified things attached to realty as described in section 2-107. The term does not include information, the money in which the price is to be paid, investment securities under Article 8, the subject matter of foreign exchange transactions, or choses in action. Comment 7 elaborates on this definition: Goods dont directly apply to an electronic transfer of information. Some are and some arent. Ex. The sale of smart goods such as an autombile is a transaction in goods fully within this article even though the car contains many computer programs. On the other hand, an architects provision of architectural plans on a computer disk would not be a transaction in goods. When a transaction includes both the sale of goods and the transfer of rights in info, it is up to the courts to determine whether the transaction is entirely within or outside of this article.

NOTES & QUESTIONS AFTER REGISTER 1,2 (1) ANALYSIS OF REIGSTER The court in Register holds that Verio had assented and was contractually bound by the terms of use of Reigsters Web site because Verio had used the site many times and was well aware of Reigsters restrictions on use. The court analogizes the situation to the visitor to an applestand who continues to bite into apples even though the visitor knows of a sign stating the price of apples. The court seems to say that a first time user (and maybe even a user for a few times) would not be bound by the restrictions unless the user were actually aware of the restrictions: P sues D in contract for the price of apples taken. D defends on the ground that on no occasion did he see Ps price notice until after he had bitten into the apples. D may well prevail as to the first apple taken. (2) MUTUAL ASSENT IN BROWSEWRAP TRANSACTIONS The court rejects the argument that clicking an I agree button is essential to contract formation on the Internet. Some contend that browsewrap agreements should be enforceable even if the user has not clicked an agreement button if 4 requirements are met: o (1) The user is provided with adequate notice of the existence of the proposed terms. o (2) The user has a meaningful opportunity to review the terms o (3) The user is provided with adequate notice that taking a specified action manifests assent to the terms. o (4) the user takes the action specified in the latter notice.

8/30/2011 12:18:00 PM WEEK 8 READINGS PP. 253-66 N+Q 2,3,5 LIABILITY FOR BENEFITS RECEIVED: THE PRINCIPLE OF RESTITUTION The Restatement of Restituion states the basis of liability as follows: A person who has been unjustly enriched at the expense of another is required to make restitution to the other. Suppose one party has received a benefit from another but has made no promise to pay for that benefit. Ordinarily, classical contract law would find no basis for imposing a promissory obligation in those circumstances. Might there still be some legal oblgiaiton, based on principles of restitution? CREDIT BUREAU ENTERPRISES V. PELO Facts: D Pelo argues that the district court erred by entering judgment against him for payment of a hospital bill. Pelo left his house after an argument with his wife, made threats of self harm and purchased a shotgun. Thereafter, Pelo was taken to the Ellsworth Municipal Hospital by the police who had been advised of his threats. Pursuant to the emergency hospitalization procedures set forth in Iowa Code, the magistrate found probably cause that Pelo was seriously mentally impaired and likely to physically injure himself. The magistrate thus entered an emergency hospitalization order on January 8 requiring Pelo be detained in custody at the hospitals psychiatric unit for examination and care for a period not to exceed 48 hours. During admission to the hospital, Pelo was given a hospital realse form to sign which would have made either Pelo or his insurance company responsible for the hospital bill, but Pelo refused to sign. o Later that morning, a nurse demanded that he sign saying that if he didnt the hospital could not insure the safety or return of his personal itmes, so Pelo did. o The form stated that Pelo understood he remained liable for any charges not covered by insurance. Later his wife filed an application for involuntary hospitalization of Pelo

There was a hearing, and although it was concluded that Pelo would benefit from his stay at the hospital b/c of his bi-polar condition, further involuntary hospitalization was not authorized and he was released. The hospital later sought compensation from Pelo in the amount of $2,775.79 for medical services provided to him from January 8-13, 1995. o Pelo refused to pay or authorize his health insurance carrier to do so and then P credit Bureau filed a petition against Pelo. o P also named Cerro Gordo county as a D based on the theory that the county, Pelos county of legal settlement, would be liable for mental health services provided to Pelo. Pelo argues that he refused to sign the release form, that he signed under duress and that he did not need evaluation or treatment. That he had health insurance and was not indigent at the time he was hospitalized. District court found Cerro Gordo not liable, but said that as a matter of public policy and under a reasonable interpretation of the involuntary commitment and mentally ill support statutes in Iowa, Pelo could not be permitted to receive court-ordered services and then choose to ignore his responsibility to pay for those services. Court entered judgment in favor of P. o At appeals they affirmed the decision saying that Pelo had entered into a valid, enforceable contract to be financially responsible for the hospital bill. He was liable under a theory of contract implied in law or quasi-contract, based on the courts conclusion that Pelo benefited from his hospitalization for which he should pay.

ISSUE: who pays for mental health medical services provided to a patient who is involuntarily committed to a private hospital. RULE: Liability under implied contract theory district court judge concluded that Pelo was liable under a contract implied in law or quasicontract theory.

A contract implied in law is an obligation imposed by the law without regard to either partys expressions of assent either by words or acts. Such contracts do not arise from the traditional bargaining process, but rather rest on a legal fiction arising from considerations of justice and the equitable principles of unjust enrichment. As such they are not real contracts and the general rules of contracts therefore do not apply to them. Restitution and unjust enrichment are modern designations for the older doctrine of quasi contracts or contracts implied in law, sometimes called constructive contracts. The term unjust enrichment is an equitable principle mandating that one shall not be permitted to unjustly enrich oneself at the expense of another or to receive property or benefits without making compensation for them. General rule: Where one renders services of value to another with his knowledge and consent, the presumption is that the one rendering the services expects to be compensated, and that the one to whom the services are rendered intends to pay for the same, and so the law implies a promise to pay. Restatements of Restitution states that a person who officiously confers a benefit upon another is not entitled to restitution therefor. o Officiousness means interference in the affairs of others not justified by the circumstances under which the interference takes place. Restatement of Restitution if a person is otherwise not fully mentally competent, a person rendering necessaries or professional services is entitled to recover from such person although the person expresses an unwillingness to accept the services.

HOLDING: Pelo is liable for the payments based on the quasi-contract theory. REASONING Where a person acts to confer benefits on another in a setting in which the actor is not acting officiously, the benefited party may be required to make restitution to the actor.

Thus where a person performs services for another which are known to be accepted by the latter, the law implies a promise to pay for those services. In certain circumstances, however, restitution for services performed will be required even thought the recipient did not request or voluntarily consent to receive such services. Restatement of Restitution provides: o A person who has supplied things or services to another, although acting w/o the others knowledge or consent is entitle to restitution therefore from the other if (a) he acted unofficiously and with intent to charge therefore, and (b) the things or services were necessary to prevent the other from suffering serious bodily harm or pain, and (c) the person supplying them had no reason to know that the other would not consent to receiving them, if mentally competent; and (d) it was impossible for the other to give consent or, because of the extreme youth or mental impairment,

the others consent would have been immaterial. o Comment b to section 116 states: Knowledge of dissent. There can be no restitution for services or things rendered to a person who refuses to accept the services and who is of sufficient mental capacity to understand the necessity of receiving themif, however, the person is insane, or if he is otherwise not fully mentally competent, a person rendering necessaries or professional services is entitled to recover from such person under the conditions stated in this section, although the person expresses an unwillingness to accept the things or services. SC agrees with district courts decision. Pelo doesnt challenge that he was hospitalized, that he suffers from mental illness, and that the costs were reasonable for the services rendered to him. o However he does argue that he has no duty to pay for those services b/c he did not ask to be hospitalized and derived no benefit from it.

o Pelos argument that he didnt consent to medical services is irrelevant b/c the emergency hospitalization order, which was based on the magistrates probable cause finding that Pelo was seriously mentally impaired establishes that Pelo lacked sufficient judgment to make responsible decisions concerning hospitalization and lacked the ability to consent to treatment. o Court also finds like the district court did that Pelos hospitalization was indeed of medical benefit to him. Based on the later reports of the doctors who examined Pelo, the referee found that Pelo clearly is in need of and would benefit from treatment of a serious mental illness and that this finding would at a minimum alert Pelo to the seriousness of his mental illness and the need for further treatment, a fact that would surely be of medical benefit to him. The fact that he was involuntarily hospitalized in order that this evaluation and finding could be made, and the fact that he may disagree with whether this finding is of medical benefit to him, does not eliminate the medical benefit he received from such hospitalization. Because the SC court finds that Pelo is legally obligated to pay for medical services provided to him under an implied contract in law or quasicontract theory, we need not consider whether an express contract was formed based on Pelos later signature on the hospital admission form. Constitutional Claims Pelo further argues that to require him to pay for medical serves he did not ask for violates his constitutional right to due process or his right to contract under article I, section 21 of the Iowa Constitution. o These contentions have no merit says SC. First quasicontracts are not true contracts and therefore the general rules of contract, including the constitutional provisions concerning the right to contract, do not apply to them. o Additionally, Pelo does not assert that the emergency hospitalization or involuntary commitment proceedings are constitutionally invalid.

Therefore based on the earlier findings and the fact that Pelo was seriously mentally impaired, court finds that Pelos involuntary hospitalization complied with the requisite procedural due process safeguards. No violation of constitutional rights.

NOTES & QUESTIONS (2) Restitutionary Liability for emergency services rendered Provides for restitution in favor of one furnishing emergency services in a situation where serious bodily harm or pain will otherwise result provided the P acted unofficiously. In other cases where the patient was conscious and could have entered into an agreement and perhaps the issue of payment was even discussed but no definite agreement was reached, in such a case, the provider will be able to recover the reasonable value of the care furnished, not under Restatement of Restitution 116 but on the more general restitutionary principle that one who receives services, with the knowledge that the person furnishing them reasonably expects to be paid, will be liable for the reasonable value of those services. Section 20 Protection of anothers life or health a person who performs, supplies, or obtains professional services reasonably necessary for the protection of anothers life or health has a claim in restitution against the other if the circumstances justify the claimants decision to intervene w/o a prior agreement for payment or reimbursement. Restitution under this Section is measured by a reasonable charge for the services rendered. (3) Contrast b/w Contract and Pure Restitution (or quasi-contract) The court argued that contracts implied in law are not real contracts, that they do not arise from the traditional bargaining process, and general rules of contracts do not apply to them. Despite the theoretical separation b/w true contracts and quasi contracts, they do have some potential overlap, as the Restatement of Restitution recognizes in the following provision: o A person of full capacity who, pursuant to a contract with another, has performed services or transferred property to

the other or otherwise has conferred a benefit upon him, is not entitled to compensation therefore other than in accordance with the terms of such bargain, unless the transaction is rescinded for fraud, mistake, duress, undue influence or illegality, or unless the other has failed to perform his part of the bargain. Basically if 2 people have entered into a contract for services, can only enforce a payment based on the terms of the contract. Cant use quasicontract principles. o In the absence of circumstances indicating otherwise, I is inferred that a person who requests another to perform services for him or to transfer property o him thereby bargains to pay therefore. This party is referred to as impliedin-fact contracts. Implied-in-fact contracts, like express contracts, are true contracts. Although the distinction b/w implied-in-fact and restitution claims are hazy, the crucial factor will often be whether the party receiving the benefit of services or property had requested it. If so, a claim based on implied-in-fact contract will lie. (5) Economic Analysis of Restiutionary Claims -

8/30/2011 12:18:00 PM WEEK 9 READINGS PP. 266-273; 286, 291-99 N+Q 3,4 AFTER COMMERCE PSHIP; 1,5 AFTER WEBB Commerce Partnership 8098 Limited Partnership v. Equity Contracting Co Facts: Equity filed a complaint against Commerce. o Commerce was the owner of an office building and contracted with a general contractor, World Properties to perform improvements on its property. o Equity contracted with the general contractor and did its work but Commerce never paid the general contractor and so Equity never got its money. o It argues that Commerce was unjustly enriched b/c it accepted Equitys services w/o paying any entity for them. o Commerce says it did pay the general contractor. o Equity brought suit against the GC who later filed bankruptcy. Equity adduced no evidence regarding Commerces payments to the GC under the construction contract or to any other party for work covered by the contract. Commerce moved for an involuntary dismissal arguing that the evidence did not establish a contract implied in fact. At some point in trail court, there was no agreement as to the cause of action at issue or the requirements of proof. Commerce testified that the contract price it had negotiated with the GC was $256,894, and that it had may three payments. o Commerce also sought to introduce evidence that it had paid $64,097 directly to three subcontractors who had performed work on the building, who were not paid by the GC, and who had perfected mechanics liens. However the court sustained Equitys objection to the testimony on the ground of relevance. The trial court entered judgment in favor of Equity for $17,100.

ISSUE: Was there a contract implied in law made b/w Equity and Commerce? RULE: A contract implied in fact is one form of an enforceable contract; it is based on a tacit promise, one that is inferred in whole or in part from

the parties conduct, not solely from their words. When an agreement is arrived at by words, oral or written, the contract is said to be express. A contract implied in fact is not put into promissory words w/ sufficient clarity, so a fact finder must examine and interpret the parties conduct to give definitions to their unspoken agreement. Common examples of contracts implied in fact are where a person performs services at anothers request, or where services are rendered by one person for another w/o his expressed request, but with his knowledge, and under circumstances fairly raising the presumption that the parties understood and intended that compensation was to be paidin these circumstances, the law implies the promise to pay a reasonable amount for the services. A contract implied in law, or quasi contract, is not based upon the finding, by a process of implication form the facts, of an agreement b/w the parties. A contract implied in law is a legal fiction, an obligation created by the law w/o regard to the parties expression of assent by their words or conduct. o This was adopted to provide a remedy where one party was unjustly enriched, where that party received a benefit under circumstances that made it unjust to retain it w/o giving compensation. o The elements of a cause of action for a quasi contract are that: (1) The P has conferred a benefit on the D (2) The D has knowledge of the benefit (3) the D has accepted or retained the benefit conferred (4) the circumstances are such that it would be inequitable for the D to retain the benefit w/o paying fair value for it. o When there is no enforceable express or implied in fact contract but where the D has received something of value, or has otherwise benefitted from the service supplied, recovery under a quasi contractual theory may be appropriate. The court held that a subcontractor could do that against the owner provided that it proved 2 elements to establish that the enrichment of the owner was unjust:

o (1) That the subcontractor had exhausted all remedies against the general contractor and still remained unpaid o (2) that the owner had not given consideration to any person for the improvements to the GC In Gene b. Click Co., the court held that an unjust enrichment cannot exist where payment has been made for the benefit conferred. The payment to which we referred was the owners payment to the GC on the construction contract.

HOLDING: Case reversed and remanded to trail court to take additional evidence from the parties on whether Commerce made payment to or on behalf of its general contractor covering the benefits Equity conferred on the property. Equity has the burden of proving its claim of contract implied in law that Commerce has failed to make such payment, and if true, then it shall enter judgment for Equity; but if the court shall determine that Equity has failed to prove that Commerce did not make such payment, then the court shall enter judgment for Commerce.

REASONING: Looks at case Maloney v. Therm Alum Industries Corp where a subcontractor sought recovery against an owner of property, where there had been no dealings b/w the owner and the subcontractor. Pursuant to the contract with GC, the subcontractor in Maloney furnished glass walls, windows and doors for the construction of an office building. The subcontractor was not paid in full for its work. The subcontractor sought to recover damages against the owner on a quasi contract theory. The court held that a subcontractor could do that against the owner provided that it proved 2 elements to establish that the enrichment of the owner was unjust: o (1) That the subcontractor had exhausted all remedies against the general contractor and still remained unpaid o (2) that the owner had not given consideration to any person for the improvements furnished by the subcontractor

In Gene b. Click Co., the court held that an unjust enrichment cannot exist where payment has been made for the benefit conferred. The payment to which we referred was the owners payment to the GC on the construction contract. In this case, Equity did not prove at trial that Commerce had not made payment to any party for the benefits conferred on the property by Equity. This was an essential element of a quasi contract claim by a subcontractor against an owner. Commerces attempt to prove that it had paid $64,097 directly to subcontractors for work on the building was relevant to issues in this case and should not have been dismissed. What Commerce expended on this project was central to Equitys cause of action. o If the $64,097 is added to the $256,894 that Commerce paid to the GC, then the total amount Commerce spent on the project exceeded the contract price for the improvements. Where an owner has given consideration for the subcontractors work by paying out the contract price for the work, an unpaid subcontractors claim that the owner has been unjustly enriched must fail. Case reversed and remanded to trail court to take additional evidence from the parties on whether Commerce made payment to or on behalf of its general contractor covering the benefits Equity conferred on the property. o Equity has the burden of proving its claim of contract implied in law that Commerce has failed to make such payment, and if true, then it shall enter judgment for Equity; but if the court shall determine that Equity has failed to prove that Commerce did not make such payment, then the court shall enter judgment for Commerce.

NOTES & QUESTIONS 3,4 (3) RESTITUTIONARY LIABILITY OF LESSORS Restitutionary claims have also been brought by contractors against lessors of property when

the lessee has contracted but has not paid for improvements to the leased property. Courts have commonly denied recovery for such claims, on the ground that the owner has not been unjustly enriched, where there has been no showing that the owner needed or wanted the improvements contracted for by the tenant. Its not inequitable for defendant owner to retain benefit of contruction work w/o paying for it; landlord knew of work but was only passive beneficiary. Some courts however will allow restitutionary recovery if such a showing can be made (that the owner needed or wanted the improvements or if that the owner was aware the improvements were being made) (4) THE MECHANICs LIEN A mechanics lien is a statutory encumbrance (as opposed to a contractual encumbrance like a mortgage) on real property for the value of improvements made to the property by a laborer or supplier of material pursuant to contract. These statutes require the laborer or supplier to take certain steps to assert the lien. Typically the lien must be filed in the public records and suit must be brought to enforce the lien within a set period. Failure to meet these requirements results in loss of the lien. Owners of property on which improvements are being made (along with banks and other institutions that finance construction) typically protect themselves from mechanics liens by releasing funds only when all subcontractors have signed lien waivers. If an owner has released funds based on a lien waiver by a subcontractor, the subcontractor will almost certainly be unable to maintain a claim for restitution. Promissory Restitution Suppose the recipient of services does make an express promise to pay for benefits conferred on them but only after the benefits are received.

As we saw in Plowman, classical theory would hold that a promise for benefits previously received was not binding b/c the benefits constituted past consideration. Even classical theory recognized some exceptions to the past consideration doctrine, as we will see, additional exceptions are being created or explored by contemporary courts and the Restatement (2d). Webb v. McGowin Facts: Appellant while in the employ of the W.T. Smith Lumber Company was engaged in clearing the upper floor of mill No. 2 of the company. Appellants job was to drop a pine block from the upper floor of the mill to the ground below, this being the usual and ordinary way of clearing the floor. As Appellant started to turn the block loose he saw the testator of the Ds, J. McGowin, on the ground below and directly under where the block would have falled had appellant turned it loose. If he did, it would have struck McGowin with such force that it would cause seriously bodily harm or death. o Appellant could have remained safely on the upper floor of the mill by turning the block loose, but it would have maybe killed McGowin, and the only safe and reasonable way to prevent this was for appellant to hold to the block and divert its direction in falling from the place where McGowin was standing and the only way to do so was for appellant to falling with it to the ground and divert its course. o Appellant did so and suffered a broken right leg, the heel of his right foot torn off and his right arm broken. o He was badly crippled for life and rendered unable to do physical or mental labor. o Later, in consideration of appellant having prevented him from sustaining death or serious bodily harm and in consideration of the injuries appellant sustained, McGowin agreed with him to care for an dmaintain him for the remainder of appellants life at the rate of $15 every two weeks from the time he sustained his injuries to and during the remainder of appellants life; it being agreed that

McGowin would pay this sum to appellant for his maintenance. o Payments continued until McGowins death, then stopped after 26 days after his death. o Thereupon P brought suit to recover the unpaid installments accruing up to the time of the bringing of the suit. o The principal grounds of demurrer to the original and amended complaint are: (1) it states no cause of action (2) its averments show the contract was w/o consideration (3) it fails to allege that McGowin had, at or before the services were rendered, agreed to pay appellant for them (4) the contract declared on is void under the statute of frauds.

ISSUE: Was McGowins promise to pay P for the rest of his life still binding after his death? RULE: Material benefit rule if a person receives a material benefit from another, other than gratuitously, a subsequent promise to compensate the person for rendering such benefit is enforceable. HOLDING: Yes the promise was binding. Reverse. There was a contract made b/w McGowin and P. REASONING: (1) The averments of the complaint show that appellant saved McGowin from death and this was a material benefit to him of infinitely more value than any financial aid he could have received. Therefore, McGowin became morally bound to compensate appellant for the services rendered. Recognizing this moral obligation, he expressly agreed to pay appellant as alleged in the complaint and complied with this agreement up to the time of his death; a period of more than 8 years.

Had McGowin been accidentally poisoned and a physician, without his knowledge or request, had administered an antidote, thus saving his life, a subsequent promise by McGowin to pay the physician would have been valid. Likewise, McGowins agreement to pay appellant for saving his life is valid and enforceable. Where the promisee cares for, improves, and preserves the property of the promisor, though done without his request, it is sufficient consideration for the promisors subsequent agreement to pay for the service, b/c of the material benefit received. o Also life and preservation of the body have material, percuniary values, measurable in dollars and cents. Thats why we have doctors, law suits for personal injuries, life insurance which measures the value of a mans life in dollars and cents, etc. o There was a valid and enforceable contract. (2) It is well settled that a moral obligation is a sufficient consideration to support a subsequent promise to pay where the promisor has received a material benefit, although there was no original duty or liability resting on the promisor. o This is different from cases where the consideration is a mere moral obligation or conscientious duty unconnected with receipt by promisor of benefits of a material or pecuniary nature. o Here the promisor received a material benefit constituting a valid consideration for his promise. (3) Where the promisor has received a material benefit from the promisee, is morally bound to compensate him for the services rendered and in consideration of this obligation promises to pay. In such cases the subsequent promise to pay is an affirmance or ratification of the services rendered carrying with it the presumption that a previous request for the service was made. o McGowins express promise to pay appellant for the services rendered was an affirmance or ratification of what appellant had done raising the presumption that the services had been rendered at mcGowins request.

(4) The averments of the complain show that in saving McGowin from death or grevious bodily harm, appellant was crippled for life. This was part of the consideration of the contract declared on. McGowin was benefited. Appellant was injured. Benefit to the promisor or injury to the promisee is a sufficient legal consideration for the promisors agreement to pay. (5) the services rendered by appellant were not gratuitous as the agreement of McGowin to pay and the acceptance of payment conclusively shows that it wasnt. (6) the contract declared was not void under the statute of frauds.

NOTES & QUESTIONS (1) PROMISSORY RESTITUTION PRINCIPLE Material benefit rule if a person receives a material benefit from another, other than gratuitously, a subsequent promise to compensate the person for rendering such benefit is enforceable. Restatements adopt this rule and calls it Promissory Restitution. However not all courts apply this rule Harrington v. Taylor a wife who was physically assaulted by husband sought refuge at a friends house. Husband went there and in the ensuing struggle the wife knocked her husband down and was about to strike him with an ax when the P intervened and was struck by the ax receving a severly mutilated hand but saving the husbands life. Husband promised to pay her but never lived up to the promise and P brought suit and lost. (5) RECOVERY IN THE ABSENCE OF A PROMISE Suppose McGowin had not promised to care for Webb. Could he have still been held liable to Webb on pure restitutionary principles? The difficulty facing Webb would be having to show that the services were not rendered gratuitously (were rendered with an intent to charge). In cases involved professional providers of services, modern courts have been willing to find an intent to charge and have allowed recovery for the reasonable value of the services rendered. The courts have refused, however, to allow recovery by nonprofessionals even for out-of-pocket losses involved in rescues.

pp. 303-14 N+Q 1,2,4,5 STATUTE OF FRAUDS Failure to comply with the statute of frauds even if a promise is supported by consideration, will be unenforceable. Today any statute that requires a transaction to be memorialized in writing for legal efficacy is likely to be referred to as a statute of frauds. Restatement 2d of Contracts describes the coverage of the typical American statute of frauds: o Classes of contracts covered: (1) The following classes of contracts are subject to a statute, commonly called the Statute of Frauds, forbidding enforcement unless there is a written memorandum or an applicable exception: (a) a contract of an executor or administrator to answer for a duty of his decedent (the executor-adminsitrator provision); (b) a contract to answer for the duty of another (the suretyship provision);

(c) a contract made upon consideration of marriage (the marriage provision) (d) a contract for the sale of an interest in land (the land contract provision) (e) a contract that is not to be performed within one year from the making thereof (the one year provision) UCC 2-201 requires contracts for the sale of goods in excess of $500 ($5000 under revised Article 2) to be evidenced by a writing signed by the party against whom enforcement is osught, unless

some exception to the statute applies. General Principles: Scope and Application Whenever the statute of frauds is asserted as a defense against the enforcement of an alleged contract, a series of questions is likely to be raised. o First is the contract at issue one of the types to which the statute of frauds applies, so that a signed memorandum will

be required for its enforcement? (is this contract within the statute?) o If the answer is NO, then the statute of frauds has no application to the case, and the P is free to prove her contract by any combination of relevant evidence, written or oral, direct or circumstantial. o If the answer is Yes, then a second question must be addressed: Is the statute of frauds satisfied? That is, is there some sort of written statement (some memorandum or note) of its terms, signed by the D (the party to be charged), that is sufficient to meet the statutes requirements? If the answer is Yes, then the statute again presents no bar to enforcement, and the case may proceed in normal fashion. If the answers to the first 2 questions are Yes and No: Yes the contract sued on is within the statute; no, there is not a writing sufficient to satisfy the statutory requirement. Does this end the case? Not necessarily. A third question must still be answered: Are there other factors in the case, such as performance or reliance by the P, which might invoke an exception to the statutory bar?

Crabtree v. Elizabeth Arden Sales Corp FACTS: In sept 1947, Nate entered into preliminary negotiations with Elizabeth Arden Corp, manufacturers and sellers of cosmetics, looking toward his employment as sales manager. At his interview, Crabtree requested a 3 year contract at $25,000 a year. He insisted upon an agreement for a definite term b/c he was giving up a secure well-paying job for a job that would take a while to master. Then Miss Arden finally indicated that she was prepared to offer a 2 year contract based on an annual salary of $20,000 for the first 6

months, $25,000 for the second 6 months, and $30,000 for the 2d year plus expenses of $5000. o Crabtree responded that the offer was interesting. o Miss Arden had her personal secretary make this memorandum on a telephone order blank that happened to be at hand. o A few days later, Crabtree called Mr. Johns and telegraphed Miss Arden that he accepted the invitation to join the organization and Miss Arden wired back her welcome. o Then a pay-roll change card was made and put into the records on Sept. 30, and to be effective starting Oct. 22d, and it contained the salary as stated above. o After 6 months of employment, Crabtree received the scheduled increase from $20,000 to $25,000, but the further specified increase at the end of the year was not paid. o Both Mr Johns and the comptroller Mr. Carstens said that the matter would be straightened out. With that in mind, another pay-roll change was signed by the comptroller indicated the increase from $25,000 to $30,000 but the latter refused to approve the increase and after further fruitless discussion, P left the job and brought this breach of contract. ISSUE: Does the statute of frauds bar the enforcement of the agreement for pay-roll?/ Since the contract relied upon was not to be performed within a year, the question is whether there was a memorandum of its terms subscribed by D to satisfy the statute of frauds? RULE: The court adopts the rule that signed and unsigned writing to be read together provided that they clearly refer to the same subject matter or transaction.

HOLDING: Judgment affirmed in favor of P.

REASONING: Trial court found against D and awarded P damages of about $14,000 and appeals affirmed. Each of the two payroll cards the one initialed by the Ds general manager, and the other signed by its comptroller unquestionably constitutes a memorandum under the statute. o They were not prepared or signed with the intention of evidencing the contract, or that they came into existence subsequent to its execution, doesnt matter. o Those 2 writings contain all of the essential terms of the contract the parties to it, the position that P was to assume, the salary that he was to receive except that relating to the duration of Ps employment. o Court must decide whether the length of the contract may be supplied by reference to the earlier unsigned office memorandum and if so whether its notation, 2 year to make good, sufficiently designates a period of employment. o The court adopts the rule that signed and unsigned writing to be read together provided that they clearly refer to the same subject matter or transaction. o Court says that none of the terms of the contract are supplied by parol. All of them must be set out in the various writings presented to the court, and at least one writing, the one establishing a contractual relationship b/w the parties, must bear the signature of the party to be charged, while the unsigned document must on its face refer to the same transaction as that set forth in the one that was signed. Parol evidence to portray the circumstance surrounding the making of the memorandum serves only to connect the separate documents and to show that there was assent, by the party to be charged, to the contents of the one unsigned. If that testimony does not convincingly connect the papers, or does not show assent to the unsigned paper, it is within the province of the judge to conclude that the statute has not been satisfied.

Court says it is true the possibility still remains that by fraud or perjury an agreement never in fact made may occasionally be enforced under the subject matter or transaction test but that it is better to run that risk than to deny enforcement to all agreements, merely b/c the signed document made no specific mention to the unsigned one. Court says that the unsigned office memo, the payroll change form initialed by the GM johns, and the paper signed by the comptroller Carstens, makes it apparent that all 3 refer to the same transaction. o The details are all identical and it is hardly possible that such detailed information could refer to another or a different agreement. o Even more, the card signed by Carstens notes that it was prepared for the purpose of a Salary increase per contractual arrangements with Miss Arden. Says that certainly constitutes a reference of sorts to a more comprehensive arrangement, and parol is permissible to furnish the explanation. Also, the evidence of Ds assent to the contents of the unsigned office memo is also convincing. It was prepared by Miss Ardens personal secretary, and so there is little likelihood that the paper was fraudulently manufactured or that D had not assented to its contents. Court finds it justified in finding that the 3 papers constituted the memorandum of their agreement within the meaning of the statute. Court says that only one term, the length of the employment is in dispute, however it says that its hard to imagine that it means anything other than the length of the contract term. o The phrase 2 years to make good signifies that the parties agreed to at term, a certain and definite term of 2 eyars, after which if P did not make good, he would be subject to discharge.

NOTES & QUESTIONS (1) The one year clause The contract in Crabtree was governed by the one year provision of the statute of frauds, which requires a contract not to be performed within one year from the date the contract is made to be in writing. This time duration subjects contracts of a longer duration to the statute of frauds while it exempts shorter contracts from that provision. The standard view is that a contract is not subject to the statutory provision if it is possible to be performed within a year, even though the prospect of such performance is remote. The statutue distinguishes b/w the possibility of performance within one year and termination within one year. o The fact that a contract may be terminated within a year is not sufficient to remove the contract from the requirements of the statute; only performance will do.

8/30/2011 12:18:00 PM WEEK 10 READINGS PP. 322-31 N+Q 1,2 COMMENT: THE HISTORICAL DEVELOPMENT OF LAW AND EQUITY ALASKA DEMOCRATIC PARTY V. RICE FACTS: Kathleen Rice contended that Greg Wakefield, chair-elect of the Alaska Democratic Party, offered her a 2 year position as executive director of the party. o When she didnt get the job, Rice sued on the alleged oral contract and was awarded damages after a jury trial. The party appeals, and the SC affirms. o Rice worked for the party from 1987-1991, got fired in 1991, then worked for the Maryland Democratic Party and while she was in Maryland, Wakefield contracted her about his potential candidacy and the possibility of Rice serving as his executive director. o In May 1992, Wakefield was elected and sometime during the summer after his election he said that he would hire Rice as an executive director for $36,000 a year for at least 2 years and an additional 2 if he was re-elected w/ $4,000 in benefits. o In August 1992, she worked with Nathan Landau who got hired as cofinance chair of the Gore vp campaign. In September or October, she accepted Wakefields offer to work for the Party in Alaska. In a closed-door meeting on February 1993, the executive committee of the Party told Wakefield he couldnt hire Rice. Rice claims that even after this meeting that Wakefield continued to assure her that she had the job. However, on February 15, Wakefield informed her that she could not have the job. Lawsuit.

Procedure: Rice was awarded $28,864 in damages on her promissory estoppel claim and $1,558 in damages on her misrepresentation claim in TC. Appealed, and SC affirmed. TC denied the Partys motions for directed verdicts and judgment N.O.V. Judgment N.O.V judgment notwithstanding the verdict requested by the losing party for the judge to exercise discretion and overrule the decision of the jury.

ISSUE: Can promissory estoppel be invoked to enforce an oral contract that falls within the Statute of Frauds? RULE: Restatement 2d, section 139 - A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a 3d person and which does induce the action or forbearance is enforceable notwithstanding the Statute of Frauds if injustice can be avoided only by enforcement of the promise. HOLDING: Yes. REASONING: SC says that even though the Statute of Frauds says that things need to be in writing, that doesnt mean that people can skip out on obligations. On whether injustice can be avoided only by enforcement of the promise, the SC said that the Restatement test tries to balance b/w the competing considerations supporting strict enforcement of the Statute and prevention of a miscarriage of justice. o If P shows that there was a promise by clear and convincing evidence, it doesnt violate the statute of frauds. Rices evidence: Rice testified that Caroline Covington had told her that the Chair makes the decision regarding employment of executive directors. Then she said Wakefield told her it was his decision who to hire, and if everyone was mad, that he would work through May and then quit, suggesting that the decision would be his. Rice also said that when John Pugh was chair, he communicated that it was within his discretion fo fire executive director Bob Speed and that the Party Plan did not give the executive committee authority over such hiring decisions. This was sufficient evidence for the jury to decide that Rice relied on Wakefields implicit promise that the

executive committee could not derail his selection for executive or finance director. o The SC says that it will use promissory estoppel to overcome the requirements of the statute of frauds. o Wakefield reasonably could have expected to induce Rices action by their promise. Rice resigned from her job, moved from Maryland, and lost money as a result of her reliance on the Party and Wakefield, which amounted to a substantial worsening of her position. TC found that her reliance on the oral promise was reasonable. However, the promise is only enforceable where injustice can only be avoided by the enforcement of the promise. These circumstances are relevant to the inquiry: (a) The availability and adequacy of other remedies (b) The definite and substantial character of the action or forbearance in relation to the remedy sought (c) the extent to which the action or forbearance corroborates evidence of the making and terms of the promise, or the making and terms are otherwise established by clear and convincing evidence. (d) The reasonableness of the action or forbearance (e) the extent to which the action or forbearance

was foreseeable by the promisor. The jury finds that Rice would be a victim of injustice w/o an award of damages, considering her induced resignation, her move from Maryland, and her loss of money and position. Under 139(2)(c), if you can prove with clear and convincing evidence that there was a promise, it will not render the statute of frauds obsolete.

The Party argues that jury instruction 12 was wrong b/c it requires more than action be taken, but that it be of definite and substantial character, and since it wasnt included in the instruction, it was wrong. o But SC says no, it was included in instruction 13 and so the jury considered it, and so it was not wrong. The Party also argues that Wakefield did not have implied nor apparent authority to contract on behalf o the party. o But the jury found that Wakeifeld did. HOW? The party elected Wakefield as its new Chair and by doing that the Party cloaked Wakefield with apparent authority to conduct business on behalf of his incoming administration. So sufficient to find the Chairs implied general authority to make hiring decisions regarding executive personnel. o Then the Party goes on to say even if he did have apparent authority, Wakefield lacked authority to hire Rice at all, and most especially for a set term employment contract of 2 or more years, as opposed to an employment contract at will. TC properly refuted both parts of this argument: (1) b/c evidence supported a finding of general authority, there was no need to adduce evidence of a specific intention to authorize Rices hiring in particular (2) With respect to whether Wakefield had the authority to hire someone for a term of years, the superior court held that since that questions was not raised at trial or on motion, it was waived. MISREPRESENTATION The Party argues that at the time the alleged representations were made, Wakefield was a volunteer, not speaking in his business or professional capacity, thus his representations cannot provide a basis for recovery.

o This argument is gotten from Restatement 2d 552(1) the section allows recovery against one who in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information. o They argue that the Restatement subsection distinguish cases where the information is given purely gratuitously SSC says thats not the case, that Wakefield had a significant stake in Rices acceptance of his alleged offer. He wanted her to serve as his executive director and although his term had not yet started, he made that claim in the course of the business of running a political party. Legal and factual support for the jurys verdict on the misrepresentation claim are found. DAMAGE AMOUNT WAS NOT EXCESSIVE IN LIGHT OF THE EVIDENCE Rice was awarded $28,864 in damages. Her salary that she was offered was $36,000 plus $4200 in employee benefits. The Ps dont argue that the amount awarded is a fair measure of Rices lost wages based upon the salary figures she alleges, but that based on promissory estoppel, that the full amount was not necessary to avoid justice. Maybe something smaller. o SC says that the jurys conclusion that the damages were necessary to avoid injustice is reasonable and that the Partys contentions are w/o merit. MISREPRESENTATION The special verdict forms indicate that the jury awarded Rice $1,558.00 on her misrepresentation claim for Rices moving expenses. o The Party argues that this plus her other award is more than she would have got if the contract had been honored.

o SC says this argument would be valid if she got that amount, but she didnt. Rice award was reduced from $30,422 to $28,864. NOTES & QUESTIONS 1,2 (1) Reliance on the promise of a writing, under the 1st Restatement The first Restatement envisioned 2 distinct situations in which enforcement of an oral contract could be based on an estoppel to assert the statute of frauds. (1) first situation is where P detrimentally relied on the Ds misrepresentation that a writing had been created that would comply with the statute. (2) 2d is where P similarly relied on a promise by the D to create such a memorandum. Reatement (first section 178 comment F). o Ex. P quit a job in CA and moved to Alaska on strength of Ds promise to employ him as general manager; written contract repeatedly promised but never delivered

o Ex. P quit his job and moved to WA on strength of Ds promise to enter into a written 10 year contract. (2) Reliance on oral promises of performance under Restatement 2d Section 139 which the court in Rice adopted saying that if P shows with clear and convincing evidence that there was a promise, that it would enforce it through promissory estoppel despite the Statute of Frauds saying otherwise. WEEK 10 readings pp. 335-43 N+Q 3-5,7

THE SALE OF GOODS STATUTE OF FRAUDS UCC 2-201 Unlike the UCC, the CISG contains no provision similar to the SOF. Instead, in Article 11, the CISG expressly negates any requirement of writing or other formality, and provides that a contract for sale may be proved by witnesses. Buffaloe v. Hart

FACTS: P filed a complaint for breach of contract and damages in Superior Court on November 13, 1989. o Ds denied there was a contract and argued that the contract was unenforceable b/c it violated the statute of frauds. o P is a tobacco farmer rented tobacco farms from D based on an oral agreement, 5 tabacco barns located on their farm for tobacco farming. The agreement was not in writing and was based on a handshake, oral agreement which P had said thats how theyve always done it. o Ds agreed to provide insurance coverage for the barns in 1988 and in 1988 P paid the $2,0000 rent for the barns and the $992.64 to Patricia Hart for the tobacco rent. o Several days later, P negotiated with the Ds on purchasing the barns. P offered to pay $20,000 for 5 barns in annual installments of $5,000 over a 4 year period but didnt offer any interest payments. D accepted the offer and confirmed with by shaking hands. At that time P was already in possession of the barns under the rental agreement. On Jan. 3, 1989, P applied for a loan to pay for the barns but was denied. o P said if the loan came thru he would pay for all the barns at once, D said it was coo, but loan never got approved. P and D then reconfirmed that P was to pay 4 yearly installments of $5,000. o D agreed to provide insurance for the 5 barns in 1989 b/c P couldnt get insurance coverage as long as P would reimburse them for the cost. o On Oct. 20, 1989, P reimbursed D in full for the insurance coverage. o P says he only agreed to pay insurance after he bought the barns and that when he rented the barns in 1988, D was supposed to pay the insurance.

(P selling the barns) 1989, P decided to sells the barns, placed an ad for 5 roanoke barns, got several calls. o P received a check of $500 on Oct. 22, 1989 as a down payment from Mr. Mohorn for 2 of the barns after quoting they were $8,000 each. o Another buyer, Mr. Stainback said he wanted to take 2 barns and that another person Mr. Elliot would take one. Stainback wrote a check for $1000 dated Oct. 25, 1989, as a deposit for the 3 barns. o Essentially got 3 down payments from 3 different purchasers for the 5 barns.

(P gave the check to the barn, informed D that he was selling the barn, then D comes back and says no go Ive already sold them, and to the same people that D was negotiating with) Then P received a call from Mrs. Hart and said let me honest, I want to sell the barns and D said its cool. o On Oct. 22 or 23, 1989, P delivered a check in person for the 1st $5,000 to Ds. It was in the form of a personal check dated Oct. 23, 1989, and on it was written that the check was for payment of the 5 barns. P said that a receipt was unnecessary and that the check would be the receipt. Next night after P gave the check, Mrs. Hart called him and said she didnt want to sell him the barns and that she had already sold them to somebody else. P received a letter dated Oct. 26, 1989 with the check inside. D tore up the check badly, tearing off the Ps name, her name, and the for line part that said the check was for the 5 barns. P pieced back the check together so that his signature and the $5,000 was visible. He later found out that D had sold the barns to the same people P had agreed to sell them to.

(testimony of others that P did in fact purchase the barn and that he was trying to sell the barns) Testimony from others that P had bought the barns for $5,000 a year, that he was going to sell them and that he had run an ad in the paper, and a testimony from an auctioneer that testified that P approached him to sell the barns. o The auctioneer received a $41,000 check for the 5 barns and held it in escrow until he could inform P. But P told the auctioneer that he thought he had them sold and that now the D was backing out and that he couldnt sell the barns until he got things straightened out.

D moved for a directed verdict but was denied. o Directed verdict is when the Judge tells the jury to tell the jury which verdict to come out with b/c no reasonable jury could reach a decision to the contrary. (Ds side of the story) Ds presented evidence showing that P did agree to pay Mr. Hart $20,000 for 5 barns in 4 year installments. o However, D said that P later called Mr. Hart and wished to make an arrangement where P would secure a loan and pay for the barns all at once. o But loan was not approved, and then P contacted Mr. Hart and wanted to know if he could still do the $5,000. o When Mrs. Hart told her husband that P had come over and brought the rent check to entice them for the previous agreement, Mr. Hart told her that it wasnt enough considering that there had been a huge acreage increase in the tobacco poundage and so he told Mrs. Hart to call P and tell him that the deal was off. His wife then tore up the check and mailed it to P.

PROCEDURE: Harts (Ds) appeal from the trial courts denial of their motions for directed verdict and judgment notwithstanding the verdict in this action brough by Buaffaloe (P) for breach of contract.

ISSUE: (i) Whether a personal check signed by P describing the property involved and containing an amount representing partial payment is sufficient to constitute a writing under the SOF? o (ii) whether there is substantial relevant evidence that P accepted the barns and D accepted Ps check, taking the contract out of the SOF. o b/c the barns are goods within the UCC and b/c the price for the barns in at least $500, the SOF applies. RULE: But law says that a check may constitute a writing sufficient to satisfy the SOF if: o (1) it contains a writing sufficient to indicate a contract of sale b/w the parties o (2) is signed by the party or his authorized agent against whom enforcement is sought o (3) states a quantity. Ex. Harper v. Battle check collected by D with her written endorsement on it for a sale of property was valid under SOF Burriss v. Starr note drawn up by D, signed by P, not sufficient to satisfy SOF b/c it did not obligate D to perform. To qualify partial performance under SOF, the seller must deliver the goods and have them accepted by the buyer. o the acceptance must be voluntary and unconditional and may be inferred from the buyers conduct in taking physical possession of the goods or some part of them. o It also explains that the buyer is required to deliver something that is accepted by the seller as such performance. (part payment may be made by money or check accepted by the buyer). UCC 2-201 on Part Performance - Partial performance as a substitute for the required memorandum can validate the contract only for the goods which have been accepted or for which payment has been made and accepted.

o Receipt and acceptance either of goods or of the price constitutes an unambiguous overt admission by both parties that a contract actually exists. If the court can make a just apportionment, therefore, the agreed price of any goods actually delivered can be recovered without a writing or, if the price has been paid, the seller can be forced to deliver an apportionable part of the goods. The overt actions of the parties make admissible evidence of the other terms of the contract necessary to a just apportionment. o Party payment can be made by check or money, and accepted by seller. If the agreed price consists of goods and services, then they must also have been delivered. o If a party receives a payment that gets rid of the requirement that the contract needs to be in contract. If both admit to it, its an obvious showing that there was a contract. Part payment HOLDING: TC did not make any errors in denying the directed verdict or the judgment notwithstanding the verdict. REASONING: o TC answered 5 questions (holding) judgment awarded $21,000 to P. D filed a judgment notwithstanding the verdict, and was denied.: (1) was there a contract b/w the P and the D? YES o (2) If so, did P accept the tobacco barns under the terms of the contract? YES o (3) If there was a contract, did D accept a payment for the tobacco barns under the terms of the contract? YES o (4) If there was a contract, did D breach the contract? YES o (5) Was there a rental contract for the tobacco barns for the year 1989 b/w the P and the D?

NO

D argues that the check didnt satisfy the SOF b/c it wasnt negotiated or signed by the D, the signature didnt appear on the check. o But law says that a check may constitute a writing sufficient to satisfy the SOF if: (1) it contains a writing sufficient to indicate a contract of sale b/w the parties (2) is signed by the party or his authorized agent against whom enforcement is sought (3) states a quantity. Ex. Harper v. Battle check collected by D with her written endorsement on it for a sale of property was valid under SOF Burriss v. Starr note drawn up by D, signed by P, not sufficient to satisfy SOF b/c it did not obligate D to perform. Court says that the check is not sufficient to satisfy SOF b/c Ds, the parties whom enforcement is sought, did not endorse the check and their handwriting doesnt appear anywhere on the check. Furthermore, the name of Mr. Hart is totally absent from the check. Court says b/c of the requirement of SOF that the writing be signed by the party against whom enforcement is sought is absent from the check, the alleged oral contract b/w P and D is unenforceable under SOF.

but just b/c the check is not endorsed by D doesnt mean its all over. There are exceptions to the rule. One exception that the court endorses being where there has been a partial performance. Here, P gave a $5,000 check that the court held was accepted by D, and

D gave the barns to D who voluntarily accepted by definition b/c he was in possession of the barns at the time. And even though there was no written instrument to qualify under the SOF for sale of goods b/c the check was not endorsed, that alone cannot establish that there was no contract when there is an exception to the rule by UCC 2-201 3(b) which says that if the parties admit in court that there was an agreement for sale of goods, and it is established, even w/o the writing or signature, the contract is now enforceable. Both parties here admitted in court that there was a transaction established and thus there was an enforceable contract. o this is kinda like the clear and convincing evidence of Rest.2d 139 on promissory estoppel in the Alaska case. Even though nothing is in writing, if you can show with clear and convincing evidence that there was a contract, then its valid. Ds further argue that (1) the part performance exception in SOF does not apply b/c there was no overt action by the P, purported buyer, in fact no change from the rental period and therefore no basis for finding a part performance. o (2) That there was no overt action of the Ds in giving up possession of the barns o (3) the delivery of the check by the P did not count as partial payment (performance) of the contract b/c it was never accepted legally by the Ds (cashed in). COURT DISAGREES with these points. o To qualify partial performance under SOF, the seller must deliver the goods and have them accepted by the buyer. the acceptance must be voluntary and unconditional and may be inferred from the buyers conduct in taking physical possession of the goods or some part of them. It also explains that the buyer is required to deliver something that is accepted by the seller as such performance. (part payment may be made by money or check accepted by the buyer).

D is saying that we never delivered the goods or took no action that makes it look obvious that we did so.

o Court says that the evidence establishes that (1) P told several people about purchasing the barn; (2) reimbursed Ds for insurance on the barns; (3) paid for improvements; (4) took possession; (5) enlisted the aid of an auctioneer and the paper to sell the barns; (6) received deposits from 3 buyers on the barns. P was in possession of the barns after the rental agreement was made in 1988, and also by 1989 when they made the agreement on the sale of the barn. Additionally, P took obvert actions that prove that he was in possession of the goods. He placed ads of selling the property in the paper, he contacted an auctioneer, he got downpayments, and he was in possession. All proving that there was partial performance. o (7) lastly, P delivered a check for $5,000 on Oct. 22, 1989, and the check was returned until 4 days later Oct. 26, 1989, meaning that the 3 days the D had the check counted as having received the check as payment. Court says that this evidence is substantial relevant evidence that a reasonable person would accept as adequate to support the conclusions reach by the jury that there was a contract b/w the P and the Ds, that P accepted the tobacco barns under the terms of the contract, and that D accepted payment for the tobacco barns under the terms of the contract. Could you argue that P relied on Ds promise? The case is not that strong b/c, the only things that cant be returned is the repairs to the house. But for the down payments, he can always return the money to the buyers, and since they were only down payments and not the full amount for the barns, its not so unjust to tell those purchasers that they cannot get the barn anymore because its just a security deposit. And for the escrow, you could just have the auctioneer who has the money just return it to the purchaser.

o Counterargument is that those people who put the down payment may have relied themselves on getting the barns, and additionally that they were promised the barns and so they too have a case of promissory estoppel. Its unjust that they dont receive the barns when they were promised, had they been other buyers that the D didnt also negotiate with. NOTES & QUESTIONS 3-5, 7 (3) Partial Performance In allowing the enforcement on the basis of paymentmade and accepted or goodswhich have been received and accepted, the Code might appear simply to be repeating the original statutes provision regarding partial performance of a sale of goods contract. Courts have generally taken the view that where the asserted contract is for one unit of the goods in question, even a payment of only part of the price will be sufficient under SOF to validate the entire contract (b/c the goods cannot be apportioned) UCC 2201(3)(c). o Ex. $500 enough for enforcement of a Corvette o Ex. $250,000 enough to enforce contract for a jet of $9 mil. (4) The admissions exception it was held back then that D admitting that there was an agreement didnt allow him to bring up the SOF. But now its not so, they can bring it up even if they have admitted orally to an agreement. WHY? b/c the admissions are merely oral and are not signed. Its not in writing so technically its not a contract. And dont wanna strip the D from his statutory right based on a voluntary admission. Question reaised under UCC 2-201(3)(b) is what constitutes an admission? o If the D denies that he made a contract with the P but admits facts that in the courts view establish that such a contract was made, the SOF defense is lost.

By the facts of the case, you can establish that there was a contract even if D testifies that he never orally said there was one. (5) The special manufacture exception Section 2-201(3)(a) establishes under an exception to the statute of frauds for specially manufactured goods. Under this subsection the goods must be specially manufactured for the buyer and not suitable for sale to others in the ordinary course of the sellers business. o Ex. Agreement for sale of 8000 shipping containers for all terrain vehicles manufactured by D for export to SE Asia enforceable under exception since containers were made pursuant to Ds specifications and were not suitable for sale to others. (7) Promissory Estoppel May courts accept Restatement 2d section 139, the principle of promissory estoppel, to justify enforcement of an oral contract despite the one-year clause of the SOF. Suppose an oral agreement subject to UCC 2-201 has not been memorialized (even by a Ps confirmation) but has been substantially relied on by the P perhaps by performance or preparation for performance, or in other ways. Should the principle of Rest.2d 139 be applicable? o Majority views that promissory estoppel can operate as an exception to 2-201 by virtue of 1-103. o However a substantial minority of decisions have concluded that the exceptions listed in 2-201 displace any CL exceptions, including estoppel.

8/30/2011 12:18:00 PM WEEK 11 READINGS PP. 350 -70 N+Q 1,3 after Joyner; 2,6 after Frigaliment PRINCIPLES OF INTERPRETATION Modern objective approach to interpreting contracts: In interpreting a contract, a court should answer 2 questions: o (1) Whose meaning controls the interpretation of the contract? o (2) what was that partys meaning? Rest.2d 200 follows this view: o 201(1) if both parties do in fact attach the same meaning to a provision, that meaning will govern. Thus the mutual understanding of the parties controls, even if it is different from the interpretation that would be given to the contract by a reasonable person. o 201(2) If the parties attach different meanings to their contractual language, the agreement is to be interpreted in accordance with the meaning of one party if the other party either knew or had reason to know of the meaning attached by the former. o 201(2)(b) - So the crucial issue in interpreting a contract is whether one party knew (or had reason to know) of the meaning attached to the contract by the other. If so, the party having knowledge or reason to know is bound by the meaning of the other. o What if the court should conclude that the parties did indeed attach different meanings to a material term of the contract, but neither party knew or had reason to know the meaning of the other? Then Raffles controls. No contract exists therefore b/c of the absence of mutual assent.

Joyner v. Adams FACTS: This is a suit brought about rent under a term of lease. P owns property and to develop her property into an office park, she and her husband contracted with Brown Investment Co.

Brown agreed to lease the property under the Base Lease from P at an annual rent, increased each year to correspond with the increase in the Wholesale Price Index Parties contemplated that Brown would remove all existing buildings, regrade the property, prepare a land plan and subdivide the areas into individual lots. o When each lot was subdivided, the lease called for the execution of individual Lot Leases to take the place of the Base Lease o Due to financial difficulties, the lease was amended to D Adams as the lessee/developer. o The amendment also suspended the annual rent increases. o Instead, D agreed to pay a fixed rate until Sept. 30 1980 at which time he was obligated to have subdivided all of the undeveloped land. If D failed to comply, the amendment required him to pay, retroactively, the amount of rent which would have been due under the terms of the Base Lease. At Sept. 30, 1980, D had executed separate lot leases and had built buildings on all lots except one. D however subdivided the remaining lot, graded it, installed water and sewer lines on it, and built all planned roads and driveways leading to the lot. But a building was not built on the lot and a Lot Lease was not executed until late 1982. P then filed this action one year later claiming that D failed to comply with the requirements of the lease to develop the property and seeking to recover the difference b/w the actual, fixed rent paid by D and the rent computed under the terms of the Base Lease.

PROCEDURE: P was awarded a summary judgment and then the court reversed, holding that the provision of the 1975 amendment relating to the retroactive rent escalation was ambiguous. Case was remanded. Then case went to TC and found that there was no meeting of the minds and concluded that although the parties had different

intentions, the ambiguity should be resolved against D, and awarded P $93,000 D appeals

ISSUE: What is the meaning of the escalation clause? Whose meaning controls?

RULE: Where the parties have attributed different meanings to a term within a contract, there is no meeting of the minds on that provision and a court will not enforce either partys meaning. Where one party knows or has reason to know what the other party means by certain language an the other party does not know or have reason to know of the meaning attached to the disputed language by the 1st party, the court will enforce the contract in accordance with the innocent partys meaning.

HOLDING: If on remand, the TC finds that D knew or had reason to know what meaning P attached to the disputed language and that P did not know or have reason to know of the meaning attached to the disputed language by D, the TC should conclude that there is a contract as to the Ps meaning. Otherwise, Ps claim does not prevail.

REASONING: Both parties argue that the TC erred in concluding that there was no meeting of the minds on the rent escalation provision. However the court says that TCs findings of fact are conclusive if supported by competent evidence, and says there is evidence to support that finding. Lower courts interpretation: From the evidence, it shows that the P intended the provision in question to require D at least to have begun construction of all buildings on the lot. o D argues that when read in conjunction with the terms of the Base Lease, his interpretation is the only reasonable interpretation of the rent escalation.

This argument was reject in TC. Said that the language was ambiguous and susceptible to more than 1 reasonable meaning. o Contrary to Ps contention, there is also evidence that D attributed a different meaning to the disputed provision. The evidence indisputably shows that both parties intended the rent escalation clause to require D to develop all the property by Sept. 30, 1980. Ds evidence showed that a lot is considered developed when water and sewer lines are installed and the lot is otherwise ready for the construction of a building. D says he also an experienced real estate developer and that P had personal experience in real estate business, and so that what P did supports the TCs finding that D intended the provision to require at most what P actually accomplished by that date. P however argues that her meaning was the only one intended by the parties especially when considering that they entered into the lease as well as evidence of the conduct of the parties after the lease was executed. Court says that the evidence relied on by P can support more than one inference and the evidence does not show what effect the parties intended the language in the rent escalation provision to have. General Rule: Where the parties have attributed different meanings to a term within a contract, there is no meeting of the minds on that provision and a court will not enforce either partys meaning. o Having found divergent meanings, the court says that TC did not err in concluding there was no meeting of the minds on the rent escalation. o Where one party knows or has reason to know what the other party means by certain language an the other party does not

know or have reason to know of the meaning attached to the disputed language by the 1st party, the court will enforce the contract in accordance with the innocent partys meaning. Therefore the court says that TC erred in awarding judgment for P based on the rule that ambiguity in contract terms must be construed most strongly against the party which drafted the contract. (rule of construction rather than interpretation) There is policy reasons for this rules application. The party who chose the word is more likely to have provided more carefully for the protection of his own interests, is more likely to have had reason to know of uncertainties, and may have even left the meaning deliberately obscure. Therefore the rule was incorrectly applied. Says before this rule of contruction can be applied, the record must clearly show that the form of expression in words was actually chosen by one party rather than by the other. P argues that he and his firm had nothing to do with the writing of the provision. Therefore it was the D or his agent who wrote it. But even then, the court says that it does not establish that D can be charged with having chosen its language. But it is unclear says the judge which party drafted the contract. o If the D had in fact wrote the provision, and it is established, then yes the award to P is right b/c according to the rule, you favor the innocent party or rule against the one who wrote the provision, for policy reasons.

o This rule is usually invoked where there is an adhesion contract or where one party is in a stronger bargaining position than the other, although not limited to these situations. But when the parties are at arms length and equally sophisticated, court believes you shouldnt apply this rule. o Both parties are experience in real estate, they both bargained from equal positions of power, no record shows that it was the D rather than P who drafted the provision, therefore the TC erred in using the rule to award judgment to P. If on remand, the TC finds that D knew or had reason to know what meaning P attached to the disputed language and that P did not know or have reason to know of the meaning attached to the disputed language by D, the TC should conclude that there is a contract as to the Ps meaning. Otherwise, Ps claim does not prevail. NOTES & QUESTIONS 1 + 3 (1) Whose meaning prevails The court declares that P can prevail only if the TC concludes that the D knew or at least had reason to know of the meaning she intended while she did not know (or have reason to know) of the meaning D intended. (3) Construction against Drafter The TCs second decision in Joyner, the TC broke the tie from the finding that there was no meeting of the minds by invoking the principle that a contractual ambiguity should generally be resolved against the party who drafted the language in question (sometimes known as the maxim of interpretation contra proferentem) as the court says, this rule is usually used when the one is in a stronger bargaining position, but in this case both were equal. o Western Sling & Cable Co v. Hamilton - Where both parties to a contract are sophisticated business persons advised by

counsel and the contract is a product of negotiations at arms length b/w the partiesno reason to automatically construe ambiguities in the contract against the drafter Frigaliment Importing Co v. BNS Intl Sales Corp Facts: The definition of chicken is at issue here, with the P arguing for a narrower definition of chicken and D arguing for a broader one. This is for a breach of the warranty that goods sold shall correspond to the description. On May 2, 1957, D confirmed the sale to P of chicken with weights and prices included. The second contract, also dated May 2, was identical except that only 50,000 lbs of the heavier chicken were called for, the price of the smaller bird was $37 per 100lbs and shipment scheduled for May 30. When the initial shipment arrived, P found that the 2 -3 lbs. birds were not young chicken suitable for broiling and frying but stewing chicken or fowl. Even the cartons and bags indicated that. Shipment under the 2d contract was made and the birds again being stewing chicken. Lawsuit! ISSUE: Whose definition of chicken controls? PROCEDURE: RULE: principle: when one of the parties is not a member of the trade or other circle, his acceptance of the standard must be made to appear by proving either that he had actual knowledge of the usage or that the usage is so generally known in the community that his actual individual knowledge of it may be inferred. HOLDING: Ps definition of chicken does not prevail, case dismissed with costs. REASONING: Since the word chicken alone is ambiguous, the court turns first to see whether the contract itself offers any aid to ints interpretation.

P says the 1 -2lbs. birds necessarily had to be young chicken since the older birds do not come in that size, hence the 2 -3 lbs. birds must likewise be young. o Court says this is unpersuasive a contract for apples of 2 different sizes could be filled with different kinds of apples even though only one species come in both sizes. o Ps second argument is that although the exchanges in writing were predominantly in German, P used the English word chicken because it understood chicken meant young chicken whereas the German word Huhn included both broilers and stewing chicken and that D, whose officers were thoroughly conversant with German should have realized this. But court says the force of the argument is weakened by Ds testimony that Ps negotiator when asked what kind of chicken he wanted said any kinds of chickens. Then he asked in German, whether the cable meant Huhn and received a positive response. o Ps next argument is that there was a definite trade usage that chicken meant young chicken. However D argues that he got in the poultry trade in 1957 and invokes the principle that when one of the parties is not a member of the trade or other circle, his acceptance of the standard must be made to appear by proving either that he had actual knowledge of the usage or that the usage is so generally known in the community that his actual individual knowledge of it may be inferred. Court says there was no proof of actual knowledge of the alleged usage. To meet the Ps argument, P must show that the usage is of so long continuance, so well established, so notorious, so universal and so reasonable in itself, as that the presumption is violent that the parties contracted with reference to it.

P brought witnesses to support his argument that chicken meant broilers and fryers but one or two of them in their transactions would also be specific as to what chicken they wanted, somewhat weakening his arugment.

Then D brought witnesses, who all argued that chicken was broad and encompassed more than just broilers and fryers and that you had to be specific when ordering. o To further his argument, D uses the Department of Agricultures Grading and Inspection of Poultry and Edible Products Thereofs definition of chicken which includes more than just broilers and fryers. Additionally the contract incorporated these regulations by reference. P however argues that the contract provision related simply to grade and Government inspection and did not incorporate the Govt definition of chicken, and also that the definition in the Regulations is ignored in the trade. However court finds this argument weak from the testimony by Ds experts and the fact that the reference to Govt grading was already in Ps initial cable to Stovicek. o Another strong point by D is that it was impossible at that time to obtain broilers and fryers at the $.33 price for the 2 -3 lbs birds when the market price was $.35 and $.37. P should have known this since hes in the business, and to argue that the $.33 is closer to the prevailing price of $.35 for broilers than to the $.30 for fowl is insufficient, b/c the difference b/w the 2 are the same. Also, P should have known that D wouldnt give P these prices and incur a loss. Thats not smart business. Finally D argues that he relied on Ps conduct after the first shipment had been received. o On May 28 P sent 2 cables complaining that the larger birds in the 1st shipment were fowl.

Then D responded refusing to recognize Ps objection and saying we have your 2d shipment ready and need an immediate answer of whether or not you will accept. Ten P replied and D argues that if P was sincere in thinking it was entitled to young chickens, P would not have allowed the 2d shipment under the 2d contract to go forward, since the distinction b/w broilers and chickens drawn in Ds cablegram made it clear that the larger birds were not broilers. P argues that the cables show that P was insisting on delivery of young chickens and that D shipped older one at his peril.

Court finds that it is clear that D believed it would comply with the contracts by delivering stewing chicken in the 2 -3 lbs. size. o Ds subjective intent is persuasive b/c it coincides with an objective meaning of chicken. The meaning of chicken coincided with the definition in the Department of Agriculture Regulations to which the contract made an obvious reference, and abided to usage in the trade, with realities of the market, and with what Ps experts said. o P argues that Ps own subjective intent was obvious to obtain broilers and fryers, the only evidence against this is the market prices and this was not sufficient brought home by P arguing that he was paying for broilers not fowls. o Court says in any event P had the burden of showing that chicken was used in the narrower sense and that he didnt succeed.

NOTES & QUESTIONS 2,6 (2) Ambiguity and plain meaning Most courts today reject the plain meaning rule (extrinsic evidence is admissible only f the court concludes that the contract is ambiguous). Most courts agree that a word can have multiple meanings and extrinsic evidence should be admitted to decide the meaning of a word in a contract.

However, some courts still abide to plain meaning rule.

WEEK 10 READINGS PP. 382-94, N&Q 2-3 THE PAROL EVIDENCE RULE This rule is usually thought of as involving the admissibility of evidence of oral agreements, but it may apply as well to various types of written evidence. This is regarding which facts, oral or written, may be introduced when disputing a contract claim into a court to be controlling. Gist of the parol evidence rule: When the parties to a contract have mutually agreed to incorporate (or integrate) a final version of their entire agreement in a writing, neither party will be permitted to contradict or supplement that written agreement with extrinsic evidence (written or oral) of prior agreements or negotiations b/w them. When the writing is intended to be final only with respect to a part of their agreement, the writing may not be contradicted, but it may be supplemented by such extrinsic evidence. o The basic function of the rule is to exclude evidence evidence that would otherwise be admissible as rationally probative of some fact at issue. o If the parol evidence rule applies at all in a given situation, it has the effect of preventing one party from introducing into court extrinsic or collateral evidence of matters not contained in the written agreement b/w the parties, where that evidence is offered to supplement or contradict the written agreement. o If the parol evidence rule doesnt apply (either b/c the parties have not executed such a written agreement or b/c the offered evidence comes within some exception to that rule), then admission of the evidence will turn on the body of rules that collectively make up the law of evidence. Thompson v. Libby Facts: P had a bunch of logs he cut and agreed with D on a terms of sale and purchase of the logs referred to and executed by an agreement.

ISSUE: Whether the oral testimony presented by D on the warranty of the quality of logs was admissible considering there was a written agreement on contract of sale? PROCEDURE: TC admitted parol evidence, appeals says it was wrong and remands. RULE: Where the parties have deliberately put their engagements into writing in such terms as to import a legal obligation, w/o any uncertainty as to the object or extent of such engagement, it is conclusively presumed that the whole engagement of the parties, and the manner and extent of their undertaking was reduced to writing. However this rule presupposes that the parties intended to have the terms of their complete agreement embraced in the writing, and hence it does not apply where the writing is incomplete on its face and does not purport to contain the whole agreement, as in the case of mere bills of parcels, and the like. When it has been established that the written agreement is a complete expression of the whole agreement, then parol evidence cannot be admitted to add another term to the agreement. It also refuses to add parol where the writing is silent.

HOLDING: Not admissible. REASONING: General Rule: Where the parties have deliberately put their engagements into writing in such terms as to import a legal obligation, w/o any uncertainty as to the object or extent of such engagement, it is conclusively presumed that the whole engagement of the parties, and the manner and extent of their undertaking was reduced to writing. However this rule presupposes that the parties intended to have the terms of their complete agreement embraced in the writing, and hence it does not apply where the writing is incomplete on its face and does not purport to contain the whole agreement, as in the case of mere bills of parcels, and the like.

When it has been established that the written agreement is a complete expression of the whole agreement, then parol evidence cannot be admitted to add another term to the agreement. It also refuses to add parol where the writing is silent. Court says that the written agreement in this case seems on its face to be a complete expression of the whole agreement of the parties as to the sale and purchase of the logs, executed by both parties. o Nothing to indicate that it was an incomplete agreement. o No new term may be added as part of the contract of sale by parol. Court discusses the argument that warranty is parol evidence that should be admitted on the grounds that warranty is collateral to the contract of sale and that the rule does not exclude parol evidence of matters collateral to the subject of the written agreement. o Says this is a misunderstanding of the term collateral as to the rule. o Gives examples of what are collateral to a contract: for leases covenants for repairs, improvements, payment of taxes etc. In a sense collateral to the demise of the premises. But the court says that parol evidence of these would not be admissible to add to the terms of a written lease. Court says that a warranty is just another term of a contract and to be able to admit it (parol evidence in general) the promise must relate to a subject distinct from that to which the writing relates. The warranty has to do with the writing, and so

cannot be admitted. Rescission unwinding of a contract, unmaking of a contract b/w parties. So is the court saying that to be able to admit parol evidence when there is already a written agreement considered to be a whole, you can only admit it when it has nothing to do with the subject matter of the agreement?

NOTES & QUESTIONS 2,3 (2) Meaning of Integration Complete integration a writing that is intended to be a final and exclusive expression of he agreement of the parties. Rest.2d 228 Partial integration a writing that is intended to be final but not complete b/c it deals with some but not all aspects of a transaction b/w the parties. Rest.2d 210 The correct application of the parol evidence rule thus requires that the court first determine whether the writing in question is intended to be a final expression of the parties agreement and, if so, whether it is a complete or partial statement of the contract terms. (3) Determining Integration Substantial number of courts abide by the 4 corners rule where the question of integration must be determined from the 4 corners of the writing w/o resort to extrinsic evidence. o Also if there is a merger clause stating that the writing is intended to be final and complete then the document is said to be a complete integration. Many courts, however, have adopted an alternative approach, looking beyond the contents of the writing. o Rest.2d 210(b) a writing cannot of itself prove its own completeness, and wide latitude must be allowed for inquiry into circumstances bearing on the intention of the parties. A finding of integration should always depend on the actual intent of the parties, and a court should consider evidence of all the facts and circumstances surrounding the execution of the contract, as well as the writing, in uncovering the intent. In this approach, a merger clause will not be solely determinative of the issue of integration. According to this approach, the Thompson case should have allowed a an in camera to decide if the evidence should have been admitted.

Exceptions to the Parol Rule:

The parol rule does not apply to evidence offered to explain the meaning of the agreement If an agreement is partial, the writing cannot be contradicted by extrinsic evidence. But, it may be supplemented by additional consistent terms. But if the writing is a complete integration, then supplemental terms may not even be admitted. However, regardless of th writing being partial or complete, a written agreement may, as the Thompson court suggested, always be explained by extrinsic evidence. The parol evidence rule does not apply to agreements, whether oral or written, made after the execution of the writing. Ex. evidence of subsequent oral modification of Ps written employment contract not barred by parol evidence rule Suppose after signing the agreement, Thompson and Libby had orally agreed that payment for the logs would be made partly in cash and partly by promissory notes. Parol evidence rule would not bar testimony as to this later oral agreement. The parol evidence rule does not apply to evidence offered to show that effectiveness of the agreement was subject to an oral condition precedent. Ex. despite execution of a formal agreement for purchase of pizza distributorship, evidence that agreement was orally agreed to be conditional on approval by buyers family within 2 weeks was admissible, precluding summary judgment in favor of seller If libby had told Thompson when the contract was signed that the agreement was contingent upon the local banks approval of a loan for which Libby had applied, and about which he would hear within a week, and if the bank denied the loan, the parol evidence rule would nto bar evidence of Libbys oral statement, even though the writing was absolute on its face, b/c the evidence would establish an oral condition to the effectiveness of the agreement. The parol evidence rule does not apply to evidence offered to show that the agreement is invalid for any reason, such as fraud, duress, undue influence, incapacity, mistake or illegality.

Ex. suppose Libby and Thompson had netered into their contract believing that 20,000 logs had been cut when really only 5000 had been. In that case, evidence of their discussions about the quantity to be sold should be admissible as bearing on the possible defense of mistake of fact. The parol evidence rule doesnot apply to evidence that is offered to establish a right to an equitable remedy such as reformation of the contract If one party can establish that a part of the agreement was inadvertently omitted from the writing due to some mistake (perhaps the error of a secretary or computer printer), that party may seek judicial reformation of the agreement a court order declaring that the mistakenly omitted provision will be treated in law as part of the agreement. o But a writing is reformed only if it is shown by clear and convincing evidence that the parties really did intend their written agreement to contain the term in question. The parol evidence rule does not apply to evidence introduced to establish a collateral agreement b/w the parties

8/30/2011 12:18:00 PM Week 12 readings pp. 394-410; 437-48 N+Q 3-5 following Wood; 1,5 following Leibel Taylor v. State Farm Mutual Automobile Insurance Co Facts: P petitions to review a decision reversing a jury verdict in his favor in a bad faith claim against State Farm Insurance. He argues that the court of appeals erroneously held that his bad faith claim was barred by a release he signed in 1981. Bad faith claim arises out of an accident that occurred 16 years ago. Accident involved 3 vehicles where all 3 drivers/passengers of the car were injured. Taylor was represented by 2 attorneys. Ring, her huasband, and Rivers filed actions against Taylor and Wistrom (the other driver). Taylor filed a counterclaim against Ring for Taylors damages. Wistrom agreed with the Ring/Rivers to a stipulated judgment, so that left Taylor as the only part vulnerable to the Ring/Rivers claims. At trial, the Rings and Rivers obtained combined verdicts against Taylor for approx $2.5 million in excess of his insurance policy limits. Rings eventually settled with State Farm, but Taylor sued State Farm for bad faith seeking damages for the excess Rivers judgment, claiming that State Farm improperly failed to settle the Rivers matter within policy limits. o State Farm moved for summary judgment, asserting that Taylor relinquished his bad faith claim when, in 1981, he signed a release drafted by attorney Randall in exchange for State Farms payment of $15,000 in uninsured motorist benefits. Taylor also moved for partial summary judgment seeking a ruling that the release did not preclude his bad faith claim. The juge denied both motions, finding that the release was ambiguous and that therefore parol evidence was admissible at trial to aid in interpreting the release.

o A second judge also denied State Farms motion for directed verdict based on the release. o The jury returned a verdict in favor of Taylor of $2.1 mil and $300,000 in attorney fees. Appeals reversed, holding that the release agreement was not ambiguous and therefore the judge erred by admitting parol evidence to vary its terms. o Court said that based on the agreements four corners, the court held that it clearly released all policy contract rights, claims, and causes of action that Taylor has or may have against State Farm. o Since the court felt that the release should have been strictly enforced, there was no basis for Taylors bad faith claim. The release form: B/c Wistrom was uninsured, Randall (Taylors personal attorney) believed that Taylor might be entitled to recover for his injuries under the uninsured motorist provisions of Taylors policy. o State Farm, however, disputes Taylors entitlement to these benefits. In any event, Randall prepared a release as part of the transaction. o It is this release that is at issue.

Procedure: TC ruled in favor Taylor; appeals reversed. Issue: Did TC properly admit extrinsic evidence to interpret the release? Rule: When two parties have made a contract and have expressed it in a 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 writing. Antecedent understandings and negotiations may be admissible, however, for purposes other than varying or contradicting a final agreement.

The Arizona court adopts the Corbin view, and has held that a court may consider surrounding circumstances, including negotiation, prior understandings, and subsequent conduct, but have not elaborated much further. o According to Corbin, the proper analysis has 2 steps: (1) the court considers the evidence that is alleged to determine the extent of integration, illuminate the meaning of the contract language, or demonstrate the parties intent. The courts function at this stage is to eliminate the evidence that has no probative value in determining the parties intent. (2) Second step involves finalizing the courts understanding of the contract. Here the parol evidence rule applies and precludes admission of the extrinsic evidence that would vary or contradict the meanings of the written words. When interpreting a contract, it is fundamental that a court attempt to ascertain and give effect to the intention of the parties at the time of the contract was made if at all possible. If, for ex, parties use language that is mutually intended to have a special meaning, and that meaning is proved by credible evidence, a court is obligated to enforce the agreement according to the parties intent, even if the language ordinarily might mean something different.

Holding: case remanded to court of appeals to resolve the other issues, but the ruling in favor of Taylor stands. Reasoning: The court asks was the release so clear that the trial judge erred in admitting extrinsic evidence to interpret it?

P is arguing that the release did not preclude did not preclude all his bad faith claim while the insurer is claiming that it did. o The court must decide whether the release language is reasonably susceptible to Taylors proffered interpretation in light of the evidence relevant to the parties intent. If it is, admission of extrinsic evidence supporting his interpretation did not violate the parol evidence rule. (1) Was the release language reasonably susceptible to differing interpretations, including that the bad faith claim was not released despite the contractual qualify of such a claim? It addresses the court of appeals holding that Taylors bad faith claim was only contractual and that the trial court erred by finding that the release language, which indisputably covered contractual matters, was unclear, requiring extrinsic evidence. Court says that the precise legal character of a bad faith claim may depend on the context of the discussionand b/c the legal character of bad faith was and is not universally established, the release reasonably could be interpreted as Taylor asserts. Thus TC was right. (2) Was there extrinsic evidence to support the conclusion that the release language was reasonably susceptible to Taylors interpretation? There was some evidence that Hofmann, on behalf of State Farm, directed that general relase language be used in the agreement without expressly mentioning bad faith. So the documents cryptic language supports this. Also, State Farm internally designated the $15,000 payment to Taylor as being for uninsured motorist coverage.

State Farms subsequent conduct may shed light on its understanding of what was covered by the agreement. So this too supports the idea that the release is reasonably susceptible to Taylors interpretation. The potential size of the bad faith claim also cannot be ignored. At the time the parties entered into the release agreement, a jury had already rendered verdicts against Taylor far exceeding his insurance policy limits. Thus the huge size of Taylors bad faith claim was obvious. It is reasonable that Taylor and his counsel would seek something more than just the payment of a potentially bona fide $15,000 UM claim to release a bad faith claim possibly worth millions. Finally, probably the most telling, is the fact that the parties used limiting language in the release. Court argues that it is reasonable to belive that if the parites had agreed to release the bad faith claim, they would not have drawn the release so narrowly confining it to contractual and subsequent matters, with no mention of tort claims or bad faith. Court says that State Farm must have known what language would effectively release it from Taylors potentional bad faith claim. o It can be inferred that sophisticated parties in the business of settling insurance claims, faced with the task of releasing a claim as large as Taylors would have used more broader language if that was their agreement.

o Thus it holds that the release language was not intended to release his bad faith claim. (3) Was the parol evidence for the jury? Whether the contract language is reasonably susceptible to more than one interpretation so that extrinsic evidence is admissible is for the court to decide. Either interpretations, by State Farm and by Taylor are both reasonable. Because of this, court says that it was properly submitted to the jury. Since the jury ruled in favor of Taylor, it will leave that ruling undisturbed.

SUPPLEMENTING THE AGREEMENT: IMPLIED TERMS, THE OBLIGATION OF GOOD FAITH, AND WARRANTIES Implied terms any term the court finds to be implicit in the parties words or conduct even though not literally expressed by them is an implied term. Implied term also refers to a term that the court does not find in the parties agreement, even as broadly viewed, but that the court holds should be implied by law made a part of that agreement by operation of the rules of law rather than by the agreement by of the parties themselves. Sometimes a term will be implied b/c a statute so provides; sometimes b/c common law precedents dictate, or b/c the court concludes that in the particular case its implication is appropriate.

Wood v. Lucy, Lady Duff-Gordon Facts: This is an appeal from a judgment which reversed an order of Special Term denying a motion by D for judgment in her favor. D is a creator of fashions. Manufacturers of dresses, millinery and like articles are glad to pay for a certificate of her approval. She is a fashion/trend-setter whenever her name is on a product, it becomes big in fashion.

D employed P to change this vogue into money. o He was to have the exclusive right, subject always to her approval, to place her indorsements on the designs of others. o He was also to have the exclusive right to place her own designs on sale, or to license others to market them. o In return, she was to have of all profits and revenues derived from any contracts he might make. o The exclusive right was to last at least one year from April 1, 1915 and thereafter from year to year unless terminated by notice of 90 days. o P says he kept the contract on his part, but that the D broke it. She placed her indorsement on fabrics, dresses, and millinery w/o his knowledge and withheld her profits. He sues for damages.

Issue: Was there an implication of promise b/w P and D making an enforceable contract? Rule: Holding: Reasoning: D argues that the agreement lacks the elements of a contract. She says that the P does not bind himself to anything. Its true that he does not promise in so many words that he will use reasonable efforts to place the Ds indorsements and market her designs, but the court thinks that such a promise is implied. o Court says a promise may be lacking, and yet the whole writing may be instinct with an obligation imperfectly expressed. Court says theres lot of evidence to show that there was an implied promise.

o D gave an exclusive privilege. She was to have no right for at least a year to place her own indorsements or market her own designs except through the P. o The acceptance of the exlucisve agency was an assumption of its duties. o Ps business is even one adapted to the placing of such indorsements as the said D has approved. o Additionally her sole compensation for the grant of an exclusive agency is to be of all profits resulting from Ps efforts. Unless he gave his efforts, she could never get anything. Without an implied promise, the transaction cannot have such business efficacy as both parties must have intended that at all events it should have. o Furthermore, the P goes on to promise that he will account monthly for all moneys received by him, and that he will take out all such patents and copyrights and trademarks as may in his judgment be necessary to protect the rights and articles affected by the agreement. Court says that it is true as the Appeals had said that if he was under no duty to try to market designs or to place certificates of indorsement, his promise to account for profits or take out copyrights would be valueless. But the promise has a value. It helps to enforce the conclusion that the P had some duties. His promise to pay the D of the profits and revenues resulting from the exclusive agency and to render accounts monthly, was a promise to use reasonable efforts to bring profits and revenues into existence. NOTES & QUESTIONS (3) When should a promise to use reasonable or best efforts be implied?

The Wood case is generally regarded as the genesis of the provision in UCC 2-306(2) that imposes a best efforts obligation in cases where the contract for sale calls for exclusive dealing. o In Wood, the D claimed that although their agreement obligated her to market her designs only through Wood, it left him apparently free to do nothing on her behalf, while at the same time representing whomever else he pleased. o Such an arrangement would have lacked business efficacy, b/c it would have effectively placed one party (Lucy) at the mercy of another. Therefore the court implied a duty on

Woods part to use reasonable efforts on Lucys behalf. (4) Assessing Best or Reasonable Efforts In Wood, Lady made a promise to P which she subsequently failed to perform. The potential barrier to enforcement of the exclusive arrangement inhered not in the lack of commitment by Lady Gordon but in the asserted failure of Wood to make any commitment in return. o Once the court concluded that P had made an implicit obligation, the court could proceed to enforcement of the Ds express commitment.

Leibel v. Raynor Manufacturing Co Facts: 2 parties entered into an oral agreement whereby appellant was to have an exclusive dealer-distributorship for appellees garage doors in a territory extending for a 50 mile radius from Lexington, Kentucky. The appellee agreed to sell and deliver to the appellant its garage doors, operators, and parts at the factory distributor price, and the appellant agreed to sell, install and service Ryanor products exclusively, thereby establishing a relationship of dealer-distributor and manufacturer-supplier. As a result of the agreement, appellant borrowed substantial sums of money in order to make certain capital expenditures, purchase an inventory, and to provide working capital for starting the business, including the rental of storage and office space, employment of personnel, and the purchase of a service truk, tools and equipment.

After 2 years of decreasing sales of Raynor products, appellee notified the appellant and said that as of that date their relationship was terminated. Appellant was notified that a new company had been established by the appellee as the new dealer-distributor for the area, and that the appellant would be required to order all future doors, operators and parts from the new dealer. Appellees motion for summary judgment was based on the ground that the agreement was for an indefinite duration, and that it could be terminated at will by either party. The appellant resisted the motion on the theory that he was entitled to reasonable notice of appellees intention to terminate the agreement.

Procedure: Circuit court granted the summary judgment for appellee. Appeals reversed. Issue: Was the notice given by manufacturer reasonable? Rule: Holding: No, not reasonable. Reversed and remanded. Reasoning: Appellant argued that he relied in part upon the provisions regarding sales in the UCC and specifically subsections (2) (3) of KRS 355.2-309. The TC concluded that the Code, as it applies to the sale of goods, was not intended to apply to the situation int his case. Secondly the court concluded that even if the UCC did apply, KRS (2) (3) means merely that actual notice of the termination must be given. o And since written notice had been given, the court concluded that the additional requirement of reasonable notification was unnecessary.

Finally the court concluded that if it required reasonable notification for termination of the agreement, it would be making a contract for the parties by stating a time for the duration of the contract. This court disagrees with the TC and holds that reasonable notification is required in order to terminate an on-going oral agreement for the sale of goods in a relationship of manufacturersupplier and dealer-distributor or franchisee. o So says that the summary judgment must be set aside and a determination must be made on the factual issue o whether or not the notification of termination given in this case was reasonable under the circumstances.

Appellant argues that the contract is enforceable under Art. 2 of the UCC. o The court must determine whether the transactions falls under Art. II of the UCC on goods and merchandise. A contract b/w an automobile manufacturer and an automobile dealer is a contract of sale since it is apparent that its over all purpose is to effect the sale of the automobiles manufactured by the manufacturer. When a manufacturer sells it product to the public through a local dealer, the transaction is a sale, and the application of the Code is not avoided by describing the relationship as a sales distribution plan. Also a dealership contract for the sale of automobile parts is a contract for the sale of goods, even though the contract declares that it is a personal service contract. Court says that this situation is for a sale of goods of the manufactuer-supplier.

o Court says that it is time to recognize that a distributorhsip agreement must be recognized as an agreement for the sale of goods and subject to the provisions of Art II of the UCC.

When sales are the primary essence of the distributorship agreement, the dealer is compelled to keep a large inventory on hand. If the distributorship is terminated w/o allowing the dealer sufficient time to sell his remaining inventory, substantial damages may result, even if the manufacturer agrees to repurchase the inventory. Thus reasonable notification should be the minimum amount of protection afforded to either party upon the termination of an ongoing sales agreement. When such reasonable notice is not given, a cause of action for damages may exist. Looking at the KRS (2) and (3), court concludes that reasonable notice is required, not just a written agreement dispensing with notification. Court says that when there is so much investment by one side, reasonable notice should be given which would allow one side enough time to find a substitute. Thus the court concludes that reasonable notice was not given, and reverses and remand to figure out the time.

8/30/2011 12:18:00 PM WEEK 13 PP. 448-61 N+Q 1,4 THE IMPLIED OBLIGATION OF GOOD FAITH UCC 1-304 (formerly 1-203) every contract or duty within its scope imposes an obligation of good faith in its performance or enforcement. Rest.2d 205 UCC 1-201(19) it definied good faith simply as honesty in fact, suggesting that at a minimum lying and other kinds of deception is regarded as bad faith conduct and proscribed. Article 2, 2-103(1)(b) also defined good faith at least where merchants are concerned, as requiring not merely honesty but also the observance of reasonable commercial standards of fair dealing in trade. Revisions to Articles 1 and 2 adopt the same definition which combines the elements of the 2 - Good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing. UCC thus generally apply to all parties (both merchants and nonmerchants) Not all jurisdictions adopt the expanded view and only apply hoesty in fact only to nonmerchants. If someone doesnt act in good faith, the party acting in good faith can expect to receive the gains that he had agreed to, and bad faith party cannot expect to receive any fruits of the contract. Good faith is a device for protecting the bargain that the parties themselves have made against later attempts by one side to undermine it. Seidenberg v. Summit Bank Facts: Ps owned two PA corporations which provided consultation, serves and sold health insurance benefit plans to employers. P sold their stocks in the 2 corporations to D in exchange for 49,500 shares of common stock of Bancorp Corp, the parent company of the D. As part of the deal, Ps remained executives of the brokerage firms and was placed in charge of the daily operations of any other employee benefits insurance business which might be acquired by Summit.

The terms they agreed to allowed Ps to work with D and give them access to the market resources of Summit to the extent that its lawful. Ps second complaint alleges all these things that D didnt perform fully on and how it cut their salary to receive a bonus which they were entitled to at the end of the year w/o the cut based on the growth of the brokerage firms and that there was an expectation of continued employment since the agreement contained a minimum of 5 years and provided also that in the absence of termination by Summit employment would continue until Ps turned 70. Ps argue that Summit got into the agreement on bad faith: o They never had intention to perform to begin with o Summit from the start never was committed to developing the business with Ps but simply wanted to acquire the business and seek out their own broker to run; o In 1999 they fired the Ps from their positions

Lower court denied Ps claim b/c it violated the parol evidence rule. Ps couldnt prove that the Ds acted in bad faith b/c there was nothing in writing to hold them to the terms. Instead they tried to prove bad faith based on an oral agreement, and that violates the parol evidence rule.

Issue: Did the Law Division judge misapprehend the nature of the cause of action and give an errorneous interpretation of the evolving implied covenant of good faith and fair dealing? Holding: Yes judge did err, reversed and remanded. Rule: all contracts mandate that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. (c) Good faith performance emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party.

 Reasoning: (a) Refers to Sons of Thunder case says that parties unequal bargaining power as one factor in finding a breach of the implied covenant of good faith and fair dealing. o Although here, the Ps were sophisticated businessmen and had the advice of an attorney when making the contract, it doesnt mean that there was equal bargaining power. (b) lower court said that the parol evidence rule was an insurmountable obstacle for Ps in trying to substantiate their claims based on oral agreements. o Since good faith dealings are implied in every contract which allows for a reasonable expectation, the parol evidence rule would make the opportunity to pursue such a claim extremely limited. o 3 ways the parol evidence rule does not affect the implied covenant of good faith and fair dealing: (1) the covenant permits the inclusion of terms and conditions which have not been expressly set forth in the written contract (2) covenant has been utilized to allow redress for the bad faith performance of an agreement even when the D has not breached any express term (3) the covenant has been held to permit inquiry into a partys exercise of discretion expressly granted by a contracts terms. 2 and 3 implicated in this case, however the court recognizes that the parol evidence rule does not allow that the implied covenant of good faith override an express term of the contract. But instead of overriding an express term, the implied covenant requires that a contracting party act in good faith when exercising either discretion in performing its contractual obligations or its right to terminateit may be found that a party

had breached the implied covenant even if the action complained of does not violate a pertinent express term. o Court says parol evidence doesnt apply here b/c the prohibition to alter or vary a written contract in parol evidence relates only to the creation of the contract. But b/c covenant of good faith and fair dealing is ipmled by operation of the law, parol evidence does not inhibit Ps claim. o Also to determine what is condiered a good faith performance, the court must consider the expectations of the parties and the purposes for which the contract was made. It would be difficult, if not impossible, to make that determination w/o considering evidence outside the written memorialization of the parties agreement. (c) Good faith performance emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party. o According to (2) of the covenant of good faith (when bad faith served as a pretext for the exercise of a contractual right to terminate), P alleges there was an expectation despite the express contractual right of Summit to terminate that the relationship would last until they reached retirement age. This contention would on its face fall within the type of implied covenant claim prohibiting a party from terminating a contractual relationship in bad faith notwithstanding the expressed right to do so. For (3) of the covenant rule the second complaint alleges that Summit used insufficient energy in discretionary areas (delaying marketing efforts, failing to pursue or create leads, etc). (d) The last element of a maintainable cause of action based upon the implied covenant of good faith is bad faith or ill motive. o An allegation of bad faith or unfair dealing should not be permitted to be advanced in the abstract and absent improper motive. The issue is whether the D acted in bad faith or

violated any commercially reasonable standard thereby depriving Ps of their right to make a reasonable profit. o The appropriate level of bad faith is difficult to define and may vary depending upon the nature of the alleged breach and the type of business engaged in by the parties, so must leave it up to the trier of the fact. Conclusion: Ps claim of breach of the implied covenant of good faith is not precluded merely b/c the parties possessed equal bargaining power, or b/c Ps were not financially vulnerable, or b/c they were assisted by highly intelligent counsel. Nor does the parol evidence rule apply in preventing the presentation of the claim that Summit failed to perform its contractual obligations in good faith or that the Ps had reasonable expectation of continued relationship. Lastly it finds Ps allegations of bad faith and ill motives are sufficient to survive dismissal. Notes & Questions (1) Applications of the good faith principle (1) a court may be persuaded that in order for the contract b/w the parties to have business efficacy, it is necessary to imply terms not expressly incorporated in the agreement. (2) The court will not imply any term that conflicts with the express terms of the parties agreement. (3) The covenant of good faith may permit a finding of breach even where no express term of the agreement has been violated. (4) the notion of good faith has often been applied to judge the appropriateness of a partys exercise of some type of discretion expressly granted to it by the terms of a contract.

8/30/2011 12:18:00 PM PP 517-26 N+Q 1-4 AVOIDING ENFORCEMENT: INCAPACITY, BARGAINING MISCONDUCT, UNCONSCIONABILITY, AND PUBLIC POLICY Dodson v. Shrader Facts: 16 year old P goes to D to buy a truck. D thought P was 18 at the time. 9 months after purchase the truck developed mechanical problems with the enginge valve. Becaue the repair was too expensive, P continued to drive the truck without repair and one month later the trucks enginge blew up and became inoperable. P requested that D rescind the purchase of the truck and a full refund. D refused to accept the tender of the truck or to give a refund.

Procedure: P tried to get the contract rescinded and recover amount for truck but was dismissed. Then P perfected a de novo appeal. D refused to accept the tender of the truck w/o compensation for its depreciation. During this time, the truck was struck in the left bender by a hit and run. D said that the worth of the truck was only $500 due to damages. D was ordered to pay $4900 in court. Now appeals.

Issue: Whether the minor is entitled to a full refund of the money he paid or whether the seller is entitled to a setoff for the decrease in value of the pick-up truck while it was in the possession of the minor. Rule: For a contract with a minor, where the minor has not been cheated in any way and the minor has actually paid money and taken and used the article purchased, that he out not to be permitted to recover the amount actually paid w/o allowing the vendor of the goods reasonable compensation for the use of, depreciation, and willful or negligent damage to the article purchased, while in his hands. However if there has been fraud or imposition by the seller or if the contract is unfair or any unfair advantage has been taken of the

minor inducing him to make the purchase, then this rule does not apply.

Holding: Go back to trial court to decide on the following issues. Whether the P was grossly negligent or his conduct intentional on not getting the car repaired after having discovered there were issues with the engine. Also decide on how the hit and run will affect the price. Reasoning: The policy issues driving the rule are that its best adapted to modern conditions to provide a fair resolution for both parties. Lots of young people work and earn money and they should be allowed to pay for their own things and enter into contracts in such ways. However, it wouldnt be fair to allow a minor to purchase something and use it like crazy and then for some reason return it for a full refund. o This could only lead to habits of trickery and dishonesty thus there is the clause that takes depreciation of the item into consideration. NOTES & QUESTIONS (1) Traditional Infancy or Minority Doctrine Traditional Infancy rule allows a minor to disaffirm or avoid a contract, even if there has been full performance and the minor cannot return to the adult what was received in the exchange. o So if the minor received goods that has lost value, courts allow disaffirmance and require the minor to return only what the minor still has or any identifiable proceeds. o A minor doesnt have to pay for the substantial diminution in value of the product he purchased. Gets the full price for which he purchased it for. Minority Doctrine (Dodson) minor has to pay for either the benefit received under the contract or the depreciation in the alue of the property, at least when the minor is seeking to recover payment made to the adult. (2) Liability for necessaries and tortuous conduct

There is a limitation to the traditional rule on minors. The minor is liable for the reasonable value of necessaries. The recovery for adults however is based on restitution and not enforcement of the contract. o Necessaries usually have been limited to items that one needs to live, such as food, clothing, and shelter. o Medical services rendered to minor were necessaries and minor is liable when payment cannot be collected from parent. o Housing is usually necessaries but not apartments because the minor can always go back to their parents home. o Legal services could be necessaries if they are to protect the rights of the minor. Minors ability to disaffirm may also be restricted if the minor engages in tortuous conduct such as misrepresentation of age or willful destruction of goods. o However mere ignorance of the minors age is no defense to the minors disaffirmance. o Majority view is that minor who misrepresents age can still

disaffirm but may be liable in tort for fraud. Ratification after reaching majority Even if a minor enters into a contract that does not involve necessaries, the contract is not void but only voidable at the election of the minor. Rest.2d 14 Once the minor reaches the age of majority, she has the power to affirm or ratify the contract, in which event the minor is bound. Moreover, on reaching the age of majority, the minor must act within a reasonable period of time to disaffirm the contract or she will be deemed to have affirmed the transaction. (4) Statutory Limits on the Minority Doctrine there could be statutes that limit the ability for minors to disaffirm.

8/30/2011 12:18:00 PM readings pp.537-67 Duress and Undue Influence Totem Marine Tug & Barge, Inc. v. Alyeska Pipeline Service Co. Facts: Totem entered into a contract with D under which Totem was to transport pipeline construction materials from TX to Alaska with the possibility of one or 2 cargo stops. At first loading in Huston, Totem was told there would be 2100 tons but there was 6000 to 7000 all haphazardly laid, and instead of taking 2 days it took 30 days. Then it became apparent that the vessels were travelling too slow because of the extra load. o In response to Alyeskas complaints, Totem chartered a 2d tug, Guidry. o However Alyeska had not yet furnished the written amendment to the parties contract and afraid that Alyeska would not agree to cover the cost of the 2d tug, Guidry was notified not to go thru the Canal. After some delays and accusations by Alyeska of Totem lying, Alyeska signed the amendment. Alyeska terminated the K after unloading the barge after some wrangling on the unbariging. After termination, Totem submitted termination invoices to Alyeska and began pressing them for payment. Alyeska said that they would pay in a day 8 months, but Totem said they urgently needed the cash. o Totems creditors were demanding payment, and w/o immediate cash, they would go bankrupt. o Totem turned over the collection to its attorney, Bell, which he then met with Alyeska and settled for $97,500 when the original amount was $260,000 to $300,000. Later, Totem filed a coplaint seeking to rescind the settlement and release on the ground of economic duress and recover the balance allegedly due on the original K. They also alleged wrongful termaination of K and sought miscellaneous compensatory and punitive damages.

Alyeska moved for summary judgment against the Ps on the grounds that Totem had executed a binding release of all claims against Alyeska and as a matter of law, Totem could not prevail on its claim of economic duress. In response, Totem argues that the release was executed under duress in that Alyeska wrongfully terminated the K; that Alyeska knew that Totem faced large impending debt and bankruptcy; that Alyeska withheld funds owed knowing the effect this would have on the Ps and that Ps had no alternative but to accept the settlement amount.

Issue: Whether the actions by Alyeska in knowing that Totem was going bankrupt, had dept to pay, and was unwilling to pay the full amount knowing all this qualifies as economic duress which would make the settlement voidable? Rule: Duress is a myriad of economic coercion which force a person to involuntarily enter into a particular transaction. The test has come to be whether the will of the person induced by the threat was overcome rather than that of a reasonably firm person. Duress exists where: (1) one party involuntarily accepted the terms of another, (2) circumstances permitted no other alternative, and (3) such circumstances were the result of coercive acts of the other party. o The 3d elements means that P must show that the other party by wrongful acts or threats, intentionally caused him to involuntarily enter into a particular transaction. This can be satisfied where the alleged wrongdoers conduct is criminal or tortuous but an act or threat may also be considered wrongful if it is wrongful in the moral sense. o Ex. A threat to breach a K or to withhold payment of an admitted debt has constituted a wrongful act. Implicit in such cases is the additional requirement that the threat to breach the K or withhold payment be done in bad faith (Rest.2d 318e)

o Economic duress does not exist merely because a person has been the victim of a wrongful act; in addition, the victim must have no choice but to agree to the other partys terms or face serious financial hardship. Thus in order to avoid a K, a party must also show that he had no reasonable alternative to agreeing to the other partys terms, or, as it is often stated, that he had no adequate remedy if the threat were to be carried out. What is an alternative or remedy the availability on the market of similar goods and services or of other sources of funds which provide an escape to the coercion. An available alternative may not be adequate where the delay involved in pursuing that remedy would cause immediate and irreparable loss to ones economic or business interest. Ex. Subcontractor threatened to refuse further delivery under a K unless the contractor agreed to modify the existing contract b/w the parties. The contractor was unable to obtain the necessary materials elsewhere w/o delay, and if it did not have the materials promptly, it would have been in default on its main K with the govt. Courts found that the alternatives to agreeing to the modification were inadequate and that the modification was signed under duress.

Holding: Should go back to trial court because there is a case for economic duress. Reasoning: Policy reasons courts want to recognize the freedom of choice into entering contracts and making all dispute resolutions final however also worried about disproportionate bargaining power and

willingness to not enforce contracts entered into under coercive circumstances. Court believes that Totem has a claim that it executed a release of its contract claims under duress. Totem has alleged that Alyeska deliberately withheld payment of an acknowledged debt, knowing that Totem had no choice but to accept and inadequate sum in settlement of that debt; that Totem was faced with impending bankruptcy; that Totem was unable to meet its pressing debts other than by accepting the immediate cash payment; and that thru necessity, Totem thus involuntarily accepted the inadequate settlement, thus this all equals wrongful conduct and lack of alternatives that would render the release voidable under economic duress. NOTES & QUESTIONS 1,2,4-6 (1) Void vs. Voidable Contracts Rest.2d 174 recognizes that a contract is void if made under coercion involving a physical threat. Contracts made under economic duress, rather than physical compulsion, are deemed voidable rather than void. o Thus such contracts will be binding unless disaffirmed and may be expressly or implicitly ratified by the purported victim. o Ex. contract executed under duress may be ratified by acceptance of benefits, remaining silent after opportunity to disavow, or rendering performance. (2) Wrongful or Improper Threat when is a threat wrongful or improper? Threat does not always have to be illegal, it can be immoral. Rest.2d 176 includes threats to commit a crime or tort and threats of criminal prosecution. While threats to engage in litigation or to refuse to honor a contractual obligation are not per se improper, such threats may be improper if the circumstances show that the threat was made in bad faith. (4) Lack of reasonable alternative

Even if the threat is improper, the resulting agreement is enforceable unless the party who submitted to the agreement had no reasonable alternative but to accept the agreement. Ex. of reasonable alternatives: availability of legal action; alternative sources of goods, services, or funds when there is a threat to withhold such things; and toleration if the threat involves only a minor vexation. (5) Inducement of involuntary assent there must also be a showing that the wrongful threat caused the victim to involuntarily enter into the transaction. Asks whether the victim was induced by the threat. Must consider the attendant circumstances such as age, background, and relationship of the parties. (6) Must threatening party cause the hardship? Some courts provide that a party who agreed to a settlement b/c of a desperate need for cash could not be the basis for duress unless the other side had caused the financial hardship. Other says that duress is there when one party takes advantage of the other sides dire circumstances w/o having caused the financial hardship. Odorizzi v. Bloomfield School District Facts: P was a teacher at an elementary school under K to teach the following year but he was arrested on criminal charges of homosexual activity and thus signed and delivered his written resignation. His charges were then dismissed and he sought to resume his employment with the District and on their refusal, he filed suit for declaratory and other relief. He asserts that his resignation was invalid because obtained thru duress, fraud, mistake, and undue influence and given at a time when he lacked capacity to make a valid contract. o Said that after bail he was not in the right mindset, had not slept for 48 hours, incapable of rational thought when he signed the resignation. o Also said that principal of school came to his house and advised him to resign or else his proceedings would be

publicized and embarrass him and make it difficult to find a job again as a teacher. o P asserts that b/c of his faith and confidence in their representations they were able to substitute their will and judgment in place of his own and obtain the signature to his resignation. P seeks to rescind his resignation on the ground that his consent had not been real or free but had been obtained thru duress, menace, fraud, undue influence, or mistake. Court says there is no cause of action for duress, menace, fraud, or mistake, but they do set out sufficient elements to justify rescission of a consent b/c of undue influence.

Issue: Whether there was duress, menace, fraud, undue influence by getting P to sign the resignation? Rule: Duress or menace consists in unlawful confinement of anothers person, or relatives, or property, which causes him to consent to a transaction thru fear. The action or threat in duress must be unlawful and party making the threat must know the falsity of his claim. Fraud involves conscious misrepresentation, or concealment, or non-disclosure of a material fact which induces that innocent party to enter the contract. A complaint for fraud must plead misrepresentation, knowledge of falsity, intent to induce reliance, justifiable reliance, and resulting damage. o Constructive fraud arises on a breach of duty by one in a confidential or fiduciary relationship to another which induces justifiable reliance by the latter to his prejudice. Confidential relationship may exist whenever a person with justification places trust and confidence in the integrity and fidelity of another. The doctrine of mistake customarily involves such errors as the nature of the transaction, the identity of the parties, the identity of the things to which the K relates, or the occurrence of collateral happenings.

Undue Influence persuasion which tends to be coercive in nature, persuasion which overcomes the will without convincing the judgment. The hallmark of such persuasion is high pressure, a pressure which works on mental, moral, or emotional weakness to such an extent that it approaches the boundaries of coercion. Undue influence is overpersuasion. o Taking an unfair advantage of anothers weakness of mind; or taking a grossly oppressive and unfair advantage of anothers necessities or distress. o (1) Undue influence involves the use of excessive pressure to persuade one vulnerable to such pressure, pressure applied by a dominant subject to a servient object. Undue influence resolves itself into a lessened capacity of the object to make a free contract. Undue influence can be the total weakness of mind which leaves a person entirely w/o understanding, or a lesser weakness which destroys the capacity of a person to make a contract even though he is not totally incapacitated (i.e. lack of full vigor due to age, physical condition, emotional anguish, or combo of these factors). o (2) undue influence in its second aspect involves an application of excessive strength by a dominant subject against a servient object. Whether from weakness on one side or strength on the other, or a combo of the 2, undue influence occurs whenever there results that kind of influence or supremacy of one mind over another by which that other is prevented from acting according to his own wish or judgment and whereby the will of the person is overborne and induced to or forbear to do an act which he would not do. Overpersuasion is generally accompanied by certain characteristics: (1) discussion of the transaction at an unusual or inappropriate time; (2) consummation of the transaction in an unusual place; (3) insistent demad that the business be finished at once; (4) extreme emphasis on untoward consequences of delay; (5) the

use of multiple persuaders by the dominant side against a single servient party; (6) absence of 3d party advisers to the servient party; (7) statements that there is no time to consult financial advisers or attorneys. If a number of these elements are simultaneously present, the persuasion may be described as excessive.

Holding: Rescission of resignation due to undue influence. Reasoning: (1) DURESS or Menace no duress because the threat must be unlawful and the party making the threat knows the falsity of his claim. o Here the school rep announced their intention to suspension and they were in their legal right and duty to do so. (2) FRAUD P failed to assert elements of knowledge of falsity, intent to induce reliance, and justifiable reliance of fraud thus no action for actual fraud. o There is no confidential or fiduciary relationship b/w P and D. Such a confidential relationship may exist whenever a person with justification places trust and confidence in the integrity and fidelity of another. However, the relationship of employer and employee does not meet this requirement, there must be another type of confidential relationship. (3) Mistake no mistake b/c P fails to disclose any facts which suggest mistake of fact or law. o Both parties knew the material facts, none was laboring under any misapprehension of law which the other took advantage, the discussion b/w P and rep was to evaluate the probable consequences of Ps predicament. No errors of identity, to which the K relates, or the occurrence of collateral happenings so no mistake.

(4) Undue Influence P declares he was under severe metnal and emotional strain after being arrested and had no sleep for 40 hours. o It is possible that exhaustion and emotional turmoil may wholly incapacitate a person from exercising his judgment. o The rep of the school board committed overpersuasion through high-pressure carrot and stick technique they assured P they were trying to assist him, he should rely on their advice, there wasnt time to consult an attorney, if he didnt resign at once the school district would suspend and dismiss him from his position and publicize the proceedings, but if he did resign that the incident wouldnt jeopardize his chances of securing a teaching post elsewhere.

NOTES & QUESTIONS 1-3,6 (1) Defining Undue Influence although neither the Odorizzi court or the Restatement require the presence of a special relationship, such a finding will often be a significant factor is a courts assessment of undue influence. The mere fact that parties have a close relationship however, or that some influence is exerted, will not necessarily prove undue influence. Rest.2d 177(1) undue influence is the unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relation b/w them is justified in assuming that that person will not act in a manner inconsistent with his welfare. Syester v. Banta

Facts: P is a widow and Ds are owners of a dance studio. P widow went to the dance studio, first visit there was no attempt to sell her any lessons but she was invited to return a few days later. o When she returned she was interviewed by the manager and sold a small course of dancing lessons. From that time on there have been successful selling campaign.

By May 1955 D sold P 3222 hours of dancing instruction for which she paid $21,0000. In all, she paid $33,000 for 4057 hours of instruction. The P was suckered into buying hours and hours of dance lessons, told that she could become a professional dancer when that statement was obviously false. o She was suckered into buying a dance course of European style by Mr. Carey, an employee at the time for the dance studio, when Mr. Carey had no idea what the dance style was and was just making things up. Also the dance studio overcharged her about 3000 hours totaling $20,000. Mr. Carey got fired, then shortly after P left the studio with thousands of hours left on her account. Mr. Carey was reinstated for the sole purpose of getting Syester to drop the charges against the studio. After much efforts, he got her to come back, sign a settlement for 6000, and drop the suit. o This was done after much convincing, and lying to her that she had the potential to become a pro, and done so that the claim would be dismissed against the studio. Claim for fraud was brought and Ds said they had a defense as the releases for dismissals were signed by P. However, jury found for $14,300 in actual damages and $40,000 for punitive damages. D appeals.

Issue: Is there a valid claim for fraud? Rule: To find fraud, certain universally recognized elements must be shown and proved: (1) that the Ds made one or more of the representations claimed by P (2) that said statements, or one or more of them, were false (3) that said false statements or representations were as to material matters with reference to the entering into the lesson contracts

(4) that the Ds knew the said representations, or one or more of them, were false (5) that said representations were made with intent to deceive and defraud the P (6) that the P believed and relied upon said false representations and would not have entered into the lesson contracts, except for believing and relying upon said misrepresentations (7) that the P was damaged in some amount through relying on said representations. o Must find all of these true in a claim for fraud.

Holding: Yes Reasoning: D argues that the 7 elements are not facts but opinion made by the P, but the court says thats for the jury to decide and if they find that they are factual, there is a cause of action for fraud. D argues that there was no proof of damage. Court disagrees and says that there is an overcharging of 3000 hours, that the jurys verdict for $14,3000 was within the evidence b/c it was less than the unproductive instruction to her. The award for punitive damages was not excessive b/c of the greed and avarice shown by Ds.

NOTES & QUESTIONS (1) Fraudulent or material misrepresentation Rest.2d 164(1) a contract is voidable if a partys manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying o Ex. college could rescind employment agreement when employee gave false information on resume to hide record of criminal incarceration o Section 162(1)(b) and (c) define fraudulent also to include an assertion made as true but w/o knowledge or confidence by the maker whether it is true or false, and thus may include statements that are made recklessly or negligently.

(3) Misrepresentation based on false opinion or prediction Rest.2d 159(d) a statement of opinion amounts to misrepresentation of fact if the person giving the opinion misrepresented his state of mind (i.e. stated that he held a certain opinion when in fact he did not). A statement of opinion may also be actionable if the one giving the opinion (a) stands in a relationship of trust or confidence to the recipient (a fiduciary relationship), (b) is an expert on matters covered by the opinion, or (c) renders the opinion to one who, because of age or other factors, is peculiarly susceptible to misrepresentation. (4) Reasonable reliance was reliance by the P reasonable that she could become a professional dancer?

8/30/2011 12:18:00 PM WEEK 3 READINGS PP.567-78, 580-84; N+Q 1-4; 1,2 AFTER PARK HILL V. JONES Facts: buyers enter into agreement with sellers to buy a home. Purchase agreement provided that sellers were to pay for and place in escrow a termite inspection report stating that the property was free from evidence of termite infestation. On one visit buyer saw a ripple in the wooden floor and asked if it was termite damage at which time he was told no, it was water damage. Then termite inspection report stated that there was no visible evidence of infestation, however it failed to note the existence of physical damage or evidence of previous treatment. Then they move in, hear from the neighbors that the house had termite problems in the past, realize that the wood on the steps leading to the sunken living room was crumbling, called exterminator, repair was $5,000. Buyers learned that sellers received 2 termite guarantees providing for semi-annual inspections and annual termite booster treatments from the previous owner when they purchased the home. o They renewed the guarantees and paid the annual fee each year until they sold the home. While they were living there, sellers experienced termite problems that were treated. Sellers never told buyers of the termite history and buyer complains that they should have, that it was their responsibility to do so. However, when they visited, the buyers saw the termite damage although they may not have suspected anything at the time, they werent restricted from looking in and out of the house, etc.

Issue: Whether a seller has a duty to disclose to the buyer the existence of termite damage in a residential dwelling known to the seller, but not to the buyer, which materially affects the value of the property? Rule: any provision in a contract making it possible for a party thereto to free himself from the consequences of his own fraud in procuring its execution is invalid and necessarily constitutes no defense.

This is even the case, if the fraud occurred after the K. The clause could not shield sellers from liability should buyers be able to prove fraud. A vendor has an affirmative duty to disclose material facts where: o (1) disclosure is necessary to prevent a previous assertion from being a misrepresentation or from being fraudulent or material; o (2) disclosure would correct a mistake of the other party as to a basic assumption on which that party is making the K and if nondisclosure amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing; o (3) Disclosure would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part; o (4) the other person is entitled to know the fact b/c of a relationship of trust and confidence b/w them

Suppression of a material fact which a party is bound in good faith to disclose is equivalent to a false representation

Where the seller of a home knows of facts materially affecting the value of the property which are not readily observable and are not known to the buyer, the seller is under a duty do disclose them to the buyer. o under certain circumstances nondisclosure of a fact known to one party may be equivalent to the assertion that the fact does not exist. For ex, when one conveys a false impression by the disclosure of some facts and the concealment of others, such concealment is in effect a false representation that what is disclosed is the whole truth. o If the facts are material, it must be disclosed a matter is material if it is one to which a reasonable person would attach importance in determining his choice of action in the transaction in question.

Holding: Such a duty to disclose info exists. Reasoning: Although the misrepresentation of termites occurred after the signing of the K, if the buyers can prove fraud, then the clause dismissing liability on sellers is invalid. Although the courts favor finality of Ks, when there is a case of misrepresentation or fraud, the policy of fair dealing and honesty defeats the policy of finality.

NOTES & QUESTIONS

(2) Modern approach to nondisclosure In some situations a failure to discloser a material fact may justify rescission of a K. Rest.2d 161(b) states a broad basis for relief: when the nondisclosure amounts to a failure to act in accordance with standards of good faith and fair dealing. Park 100 Investors, Inc v. Kartes Facts: Kartes trying to lease a room @ Park 100. The lease handled b/w the rep of Park 100 and KVCs lawyer (Kaplan) did not include any provisions for a personal guaranty of the lease and a personal guaranty was never mentioned during any of the lease negotiations. One day before KVC was to move in, after Kaplan had already signed the lease, Park 100 rep stopped them and said that it was urgent for them to get their signatures on the lease papers. Park 100 rep (Scannell) told presented to them a doc called Lease Agreement, and he never told the Karteses that what they were signing was actually a personal guaranty of lease. The Karteses signed the doc. Years later, Park 100 sent the Karteses a Tenant Agreement and this is when the Karteses first learned of the guaranty of lease. o They refused to affirm that portion of the Tenant Agreement. o Eventually the Kartes sold their interest in KVC to someone else who failed to make rent payments and Park 100 brought suit to collect the unpaid rent from the Karteses under the personal guaranty.

Issue: whether the trial court erred in finding that Park 100 used fraudulent means to procure the signatures of the Karteses on the guaranty of lease. Rule: Elements of actual fraud are: (1) a material misrepresentation of past or existing fact by the party to be charged, which (2) was false (3) was made with knowledge or in reckless ignorance of the falsity (4) was relied upon by the complaining party, and (5) proximately caused the complaining party injury Generally, parties are obligated to know the terms of the agreement they are signing, and cannot avoid their obligations under the agreement due to failure to read it. However, where one employs misrepresentation to induce a partys obligation under a K, one cannot bind the party to the terms of the agreement. It has many times been held, and is a well-settled rule of law, that a K of guaranty cannot be enforced by the guarantee, where the guarantor has been induced to enter into the K by fraudulent misrepresentations or concealment on the part of the guarantee. While a person relying on anothers representations must use ordinary care and diligence to guard against fraud, the requirement of reasonable prudence in business transactions is not carried to the extent that the law will ignore an intentional fraud practiced on the unwary.

Holding: Trial courts conclusion that signatures were obtained by fraud is correct. Reasoning:

(1) the statements made by Park 100s rep that the guaranty was lease papers and that KVC could not move in until they were signed were misrepresentations of material facts (2) Scannell knew that the doc he presented for the signatures was a guaranty and knowingly made false misrepresntations (3) Karteses, thru the use of ordinary care and diligence, belived that the doc they were signing was a lease, and reasonably relied upon Scannells statements to their detriment. o A guaranty of lease was never discussed during the lease negotiations, and the lease agreement makes no reference to a guaranty. Also, Scannell never told the Karteses that they were signing a personal guaranty of lease, even when he overhead the telephone conversation they had with Kaplan if the lease agreement had been approved. Also like in the last case, Scannells silence could have been seen as a fraudulent omission of a material fact, but that was not needed to prove b/c Scannells express misrepresentations alone support the finding of fraud.

Scannell argues that the Karteses are smart businesspeople and should have read the K and known better.

NOTES & QUESTIONS (1) Fraud in the execution Where a party is misled regarding the content of the document that they executed or signed, Rest.2d 166 says: if a partys manifestation of assent is induced by the other partys fraudulent misrepresentation as to the contents or effect of a writing evidencing or embodying in whole or in part an agreement, the court at the request of the recipient may reform the writing to express the terms of the agreement as asserted.

8/30/2011 12:18:00 PM WEEK 4 READINGS PP. 584-96, N+Q 1,4,6 UNCONSIONABILITY Unconsionability is there to limit unfair contracts. When there is an uneven exchange, or the K or a term unjustifiably gives an excessive advantage to one party. Also the fact that the other party has taken advantage of the first partys dependence, economic distress or urgent needs, or of its improvidence, ignorance, inexperience or lack of bargaining skills. Williams v. Walker-Thomas Furniture Co.

Facts: D who operates a retail furniture store made a printed form contract with P where P purchased a number of items. The terms of each purchased were in the K which set forth the value of the items and purported to lease the item to Williams for a stipulated monthly rent payment. The K provided that title would remain in Walker until the total of all the monthly payments made equaled the stated value of the item, at which time appellants (Williams) could take title. In the event of default of any monthly installment, Walker (appellee) could repossess the items. There was a vague provisions in there which was to keep a balance due on every item purchased until the balance due on all items, whenever purchased, was liquidated. o As a result, the debt incurred at the time of purchase of each item was secured by the right to repossess all the items previously purchased by the same purchaser, and each new item purchased automatically became subject to a security interest arising out of the previous dealing. In May 1962, appellant Thorne purchased three tables and 2 lamps totaling $391.10. Shortly after, he defauled on his payments and appellee sought to replevy all the items purchased since the first transaction in 1958. o Also, appellant Williams bought a stereo set of $514.95 in April 1962, and she too defaulted thereafter and appellee sought to replevy all the items purchased since Dec 1957.

Appellants argue that the K are unconscionable, or at least parts of it are. When appellant purchased the stereo, she already owed $160, however, appellees knew that appellant was in a financial rut, but still sold her the stereo knowing that it was possible she would default. o Court said nevertheless, this is not against public policy although it seems like taking advantage of and that it does not have the power the prevent enforcement of the K

Issue: Was the lower court right in not being able to stop enforcement of the K? Was the K unconscionable? The court focused on the add-on clause as being unconscionable, or the fact that they sold it to a poor girl knowing she might be unable to pay, or both. Rule: If a K be unreasonable and unconscionable, but not void for fraud, a court of law will give to the party who sues for its breach damages, not according to its letter, but only such as he is equitably entitled to. UCC 2-302 courts may refuse to enforce a K which it finds to be unconscionable at the time it was made. Where the element of unconscionability is present at the time a K is made, the K should not be enforced. Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with K terms which are unreasonably favorable to the other party. o In many cases, the meaningfulness of the choice is negated by a gross inequality of bargaining power. o The manner in which the K was entered is also relevant to this consideration. Did each party to the K, considering obvious education or lack of it, have a reasonable opportunity to understand the terms of the K, or were the important

terms hidden in a maze of fine print and minimized by deceptive sales practices? When a party of little bargaining power, and hence lil real choice, signs a commercially unreasonable K with little or no knowledge of its terms, it is hardly likely that his consent, or even an objective manifestation of his consent, was ever given to all the terms. In such a case the usual rule that the terms of the agreement are not to be questioned should be abandoned and the court should consider whether the terms of the K are so unfair that enforcement should be withheld. Corbin suggests that when examining the terms and circumstances when the K was made, the terms must be so extreme as to appear unconscionable according to the mores and business practices of the time and place.

Holding: The lower court was wrong in not being able to stop enforcement, the K could have been found to unenforceable considering the facts, terms, and circumstances, so remanded. Reasoning: NOTES & QUESTIONS (1) Williams court states that unconscionability consists of an absence of meaningful choice on the part of one of the parties together with K terms which are unreasonably favorable to the other party and goes to ntoe that conspicuousness and intelligibility of a clause will also be relevant. Procedural unconscionability refers to either lack of choice by one party or some defect in the bargaining process (such as quasi-fraud or quasi-duress) Substantive unconscionability relates to the fairness of the terms of the resulting bargain. o Many courts now uses these concepts as a framework for unconscionability, generally requiring a showing of both.

WEEK 4 Readings pp. 599-610; 622-23; N+Q 2,3 after Higgins; 2-4 after Alder HIGGINS V. SUPERIOR COURT OF LA COUNTY Facts: Five siblings from the show Extreme Makeover: Home Edition claim that the arbitration clause contained in a written agreement they executed before the program was broadcast is unconscionable. Petitioners lost both their parents, and the eldest brother Charles, then 21, looked after the siblings and moved in with church acquaintances b/c they had nowhere else to go. Extreme Makeover speaks with them about the show. The kids were sent through mail an Agreement and Release form for their signatures. It contained 24 pages, 72 paragraphs, and a Release. o The agreement had on its first page to not sign until everything has been read, and also a line at the end saying that I have read everything and comply with it. o However, there is nothing to point specifically to the Arbitration clause, it doesnt require a signature or initial like other parts of the agreement, and the release has different and smaller font from the others. Arbitration clause states that all disputes will be settled by the American Arbitration Association and be final. When petitioners got the document, they only read it for 5-10 minutes, didnt know what an arbitration was, and did not state whether he saw it or not. After the house was reconstructed and show broadcasted, the Leomitis informed petitioners that the home was theirs, and forced petitioners to leave. Petitioners claimed intentional and negligent misrepresentation, breach of K, unfair competition, and false advertising. o With respect to the TV Ds, they allege that those Ds breached promises to provide petitioners with a home, exploited petitioners, and portrayed them in a false light on TV.

Then Ds moved for arbitration pursuant to the K terms, and petitioners objected arguing that the provisions was unconscionable.

Issue: Does the petition here challenge the enforceability of the Agreement and the Release, in toto, or does it contest only the arbitration provision? If the latter, is the arbitration provision unconscionable? Procedure: Trial court dismissed because it said the petitioners were challenging the whole agreement and not the provision, and since its not allowed to it will dismiss. This court said that trial court erred in coming to that conclusion.

Rule: Arbitration agreement will be subject to the same rules governing Ks, and if they can, be rescinded, revoked, made valid or enforceable. Adhesion contracts is a standardized K that is imposed and drafted by the party of superior bargaining strength and relegates to the other party only the opportunity to adhere to the K or reject it. o If a court finds a K to be adhesive, it must then determine whether other factors are present which, under established legal rules, operate to render it unenforceable. o Adhesion Ks are normal in business, and just its presence alone will not render a K unenforceable. Must look at the circumstances surrounding it. Unconscionability has both a procedural and a substantive element. o The procedural focuses on oppression or surprise due to unequal bargaining power; the substantive focuses on overly harsh or one-sided results. o However both need not be present in the same degreethe more substantively oppressive the K term, the less evidence of procedural unconscionability is required and vice versa. On substantive unconscionability an agreement may lack of modicum of bilaterality and therefore be unconscionable if the

agreement requires arbitration only for the claims of the weaker party but a choice of forums for the claims of the stronger party.

Holding: The arbitration clause is unconscionable, cannot be enforced at arbitration, and the petitioners can seek their costs in a regular court. Reasoning: This court said that the trial court was wrong in thinking that petitioners opposed the entire Agreement. Petitioners devoted considerable attention to paragraph 69 of the Agreement, emphasizing that it is not set out or made distinguishable in any manner. It is misidentified within the caption as miscellaneous. It is not distinguished in different type font size, bold letters, caps, in red, and does not contain any separate waiver notice. So petitioners were only arguing that the provision was unconscionable, not the entire agreement. And just b/c they read it doesnt mean they cant come to court and argue on the Ks unconscionability. The court concludes that the K was an adhesive contract as the company had far more bargaining power, and the petitioners were told just to flip through the pages and sign and the docs were returned in 10 minutes. o It was presented to petitioners on a take-it-or-leave-it basis by the party with the superior bargaining position who was not willing to engage in negotiations. Court finds that there was procedural unconscionability: o The petitioners were young and unsophisticated o Their vulnerability was what made them so attractive to the TV Ds. o The Ds made no effort to highlight the presence of the arbitration provision o No words of it are printed in bold or larger font or CAPs. Substantive Unconscionability o The arbitration provision requires only petitioners to submit their claims to arbitration. Thus the defendants can submit

their claims to arbitration and not be precluded from doing so in a regular court. o Also petitioners are only barred from seeking appellate review of the arbitrators decision. o It was completely one-sided and unfair. NOTES & QUESTIONS 2-4 AFTER ALDER (2) Procedural and substantive unconscionability The Adler court departs from that more common approach of requiring both and holds that substantive unconscionability alone can be enough to render a K unenforceable. (3) Severance of substantively unconscionable terms the Adler court found that a number of provisions in the agreement were substantively unconscionable but held that the appropriate remedy was to sever those provisions and enforce the remainder of the arbitration agreement.

8/30/2011 12:18:00 PM WEEK 5 READINGS PP. 632-47; N+Q 1-3,5 PUBLIC POLICY In some situations, even where the K formation is untainted, a K may still be unenforceable b/c the K itself either violates or runs directly contrary to some public policy. Valley Medical Specialists v. Fraber Facts: Valley Medical Specialists (VMS) hired Farber as an intern who treated AIDS and HIV. A few years later, he became a shareholder and a minority officer and director. Later he got into employment agreements which contained a restrictive covenant, which was amended over time. Later Dr. Farber left VMS and began practicing within the area defined by the restrictive covenant o The covenant basically restricted the doctor from getting the companys employees or competing in the same practice as VMS for 3 years after his termination within a 5 mile radius, and if he did, that an injunction would be enforced and damages equal to 50% of the gross receipts. VMS brought 3 claims against the Dr. for injunction, liquidated damages for breach of employment agreement and damages for breach of fiduciary duty, conversion of patient files and confidential information, and intentional interference w/ contractual and/or business relations.

Procedure: Trial court denied VMSs request for a preliminary injunction finding that the restrictive convenant violated public policy, or was unenforceable b/c it was too broad. Moreover trial court said that any covenant over 6 months was unreasonable; the 5 mile radius from each of the 3 VMS offices was unreasonable b/c it covered a total of 235 square miles. And it was also unreasonable b/c it did not provide an exception for emergency medical aid

Court of Appeals reversed. Said it was reasonable if trial court would modify the restriction so that the Dr. could provide emergency services within the restricted area and that the Dr. had 8 hospitals outside the restricted area that he could practice. o Also said that the covenant did not violate public policy and that courts must not unnecessarily restrict the freedom of K.

Issue: Whether the restrictive covenant b/w Dr. Farber and Valley Medical Specialists is enforceable? Rule: Restrictive covenants in the medical profession are valid when the restraint is reasonable; and the restraint is reasonable when it imposes no shackle upon the one party which is not beneficial to the other. The restraint must be there to afford a fair protection to the interest of the party in favor of whom it is given, and not so large as to interfere with the interest of the public. Whatever restraint is larger than the necessary protection of the party be only be oppressive and unreasonable and thus void. Mandeville v. Harman. Restrictive covenants are enforceable if reasonable. o A restriction is unreasonable and thus will not be enforced: (1) if the restraint is greater than necessary to protect the employers legitimate interest; OR (2) if that interest is outweighed by the hardship to the employee and the likely injury to the public. Rest.2d 188 cmt. a must examine the interests of the employer, employee, patients, and public in general. Also each case must be decided on its own unique facts. In the medical context, the doctor/patient relationship is a very personal one, and the patients wish to see any particular doctor is highly valued. In the commercial context, the employers interest in its customer base is balanced with the

employees right to the customers. Where the employee took an active role and brought customers with him or her to the job, courts are more reluctant to enforce restrictive covenants. o Scope of Restrictive Covenants The scope is defined by its duration and geographic area. It cannot be greater than necessary to protect the employers (VMS) legitimate interests. The point of the scope is to give the employer a reasonable amount of time to overcome the former employees loss, usually by hiring a replacement and giving the replacement time to establish a working relationship. Its duration is reasonable only if it is no longer than necessary for the employer to put a new man on the job and for the new employee to have a reasonable opportunity to demonstrate effectiveness to customers. The activity prohibited by the restraint also defines the

covenants scope. The restraint must be limited to the particular speciality of the present employement. o Public Policy if public policy weighs against enforcement of the restriction, it will not be enforceable. In the medical world, the court must evaluate the extent to which enforcing the covenant would foreclose patients from seeing departing physicians if they desire to do so. The patients right to see the doctor of their choice is entitled to substantial protection.

Holding: It is not due to public policy. Reasoning: Ct said that when you have a restrictive covenant, it would be reasonable to look to see if there is unequal bargaining power, however this case doesnt deal with the hardship to Dr. Farber.

Ct. says that by restricting a physicians practice of medicine, this covenant involves strong public policy implications. o The medical world is highly against restrictive competitions convenants b/c it believes that free choice of doctors is the right of every patient and free competition among physicians is a prerequisite of optimal care and ethical practice. Dr. Farber asked the court to hold restrictive covenants in the medical profession void per se as against public policy, but thats too strict. It will determine reasonableness in deciding whether the restrictive covenant is enforceable or not.

NOTES & QUESTIONS (1) PUBLIC POLICY LIMITS AND FREEDOM OF CONTRACTS Courts often state that there is a strong public interest in freedom of contract and there must be a well established basis for any public policy that would deny enforcemeant of a K. (2) ANCILLARY COVENANTS Rest.2d 187 Preserves the common law rule that a covenant not to compete is unenforceable unless it is ancillary to a valid transaction. o 188 defines restraints that are ancillary to a valid transaction or relationship to include: a promise by a seller of a business not to compete with the buyer so as to injure the business sold; a promise by an employee or agent not to compete with his employer or principal; and a promise by a partner not to compete with the partnership.

(3) REASONABLENESS OF COVENANT A covenant related to partnership or sale of business contracts will not be scrutinized as strictly or closely as a covenant related to employment b/c employees are usually at a greater bargaining disadvantage and therefore need more protection from the court. In assessing the reasonableness of the covenant, general considerations are its scope, the hardship imposed on the promisor, and the public interest.

o Scope may include the time period covered, the geographical reach, and the scope of activities prohibited. (5) PUBLIC POLICY BASED ON STATUTES Rest. 2d 179 comment b the declaration of public policy has now beomce largely the province of legislators rather than judges and courts may refuse to enforce contracts that conflict with statutory law. Rest.2d 178 comment a when statutes explicitly declare that certain contracts are unenforceable or void, courts will obey the legislative mandate. In the more typical situtation, the making of the K violates or is inconsistent with a statute, but the statute is silent on the question of whether the K is unenforceable. o Generally a distinction is drawn b/w regulatory statutes, which are designed to protect the public, and revenue raising measures. Violation of the latter will not generally prevent the enforceability of a K.

8/30/2011 12:18:00 PM WEEK 6 READINGS PP. 647-58 N+Q 1,2,5,6 R.R v. M.H. & Another Facts: Father and wife, infertile, seek NESPA, a for-profit corporation for surrogacies. D, mother, sees the ad and applies to be a surrogate. As part of the application, the mother met with a psychiatrist and was deemd fit to have a baby. She also consulted with lawyers and had her husbands support. Father and mother signed the agreement, and it provided that the mother would permit the father to have legal rights as the father and take the baby home from the hospital, however if she denied this at time of birth, then she forfeited all rights of the agreement and would have to reimburse the father for all fees and expenses paid to her under it. o Mother signed out of her own volition, no evidence of undue influence, coercion, or duress. She fully understood the agreement. o The insemination was successful, father sent the mother a check for $500, another for $2,500. Later father sent the check for $3,500, and at the time mother wanted to keep the baby and returned the check uncashed. She however did not reimburse the father for the other 2 checks. Father alleges breach of K.

Procedure: Lower court entered an order directing the mother to give the child to the father and she did so. Then she appealed Issue: Whether the surrogacy agreement is enforceable? Rule: Policies underlying the adoption legislation suggest that a surrogate parenting agreement should be given no effect if the mothers agreement was obtained prior to a reasonable time after the childs birth or if her agreement was induced by the payment of money. Any such consent, is not to be executed sooner than the 4th calendar day after the date of birth of the child to be adopted.

o The strong policy behind this is that a mother should have time after a childs birth to reflect on her wishes concerning the child. Payments cannot be towards adoption or custody, must be solely to the mothers services in carrying the child. o As a matter of policy, a mothers agreement to surrender custody in exchange for money (beyond pregnancy-realted expenses) should be given no effect in deciding the custoy of the child. Here it was determined that the payment was not only for childbearing, but for custody, thus making the agreement invalid.

Holding: The mothers consent to custody in the agreement is ineffective b/c no such consent should be recognized unless given on or after the 4th day following the childs birth. Also the payment of money to influence the mothers custody decision makes the agreement as to custody void. o Policy reason: court wants to elimiate any financial reward to a surrogate mother b/c that is the only way to assure that no economic pressure will cause a woman, who may be economically vulnerable, to act as a surrogate. It raises the concern that under financial pressure, a woman will permit her body to be used and let her child be taken away. The mother definitely entered into this agreement for monetary reasons as well as others. o Court says that if the payment was not for adoption, then the agreement wouldnt have provided that the mother must refund all compensation paid if she should want the baby. Court says that if payments were solely for child bearing, and the mother had consented after a suitable period had passed after the birth, she would not have a claim. Also must consider other important factors in conjunction. Court also says that surrogacy agreements cannot be valid when made by private parties, but must have the consent of the court.

NOTES & QUESTIONS (1) Public Policy and Family Relations Rest.2d 191 a contract affecting the custody of a child is unenforceable on grounds of public policy unless it is consistent with the best interest of the child. o The section is consistent with the view that termination of parental rights in exchange for money is against public policy, as commonly reflected in adoption statutes. (5) Remedial Options Courts will not necessarily deem void and completely unenforceable a K that is inconsistent with a statute or other basis of public policy. o Rather the courts may enforce the K or, more likely yet, may grant restitutionary relief to one of the parties if a benefit has been conferred. o Rest.2d adopts an approach that requires the weighing of a number of factors before denying enforcement of a K or refusing restitutionary relief on public policy grounds, including assessing the nature of the public policy involved, the degree of resulting forfeiture, and whether denial of relief would further the policy.

(6) In Pari Delicto If both parties willfully engage in wrongful conduct, and therefore are in pari delcito (equally culpable), the courts usually take the position that the parties should be left where the court finds them and will give no remedy to either party, even if one has received a benefit from the other. This rule is applied particularly where the K involves serious illegal conduct. o Ex. employee who claimed gambling winnings of employer in plan to avoid federal income tax could nto enforce employers promise of reimbursements of taxes paid.

8/30/2011 12:18:00 PM WEEK 7 2.25.12 pp. 684-701 N+Q 1-3,5,6 CHANGED CIRCUMSTANCES: IMPOSSIBILITY, IMPRACTICABILITY, AND FRUSTRATION If an obligation was in fact impossible to perform, then the remedy for breach obviously could not be specific performance, however, the court still could and presumably would award damages to compensate the P for the lost value of the Ds expected performance. Taylor v. Caldwell regarded as the fountainhead of the modern law of impossibility. D Caldwell agreed to rent a music hall to P taylor for several days, so that Taylor might make a musica performance there. The hall burned down shortly before the first performance was to take place, and Taylor sued for breach of K. Court absolved Caldwell of liability, holding that b/c the hall itself was essential to the performance of the K, and the parties had contracted on the basis of its continued existence, Caldwells duty of performance should be excused by its accidental destruction. o The principle of Taylor has been applied to contracts for personal service or for the sale of specific goods: When a

person or thing necessary for performance of the agreement dies or is incapacitated, is destroyed or damaged, the duty of performance is accordingly excused. Rule of impossibility would not excuse a party merely b/c the K itself had lost its value to that party or merely b/c performance had come to be more difficult or expensive. Krell v. Kenry D had agreed to pay the P for the use of a room overlooking the route that the coronation procession would travel. The sudden illness of the kind forced the cancellation of his coronation, however, making the Ps room useless to the D. Court held that D was excused from his duty of payment. o This is not true impossibility b/c the promises of each party could literally have been performed. o Krell is rather a case fo frustration of purpose; the exchange called for by the K had lost all value to the D, b/c of a supervening change in its extrinsic circumstances.

3d type is impracticability Mineral Park Land Co v. Howard D contractor had agreed to purchase and extract from Ps land, at fixed prices, all the gravel required for the construction of a concrete bridge. o D procured some of the gravel for the bridge from another source and was sued for its failure to take all of its gravel requirements from Ps land. o D showed that it had removed from Ps land all the gravel that was above water-lvl and that removal of that which lay below water-level would have entailed not only a different means of extraction, but 10 to 12 x the cost. Court held that the extreme increase in the cost of extraction justified the Ds nonperformance. Again the performance clearly was not literally impossible nor subjectively impossible, it was sufficiently different from what the parties ahd both contemplated at the time of contracting as to be impracticable. Karl Wednt Farm Equipment Co v. International Harvester Co Facts: Wendt and IH entered into a Dealer Sales and Service Agreement which established Wendt as a dealer of IH goods. The agreement set forth the method of sale, provisions for the purchase and servicing of goods, as well as certain dealer operating requirements. o Also set for specific provisions for the termination of the K upon the occurrence of certain specified conditions. o There was a dramatic recession in the farm equipment market, and substantial losses on IH, so IH negotiated an agreement with another company JI Case to sell its farm equipment division to them. As part of the purchase, Case/Tenneco did not acquire IHs existing franchise network. Rather, it received access to IH dealers, many who eventually received a Case franchise.

There were conflicted areas in which both a Case and an IH dealdership were located, Wendt was part of that area and did not get a Case franchise.

Wednt contends that the defense of impracticability due to extreme changes in market condition is not a cognizable defense under Michigan law.

Issue: Whether the defense of impracticability of performance to invalidate the K is proper? Rule: the doctrine of impossibility is a valid defense not only when performance is impossible, but also when supervening circumstances make performance impracticable. Mere lack of profit under the K is insufficient: Impracticability means more than impracticability. A mere change in the degree of difficulty or expense due to such causes as increased wages, prices of raw materials or costs of construction, unless well beyond the normal range, does not amount to impracticability since it is this sort of risk that a fixed price K is intended to cover. Comment d Rest.2d 261 a severe shortage of raw materials or of supplies due to war, embargo, local crop failure, unforeseen shutdown of major sources of supply, or the like, which either causes a marked increase in cost or pevents performance altogether may bring the case within the rule stated in this Section. Comment b to 261 in order for a supervening event to discharge a duty under this section, the non-occurrence of that event must have been a basic assumption on which both the parties made the K. o Ex. A contracts to employ B for 2 years at a set salary. After a year, a govt regulation makes As business unprofitable and he fires B. As duty to employ B is not discharged due to impracticability and A is liable for breach. Frustration of purpose rest.2d 265 where, after a K is made, a partys principal purpose is substantially frustrated without his fault

by the occurrence of an event the non-occurrence of which was a basic assumption on which the K was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary. o In Groseth, the court found that under the rest., the defense of frustration requires 3 factors: (1) that the prupose frustrated by the supervening event must have been the principal purpose of the party making the K it is not enough that the contracting party had in mind a specific object w/o which he would not have made the K. The object must be so completely the basis of the K that, as both partie understand, without it the transaction would make little sense. (2) the frustration be substantial. The frustration must be so severe that it is not fairly to be regarded as within the risks that he assumed under the K. The fact that performance has become economically burdensome or unattractive is not sufficient to excuse performance. (3) the frustrating event must have been a basic assumption of the K. Same analysis under the defense of impracticability.

Courts will use their equitable power to imply terms into Ks in circumstances which would apportion the risk of loss as the parties would have had they thought to include such provision o

Application: The fact that IH experienced a dramatic downturn in the farm equipment market and decided to go out of the business does not excuse its unilateral termination of its dealership agreements due to impracticability. IH contends that it lost 2 mil a day and it would have gone bankrupt and that should warrant the special application of the defense.

However, neither market shifts nor the financial inability of one of the parties changes the basic assumptions of the K such that it may be excused under the doctrine of impracticability. Rest.2d 261 comment b. o Also IH may not have been entirely responsible for the economic downturn, but it was responsible for its chosen remedy: to sell its farm equipment assets. They had alternatives which could have precluded unilateral termination of the . Frustration of purpose the court found that the primary purpose of the Agreement was to establish the dealer of goods covered and to govern the relations b/w the dealer and the company in promoting the sales of those goods and their purchase and sale by the dealer, and in providing warranty and other services. o The primary purpose was to establish the dealership and the terms of interaction and was not mutual profitability as asserted by IH. o A dramatic down-turn in the farm equipement market resulting in reduced profitability did not frustrate the primary purpose of the agreement. o Furhtermore, the continuity of market conditions or the financial situation of the parties were not basic assumptions or implied conditions to the enforcement of a K. In this case the frustrating event was IHs decision to sell it farm equipement assets and go out of that line of business. While IH might have determined that suh a move was economically required, itmay not then assert that its obligation under existing agreement are discharged in light of its decision,

Implying a term which enables IH to terminate its franchise agreement unilaterally without following the termination conditions of the agreement and without incurring a breach places all the risk on the dealer.

o If economic circumstances require that IH leave the market, it should properly seek to terminate its agreement under the terms of the agreement.

Holding:

8/30/2011 12:18:00 PM WEEK 8 READINGS PP. 664-84; N+Q 2,4,5; 2-4; LENAWEE COUNTY BOARD OF HEALTH V. MESSERLY Facts: appellees purchased from appellants a 600 square foot tract of land upon which is located a 3 unit apartment building. Shortly after the transaction was closed, the Lenawee County Board of Health condemned the property and obtained a permanent injunction which prohibits human habitation on the premises until the defective sewage system is brought into conformance with sanitation code. 5 or 6 days after the K, the Pickleses went to introduce themselves to the tenants when they discovered raw sewage seeping out of the ground. o Tests indicated inadequacy of the sewage system and the county condemned the property and initiated this lawsuit against the Messerlys as land contract vendors and the Pickleses, as vendees, to obtain an permanent injunction proscribing human habitation of the premises until the property was brought into conformance with sanitation code. The injunction was granted and the County was permitted to withdraw from the lawsuit. When no payments were made on the land K, the Messerlys filed a cross-complaint against the Pickleses seeking foreclosure, sale of the property, and a deficiency judgment. o The Pickles counterclaimed for rescission against the Messerlys. The Pickleses alleged failure of consideration; willful concealment and misrepresentation as a result of their failure to disclose the condition of the sanitation sstem.

Issue: Whether appellees should prevail in their attempt to avoid this land contract on the basis of mutual mistake and failure of consideration. Whether there was a mistaken belief entertained by one or both parties to the K in dispute and if so the resultant legal significance?

Procedure: Trial court concluded that the Pickleses had no cause of action and there was no fraud or misrepresentation. Appeals affirmed Rule: a contractual mistake is a belief that is not in accord with the facts. The erroneous belief of one or both of the parties must relate to a fact in existence at the time the K is executed. That is to say, the belief which is found to be in error may not be, in substance, a prediction as to a future occurrence or nonoccurrence. A contract may be rescinded b/c of a mutual misapprehension of the parties, but this remedy is granted only in the sound discretion of the court. Rescission is not available, however, to relieve a party who has assumed the risk of loss in connection with the mistake. Rest.2d 152 When Mistake of Both Parties Makes a K Voidable o (1) where a mistake of both parties at the time a K was made as to a basic assumption on which the K was made has a material effect on the agreed exchange of performances, the K is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in 154. o (2) in determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise. Rest.2d 154 When A Party Bears the Risk of a Mistake o A party bears the risk of a mistake when (a) the risk is allocated to him by agreement of the parties, or (b) he is aware, at the time the K is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or (c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.

Application: The parties were mistaken as to the income-producing capacity of the property in question. Both the vendors and the vendees each believed that the property transferred could be utilized as incomegenerating rental property. All of the parties subsequently learned that, in fact, the property was unsuitable for any residential use. Appellants assert that there was no mistake in the contractual sense b/c the defect in the sewage system did not arise until after the K was executed. o Appellees respond that the Messerlys are confusing the date of the inception of the defect with the date upon which the defect was discovered. o However the facts show that the septic system was defective prior to the date on which the land K was executed. The Messerlys grantor installed a nonconforming septic system without a permit prior to the transfer. Therefore both parties entered into the land K under a mutual mistake of fact, now to determine the legal significance. All of the parties to this K erroneously assumed that the property transferred by the vendors to the vendees was suitable for human habitation and could be utilized to generate rental income. o Despite the significance of the mistake made by the parties, the court concludes that equity does not justify the remedy for the Pickles. o In cases of mistake by two equally innocent parties, the court is required to determine which blameless party should assume the loss resulting from the misapprehension they shared. Equity suggests that in this case, the risk should be allocated to the purchasers. There was indeed some agreed allocation of the risk to the vendees by the incorporation of an as is clause into the K which provided: Purchaser has examined this property and agrees to accept same in its present condition.

That clause is sufficient to indicate that the parties considered such risk as related to the present condition of the property should lie with the purchaser.

Holding: No rescission of K. Wil-Freds, Inc. v. Metropolitan Sanitary District Facts: D published an ad for the rehabilitation of sand drying beds and it specified that the work to be performed required the contractor to remove 67,500 linear feet of clay pipe and 53,200 cubic yards of gravel from the beds and to replace these items with plastic pipe and fresh filter material. The ad also stated that the cost estimate of the work was about 1 million. P submitted a bid with a $100,000 deposit. o P received a form indicating that P has read the K documents, examined the site of work, examined the ad, etc. P submitted the lowest bid, but however later sent a telegram wishing to withdraw its bid. It explained why: o One of the subcontrators had in error given the wrong amount for performing its work, that if it performed the work at that amount it would go bankrupt, and thus b/c of the subcontractor backing out, that P could no longer abide to its original amount. Then D responded by saying that the reason P gave does not justify withdrawal of the bid, and that the K would be awarded to P at the original bid price. In response, P filed a complaint for preliminary injunction and rescission. o The complaint alleged that the company would be irreparably injured if required to perform the K at such an unconscionably low price or if forced to forfeit the $100,000 bid deposit. By bidding on the project, P made a binding commitment. Its bid was in the nature of an option to the District based upon valuable

consideration: the assurance that the award would be made to the lowest bidder. o The option was both an offer to do the work and a unilateral agreement to enter into a K to do so. o When the offer was accepted, a bilateral K arose which was mutually bdining on P and the Dwhen P tried to withdraw its bid, it became subject to the condition incorporated in the proposal form.

Procedure: Issue: Whether P can obtain rescission of its K with the D because of its unilateral mistake? Rule: General rule is that relief will not be granted if but one party to a K has made a mistake. However, unilateral mistake may afford ground for rescission where there is a material mistake and such mistake is so palpable that the party not in error will be put on notice of its existence. The mistake must be material to the K. Generally relief refused for errors in judgment but allowed for clerical or mathematical mistakes.

Application: P argues that the mistake was material to the K; that this error was directly caused by the Ds misleading specifications; that the D did not alter its position in reliance upon the erroneous bid b/c the company promptly notified the District of the mistake; and that under these circumstances it would be unconscionable to enforce the K or to allow the D to retain the security deposit. Ciaglos (subcontractor) mistake related to a material feature of the K and it was supported by clear evidence. o Subcontractor testified that it gave P a price quotation incorrectly based upon the assumption that heavy trucks could be driven into the sand drying beds and onto the plastic pipes. And b/c the statement were uncontradicted, it stands

that the employment of the proper procedure would have cost $150,000 more. Moreover the $100,000 forfeiture would constitute substantial harship. The D was not seriously damaged by the withdrawal of the bid. They were promptly notified of the mistake and of Ps intention to withdraw within 48 hours. Also the K had not been awarded at this time. Moreover, the D suffered no change in position since it was able with no great loss to award the K to the next lowest bidder. D however argues that P failed to use ordinary care in the preparation of its bid and argues that rescission is not warranted under such circumstances. o Court disagrees. P has always performed in a highly skilled manner and always carefully examines their bids. P was justified in relying on the subcontractors quotation given their business relationship. o Also P made 2 separate reviews of its price quotation, and exercised reasonable care in the preparatin of its portion of the total bid.

Generally relief is refused for errors in judgment and allowed for clerical or mathematical mistakesbut the facts surrounding the error should allow this one exception.

Holding: Yes P can obtain rescission. NOTES (3) Effect of negligence must a unilateral mistake be non-negligent in order to form a basis for relief? Many courts have so held, but there is a clear tendency to relax this requirement where the proof of mistake is strong and the effect of enforcement will be devastating or at least severly injurious to the mistaken party.

WEEK 8 741-54 N+Q 1,2 Rights and Duties of 3d Parties Rights of 3d parties as Contract Beneficiaries: In any systemt that allows persons to compete more or less freely for goods and services and to enter into binding contracts by which such commodities can be bought and sold, it is obvious that the making of a K is often likely to have effects on persons who are not parties to it. Ex. If A agrees to construct a building on land owned by B, this building may have the practical effect of lessening the enjoyment or utility to C. However this adverse effect on C does not always go unchecked. o Any invasion of legal rights by A or B would be an actionable wrong possibly a breach of K or a tort. o Under our system of legal rules, the power to invade or destroy the rights of nonconesnting persons can only be conferred by public law. o The general rule is that the kind of legally enforceable obligations that result from the making of a private agreement cannot destroy or impair the rights of anyone who

is not a party to that agreement; nor can it impose duties on such a person. Lawrence v. Fox P Lawrence (A) had loaned money to one Holly (B); Holly later made a similar loan to Fox (C), who promised Holly that he (Fox) would make repayment to Lawrence. Fox didnt keep that promise, however, and Lawrence sued Fox for the amount of the promised payment. Although Lawrence was not a party to the transaction b/w Holly and Fox Lawrence wasnt in privity with Fox the ocurt nevertheless held that the cause of action would like. This is called creditor beneficiary. Seaver v. Ransom promisee Mrs. Beman, an elderly woman in ill health was about to sign a will that had been prepared pursuant to her instructions by her husband, Judge Beman, when she realized that it made insufficient provision for a beloved niece.

Mrs. Beman propsed that another will be prepared to remedy this omission, but it appeared that she would not live long enough to execute it. Judge Beman urged his wife to sign the will and promised her that he would see that the niece was amply provided for in his own will. When Judge Beman later died, it was discovered that his will made no provision for the niece, and she therefore sued Judges estate to enforce the promise he had made to his dying wife. o The court allowed recovery by the niece, holding that the principle of Lawrence v. Fox should be extended to the facts of Seaver. o In reaching this decision, the court observed that some earlier cases allowed 3d part standing to children and wives on the basis of the close relationship they had with the promisee. Many courts have since permitted 3d party enforcement of promises where it appears that the promisees intention was to make a gift to the P 3d party. Such Ps are often referred to as donee beneficiaries.

Vogan v. Hayes Appraisal Associates Inc Facts: The Ps moved to Des Moines and wanted to build a home, so they met with builder who agreed to building the home. The Vogans (P) contacted MidAmercia for a mortgage. Then MidAmerica orally contracted with D Hayes Appraisal to do the initial appraisal and make periodic appraisals of the progress of the construction. o The home was appraised at 250,000. Thereafter, the Vogans obtained a $170,000 mortgage from MidAmerica. o MidAmerica was to disburse progress payments to Markley (builder) based on progress reports from D. o Construction began and make a progress report. Later, MidAmerica determined there was less than $2000 remaning of the $170,000 loan to complete the home, so the Ps took out a 2d mortgage on the home

for $42,050 and turned that money plus some of their own funds over to the bank to ocntinue making progress payments to builder based on Hayes Appraisals progress reports. Prior to completion of the home, the Ps decided to sell the home rather than occupy it. Later, D certified that the home was 60% complete. o 8 days later, Hayes Appraisal issued another progress report indicating that 90% was complete. During trial, witnesses testified for the Ps that this was an inaccurate report. Later, substantial additional work was reuiqred, and at this point builder defaulted on the job after having been paid all of the initial 170,000 and much of the additional monies raised by the Vogans. o Another contractor estimated the completion of the home would cost an additional $60,000 Then the Vogans stopped making mortgage payments, and MidAmercia brought an action to foreclose the mortgage. o Ps counterclaimed, alleging that the bank had improperly authorized payment of funds to Builder. o Allegedly, MidAmerica did not follow its loan procedure for disbursement of funds. Then Vogans filed a petition against Ds, contending it negligently certified the extent of the construction that had been completed. o Ds moved for directed verdict but was denied. They argued that the Ps were not third-party beneficiaries of its contract with MidAmerica and that the progress reports did not proximately cause the damages alleged.

Procedure: Trial court denied directed verdict for Ds, appeals reversed. Issue: Whether there is sufficient evidence to justify submitting the case to the jury that the Ps were 3d party beneficiaries of the K b/w Midamerica and Hayes Appraisal.

Rule: Rest.2d on 3d party beneficiary cases: (1) Unless otherwise agreed b/w proimsor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intaention of the parties and either o (a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or o (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance (2) an incidental beneficiary is a beneficiary who is not an intended beneficiary. In Tredrea when a K is made, the 2 or more contracting parties have separate purposes; each is stimulated by various motvies, some of which he may not be acutely consciousa 3d party who is not a promisee and who gave no consideration has an enforceable right by reason of a K made by 2 othersif the promised performance will be of pecuniary benefit to the 3d party and the K is so expressed as to give the promisor reason to now that such benefit is contemplated by the promisee as one of the motivating causes of his making the K.

Application: Ps argue that they present ample evidence to show they were 3d party beneficiaries of the contract b/w MidAmerica and Hayes. o They assert that the court should look to the intent of the parties and the surrounding circumstances and argue that the banks intent was to protect the Vogans money as construction progressed. They claim that Hayes knew they were owners of the property and that they would benefit from the progress reports. Ds argue that the verbal contract b/w Midamerica and hayes had no provision or intent to make the Ps 3d party beneficiares.

o Ds claim that the Ps presented no evidence of intent on behalf o the bank to benefit the Ps and so failed to meet their burden of proof. In this case, MidAmerica is the promisee, who stands to benefit from Hayess performance, and Hayes is the promisor, who agreed to provide periodic inspections to the bank. The promised performance of Hayes to MidAmerica will be of pecuniary benefit to the Vogans, and the K is so expressed as to give Hayes reason to know that such benefit is contemplated by MidAmerica as one of the motivating causes of making the . o The inspection reports and invoices that Hayes provided MidAmerica contained not only the location of the project, but also the Ps name as the home purchasers. This info gave Hayes reason to know that the purpose of MidAmerica obtaining the periodic progress reports from Hayes was to provide the Vogans with some protection for the money they had invested in the project. If Tredrea standard is applied, the Ps qualify as 3d party beneficiares of the agreement.

Holding: They were 3d party beneficiaries NOTES (1) Whose Intent Determines Standing 3 lines of authority have developed on the interpretation of the Restatement: o some courts have held that both the promisor and the promisee must intend to give the 3d party rights under the K. o Others have concluded that the intention of the promisee controls. o Finally a number of decisions hold that the promisor must know or at least have reason to know of the promisees intent to benefit the 3d party, even if the promisor has no particular

desire to confer a benefit on or create an obligation to the 3d person. The more modern view holds that it is enough that the promisor understood that the promisee had an intent to benefit the 3d party. (modern case requires intent of promisee and promisors knowledge of that intent) On the nature of the benefit sufficient for a 3d party to be a beneficiary of a K; the court in Vogan refers to the need for a pecuniary benefit, but it might be argued that such a requirement is too restrictive.

o Rest.2d 302, cmt. D provides that if the beneficiary would be reasonable in relying on the promise as manifesting an intention to confer a right on him, he is an intended beneficiary. (2) Evidence of Intent What evidence should be used to determine the intention of parties? On occasion the K will specifically confirm or negate standing for a 3d party beneficiary. o i.e. K expressly provided that consultant would be accountable solely to county and not to any 3d person Recent cases indicate that in the absence of a clear contractual provision, a totality of the circumstances approach will be sued. o Courts generally will consider the language and provisions of the agreement, the background of the k, and considerations of fairness and practicality. Some courts however apply a presumption against 3d party standing that will be overcome only by clear evidence to the contrary found in the K.

8/30/2011 12:18:00 PM WEEK 9 READINGS PP. 806-14 N+Q 4,5,7,8; 817-24 N+Q 1-3,5; 24-33 N+Q 2-4 Jacob & Youngs, Inc v. Kent Facts: P built a country residence for the D at a cost of upwards of $77,000 and now sues to recover a balance of $3,483.46 remaining unpaid. Work of construction ceased and then D began to occupy it. There was no complaint of defective performance until a year later. P was supposed to install a Reading standard pipe but neither fraudulenty nor willfully installed a different one. o Result of oversight and inattention of the Ps subcontractor. o Even the Ds architect, though he inspected the pipe, failed to notice the discrepancy. P tried to show that the brands installed, though made by other manufacturers, were the same in quality and appearance. o This evidence was excluded.

Proceudre: Trial court ordered a directed verdict for D. Appeals reversed. Issue: Whether the measure of allownce must be the difference in value of the pipes or for the pipes that were omitted overall. Rule: The courts never say that one who makes a K fills the measure of his duty by less than full performance. They do say, however, that an omission, both trivial and innocent, will sometimes be atoned for by allowance of the resulting damage, and will not always be the breach of a condition to be followed by a forfeiture. In this case, the measure of the allowance is not the cost of replacement, but the difference in value, which would be either nominal or nothing. o

Application:

Holding: It should just be the difference in value of the pipes, and not for the whole thing. Should be able to recover the full contract price less the amount necessary to fully compensate the D for damages caused by such omissions. NOTES & QUESTIONS (4) Principle of Substantial Performance Even though Jacob & Youngs could have been treated as a case involving express conditions, instead it is recognized as the leading case adopting the principle of substantial performance. Substantial performance can best be understood as one aspect of the doctrine of constructive conditions. The principle provides that each partys duty of performance is implicitly conditioned on there being no uncured material failure of performance by the other party. Rest.2d 237 o Minor or immaterial deviations from the contractual provisions do not amount to failure of a condition to the other partys duty to perform. o Even a minor deviation will give the other party a right to

recover damages for that nonperformance, but those damages may be negligible. (5) Standard for Substantial Performance When is performance substantial? There is substantial peformance where the variance from the specifications of the K does not impair the building or structure as a whole, and where after it is erected the building is actually used for the intended purpose, or where the defects can be remedied without great expenditure and w/o material damage to the parts of the structure, but the defects must not run thorugh the whole work, so that the object of the owner to have the work done in a particular way is not accomplishednor be so substantial thatthe allowance out of the K price will nto give the owner essentially what he contracted for. (7) Effect of Willful Breach Cardozo states in the case that the willful transfgressor will not be entitled to recover under the substantial performance doctrine.

The Restatment says otherwise: A willful breach does not automatically bar recovery, but the motive of the breaching party is a factor to be considered in determining whether performance was substantial. Rest.2d 241(e) (8) Other Grounds for Recovery: Restitution and Divisibility If the contractor has not substantially performed, other bases for recovery may nonetheless exist. Many courts will allow a breaching contractor to recover in restitution (quantum meruit) for the reasonable value of its services. If the K is divisible, a court may allow recovery for the portions that have been completed. o Contract for construction of 35 houses in groups of 10; contractor who completed 20 houses allowed to recover b/c K was divisible. o Rest.2d 240 defines the doctrine of divisibility it provides that 2 requirements must be met in order for a K to be divisible. (1) it must be possible to apportion the performances of the parties into corresponding pairs of part performances. (2) it must be proper to treat these pairs of part performances as agreed equivalents.

Sackett v. Spindler Facts: D was the owner of a majority of the shares of S&S Newspapers. As president he entered into a written agreement with P whereby P agreed to purchase 6,316 shares of stock. The K provided for a total purchase price of $85,000 payable as follows: 6,000 on or before July 10; $20,000 on or before July 14; and $59,000 on or before August 15. o In addition the agreement obligated P to pay interest at the rate of 6% on any unpaid balance. o Finally the K provided for delivery of the full amount of stock to P free of encumbrances when he made his final payment under the K.

P paid the initial payment on time and made an additional $19,800 payment on July 21. o On August 10 P gave D a check for the $59,200 balance due under the K; however due to the fact that the account on which this check was drawn contained insufficient funds to cover the check, the check was never apid. o Meanwhile D had acquired the stock owned by the minority shareholders of S&S Newspapers and had given all but 454 shares to Ps attorneys to hold is escrow until P had paid D the $59,200 balance due under the K. o However on Sept 1, after the $59,200 check had not cleared, P reclaimed the stock certificates held by Ps attorney. Then P contacted Ds attorney and said that he would be able to pay the balance by September 22. o D gave P notice that unless that happened, D would not consider completing the sale and would assess damages for Ps breach of the agreement. Pursuant to this discussion, P paid D $3,944.26 as an advance for working capital. However P failed to make any further payments or to communicate with D by Sept 22, and on that date, D again extended the time for Ps performance until Sept 29. Again P failed to tender the amount or to contact D and later Ps attorney contacted Ds attorney that he would be able to pay under a liquidating trust but that was rejected. Beginning during the period scheduled for Ps performance of the K, D found it increasingly difficult to operate the paper at a profit, particularly due to the lack of adequate capital. o In an attempt to remedy this situation, D took out $4000 in loan by mortgaging various items of personal property owned by him. o In addition, D sold half of his stock in S&S for $10,000.

o Thereafter he converted the paper from daily to weekly, and finally D repurchased for the $10,000 stock he sold and sold the full 6,316 shares for $22,000.

Procedure: Trial court did not allow P to recover anything and awarded D $34,000 plus interest on his cross-complaint for breach of K. Issue: Whether Ps duty to consummate the K or to respond to D in damages for the formers failure to perform the subject K was in any way discharged by Ds conduct? Rule: whether a breach of K is total or partial depends upon its materiality. In determining the materiality of a failure to fully perform a promise the following factors are to be considered: (1) the extent to which the injured party will obtain the substantial benefit which he could have reasonably anticipated (2) the extent to which the injured party may be adequately compensated in damages for lack of complete performance; (3) the extent to which the party failing to perform has already partly performed or made preparations for performance; (4) the greater or less hardship on the party failing to perform in terminating the K; (5) the willful, negligent, or innocent behavior of the party failing to perform; and (6) the greater or less uncertainty that the party failing to perform will perform the remainder of the K.

Application: The letter which Ds attorney wrote to Ps attorney that due to the many delays there will be no sale and purchase of the stock constituted notification to P that D considered his own duty of performance under the K discharged as a result of Ps breach of K and that D was thereby terminating the K and substituting his legal remedies for his contractual rights. Such action was justifiable if, but only if, Ps breach could properly be classified as a total, rather than a partial, breach of K.

If on the other hand, Ps breach was not total so that D was not entitled to consider himself discharged under the K, then Ds action would constitute an unlawful repudiation of the K, which would in turn be a total breach of the k sufficient to discharge P from any further duty to perform the K. Although P had paid part of the purchase price for the stock and although his delay in paying the balance due under the K could probably be compensated for in damages, the court is of the opinion that D was justified in terminating the K despite Ps offers to perform and his assurances to D that he would. o In addition, in light of Ds numerous requests of P for the balance due, the latters failure to perform could certainly not be characterized as innocent; rather it could be ascribed to gorss negligence or willful conduct o Despite Ps frequent expressions that he would perform, the evidence is such as to warrant the inference that he did not intend to perform the K. o D was not requied to endure the uncertainty or to await Ps convenience and was therefore justified in treating the Ps nonperformance as a total breach of the . o Moreover, Ds attorneys rejection of Ps attorneys request was not an unlawful repudiation of the K on Ds part, and was therefore not a breach of the K and thus did not discharge Ps duty to perform the k or to respond to P in damages.

NOTES & QUESTIONS (1) Total and Partial Breach The term total breach does not mean that a party has breached all of her obligations under the K. A breach is total if the breach is sufficiently serious to justify discharging the nonbreaching party from her obligations to perform the K. rest.2d 242 identifies vaiours factors to guide courts in making this determination. The distinction b/w total and partial breach is significant in 2 ways:

o it determines the effect of the breach of the performance obligations of the nonbreaching party; it also affects the measurement of that partys damages. o A total breach relieves or discharges the nonbreaching party from his duties under the K; after a total breach the nonbreaching party is justified in refusing to perform his obligations and may enter into alternative Ks. o A partial breach does not discharge the nonbreaching party, who must ocntinue to perform his obligations under the . o 2d, after a total breach, the injured party is entitled to recover not only actual damages accrued as a result of the breach but also any future damages that will reasonably flow from the breach; o a partial breach produces a right to damages only for the actual harm that has resulted to date, not for future harm.

(2) Material and Total Breach When an uncured material breach by one party occurs, the Rest.2d 237 treats this as in effect the nonoccurrence of a (constructive) condition to the other partys duty to render any performance not yet due, and performance by that party may therefore be suspended until the breach is cured. The materiality of a breach is to be decided in light of the factors listed in rest.2d 241. When a material breach becomes total, under 242, it has the effect of discharging the other partys remaining duties of performance and permitting that party to proceed immediately to pursue a claim for damages from total breach. Consider the relationship b/w the concept of total breach and the substantial performance doctrine. o If performance is substantial but defective, nonperformance would be only a partial breach. The breaching party must naswer in damages for the partial breach, but the nonbreaching party is not discharged.

Thus in Jacob & Young, Kent could not refuse to pay Jacob & Youngs the balance of the purchase price. Kent had the theoretical right to recover damages for Jacob & Youngss partial breach, its failure to use Reading pipe.

(3) (5) Risks facing the nonbreaching party there are substantial risks involved for the party who elects to treat the other partys nonperformance as a material or total breach, justifying suspension of performance or even termination on her party. Truman L. Flatt & Sons Co. v. Shupf Facts: P and D entered a K in which Ds agreed to sell P a parcel of land. The K stated the purchase price was to be $160,000. o The contract contained the following provisions: That the transaction shall be closed on or before June 30; and that within 120 days after the date, Buyer must obtain a zoning permit and in the event the City Council denies the request for such use of the property, then this K shall ve voidable at Buyers option and if Buyer elects to void this K Buyer shall receive a refund. Ps attorney sent a letter to Ds attorney informing him of substantial public opposition P encountered at a public meeting concerning its request for rezoning. o b/c of that, P provided that the property was worth less and only willing to pay less. D responded that that is not acceptable. Then P replied saying he will still purchase the property. After this, Ps attorney sent 2 more letters to Ds attorney, each requesting information concerning the statuts of Ds preparation for fulfillment of the K. Ds attorney replied that Ps failure to waive the rezoning requirement and elect to proceed under the K at the time the rezoning was denied, coupled with the

new offer to buy the property at less than the K price, effectively voided the K. P sent one more letter to convince Ds to honor the K, but Ds declined. Ds then arranged to have Ps money returned. P seeks specific performance and other relief against Ds, asking the court to direct Ds to comply with the terms of the K. o Ds responded by filing a motion to strike, motion to dismiss, motion for summary judgment.

Trial court granted the Ds motion for summary judgment. P appeals Issue: Whether trial court erred in granting summary judgment to D b/c P did not repudiate the K and even if it did, it timely retracted that repudiation. Rule: The doctrine of anticipatory repudiation requires a clear manifestation of an intent not to perform the K on the date of performancethat intention must be definite and unequivocal manifestation that he will not render the promised performance when the time fixed for it in the K arrives. Doubtful and indefinite statements that performance may or may not take place are not enough to constitute anticipatory repudiation. Rest. adtops the UCC and states language that under a fair reading amounts to a statement of intention not to perform except on conditions which go beyond the K constitutes a repudiation. Rest. the effect of a statement as constituting a repudiation under 250 or the basis for a repudiation under 251 is nullified by a retraction of the statement if notification of the retraction comes to the attention of the injured party before he materially changes his position in reliance on the repudiation or indicates to the other party that he considers the repudiation to be final. UCC Retraction of Anticipatory Repudiation (1) Until the repudiating partys next performance is due he can retract his

repudiation unless the aggrieved party has since the repuditaiton cancelled or materially changed his position or otherwise indicated that he considers the repudiation final. After an anticipatory repudiation, the aggrieved party is entitled to choose to treat the K as rescinded or terminated, to treat the anticipatory repudiation as a breach by bringing suit or otherwise changing its position, or to await the time for performance. o Unless the aggrieved party provides notice or materially changes its position, the other party has the right to retract its anticipatory repudiation. o If the aggrieved party has not changed their position at all, it must indicate to the other party it is electing to treat the K as rescinded. This can be accomplished either by bringing suit, by notifying the repudiating party, or by in some other way manifesting an election to treat the K as rescinded. Prior to such indication, the repudiating party is free to retract its repudiation.

Application: P argues that trial court erred in finding P repudiated the K. Court holds that the language in the letter did nto constitue a clearly implied threat of nonperformance. o Although the language in the letter perhaps could be read as implying P would refuse to perform under the K unless the price was modified, given the totality of the language in the letter, such an inference is weak. o Even if such an inference were possible, IL law requires a repudiation be manifested clearly and unequiovally. Ps letter at most created an ambiguous implication whether performance would occur. Court holds that trial court erred on granting summary judgment b/c P timely retracted its repudiation. o P admits that D had the right to treat the K as being terminated or rescinded.

However, P has the option to retract the repudiation before the aggrieved party has chosen one of its options allowed under the common law, and P argues that Ds letter failed to treat the K as rescinded, and absent notice or other manifestation Ds were pursuing one of their options, P was free to retract its repudiation. Court agrees. Ds admitted that they had not entered another agreement to sell the property, nor even discussed or considered the matter with another party. Ds had not changed their position at all, nor do Ds make any attempt to so argue so they have not undergone a material change. So it must have indicated to the toher party that it was electing to treat the K as rescinded. This can be accomplished by bringing suit, by notifying the repudiating party, or by in some other way manifesting an election to

treat the K as rescinded. Prior to such indication the repudiating party is free to retract its repduation. Applying the facts to the CL rule, P sent Ds a letter which clearly and unambiguously indicated P intended to perform under the K. o However, Ds did not notify P, either expressly or impliedly, of an intent to treat the K as rescinded. Nor is there anything to indicate an intent by Ds to treat the K as rescinded or terminated. o Thus assuming, Ps request for a lower purchase price constituted an anticipatory repudiation of the K, P successfully retracted that repudiation in the letter b/c Ds had not yet materially changed their position or indicated to P an intent to treat the K as rescinded.

Holding: Therefore b/c P had timely retracted any alleged repudiation of the , the trial court erred in granting summary judgment for Ds.

NOTES & QUESTIONS

8/30/2011 12:18:00 PM WEEK 10 READINGS PP. 845-57 N+Q 2,3; 868-86 N+Q 2,3 AFTER HADLEY; 7 AFTER FLORAFAX EXPECTATIONS DAMAGES: PRCINIPLES AND LIMITATIONS Computing the Value of Ps Expectation the expectation that the court seeks to protect in its award of K damages is the gain the P would have realized if the K b/w P and D had been fully performed, as promised by both parties. If the Ps own performance was incomplete when the Ds breach occurred and remains incomplete when the Ps claim for damages is adjudicated, since the aim of the law is to put the P in as good a position as she would have occupied had the K been fully performed on both sides, the expectation to be protected is the Ps net expectation the value of the performance d had promised to render, less the cost of the performance P had promised in return as the price of Ds performance. o Rest.347 General Measure of Damages the difference b/w the value to the injured party of the performance that should have been received and the value to that party of what, if anything, actually was received will be referred to as the loss in value. if for ex, a buyer of goods has a claim for damages for partial breach b/c the goods were nonconforming, the loss in value equals the difference b/w the value to the buyer of the goods that were to have been delivered and the value of the goods that were actually delivered. Second, the breach may casue the injured party loss other than loss in value, and the party is also entitled to recovery for this, subject again to limitations such as that of unforeseeability. Such loss will be referred to as other loss and is sometimes said to give rise to incidental and consequential damages. Incidental damages include additional costs incurred after the breach in a reasonable attempt to avoid loss, even if the attempt is unsuccessful.

Roesch v. Bray Facts: Ps entered into a written contract for the sale of their home with Ds. 5 days after the K was entered into, Ds informed Ps that they would not be able to perform on the K. Prior to the breach of the K, Ps had entered into a K to purchase another home. D Harry Bray, father of P, Janie Roesch, had encouraged Ps to purchase other real estate in order that he and his wife could move into the property that they were living in. The K entered into b/w Ps and Ds provided for a purchase price of $65,000, $45,000 to be paid at the time of closing and $20,000 to be paid upon the sale of Ds home with no interest to be charged on said amount. o Due to the breach, Ps borrowed $65,000 from a 3d party at 16% interest in order to meet his obligations under the K for the purchase of his new home. o Ps ultimately resold the property for $63,500.

Procedure: Trial court granted Ps partial summary judgment on the breach. An award of $9,163 was awarded for utilities, insurance, real estate taxes, yard maintenance, advertising and interest on the $45,000. o Ps now contend that the trial court erred in failing to award damages for the difference b/w the K price agreed to by the appellees and the resale price of the home. Ps argue that they realized net proceeds in the amount of $52,000 when the actual price of the home was $63,000, and therefore the maximum amount that Ps are entitled to recover in addition to what has been awarded is $1,500 plus interest. Trial court held that there was no evidence introduced to establish the market value of the property at the time of the breach and that the ultimate sale price of the home received one year after the breach of the K

and upon different terms should not be admitted as evidence of the market value at the time of the breach. Issue: Whether trial court erred in not awarding $1,500 more to Ps? o 2d issue: Whether the trial court erred in awarding Ps damages for the costs of holding the property until resale and for interest on the $45,00. Rule/Application: When the sale of real estate after a breach of K is made within a reasonable time and at the highest price obtainable after the breach, it is evidence of the market value on the date of the breach. At the time of Ds breach, the housing market was moving slowly since interest rates were very high, therefore, it would nto be unreasonable to assume that the resale price tendered in August 1983 was the best indicator the market value of the home in 1982. Also, the court cannot conclude that the resale of the home one year after Ds breach was unreasonable due to the market condition. Also the resale price obtained by appellants, $63,500 was very close to the purchase price offered by appellees. That is, the eventual sale price in 1983 is a measure of the value of the property in August 1982. Generally, damages on a breach of K are limited to losses that are reasonably to be expected as a probable result of the breach. o In this case, the damages awarded by trial court include maintenance and utiliy expenses for several months, plus certain costs for resale. Court says to allow recovery for expenses of this kind could lead to harsh consequences, and could mount indefinitely to unlimited amounts if the sellers failed to use, rent or resell their property.

Holding: Court concludes that appellants are entitled to the benefit of their bargain: the contract price less the actual resale price.

The resale price is $63,500, rather than $52,419.20. 2d Holding: THe court holds that these expenses are incidental to ownership, that a breaching party ould be subjected to liability for similar expenses for months or years on end, and that appellees cross-assignment of error is well founded. Total judgment of $1,500 plus 10% interest from the date of the breach.

Hadley v. Baxendale Facts: Ps were millers when one of their mill was stopped working. They had it manufactured from engineers at Greencwich, and so, the next days, the Ps sent one of their servants to the office of the Ds, for the purpose of having the shaft carried to Greenwich and to get a new shaft. The store told them that it would be shipped out the next day and in Greenwich within a day. Ds clerk had it shipped out the next day and everything before the deadline, however, the delivery of the shaft was delayed by some neglect and as a consequence, the Ps did not receive the new shaft for several days after they would otherwise have done, and the working of the mill was delayed, and los the profits they would otherwise have received.

Procedure: Damages were awarded but then a new trial was issued based on an error of the rule. The new rule was that: the amount which would have been received if the K had been kept, is the measure of damages if the K is broken. Issue: Whether the rule issued at trial court was errorneous? Whether applying the new rule laid down by the court, damages for loss of profits should be taken into consideration? Rule: Court lays out a new proper rule: Where 2 parties have made a K which one of them has broken, the damages which the other party ought to receive in respect of such breach of K 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 K itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the K, as the probable result of the breach of it. Now, if the special circumtsnaces under which the K was actually made were communicated by the Ps to the Ds, and thus known to both parties, the damages resulting from the breach of such a K, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of K under these special circumstances so known and communicated. But on the other hand, if these special circumstances were wholly unknown to the party breaking the K, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of K.

Application: The only circumstances here communicated by the Ps to the Ds at the time the K was made, were, that the article to be carried was the broken shaft of a mill, and that the Ps were the millers of that mill. But how do these circumstances show reasonably that the profits of the mill must be stopped by an unreasonable delay in the delivery of the broken shaft by the carrier to the 3d person? Court says that it is obvious that, in the great multitude of cases of millers sending off broken shafts to 3d persons by a carrier under ordinary circumstances, such consequences would nto, in all probability have occurred; and these special circumstances were here never communicated by the Ps to the Ds. o Therefore the loss of profits here cannot reasonably be considered such a consequence of the breach of K as could have been fairly and reasonably contemplated by both the parties when they made this K. Such loss would neither have flowed naturally from the breach of this K in the great multitude of such cases occurring under ordinary circumstances, nor were the special circumstances, which, perhaps, would have

made it a reasonable and natural consequence of such breach of K, communicated to or known by the Ds. The j

Holding: the Judge, therefore, ought to have told the jury, that, upon the facts, they ought not to take the loss of profits into consideration at all in estimating the damages. NOTES & QUESTIONS 2,3 (2) General and consequential Damages In Hadley, the court refers to 2 types of damages: those that arise naturally from the breach of K and those that result from special circumstances communicated at the time the K was formed. These 2 types of damages have various labels. Damages that arise naturally are often referred to as general or direct damages. Damages flowing from special circumstances are usually called consequential damages although the term special damages is sometimes used. o The P need not make any special showing to recover general damages. o The most important type of consequential damages in commercial cases is lost profits arising from collateral Ks. (note that lost profit on the K that is breached, as opposed to other Ks, is treated as general rather than consequential damages). Consequential damages also include injury to person or property caused by goods that fail to comply with

contractual warranties. (3) FORESEEABILITY the modern formulation of the rule in Hadley is now stated in terms of the foreseeability of the loss. The application of the test is uniformly understood to depend on the Ds knowledge at the time the K is made. 2d it is only necessary that the type of loss be foreseeable, not the manner in which the loss occurs.

3d, while courts sometimes refer to risks that are within the contemplation of both parties, the focus of foreseeability is on the breaching party. 4th the standard for foreseeability is at least in part objective. o The breaching party is liable for losses about which it had reason to know. Finally, the loss must be foreseeable as a probable result of the breach. o Liability is not limited to losses that are necessary or inevitable, but it does not extend to remote losses.

Florafax Int, Inc. v. GTE Market Resources, Inc. Facts: P is a flowers by wire company acting as a clearinghouse to allow the placement and receipt of orders b/w florists throughout the US and internationally. In addition, P solicits agreements with 3d party clients such as supermarket chains, American Express that advertise the sale of floral products by various methods (i.e. tv, radio, newspapers, etc) which allow a consumer to order floral arrangements via the use of a 1-800 call. o One client that signed up for an arragement like that described above was Bellerose Floral Inc. o P and Bellerose entered a K whereby P and/or its designee would accept direct consumer orders placed via the 1-800 call and it also agreed to handle the outbound placement of orders either by telephone or computer. The K provided P would be paid certain fees per order. K said it could be terminanted w/ or w/o cause upon a 60 days written notice. GTE, was a company providing telecommunication and/or telemarketing service for toehr businesses. o After 2 weeks P signed the agreement with Bellerose, The P/GTE K was entered. It provided D would via a call answering center handle much, if not all, of the activities connected with taking incoming orders and placing outgoing calls or computer

transmissions directed to it by P associated with the purchase and fulfillment of floral orders throughout the US and internationally. The agreement required P to pay D certain fees for this service. GTE knew before the K that it would be providing services also for Bellerose. o Problems surfaced in regard to the adequacy of Ds performance. The most glaring breach of Ds party was a failure during the week leading up to Mothers Day to provide sufficient employees to answer calls anticipated to be directed to it by Florafax, including calls from Bellerose. W/o adequate employees, floral product orders would obviously be lost and Ps income lost in the process. o There was also evidence that during the term of the K Ds project manager for the Florafax account that D no longer wanted the P account b/c D was not making money under the Ks pricing scheme. o Also, evidence was presented that Ds failure to perform caused Bellerose to terminate its agreement with P and Bellerose ceased its relationship with P. As a result of Ds breach, in addition to losing Bellerose as a client, P incurred costs primarily associated with taking steps necessary to set up its own call answering center to perform Ds duties. o In addition to seeking damages attributable to costs associated with performing the services D was supposed to perform, P sought lost profits it claimed would have been realized from the P/Bellerose K.

Procedure: Jury determined D breached its contract with P and awarded P $750,000 in lost profits that would have been earned under the Florafax/Bellerose K over a 2 year period of time. Other damages awarded was a little over $820,000.

Issue: Whether the jury award of lost profits over a 2 year time period in favor of P against D for breaching a K requiring D to provide telecommunication and/or telemarking services for P, the profits which were those P claimed it stood to make from a collateral K it had with a 3d party, but allegedly lost when the collateral K was canceled purportedly b/c D breached its K with P was appropriate? Rule: Loss of future or anticipated profit i.e. loss of expected monetary gain is recoverable in a breach of K action: (1) if the loss is within the contemplation of the parties at the time the K was made, (2) if the loss flows directly or proximately from the breach i.e. if the loss can be said to have been caused by the breach and (3) if the loss is capable fo reasonably accurate measurement or estimate. Where there is sufficient evidence presented on the issue of the recovery of special damages including lost profits what was or was not in the contemplation of the parties at the time of contracting is a question of fact to be determined by the trier of fact. In order for damages to be recoverable for breach of K they must be clearly ascertainable, in both their nature and origin, and it must be made to appear they are the natural and proximate consequences of the breach and not speculative and contingent. o It is not necessary, however, for the recovery of lost profits shown to have been caused by a breach of K, that the profits be established with absolute certainty and barring any possibility of failure, but it is only required that it be established with reasonable certainty that profits would have been made had the K not been breached. o In essence, what a P must show for the recovery of lost profits is sufficient certainty that reasonable minds might believe from a preponderance of the evidence that such damages were actually suffered.

o Once it is made to clearly appear that loss of business profits has been suffered by virtue of the breach, it is proper to let the jury decide what the loss is from the best evidence the nature of the case admits. When a breach of a contractual obligation with resulting damages has been established, although the amount of damage may not be based on mere speculation, conjecture and surmise alone, the mere uncertainty as to the exact amount of damages will not preclude the right of recoveryit is sufficient if the evidence shows the extent of damages by just and reasonable inference.

Application: The Florafax/Bellerose K was entered 2 weeks prior to the GTE agreement and GTE knew either before or contemporaneously with signing the K that Bellerose was considering turning over a portion of its inbound and outbound business via its 1-800-flowers network to Florafax. D had within its contemplation at the time of contracting the potential for profits from a Florafax association with Bellerose. D knew it would be providing servies not only directly for Florafax, but for others on behalf of Florafax. Further, a clause in the Florafax/GTE K itself expressly reflects the parties contemplation of the recovery of lost profits by Florafax should GTE cease to perform its duties and obligations during the term of the K. Ds argue that the 60 day termination clause precludes the recovery of lsot profits beyond the 60 day period in the Florafax/Bellerose K. o Court disagrees. o D had no right to terminate either the Florafax/GTE or Florafax/Bellerose Ks upon any short specified notice provision. That right belonged only to Florafax and Bellerose, and only in relation to the latter K. Thus full performance could not have been supplied by the simple expediency of GTE giving 60 days notice to Florafax that it was terminating their agreement.

Instead, the Florafax/GTE K had a minimum term of 2 years based on the effect of the price renegotiation provisions of the K, i.e. Florafax was guaranteed performance by GTE for a full 2 years. The Osborne case D tries to use is distinguishable b/c there there was the right to cancel while here GTE had no right to cancel at any time. So P can recover for lost profit in excess of a 60 day period.

The court believes that sufficient evidence was presented so that Florafax carried its burden to prove the fact, cause anda mount of its lost profit damages with the requisitie degree of reasonable certainty. o Although the numbers conflict b/w those presented by P and D, both presented estimates that Florafax could have made profits from the Florafax/Bellerose relationship had it survived. o There is enough evidence to support a reasonable determination that Belleroses decision to cancel or terminate its relationship with Florafax was the direct result of GTEs failure to render adequate performance and, that GTEs breach of the K caused the cancellation.

Evidence that Bellerose had been in business for a number of years, and it had experienced 100,000-200,000 orders annually is relevant in determining damages. o Evidence also existed which showed that Bellerose, after terminating its relationship with Florafax, experienced a substantial increase in its sales volume in 1991. In other words, there was not only evidence tending to show a certain volume of orders prior to the breach, but evidence tending to show that level of sales would have in all probability increased substantially during part of the term of the Florafax/GTE K had Bellerose continued its relationship with Florafax.

$750,000 awarded for the 2 year period was within the range of the estimates of the 2 experts.

Holding: The award of damages was an appropriate remedy for GTEs breach of its K with Florafax. NOTES & QUESTIONS (7) CONSEQUENTIAL DAMAGES IN OTHER CASES for breach of an employment K an employee may recover as general damages the wages that she would have received under the K less the amount of wages that she could have earned from comparable employed found through reasonable efforts.

8/30/2011 12:18:00 PM WEEK 11 READINGS PP. 886-904 N+Q 2 AFTER ROCKINGHAM; 2-3, 5-7 AFTER HAVILL The P may not recover for those injurious consequences of the Ds breach that the P herself could by reasonable action have avoided. This principle is also referred as the doctrine of avoidable consequences. Rockingham County v. Luten Bridge Co Facts: Luten Bridge Co as P to recover of Rockingham County an amount alleged to be due under a K for the construction of a bridge. The county admits the execution and breach of the K, but contends that notice of cancellation was given the bridge company, before the erection of the bridge was commenced, and that it is liable only for the damages which the company would have sustained, if it had abaondend construction at that time. Luten Bridge entered into a K to build a bridge for Rockingham county. Then the county changed its mind and instructed Luten to stop work on the bridge K, they took the position that the K was not binding on the county and would not be honored. Luten gambled on the fact that the majority who voted for the bridge would regain control of the Commission and continued with construction.

Issue: Whether Luten can add the damages from continuing construction after having received notice to desist onto the damages for breach of K by the county? Rule: If A enters into a binding K to build a hosue for B, B, of course, ahs no right to rescind the K without As consent. But if, before the house is built, he decides he does not want it, and notifies A to that effect, A has no right to proceed with the building and thus pile up damages. His remedy is to treat the K as broken when he receives the notice, and sue for the recovery of such damages as he may have sustained fromt eh breach, including any profit which he would

have realized upon performance, as well as any other losses which may have resulted to him. After an absolute repudiation or refusal to perform by one party to a K, the other party cannot continue to perform and recover damages based on full performance. This rule is only a particular application of the general rule of damages that a P cannot hold a D liable for damages which need not have been incurred; or, as it is often stated, the P must, so far as he can without loss to himself, mitigate the damages caused by the Ds wrongful act.

Application: The county had no right to rescind the K, and the notice given P amounted to a breach on its part; but, after P had received notice of the breach, it was its duty to do nothing to increase the damages flwoing thereform. When the county gave notice to the P that it would not proceed with the project, P should have desisted from further work. It had no right thus to pile up damages by proceeding with the erection of a useless bridge. Holding: No Luten cant. The measure of Ps damage, upon its appearing that notice was duly given not to build the bridge, is an amount sufficient to compensate P for labor and material expended and expense incurred in the part performance of the K, prior to its repudiation, plus the profit which would have been realized if it had been carried out in accordance with it terms. Havill v. Woodstock Soapstone Company Inc

Facts: P was an employee of Ds. As part of Ds policy it said in a manual that an employee was entitled to 2 written warnings in a 12 motnh period prior ot termination. D started having financial problems and hired Scott to strealine operations. P and Scott began having issues, D was alerted of it, and a letter reprimanding P of her behavior was received.

Then P and Scott decided to reconcile their differences in a written agreement but a month later P was fired. P did not receive any written warnings prior to termination. P won and was awarded $74,644 in principal damages plus $15,040 in prejudgment interest. o Both appeal on damages.

Procedure: Supreme Court upheld trial courts ifnding that D employer intended to be bound by its personnel policies that employees would be terminated with 2 written warnings. Held that D breached the employment K by terminating the P without warning and was therefore liable for damges.

Issue: Did P mitigate her damages by finding work after her termination? Rule: an employee claiming wrongful discharge has a general duty to mitigate damages. Mitigtion in the context of an employment dispute, requires that the employee make a good faith effort to find suitable alternative employment. When an employer is claiming that the employee did nto properly attempt to mitigate damages, the burden of proof is on the employer to show such failurethis requires that thee employer show both that suitable work existed and that the employee did not make reasonable efforts to obtain it.

Application: Yes, she entered the market right away, worked for 2 different people. And considering her age at 60, it was unlikely that any employer would take a chance on hiring and training her when she was so close to retirement age. Furthermore P was able to secure a client for her home typing business within a matter of days after her employment at Morgans ended. P acted with the utmost good faith in trying to keep herself employed after D terminated her, and that was all that was required of her.

Holding:

8/30/2011 12:18:00 PM WEEK 12 READINGS PP. 965-82; N+Q 2,3,6 AFTER WIRTZMANN; 3,4,6 AFTER Walser Wartzman v. Hightower Productions Ltd (Reliance damages) Facts: Woody Hightower did not succeed in breaking the Guinness world record for flagpole sitting; his failure to accomplish this feat generated protacted litigation. Hightower Productions Ltds principals intended to employ a singerentertainer who would live in a specially constructed mobile flagpole perch from April 1, 1975 until New Years Eve at which time he would descend in Times Square in NY before a nationwide television audience having established a new world record for flagpole sitting. The man selected for this was Woody Hightower and his venture was to be publicized by radio and tv and by having the uncrowned champion make appearances from his perch throughout the country at concerts, state fairs and shopping centers. The 3 principals went to a law firm to incorpate their venture. o The lawyer indicated that they needed to sell stock to the public in order to riase the $250,000 necessary to finance the project. o Then it issued the stocks and became incorporated. o Hightower raised $43K by selling stock in the corporation. Within 2 weeks of Woodys ascension, a stockholder meeting was schedule b/c the corporation was low on funds. The problem was that the law firm had failed to prepare an offering memorandum and failed to assure that the corporation had made the required disclosures to prospective investors in accordance with the provisions of the Maryland Securities Act. The lawyer advised Hightower that the cost of the specialist would be b/w 10k and 15k. Hightower asked the firm to pay and was denied. Hightower then employed substitute counsel and stockholders were advised that Hightwoer was not in compliance with the securities laws. There were many issues and costs and so the shareholders decided to discontinue the entire project.

Hightower filed suit alleging breach of K and negligence for the law firms failure to have created a corporation authorized to raise the capital necessary to fund the venture. o The only claim submitted for the jurys consideration was the claim of the corporation, Hightower, against the D law firm.

Procedure: Jury returned a verdict in favor of Hightower in the amount of $170K. Ds appeal and Hightower filed a cross appeal alleging that the jury should have been permitted to consider prejudgment ineterest. Issue: whether trail judge correctly permitted a jury to consider the issue of reliance damages? Appellants raise 4 issues: o (1) the trial court erred in permitted hightower to recover reliance damages or development costs. o (2) If reliance damages were recoverable, the trial court failed to properly instruct the jury on the law concerning their recovery o (3) the trail court erred in refusing to instruct the jury on the duty to mitigate damages o (4) the trail court erroneously permitted a member fo the Ps law firm to testify as a witness to the case.

Rule: ordinarily, profits lost due to a breach of K are recoverable. Where anticipate profits are too speculative to be determined, monies spent in part performance, in preparation for or in reliance on the K are recoverable. Recovery based upon reliance interest is not without limitation. If it can be shown that full performance would hav resulted in a net loss, the P cannot escape the consequences of a bad bargain by falling back on his reliance interest. Where the breach has prevented an anticipated gain and made proof of loss difficult to ascetain, the injured party has a right to damages based upon 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 K been performed. A contracting party is expected to take account of only those risks that are foreseeable at the time he makes the contract and is not liable in the event of breach for loss that he did not at the time of contracting have reason to foresee as a probable result of such a breach. TO find reliance liability the P must prove 3 things: o (1) the employment of the Ds in behalf of the P and the extent of the duties for which the Ds were employed o (2) that the Ds neglected the duties undertaken in the employment and o (3) that such negligence resulted in and was the proximate cause of loss by the P, that is that the P was deprived of any right or parted with anything of value in reliance upon the negligence of the Ds.

Application: appellants knew, or should have known, that the success of the venture rested upon the ability of hightower to sell stock and secure advertising as public interest int eh adventure. Appellants contention that their failure to properly incorporate Hightower was collateral and lacked the necessary nexus to permit consideration of reliance damages is not persuasive. o The very life blood of the project depended on the corporations ability to sell stock to fund the promotion. o This is the reason for the employent of the appellants, and in reliance, Hightwoer sold stock and incurred substantial obligations. When it could no longer sell its stock, the entire project failed. Appellants were unable to prove that the stunt was doomed to fail. The issue was properly submitted to the jury.

For mitigation of damages: o Hightwoer did not have the 43k to place in escrow covering stock sold; did not have the 10k or 15k to employ a securities specialist and could not continue stock sales or exhibitions to obtain the necessary funds. o Mr. Wartzmans (lawyers) offer to set up an appointment for hightower with an expert in security transactions at Hightowers expense can hardly be construed as a mitigating device that Hightower was obligated to accept. The party who is in default may not mitigate his damages by showing that the other party could have reduced those damages by expending large amounts of money or incurring substantial obligations. Since such risks arose b/c of the breach, they are to be borne by the defaulting party. o The doctrine of avoidable consequences, moreover, does not apply where both parties have an equal opportunity to mitigate damages. Appellants had the same opportunity to employ and pay a securities specialist as they contend Hightower should have done. They refused. Having rejected Hightowers request to assume the costs of an additional attorney, they are estopped from asserting a filaure by Hightower to reduce its loss.

The reliance damages in this case are not subject to pre-judgment valuation. o Reasonable and justified damages incurred by reason of Mr. Wartzmans representation of Hightower were not reasonably ascertainable until the jury rendered its verdict. o Refusal to permit the jury to consider prejudgment interest was not an abuse of discretion.

Holding: appellants contention that permitting the jury to consider that reliance damages in this case rendered the appellants insurers of the venture is without merit. It was properly submitted to the jury. NOTES (2) K price as limit on reliance damages A distinction should be drawn b/w the costs of performance of the K (essential reliance) and the costs incurred in collateral transactions related to the K (incidental reliance). The K price should limit the recovery only of essential reliance damages. To the extent that essential reliance exceeds the K price, the K would be a losing one. o An award of essential reliance damages in excess of the K price would put the injured party in a better position than if the K had been fully performed. o The K price should not, however, limit the recovery of incidental reliance damages.

(3) Limitations on recovery of reliance damages. Restatement indicates that the doctrines that normally apply to limit recovery of expectation damages foreseeability, causation, certainty, and mitigation should also apply to recovery of reliance damages. o One of the principal damage-limiting factors is the possibility that the P could have mitigated the injury resulting from the Ds breach. o In Wartzman, the court held that the Ps had no obligation to mitigate their damages by paying the amount necessary to hire an attorney specialized in securities law, b/c the Ds had the same opportunity as the Ps to take that action. o Known as the equal opportunity exception to the requirement of mitigation. (6) Foregone opportunities as reliance damages ordinarily, reliance damages are thought of as out of pocket expenditures made by the P. Sometimes, hwoever, protection of

the injury to the Ps reliance extends further, taking into account the gains the P would have made had she not relied on the promises of the D. o ex. after breach of exclusive territory provision, P permitted to recover not only initial franchise fee but also amount of lost salary after quitting his original job until reemployed; Walser v. Toyota Motor Sales Facts: Ps appeal from a jury verdict awarding them $200,000 in damages on their promissory estoppel claim against Toyota. Toyota began a search for a dealer for the Bloomington/Richfield location. Stephen Haag contacted Walser P who was tehn co-owner with McLaughlin of a BMW and Lincoln dealership. Both met with Haag and asserted an interest in obtaining the Lexus dealership. After Ps applied for the dealership, Haag told Walser in October that the letter of intent would soon be approved. Subseqnetly in December, Haag told Walser that youre our dealer and that the letter of intent had been formally approved. A few days later Haag called Walser to tell him that a mistake had been made, that the letter had not been approved, and that additional information would be necessary. In the meantime, Walsers father, had agreed to purchase property for the proposed Lexus dealership. Then February next year, Haag informed Walser that Lexus would not be issuing the letter of intent.

Procedure: District court granted Toyotas motion for partial summary judgment and dismissed the claims for breach of the Minnesota motor vehicle frachise statute and for recovery on a joint venture theory. Walser and McLaughlin sought approx 7.6 million in damages, which included expected lost profits. Jury returned a verdict in favor of Toyota on the K and fraud claims but in favor of Ps on the promissory estoppel claim. Jury awarded Ps $200,000.

Issue: whether district court erred by instructing the jury that the Ps damages on their promissory estoppel calim were limited to out-of-pocket expenses? Whether the language of section 90 authorized the district court to limit damages to Walser and McLaughlins out-of-pocket expenses. Whether the district court erred in declining to award specific performance as an alternative remedy on their promissory estoppel claim, in denying their motion for judgment as a matter of law on their K claim, in instructing the jury on their K claim, in requiring them to accept payment from Toyotal for $.89 less than the amount of damages and interest awarded, in granting summary judgment on their claim under the Minnesota Motor Vehicle sale and Distribution Regulations, and in precluding them from taxing costs prior to a final determination?

Rule: Remedy for breach based on promissory estoppel: A promise binding under this section is a K, and full-sclae enforcement by normal remedies is often appropriate. But the same factors which bear on whether any relief should be granted also bear on the character and extent of the remedy. In particular, relief may sometimes be limited to restitution or to damages or specific relief measured by the extent of the promisees reliance rather than by the terms of the promise. Courts may limit relief as justice requires

Application: Toyota presented evidence that the negotiations were still in a preliminary stage and broke down. The promise on which they relied did not guarantee that they would get the dealership, as they were other conditions in the letter of intent that still would have had to be satisfied. Ps could have relied on the promise for only a short period of time, as they were informed by D only a couple of days later that he had misinformed them. Ps have not demonstrated any opportunity they lost by virtue of relying on the promise by Toyota.

Holding: district court was allowed to limit damages. NOTES

8/30/2011 12:18:00 PM WEEK 13 READINGS PP. 983-95; N+Q 2,3,4 AFTER ALGENON BLAIR; 2,3,4 AFTER LANCELLOTTI Restitutionary Damages K law allows a nonbreaching party to elect recovery of retitutionary rather than expectation damages for breach of K. rest. 2d 373 Even a breaching party may in some cases be entitled to restitution by virtue of the benefit conferred on the other party by part performance. Moreover, if the performance obligations imposed by the K have been discharged for some reason, such as incapacity or impracticability, either or both of the parties may be entitled to restitutionary relief. US Coastal Steel Erectors v. Algernon Blair Facts: Blair had entered a K with the US for the construction of a naval hospital. Blair had then contracted with Coastal to perform certain steel erection and supply certain equipment in conjunction with the K. Coastal commenced performance of its obligations, supplying its own cranes. Blair refused to pay for crane rental, maintaining that it was not obligated to do so under the subK. After completion of 28% and due to the refusal to pay for the rental, Coastal terminated its performance. Blair then proceeded to complete the job with a new subcontractor. Coastal brought action to recover for labor and equipment furnished. o Lower court found that Coastal was entitled to 37K. o Additionally the court found Coastal would have lost more than 37k if it had completed perofmrnace.

Issue: Rule: a promisee can recover the value of services he gave to the D irrespective f whether he would have lost money on the K and been unable to recover in a suit on the K.

The measure of recovery is the reasonable value of the performance, and recovery is undiminished by any loss which would have been incurred by complete performance.

Application: Coast provided Blair with labor and the use of equipment. Blair who breached the subK has retained these benefits without having fully paid for them. Holding: Yes you can recover. NOTES (2) Market Value Restitution

Lancellotti v. Thomas Facts: The Appellant entered into an agreement with the Appellee, where the Appellant agreed to purchase the Appellees luncheonette business and to rent the premises on which the business is located. In return, in addition to paying rent, the Appellant agreed to build an addition onto the structure in which the business was located.

The Appellant paid $25,000 as specified by the agreement. However, it failed to build the addition. Eventually, the Appellee built the addition. The Appellant lost interest in the business and the Appellee resumed possession. The Appellant then sued, demanding his payment of $25,000.

Issue: whether a defaulting purchaser of a business who has also entered into a related lease for the property can recover any part of his payments prior to default (breach)? Rule: the party who breached should be entitled to recover any benefit in excess of the loss that he has caused by his own breach. Application:

Holding: Yes. Judgment reversed and remanded for further proceedings. Pennsylvania should follow the modern view of contract law, which allows a breaching party to recover any benefit NOTES (3) Effect of willful breach Rest. 2d 374 an intentional variation from the terms of the K (as distinguished from an intentional nonperformance) will preclude restitution: o A party who intentionally furnishes services or buids a building that is materially different from what he promised is properly regarded as having acted officiously and not in part performance of his promise and will be denied recovery on that ground even if his performance was of some benefit to the other party. (4) Measure of restitution What should the measure of the restitutionary interest be when recovery is gven to a party who has committed a material breach? o Rest. 374 comment b provides that recovery should be limited to the lesser of either (a) the value of the benefits conferred or (b) the Ds increase in wealth. In addition, to prevent the breaching party from recovering more than her expectation interest, the Restatement also provides that in no case will the party in breach be allowed to recover more than a ratable portion of the total K price where such a protion can be determined. Finally, to ensure protection of the nonbreaching partys expectation interest, any damages suffered by that party must be deducted from the amount of the restitutionary award.

8/30/2011 12:18:00 PM WEEK 14 READINGS pp 1008-1021 SPECIFIC PERFORMANCE City Stores Co v. Ammerman Facts: P, City Stores Company, seeks specific performance of a K wherein Ds allegedly promised to offer P a lease as a major tenant in Ds shopping center. In exchange, P promised to express great interest in becoming a major tenant for Ds rather than for the competing shopping center to be built and to assist D in securing the necessary zoning for the tract. There was also a letter from Ds promising Ps tenancy for its efforts in assisting Ds for the zoning application. o Court finds that the services P performed for Ds constituted adequate consideration for a valid unilateral K which was binding on the Ds thereafter.

Issue: whether there is a valid K and if so whether it is sufficiently definite so that specific performance of it should be decreed? Rule: the mere fact that a K, definite in material respects, contains some terms which are subject to further negotiation b/w P and D will not bar a decree of specific performance, if in the courts discretion specific performance should be granted. Contracts involving interests in land or unique chattels generally are specifically enforced b/c of the clear inadequacy of damages at law for breach of K. Performance of Ks for construction of buildings and other Ks requiring extensive supervision should be specifically enforced unless the difficulties of supervision outweigh the importance of specific performance to the P. o This is particularly true where the construction is to be done on land controlled by the D, b/c in that circumstance the P cannot employ another ocntractor to do the construction for him at Ds expense.

Application:

The K is not an option K. o Any specific terms they might have included in the letter would have been meaningless b/c they had neither received the necessary permission to construct their center, nor had they entered into leases with other major tenants which were to be the measure of the lease offered to Ps. o Yes it does not follow that what they did promise to offer P was without substance. What we havae here is a K with certain conditions precedent to its operation. The first condition precedent was securing the necessary zoning for its center, without which it couldnt construct a shopping center. The 2d condition precedent was its entering into leases with other major tenants for stores in the center, so the terms of those leases could provide the essential terms of a lease to be offered to P. Overall the court holds that Ds letter was a binding unilateral K, which gave P an option to accept a lease at Tysons Corner, and that the existence of express and implied conditions precedent did not render it invalid or too indefinite to be a K.

Specific Performance the crucial elements of rate of rental and amount of space can readily be determined from other leases, but the details of design, construction and price of the building to be occupied by P at Tysons Corner would have to be agreed to by the parties, subject to further negotiation and tempered only by the promise of equal terms with other tenants. o ISSUE: Thus the question is whether a court will grant specific performance of a K which has left such substantial terms open for further negotiation?

ISSUE: Whether a K which also calls for construction of a building can or should be specifically enforced?

o Court says that it is apparent from the nature of the K that even were it possible to arrive at a precise measure of damages for breach of a K to elase a store in a shopping center for a long period of years which it is not money damages would in no way compensate the P for loss of the right to participate in the shopping center enterprise and for the almost incalculable future advantages that might accrue to it as a result of extending its operations into the suburbs.

Holding: specific performance granted. NOTES & QUESTIONS 2,4,5,7 (2) Inadequacy of damages courts will generally grant specific performance to purchasers of real estate. Specific performance has traditionally been available to both buyers and sellers, however, specific performance to sellers of property are not very common. Rest. 360 identifies othe rcircumstnaces which support a claim that damages are inadequate. o These include the difficult of proving damages with certainty, the difficulty of procuring a suitably equivalent substitute performance, and the likelihood that a damage would not be collectible. (4) Other factors affecting award of specific performance besides the question of adequacy of the remedy and the problem of difficulty of supervision, courts consider various other factors n deciding whether specific relief should be available. o These include the possibility that the K was the product of mistake or unfair practices, or that the exchange it calls for is grossly inadequate or the terms of the K are otherwise unfair. These factors are reflected in the doctrine that equity will not aid one who comes to court with unclean hands. Tenant denied specific peformance of option K b/c he had unclean hands; tenant mistled landlord

into believing that he would not exercise option and he had ulterior motive for doing so. Another factor to be considered is the question whether specific relief would cause unreasonable hardship or loss to the party in breach. o Ex, declining to award specific performance for buyers where sellers health had declined significantly due to spinal muscular atrophy after K was made, even though buyers were faultless and there is virtual presumption that nonbreaching buyers would receive specific performance.

(5) Effect on 3d parties besides the possibility that specific relief may disproportionately affect the D, the court in some cases must consider the possible impact of its decree on 3d parties. o Ex, denying award of specific performance to tenant in building project where enforcing commitment for location of Ps store would have required destruction of 5 new townhouses valued at $5 million, dispossessing the residents, and would have required judicial supervision. (7) Specific performance under the UCC in 2-716 the UCC declares that specific performance may be decreed for a buyer where the goods are unique, or in other proper circumstances. The provisions for seller, 2-709(1)(b) allows goods to be forced on the buyer and the price obtained when the goods are not reasonably subject to resale to others. o Under the Codes approach, courts will still face the question whether the goods contracted for are sufficiently unique to justify specific enforcement. Ex, specific performance of K for hog casings appropriate for buyer where comparable goods were not available in market palce and harm to buyer would be irreparable.