Contracts Frier Fall 2005

Contracts / Frier / Fall 2005
CH. 1: A ROADMAP FOR CONTRACT LAW

• Lucy v. Zehmer (1954)
o P asserts that D sold him a farm for $50K, which was written out on a restaurant bill, after both
had had a few drinks. Signed by D and wife. D claimed he was not serious, that it was a bluff
to get P to admit that he couldn’t pay the $$. No intention to sell. P thought he was serious and
made preparations for the sale. P sues for specific performance
o Issue: Does a valid K for sale exist?
o Holding: Event constituted a binding K of sale, whether offer was serious or not. Look to the
OBJECTIVE manifestations of the parties, not the private intent. P gets specific performance.
 D said it was a bluff – this is bad, joke would’ve been better. Bluff = intent to deceive.
Also, D never made it clear that he was not serious.
 D used incapacity – must be unable to comprehend the nature and consequences of the
instrument executed (R2K § 16)
 Objective theory: look to outward expression of a person as manifesting intention, not
secret and unexpressed intent – as a reasonable person would understand those actions
• R2K § 2 re: def’n of promise – objective “manifestation of intention”
 Note that if P had only offered $10K for it, the offer would be viewed differently –
gross inequality of exchange
 They also reduced this to writing, price was reasonable, signatures were there, and they
re-wrote it when D misspelled a word!
 Contract/no-contract:
• Expectation interest – formation of K over (offer/acceptance made, execution).
Legally sufficient to prevent Ds to avoid K – no one has given/received
anything, expectation of future state of performance only. Exchanging
promises (no need for $5)
• Reliance interest – P invested time/$$ - got an attorney. This is a change in
position, investment in K.
• Restitution interest – transfer in value, the other side has benefited from its
promise at your expense
• $$ value: expectation>reliance>restitution. This is the opposite when
considering the moral value
 Specific performance – equity (common w/ land transfers). Remedy – judicial decree
requiring transfer of deed in exchange for purchase price. Cts prefer damages
• Delchi Carrier Spa v. Rotorex Corp. (1995) US Ct of App 2nd Cir

o D sold P compressors for ACs, and sent a sample compressor for inspection and written specs.
After paying, P realizes that goods do not conform, and informs D, asking for new conforming
goods. P tries to cure. D refuses, so P cancels K. P was able to get substitute goods from other
suppliers, loss in sales though.
o Issue: Did D breach and if so, what damages are due?
o Holding: For P. D breached by delivering non-conforming goods, and this was fundamental
breach because D could foresee this result and it was what P was entitled to expect. Damages
for lost profits, consequential damages, incidental damages, labor shutdown – all because these
were foreseeable
 Using the CISG here – international sale of goods
 D is liable for the lack of conformity because of EXPRESS WARRANTY – assume
compressors will conform – not the same quality of goods. CISG art. 35
1
 This is a fundamental breach because it substantially deprives P of what it expected and

it was foreseeable
 Damages: should be equal to loss, including lost profit. CISG says that they cannot
exceed what party in breach could foresee at the time of K’ing. CISG art. 74
• Give lost profits – revenues minus the costs that would’ve been incurred but
were not.
• Incidental damages (direct consequence of breach) – storage of the
nonconforming goods, shipping them back – must be reasonable and
foreseeable
• Consequential damages (costs stemming from breach) – unreimbursed tooling
costs and unusable stuff obtained for D’s goods
 Court limits this at damages that are CAUSED by breach, CERTAIN (not projected
sales), and FORESEEABLE
 NOTE: When UCC and/or CISG are applicable, they MUST be used
Why do we contract?
 Invoke pwr of the state to get performance or damages – legal deal, threat of suit changes
actions.
 Make sure we agree on terms of deal
 Allocates and protects against known risks
CH. 2: THE BARGAIN THEORY OF CONTRACT

R2K § 1: The definition of a contract: “A promise or a set of promises for the breach of which the law gives a
remedy, or the performance of which the law in some way recognizes a duty.”
The law recognizes a promise as resulting in legal duties in 2 ways:

1. A moral duty to fulfill it
2. No promise should be enforced unless there is a good reason for enforcing it (the Courts’ view)
2 Interpretive devices to see if a promise is enforceable:

1. Form – formal contract, one under seal, written down
2. Consideration
A. CONSIDERATION
• What each promisor seeks in return for their making a promise
• R2K § 71 “The Bargain Theory of K” (dominant modern view)
o Promise is serious if there is some sort of exchange going on
o Performance or return performance must be BARGAINED for
o Performance is bargained for if it sought by the promisor in exchange for his promise, and given
by the promisee in exchange for the promisor’s promise.
o Performance = a) an act other than a promise, b) forbearance, c) creation, modification,
destruction of legal relations
• Party views what she gives as the price of what she gets.
• R2K § 79 adds that if there is consideration, there is no need to show a) additional benefit to promisor
or detriment to promisee, b) equivalence in values exchanged or c) mutuality of obligation [gets rid of
old notions of consideration]
2
• The value of consideration does not usually matter – no need to look at “adequacy of consideration” –
just see fair exchange of values.
• Inadequate consideration:
o Pretense of consideration: mere recital of consideration is not enough usually, unless option K
(R2K § 87) Schnell v. Nell
o Promise to make a gift is not enforceable because there is no consideration (Aunt Tillie)
o Past consideration – you can’t bargain for something you’ve already received. Moral
consideration – promisor acts from a strong sense of duty towards promisee. This might be an
exception to the rule that w/out a bargain, there is no K. (Webb v. McGowan)
• R2K § 86: binding to the extent necessary to prevent injustice. Rigid rule, so moral
consideration isn’t usually enough to enforce a promise.
o Pre-existing duty rule
o Illusory promises
 Unilateral contract: promise is given in exchange for a future act (must fulfill an act, not just
promise). Offer of a reward – the offeror wants the act (capture), not the promise. This is the case
above.
 Bilateral contract: exchange of a promise for a promise. The form of most Ks. Each promise is
consideration for the other.
 Donative Promise: as long as this isn’t too blatantly obvious, we don’t care about it for consideration
purposes, unless the thing that is bargained for is of no real value or pretense. Look at motive,
equivalence, genuine bargain. (This goes along w/ R2K § 79)
 Illusory Promise
o A promise that places no limit on the freedom of the alleged promisor but leaves his future
action subject only to his own will. Only if you want to.
o Unenforceable due to lack of consideration
o If A and B arrange that A will work for B for 5 yrs, but B can terminate the agreement
whenever she wants, this is not a real promise. It is irrelevant that B hasn’t terminated it
yet. She can get out whenever.
o Exclusive dealing Ks – no duty to sell the goods, so no consideration. However, there is an
implied duty to exercise best effort (Wood v. Lucy, Lady Duff-Gordon) UCC § 2-306(2)
o R2K § 77 – if the alternatives would each be consideration alone, then illusory promise is
consideration.
o This undermines mutuality of obligation – unless both parties are bound, neither was.
Under R2K § 79, this is absorbed into the rest of consideration – not necessary if there is
already consideration.
 These days, you’ll see ouput Ks (seller agrees to sell goods manufactured during a
certain time to buyer) and requirements Ks (buyer will buy everything it requires
from seller). These are enforced by courts because the seller or the buyer is
constrained in some way.
1. Hamer v. Sidway (1891)

o Uncle (promisor) agreed to give his nephew $5,000 on his 21st bday if the nephew refrained
from drinking/smoking until then. He performed this duty.
o This is different from Dougherty v. Salt: there, Aunt Tillie promised Charley $3,000 – and she
was not serious, this was not enforced. IT WAS A DONATIVE PROMISE. No consideration
o Here, Uncle argues that even though nephew followed through, there was no consideration.
Nephew was benefited and unless Uncle was too, no consid.
3
o Issue: Is a promise that doesn’t provide a tangible benefit to promisee for actions of promisor
valid consideration?
o Holding: Courts won’t ask whether consideration benefits promisee. It’s enough that
something is promised, forborne, or done by party to whom promise is made as consideration.
It’s sufficient P restricted lawful freedom.
o If nephew had agreed not to shoot heroin, there would not be consideration because he hasn’t
incurred a detriment (it’s not LEGAL).
2. Fiege v. Boehm (1956)

a. RULE: Forbearance to assert an ultimately invalid legal claim is sufficient consideration if that
person acted in good faith at the time K was made
b. P alleges that D breached K – D agreed to pay expenses for P’s baby in return for P not
instituting bastardy proceedings against him. D pays $480 but then finds out he is not the father
c. Issue: Is forbearance to assert a claim, even though it later turns out to be an invalid claim,
sufficient to establish consideration?
d. Holding: For P – As long as the mother acts in good faith at the time of the K (she believed
that it was her child), forbearance to assert a claim (even though it later turns out to be an
invalid claim) establishes consideration.
i. Note that there is NOT sufficient consideration when forbearance to assert a claim is
done in bad faith, fraud, without an honest and reasonable belief
ii. R2K § 74: forbearance is consideration if surrendering party believes the
claim/defense may be fairly determined to be valid.
iii. R2K § 175(1): K is voidable if the manifestation of assent is due to improper threat by
the other party. And under R2K § 164(1), the recipient of fraudulent misrepresentation
can seek to void the K if he justifiably relies on the misrepresentation
3. Petroleum Refractionating Corp. v. Kendrick Oil Co. (1933)

a. D contracted to buy a certain amount of oil from P unless P should stop making that grade of
oil. D states that the grade is not correct and will not accept further deliveries. P then sells the
rest of the oil elsewhere for much less and sues for the difference.
b. Issue: Was there consideration for D’s promise to buy oil?
c. Holding: For P – Seller giving up legal right to sell is consideration even if seller has no
obligation to produce the goods whatsoever. Detriment does not have to be real and involve
actual loss, it is a LEGAL detriment where the promisee gives up a legal right (right to continue
to make oil).
i. The P had 2 options here: carry out the K or stop making the grade of oil.
ii. D claimed the K was illusory – perf was entirely optional. Ct disagrees
4. Harrington v. Taylor (1945)

a. Wife knocks down D, who abused her, and is about to decapitate him when P intervenes and
stops the axe, sustaining damage to her own hand. D orally promises to pay P damages, but he
fails to do so.
b. Issue: Is there consideration recognized by our law that supports D’s promise?
c. Holding: Common gratitude aside, a humanitarian act like this, voluntarily performed, is not
consideration.
5. EMU v. Burgess (1973)

a. D signed doc that granted P a 60-day option to purchase D’s home, doc acknowledged receipt
by D of $1 and other “valuable consideration”, none of which was actually pd to D. Before
4
option was up, P writes that they will exercise option, but D rejects, claiming no consideration
and revocation prior to acceptance.
b. Issue: Does the acknowledgment of receipt of consideration suffice as consideration and thus
an option for sale of land, if it was never pd?
c. Holding: For D – consideration was a pretense, therefore there was not an enforceable option,
but instead an offer that was revocable at will before acceptance by P.
i. RULE: Offer w/ consideration (any amount) is an OPTION K (keep offer open till
time expires) and it is binding, but if there is no consideration, it is merely an offer.
Mere recitation of a bargain is not enough, there is a nominal consideration needed
ii. This is strict; ct could’ve used equitable estoppel (D signed acknowledgment that she
received the $1, so this should estop her from asserting otherwise); implied a promise;
used the Rest. (see below).
6. Fisher v. Jackson (1955)

a. P applied for job at newspaper, for permanent position, which he acknowledges in letter of
interest. P left job at bakery for less pay as a reporter. Oral K – for life of the P, but he is fired
after 5 years. Sues for breach.
b. Issue: Was there consideration or is this an employment K, terminable at will?
c. Holding: There was no additional consideration for a promise that might’ve been made by D.
d. RULE: In employment Ks, rendering services that are incidental to employment does not make
consideration, it is an indef general hiring, terminable at will by either party. Would need
additional consideration to bind the bargain.
i. So, if the P had been very explicit that giving up his old job was a condition for
accepting employment, that it was a real detriment and that he was lured by the D – this
would be additional consideration.
B. RELIANCE
 These are situations where there is no consideration for a bargain, there may not be a K then, but the
reliance of one of the parties changes things.
• PROMISSORY ESTOPPEL
o Cts will sometimes enforce a promise when there is no consideration based on the reliance of
another upon that promise.
o However, COURTS WILL PREFER USING CONSIDERATION
o R2K § 90 – promise that promisor should reasonably expect to induce action/forbearance that
does induce action is BINDING if injustice can only be avoided by enforcing the promise
o PrEst can be thought of as a) substitute for consideration (no bargain, but enforceable promises,
estopped from claiming no consideration) or b) an independent cause of action to enforce
promises
o OLD RULE: Initially, PrEs was not intended to be a rarely used equitable remedy that required
“definite and substantial” detrimental reliance, as well as extreme injustice absent enforcement.
o MODERN TREND: PrEs simply requires reliance (not necessarily substantial) and remedies
are more often “limited as justice requires,” then only to avoid injustice.
o There are 4 necessary steps, a chain of logic, each MUST be proven
1. Promise
2. Foreseeable Reliance (promisor expected to induce action on the part of the
promisee)
3. Reliance in FACT (it does induce ACTION of that type – must be reliance on
expectation that promisor had, not something promisor did not foresee)
4. Injustice absent enforcement (promise must be enforced to prevent an injustice)
5. Then…damages.
5
1. Ricketts v. Scothorn (1898)

a. This is one of the earliest promissory estoppel cases: shows how early courts used it to enforce
family gift promises
b. D grandfather promises P granddaughter $2K/year, she claims that it was to induce her to stop
working, she did but then got another job, but D then died and executor refuses to pay the
balance.
c. Issue: Is there sufficient consideration for P to enforce D’s promise?
d. Holding: D’s promise is a gratuity, a gift. However, the theory of promissory estoppel is used
b/c the gift was meant to influence P to change her position for the worse in reliance on the K;
it’d be “grossly inequitable” to allow D to resist payment b/c of no consideration.
i. So, even though P’s quitting job was voluntary (it was not a condition of the gift), the
fact that donee has expended $$ or liability on the faith of the gift, there is some
consideration.
• Not like Hamer then – D did not give $$ in return for P’s quitting her job.
ii. Equitable estoppel: D is precluded from asserting rights that might have existed against
person who in good faith relied on such conduct and changed position for the worse.
Misrepresented the facts.
iii. D contemplated that P might quit her job – reasonable consequence – he intentionally
influenced P to alter position.
iv. However, this is not a misrepresentation of the facts, but PROMISSORY ESTOPPEL
– sue for damages based on the reliance of a promise. New idea.
2. Cohen v. Cowles Media Co. (1992)

a. P gave info to reporter in return for promise that his identity would be kept confidential, editors
of newspps overrule these promises, ID is leaked and P loses his job.
b. Issue: Does promissory estoppel enforce the promise?
c. Holding: Yes, the promise was clear, P relied on anonymity and so D induced reliance.
Promise must be enforced to avoid injustice
i. There was no K here, no consideration. They were not bargaining, offering or
accepting. There was also no intent to K. Moral obligation alone does not a K make!
ii. Court allows promissory estoppel b/c it would be unfair not to – even though it is a
newspp and they just published the whole truth, sense of fairness overrides. Each step
of promissory estoppel was proven.
iii. Damages – use expectation damages formula, limited as per R2K § 90.
3. Midwest Energy, Inc. v. Orion Food Systems, Inc. (2000)

a. The big issue here: there was definitely no K – but liability for reliance? Broad interpretation of
PrEst.
b. P was building a service station and wanted to franchise D’s products. D’s rep delivered
paperwork (containing caution not to take further action until P was notified in writing that app
was approved). D represents orally that they can go ahead, P changes store plans, etc. D
decides not to award K. Only P signed the agreement.
c. Issue: Can promissory estoppel overcome the Statue of Frauds and make this promise
enforceable?
d. Holding: There are genuine issues of material fact re: promissory estoppel so it can be tried.
For P.
i. There is no K here – SOF means there clearly needed to be a writing, signed by both
parties.
ii. Promise? Yes, D’s agent made certain promissory statements that might lead P to
believe that she could go ahead w/ the plans, and the K was as good as signed.
6
[DISSENT: no promise, just a statement of intent to work together. Regular biz

dealing!]
iii. Foreseeable reliance? Yes, D should believe that P would comply w/ directions for fear
of losing the tender of franchise.
iv. Reliance in fact? P made changes to food area in its plans, didn’t get other franchisors.
[DISSENT: P could have gotten other products]
v. Just because D had a writing disclaiming any reliance, that is not enough for the court.
vi. Damages would be reliance damages, not expectation, b/c it’s a pre-K promise.
C. THE RESTITUTION INTEREST

• Restitution – can be a cause of action and a form of damages.
• Cause of action – used by P whose K was unenforceable, or even when there was no K-like exchange.
Party wants to get back the thing or value that is (or was) in the D’s hands.
• Damages – P’s recovery is measured by the benefit that act conferred on the D
• K IMPLIED-IN-FACT
o Ordinary K that is not express. Inferred. Suppose tacit agreement.
o Parties’ intentions are the source of obligation here – inferred on the basis of general
knowledge, even w/ no words exchanged. Ex: fill up car w/ gas on a credit card, there is a K
implied-in-fact that you will pay.
• QUASI-CONTRACT (restitution interest)
o K implied-in-law, this is a contractual creation of the court in the aftermath of something.
o Based on the restitution of a benefit conferred.
o Elements:
 A benefit conferred upon D by P
 Appreciation of this benefit by D
 Acceptance/retention by D of this benefit under circumstances that would be
inequitable to keep it unless payment for the benefit’s value.
o However, officious intermeddlers are not looked upon favorably, which is what P was in Bailey
above. Ex: neighbor is on vacation, you paint house to make it look better, and it does increase
the value. You can’t expect to recover restitution for this.
o Based on notions of fairness: if doctor sees an accident, renders services to seriously injured
person, he can receive some restitution.
o Damages
 Goal is to prevent unjust enrichment
 Typically it is the value of the benefit conferred
1. Bailey v. West (1969)

a. D buys a horse, discovers it is lame, sends back to seller who refuses it. D’s trainer gave
the horse to P where he took care of it for 3 yrs, P sends bills to D but D refuses to pay. P
knew there had been a dispute re: the horse.
b. Issue: Is there a K “implied in fact” or a quasi-K, and thus liability for breach?
c. Holding: No K implied in fact for want of mutual agreement, no quasi-K either. No
intention of both parties to be bound, and D didn’t agree to have benefit conferred upon
him, P volunteered.
i. Implied-in-fact K: P knew there was a dispute, D never dealt w/ P before. No
“intent to agree” and no mutual agreement.
7
ii. Quasi-K: P was a volunteer, so he took the risk himself. Benefit conferred was all
P’s doing.
CH. 3: NEGOTIATION AND FORMATION OF THE CONTRACT

• Objective theory: the ritual of K formation is what counts, the actions of the parties – not ideas or
manifested intentions
• Mutual assent – parties agree to same essential terms
• Keep an eye out for problems that arise by offer/acceptance w/ new mediums (e-mail, etc.)
A. THE ROLE OF THE COURTS

1. Sun Printing v. Remington Paper & Power Co. (1923) – CARDOZO
a. P agreed to buy from D 1,000 tons of paper/month with the price and the length of the time that
price would be valid left unsettled. Ceiling on price is the standard set by Canadian Export
price. D gives notice that K was imperfect and disclaimed obligation to deliver pp in the future,
P thinks it would resort to the Canadian Export price, but no deliveries made. P claims
damages.
b. Issue: Does P have a cause of action, even though the K doesn’t explicitly set out the price and
term?
c. Holding: P cannot recover damages b/c there was no obligation for D to sell under the K when
a term for pricing and length of time isn’t stated.
i. This was only an “Agreement to Agree.” P argues that the Canadian price would be the
default price, but ct disagrees – D would never know where it stood.
ii. Dissent argues that price could be imputed, this would be FAIR.
iii. The real issue here: The role of the courts in interpreting Ks.
1. Cardozo: Cts are held to the strict contents of the K, they will not make an
agreement for the parties.
2. Crane (dissent): Cts should hold parties to their Ks even when parts are
missing, they clearly intended to make a binding K. This lets D out of the K,
unfair.
iv. There is a need of certainty in commercial Ks, and the court can’t revise a K, only
interpret.
v. Cardozo believes that it is ok to ignore this inequity in order to send a msg: If you want
something that is binding, you must NEGOTIATE it and be explicit. Don’t leave terms
up for grabs. This will impute efficiency and better biz practices.
B. OFFER AND ACCEPTANCE

• OFFER is defined in R2K § 24
o The objective manifestation of a willingness to enter into a bargain, which justifies
another’s understanding that his assent to that bargain is invited, and will conclude it.
o OFFEROR IS THE MASTER OF THE OFFER
• Offeree has the power of acceptance (R2K § 35)
• However – see R2K § 22(2) – Manifestation of mutual assent can be made even though you don’t have
an offer/acceptance and moment of formation can’t be determined.
• Beware of mere invitations to bargain
8
o Price quote generally not an offer, but will be an offer if it covers 1) parties, 2) subject matter,
3) time for performance, 4) price, 5) quantity (especially if it is sufficiently definite on quantity)
o Advertisements are not offers unless they contain specific words of commitment (especially a
promise to sell a specific number)
 Can be when they promise to sell a particular number of units, or to sell the units in a
particular manner R2K § 26
• Did communications b/t parties form a reasonable basis to conclude that they were willing to enter into
a binding agreement?
• When looking at an offer BE SURE TO LOOK TO SEE IF
o Is it an offer?
o Is it an advertisement?
o Is it an offer for bids?
o Is it an offer to negotiate?
• This type of language or document BE CAREFUL
o No definite quantity
o Form letters
o Sent to multiple people
• What types of offers are irrevocable?
o Contracts made irrevocable through the commencement of performance (see below)
o Option contracts
o Firm Offers 2-205
 An offer by a merchant to buy or sell goods in a signed writing; under certain
conditions, it is valid “for a reasonable time” not to exceed three months. §2-205
o Sub-contractor bids
• Cts consider the oral bid by the sub to be a temporarily IRREVOCABLE offer until
prime K is awarded. Then the contractor can accept the bid, which creates a bilateral K.
• If P has justifiably relied on the bid, then ct will use PROMISSORY ESTOPPEL to
prevent raising the bid.
• However, after the prime bid is awarded, the contractor is not bound to accept. Seems
unfair to bind the little guy.
- Hand: Traditional – offer/acceptance – sub can withdraw offer before it is accepted.
- Traynor: The little guy is protected – if contractor starts to bid shop or bid chop, then
they can consider themselves cut free – good faith transaction. If contractor reopens
negotiations, then the offer is rejected (counteroffer). The contractor cannot delay
acceptance after the prime bid is awarded to find a better deal.
Is it an offer?? Consider:
• Subject Matter, definite price, specific quantity, time of performance, context, parties’
expectations/intent, are most (if not all) terms included?
TERMINATION of the power to ACCEPT: (R2K § 36) (the offeree has power of acceptance)
o 5 possibilities:
o Rejection or counter-offer by offeree (R2K § 68)
o Lapse of time – specified in K or a reasonable time (R2K § 41)
o If offeror revokes the offer (R2K § 42)
 Even if offeror says he’ll keep it open, no consideration means he can change
his mind
 Can withdraw before acceptance, but this must be directly communicated to
offeree, or can be indirect. If offeree “acquires reliable information” that
offeror has taken an action showing he changed his mind, pwr of acceptance
terminated (R2K § 43)
9
o If either party dies or becomes incapacitated

o If terms for the offer have a condition for acceptance and condition doesn’t occur
• ACCEPTANCE is defined in R2K § 50

o Manifestation of assent to the terms thereof made by the offeree in a manner invited or required
by the offer
o Offeree must know of offer (e.g. reward for criminal)
o Mode of acceptance:
 Must accept by offeror’s chosen mode, and if not specified, by any reasonable method
 UCC § 2-206, but see R2K §30: Language referring to a particular mode of acceptance
is often intended and understood as suggestion rather than limitation; the suggested
mode is then authorized, but other modes are not precluded.
• Ks accepted by offeree’s performance

o Bilateral K: acceptance by a return promise
o Unilateral K: acceptance by performance
• What is bargained for is a specific act – recipient of offer may or may not choose to
carry out (R2K § 30) – see Hamer v. Sidway
• So long as the offer remains open and until it is accepted, offeror is bound to it, but
offeree is not obligated
• Acceptance by Part Performance

o Offer invites acceptance by performance only – offeree who starts has the option not to
continue
o R2K § 45(1): when offer clearly envisages a unilateral K, OPTION K is created when
offeree begins performance or tenders a beginning of it. Option lies w/ the offeree who can
complete performance, but it will not be enforceable until performance IS complete.
(45(2))
o By beginning to perform, you have accepted the offer
o Preparation for performance does not count – ACTUAL perf
• Offers ambiguous as to manner of acceptance
o If offer doesn’t specify acceptance by performance or a promise to perform, offeree can
chose (R2K § 30 and 32)
o If ambiguous, and if offeree chooses to start performance, he is legally obligated to
complete it (R2K § 62)
o Therefore, there is a preference for the offeree to accept by promising – otherwise, he must
complete performance.
o UCC § 2-206(1) – offer to make a K can be accepted in any manner and by any medium
reasonable, and an offer to buy goods, if ambiguous, can be accepted by prompt promise to
ship or by prompt shipment
• Acceptance by silence
o Generally silence is not an acceptable form of acceptance to an agreement
o Silence will bind if prior dealings make it reasonable for the offeror to expect the offeree to give
notice of objection
• When is a contract formed?

o Can be made in any manner consistent showing an agreement, or conduct which
recognizes the existence of such a contract (UCC 2-204)
10
o Don’t need to know exact moment of contract formation for a contract to be found to exist.
Terms can be left open and still a contract can be formed
• Option Ks are different

o This is an offer accompanied by an independent promise to keep offer open where promise
is supported by consideration.
o R2K § 87: Offer is binding as an option K if 1) it is in writing and signed by offeror, 2)
recites a purported consideration for the making of the offer, and 3) proposes an exchange
on fair terms w/in reasonable time.
o NO ACTUAL PAYMENT OF CONSIDERATION IS REQUIRED, just acknowledgment
of consideration. However, many courts will require some consideration (see EMU v.
Burgess)
o Offeror cannot revoke during the time set forth, and offeree is entitled to accept during the
time set forth.
o Most courts have held that an option K is not automatically terminated by rejection or a
counteroffer, unless the offeror then justifiably relies on it.
o Mailbox rule does not apply here – acceptance upon receipt (R2K § 63)
• Firm offers under UCC § 2-205

o Applies to a merchant who in a signed writing makes an offer and assures that it will be held
open.
o Such offer is “not revocable, for lack of consideration, during the time stated for a reasonable
time, but no period of irrevocability can exceed 3 mos”
o No consideration needed in order to bind – merely characterize them as such and express this in
a signed writing.
o If offeree has a firm offer on its own form, it must be separately signed by the offeror
o If offeree has pd for the promise to keep the offer open, there is an enforceable option K – and it
will remain open for the specified period of time. That is not a firm offer b/c of the
consideration.
• What if there is a misunderstanding?

o Possible barrier to K formation
o Meeting of the minds: when any terms used to express the agreement are ambivalent or
parties understand them differently, no K unless one party SHOULD have been aware of
the other’s understanding (Raffles v. Wichelhaus, re: the ship “Peerless”)
o R2K § 20 (Effect of Misunderstanding)
 This is modified to reflect OBJECTIVE theory of K
 No mutual asset if parties attach materially diff’t meanings to manifestations, and
they don’t have “reason to know” that the other party had a different view.
 If A knows or has reason to know of B’s meaning, then B’s meaning will
control
 This is objective – not what A actually knew
o What is chicken?
 Parties K for sale of frozen chickens, B claims that he only intended to K for
young chickens, K says “frozen chickens” – this is merely a matter of
interpretation, and there is a K.
• MIRROR-IMAGE RULE
11
o Unless an acceptance mirrors the offeror’s terms, neither omitting or adding terms, it has no
legal effect as an acceptance and operates as a rejection and a counteroffer.
o R2K § 59: reply to an offer that purports to accept it, but is conditional on offeror’s assent
to additional or different terms is not acceptance
o R2K § 61: an acceptance that requests change/addition to terms of offer is not invalid
unless the acceptance depends on assenting to those new terms.
• Ks Concluded by Exchange of Letters (or other communications)

o This is a common law rule
o The offeror is the master of the offer (R2K § 30): offeror controls the form in which
acceptance occurs.
• If there is no express requirement re: acceptance, then an offer to make a K should
be construed as inviting acceptance in any manner and via any medium reasonable
in the circumstances. (UCC 2-206(1) and R2K § 30(2))
• Offeror cannot turn some normal act into an acceptance, however – must be
intentional
o The Mailbox Rule
• Offers, rejections, revocations take effect at the time of receipt
• ACCEPTANCES ARE DIFFERENT – they take effect where and when they are
DISPATCHED, and it is immediate, even if offeror never gets it (R2K § 63)
[However, as master of the offer, the offeror can require receipt before acceptance
is valid]
• Issues
• Mailing is sent w/ beyond the offeree’s possession
• As long as ACCEPTANCE is dispatched before REJECTION received, K
is good
• Exception: reliance. If one party has relied upon the rejection, for ex.
1. Ford Motor Credit Co. v. Russell (1994)

a. Ad offers car for sale price w/ set APR, D goes in to buy car and gets financing after some
trouble, but b/c of limited credit history, gets higher APR, she signs K. D then defaults on
payments and P will repossess and sell, D does nothing to redeem. D counters w/ breach of
K.
b. Issue: Was the ad an offer to the general public that binds the advertiser to its terms?
c. Holding: An ad is merely an invitation to bargain, it was not an offer b/c the APR
advertised was only for those qualified, and there were not an unlimited # of cars to sell.
Unreasonable to believe ad binds P.
i. Test of whether binding obligation is present in ad to general public, under caselaw
here: Do facts show that some perf was promised in positive terms for something
requested?
ii. Ad may be offer when clear, definite, explicit, nothing left open – since the APR
was only for those that qualified, and cars were limited – that is not the case here.
iii. Lefkowitz case: shows that a binding obligation can originate in an ad where the
facts show perf was promised in return for something requested – first come, first
served.
2. Davis v. Satrom (1986)

a. P sends LOI to D to purchase mobile home park (offer), and P changes the terms and sends
back (counteroffer). P then sends purchase agreement to D w/ new terms (counteroffer),
and D changes terms again, sending it back – WITH A CONDITION OF ATTNY
12
APPROVAL (counteroffer). D then tells P that they will pass, P sends letter saying he is
ready to complete w/ $$, check returned. P sues for specific performance.
b. Issue: Was the purchase agreement a valid K to sell?
c. Holding: There was no enforceable K b/c there was not an unqualified acceptance of an
offer w/ out introduction of new terms, and even if he did accept the new conditions, the
attny reasonably didn’t approve.
i. There was no meeting of the minds – the modifications were counteroffers
ii. Changing terms of the offer terminates the pwr of acceptance. Offer would only
stay open if offeror (P) had expressly stated it would be open despite a counteroffer.
Still can be withdrawn though
iii. Conditional/qualified acceptance is a counteroffer.
iv. Adding the condition, however, still allowed P to accept, and if the attny accepted,
then a K. But still subject to condition.
v. Note: reasons for attny’s not approving are important – he must disapprove
REASONABLY.
3. Oswald v. Allen (1969)

a. P wants to buy coins from D, all Swiss coins. To P, this means every Swiss coin D has. To
D this means the “Swiss Coin Collection.” D did not want to proceed and called it off.
b. Issue: If there was a misunderstanding b/t the parties, can there still be an enforceable K?
c. Holding: No K b/c there was a misunderstanding.
i. Formation of a K presupposes MUTUAL ASSENT, so if each party assents to
a different proposition, there is nothing to enforce and the K is void
4. Ardente v. Horan (1976)

a. P made a bid for D’s property, D said it was acceptable and sent purchase/sale agreement to
P (OFFER). P executes, sends this w/ check for $20K and ltr to D, with a condition in the
letter. D did not execute and refused to sell to P.
b. Issue: What is the line b/t a conditional acceptance (counteroffer) and an acceptance
(contract)?
c. Holding: P’s letter of acceptance was conditional so it was a rejection of D’s offer and no
K was created.
i. If P had clearly said that he was accepting IN SPITE OF his question/condition
about the furniture, then this might be a valid acceptance. It would be an absolute
acceptance w/ a mere inquiry.
ii. Acceptance must be explicit and overt, unequivocal. P’s was not, the ltr never
said that he would complete the K even w/out the items in the house
5. Mid-South Packers, Inc. v. Shoney’s, Inc.

a. P submits ltr proposal for sale to D of pork at certain prices and terms, and D would be
informed of any changes in price 45 days prior. No quantity or duration in the ltr, D began
purchasing over phone/ltrs and P sent invoices. Then P raised prices 3+ mos after the date
of the ltr and informed D objected, but continued to purchase at the new price. In last order,
offset the amount charged over the original price since P changed it.
b. Issue: Is Letter Proposal a binding K or an offer?
c. Holding: The ltr was not a requirements K and binding, it was at most a firm offer that P
could revoke after 3 mos, setting each purchase order as its own K at a new price.
i. NO requirements K, because D did not promise to purchase exclusively from seller,
so no consideration.
13
ii. After 3 mos from date of Ltr, P could raise price b/c D had not accepted and
therefore the 45-day notice no longer applied. D should’ve accepted the 1st
proposal.
iii. D accepted the price increase by performance – manifested assent was the higher
price. Under UCC 1-207, D could have reserved right to old price with an explicit
reservation, or D could have found another supplier.
iv. At best a firm offer b/c it was revocable w/ a 45 day notice, they did not do so, and
at the end of 3 mos the offer expired.
6. Arango Construction Co. v. Success Roofing, Inc. (1986)

a. D (sub-contractor) submits bid to P (contractor) for project, it is prepared by 3rd party.
Included in prime bid to customer, it was lowest. P gets K, notifies D who gives them
subcontract form for signing, but D refuses b/c they realize the bid was in error and too low,
they would not perform at that price.
b. Issue: Is this oral bid enforceable, and if so, should P’s SJ motion for PrEst damages be
awarded?
c. Holding: Yes, K terms were not in dispute b/t the parties at the time, and so bid is an
irrevocable offer until prime K is awarded. Since P relied on D’s bid and D could expect
that they would do so, damages for PrEst are in order
i. This is governed by COMMON LAW, not UCC
ii. The bid submitted by D is an irrevocable offer until the prime K is awarded, and
then the court uses promissory estoppel theory to prevent raising of the bid. When
P accepts the bid – BILATERAL K, and if sub raises the price, must pay damages
for price difference.
iii. P did justifiably rely on D’s bid, no reason they should not have – no evidence that
P should’ve known about the mistake. This satisfies PrEst.
C. NEGOTIATION AND CLOSURE

 Even if parties intend final agreement to be a written K, sometimes a ct will find a K exists
w/out the writing – issue is whether parties view it as a mere formality, or a final chance to
settle the terms.
 Intermediate docs: LOI, Memo of Agreement, etc – consensus on certain aspects. Cts will use
objective theory to ascertain what the parties’ intent is – does it appear as if there is a final K?
 Parties may sometimes leave certain matters unsettled – agreements to agree, etc. Cts may
imply that there is a duty to negotiate in good faith on remaining differences.
1. SMS v. Malouf, Inc. (2000)

a. P and D had a long-term relationship w/ 3 Ks in which D purchased training materials from P.
Another purchaser of P’s products (Kasten) is for sale, and P encourages D to buy it. P assures
D of a 5-yr commitment so that D can buy Kasten, and P orally agreed to this new 5-yr K. D
relies and buys. P proposes K w/ significantly diff’t terms, negotiations break down, D’s profits
plummets and they sue.
b. Issue: Is the oral agreement an enforceable K that P breached?
c. Holding: Even though there were terms to be negotiated, a jury could reasonably infer that P’s
assurance of the 5-yr. K in return for D’s promise to buy Kasten was an enforceable K.
i. Ct infers that parties intended to be bound and THERE IS A K. Why? 1)15 years in
biz together, 2) material terms were the same as previous Ks, 3) principles of companies
14
had personal relationship, 4) previous negotiations were perfunctory, 5) had done biz
together w/out K once before, 6) P KNEW that D was buying Kasten in reliance.
ii. RULE: If there is agreement on all material terms of the K, an intention for a
written K is a mere memorial of the contract, especially when considering
relationship b/t parties.
iii. Reliance is unnecessary here b/c that is only when there is no K. So P’s view that
reliance was unnecessary is n/a.
iv. IMPORTANT: P encouraged D to buy Kasten, they were interested in it. Therefore, ct
doesn’t consider D to be “jumping the gun”
 R2K § 27 - lists circumstances to determine if there is actually a K or not

o the extent to which express agreement has been reached on all the terms to be included
o Is contract of a type usually put in writing?
o Does it need formal writing for its full expression?
o Does it have few or many details?
o Is amount involved large or small?
o Is it a common or unusual contract?
o Is a standard form of contract widely used in similar transactions
o Did either party take any action in preparation for performance during negotiations?
2. Arnold Palmer Golf Co. v. Fuqua Industries, Inc. (1976)

a. NOTE: this is diff’t from SMS b/c negotiations are further along – signed MOI
b. P wants to start making golf products, meets w/ D and at BofD mtg, propose a corporation that
combines part of the 2 companies, sign a Memo of Intent (MOI). Set forth all detailed terms,
and 1) proceed promptly to prep agreement and 2) condition that it must be satisfactory to both
and approved by D’s BofD. D sends press release, but then withdraws.
c. Issue: Is the MOI sufficient to show that the parties intended to enter into a binding agreement?
d. Holding: Facts and inferences indicate the parties intended to be bound, even w/out a formal
doc, b/c circumstances show that the final agreement was a formality.
i. If all terms are set out, and the parties would move forward w/ those terms and no
others, they probably have a formal K. Look at essential terms – agreed upon?
Binding.
ii. This is a subjective reading of the intent and circumstances
3. Empro Manufacturing Co., Inc. v. Ball-Co Manufacturing, Inc. (1989)

a. Here, the LOI is not enough to be binding. Diff’t from Arnold Palmer. Judge Easterbrook
is also a Chicago economist – not judicial activism. Let parties be.
b. D floats assets on market, P sends Letter of Intent (LOI) to purchase, still had to prepare a
formal, definitive Asset Purchase Agreement. P had conditions in the LOI – “subject to”
satisfaction of shareholders and BofD. D balks, disagreement over security for the note, D
negotiates w/ another and P files for TRO.
c. Issue: Does the condition in the LOI show the parties intended to be bound?
d. Holding: Neither the text/structure of the LOI suggests enforceability – parties still had things
to decide.
i. This is an objective way of looking at parties’ intent – “subject to” means that they
did not intend this to be a K. Look at language on its face.
ii. Give effect to parties’ wishes but not from a subjective pov, because K law would be a
mess if cts did that. Must express intent openly, and w/ “subject to” clause, that
objectively means that parties didn’t meant to be bound. Just sets the state for
negotiations.
15
 How do you distinguish Arnold Palmer and Empro?

There was no express language like “subject to” in AP’s situation
o
There is a different theory of looking at these, the cts became more conservative – wanted to
o
force parties to be more explicit.
o Some terms of Empro still had to be discussed – not as final.
o To make these letters binding, put agreement to agree in very certain terms.
o To make these letters non-binding, put header at top of each pg: “This ltr is not intended to be
binding”
o Also, in AP, Fuqua sent out a press release.
 R2K § 27 – comments
o K before the agreement: if parties definitely agree to writing, but it will contain agreed-upon
provisions and no others. K concluded.
o No K before the agreement: if either party knows or has reason to know that the other regards
the agreement as incomplete, and terms still need to be assented to, then no K.
4. City of Kenai v. Ferguson (1987)

a. RULE: A ct will be willing to supply terms where a long-term K is formed w/ clear terms
except for price, well after substantial reliance on that K. An agreement to agree re: particular
terms doesn’t void the lease.
b. D and P sign lease for land for 55-yr term, price of rent is an AGREEMENT TO AGREE, every
5 yrs they can re-negotiate. 10 yrs in, P wants to raise D’s rent by 500%, and they cannot agree
on this. D pd rent based on old rate, P filed suit seeking forfeiture, rents due, etc. D never
conducted his own appraisal so the parties could re-negotiate.
c. Issue: Is the agreement to agree enforceable, and if so, should ct imply a reasonable rate for
fair mkt rent when parties can’t agree?
d. Holding: Yes, agreement is enforceable and ct is fair to step in and set terms
i. Both parties knew the land would be used for a gas station, so city could not set rate at
the best-use rental amount. Instead, FMV for similar properties (gas stations).
ii. When city signs the long-term lease, they accept the risk that the land might not be used
for best use, they sign away ability to control. D can keep station running at the
favorable rate.
iii. City could have set more explicit terms – a formula, or something giving 3rd party right
to set rate in case of disagreement. Or they could have provision to buy D out for a fair
price.
iv. This is diff’t from Sun Printing: long-term K, substantial reliance already, and only
quibbling over small terms
v. Note: in agreements to agree, the length of the term is significant, because the lessee’s
reliance is high, so the court will hold these agreements to be valid.
 UCC on Open terms: § 2-204(3): even though one or more terms is left open, the K doesn’t fail for
indefiniteness if parties intended to make a K and there is a reasonably certain basis for giving a remedy
o However, if parties intend not to be bound unless price is fixed, and it is not, then there is not a
K. § 2-305
D. GOOD FAITH IN CONTRACT FORMATION

 Duty of good faith arises ONLY after the contract is concluded. There is no pre-contractual
obligation of good faith.
o Our system stresses parties looking out for themselves during K formation
16
o UCC § 1-203: “Every K or duty w/in this Act imposes an obligation of good faith in its
performance or enforcement.”
o Similar approach in R2K § 205
o In an Agreement to Agree, there is an implied covenant of good faith
o Good faith rests on some sort of contractual obligation to prevent party from conduct that
frustrates the other party’s rights to benefits.
o Negotiating in good faith could just mean not negotiating in bad faith!
When there might be a duty of good faith in pre-K circumstances:

o During negotiation, parties can agree to do so in good faith via some K (LOI, etc.) Absent this
agreement, the parties can be unreasonable and break off as they wish
o Preexisting agreement may impose an obligation of good faith bargaining w/r/t the modification
of some term of that agreement. If it gives discretionary pwr of alteration, then this implies a
req’t to do so in good faith.
o Sometimes, if during negotiations a party so misleads another by promises or representations,
and the 2nd party detrimentally relies on this justifiably, then PrEst!
1. Racine and Laramie v. Dept. of Parks and Rec (1992)

a. P, concessionaire, was in lease w/ D for 40 yrs. Clause says parties may negotiate to modify at
any time. They negotiated to expand operations, parties can’t agree, P argues that D retreated
from positions arbitrarily and that existing K req’d parties to negotiate in good faith.
b. Issue: Is there a breach of covenant of good faith by refusing to enter into a new K?
c. Holding: The existing K created no obligation of negotiating in good faith, and D could break
off negotiations or be unreasonable for any reason or no reason at all.
i. Since the parties were negotiating for so long, P claimed that D had to negotiate in good
faith and couldn’t cut them off arbitrarily. However, the existing K just provided for
negotiations if D wanted to do so, and it did not say anything about good faith.
ii. Culpa in contrahendo – damages can be awarded if negotiations are in bad faith – this
is in Civil Law, not common law
iii. Implied covenant of good faith was only w/r/t the existing K
 Distinguishing Racine from Kenai – here, the K only said parties may assent to negotiation. In Kenai,
provided that parties shall reach some sort of agreement to agree re: rent. Here, neither party had to
negotiate anything.
2. N.E. Insulation Co. v. General Dynamics Corp. (1988)

a. D invited P to bid in auction, and as a condition, stated that bids would be confidential (they
contain trade secrets), and so P made bids relying on this statement. D showed P’s bid to a 3rd
party, P alleges sham bidding procedure.
b. Issue: Is there an implied K theory here, where bids solicited during bidding are binding w/r/t
conditions set?
c. Holding: For P, remanded for further proceedings. Even though in the private sector, the
implied K to perform in good faith stands and D did not have the right to make representations
to bidders that they then rely upon. Condition is binding.
i. Requests for bids are usually non-binding invitations for offers.
ii. However, invitation to bid on certain conditions, followed by a bid, forms an IMPLIED
K obligating solicitor to those conditions. Must realize that terms they set will be relied
upon by bidders and they are bound to them. Must give fair and impartial consideration
to bid.
iii. Public auctions always impose a duty of good faith
17
iv. Court is looking to find some sort of liability here, they try tort – don’t want to imply a
K, this is a pre-K context. There is a sense, however, that there is something wrong w/
influencing party to bid and then not dealing fairly.
v. This case could’ve been decided on RELIANCE theory
E. PROBLEMS WITH STANDARD FORM CONTRACTS

 These are everywhere; gas station credit card receipts, credit card agreements, theater tickets, etc. No
one even sees it…until a controversy arises
 Pros: reduce transaction costs, legal risks are more manageable (uniformity) – benefits consumers who
pay less
 Cons: one party constructs the K according to its own wishes, often construed in favor of sellers who
know of potential probs w/ goods, damages can be limited, and they accentuate inequalities of
bargaining pwr.
• So, in Ardente v. Horan, we had the MIRROR IMAGE RULE – where quibbling response was a
counteroffer.
• What happens if a buyer sends an order, specifying only model and price. Seller responds w/
acceptance form that also lists lots of terms favorable to it.
o Under traditional K theory – this is a counteroffer, no K
o BUT ---- what if parties continue as if there is a K? Shipping, delivery, and then there is a
problem 6 mos down the line
o LAST-SHOT RULE
 If performance occurs as though a contract has been formed, this rule provides that the
terms of the last offer exchanged will govern the contract.
 So, in example above, K is in seller’s terms – which is the usual situation
 CISG uses the mirror-image rule
 Non-UCC contracts use the mirror-image rule too, see R2K §§ 58, 59, 61
 UCC § 2-207 tries to avoid this situation, looking for a better outcome
• UCC § 2-204 and 206 accept the ordinary rules for K formation
o 2-204: K for sale of goods may be made in any manner sufficient to show agreement –
including parties’ conduct.
• § 2-207 says that a purported acceptance will be treated as such even if it contains
additional/different terms. Many common law counteroffers are thus acceptances.
o Avoids the Ardente problem: party can’t get out of K b/c of nonconforming terms
• The status of these diff’t terms are treated under subsection (2)
• If docs indicate there ISN’T a K, but parties acted as if there was, then conduct governs via
subsection (3)
1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable
time operates as an acceptance even though it states terms additional to or different from those offered or agreed
upon, unless acceptance is expressly made conditional on assent to the additional or different terms.
(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such
terms become part of the contract unless:
(a) the offer expressly limits acceptance to the terms of the offer;
(b) they materially alter it; or
(c) notification of objection to them has already been given or is given within a reasonable time after notice of
them is received.
(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale
although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular
18
contract consist of those terms on which the writings of the parties agree, together with any supplementary terms
incorporated under any other provisions of this Act.
A Guide to using § 2-207: THE BATTLE OF THE FORMS

1. Has a contract (K) been formed under 2-207(1)?
a. Outside of normal K rules, a K can be formed in 2 ways:
i. Exchange of writings
1. Offer made?
2. If yes, and offeree manifests assent (“definite and seasonable expression of
acceptance”) then a K is formed even if there are additional/diff’t terms. Go to
2-207(2) to determine how these terms affect the K.
3. If offer made, response will not be an acceptance if: 1) buyer sends purchase
order for 100 widgets at $5 and seller confirms purchase at $6. THIS IS A
COUNTEROFFER. 2) if an offeree expressly conditions its acceptance on
the offeror’s assent to the additional/diff’t terms, THIS IS A
COUNTEROFFER. In order for this to be construed as a conditional
acceptance, it has to have CLEAR and EXPLICIT language stating it is such.
(Roto-Lith is turned over)
ii. Oral agreement followed by a written confirmation
1. If this happens, K is formed. (did they enter into an oral agreement? It’s a
question of fact)
2. Terms contained in the written confirmation are part of the K if they reflect the
oral agreement. If not, go to 2-207(2) to determine how these terms affect the
K.
3. Once an oral agreement is made, there is no way you can have a conditional
acceptance (= counteroffer).
2. If a K is formed in either of 2 ways above (i and ii), do any additional or diff’t terms in the
acceptance or confirmation become part of agreement under 2-207(2)?
a. ADDITIONAL TERM: just added on
i. Not between merchants: additional terms not part of agreement
ii. BETWEEN MERCHANTS: additional terms part of agreement UNLESS 2(a)(b)(c)
apply
1. (a): offer contained express language limiting acceptance to terms of the offer –
terms NOT part of agreement (i.e. “this order is conditional on seller’s
acceptance of the terms hereof”)
2. (b): if terms materially alter the offer, NOT part of agreement.
a. What constitutes terms that “materially alter”?? Comment 4 will show
what does alter the offer (disclaimer of warranties). Comment 5 will
show those that do NOT alter. “Surprise or hardship if incorporated
w/out express awareness by other party” would also materially alter the
terms.
3. (c): if offeror notifies offeree that he objects to his additional terms, before or
after receiving the acceptance, the terms do NOT become part of the agreement.
b. DIFFERENT TERM: contradicts/qualifies an express term
i. This is uncertain, cts treat it in various ways.
ii. KNOCK-OUT RULE: most generally accepted rule.
1. If offer and acceptance have diff’t terms, they knock each other out of the
agreement, and the K then consists of the terms that the offer and acceptance
agreed upon, plus any DEFAULT TERMS that would be implied as a matter of
law
19
3. NO CONTRACT WAS FORMED, but parties behaved as if there was one.

a. This could happen when a buyer’s offer contains a clause limiting acceptance to terms of the
offer, and then the seller accepts with a CONDITIONAL acceptance. These forms conflict, but
then the parties behave like they had a contract
b. 2-207(3) then deals with this.
i. Parties’ actions speak louder than words – there is a K.
ii. Terms are those that the documents AGREE upon, plus other implied-in-law terms like
UCC provisions on implied warranties and remedies.
1. Gardner Zemke v. Dunham Bush, Inc. (1993) SC of NM

a. P(GZ) orders chillers; order (offer) has warranty provision/specs. DB responds w/preprinted
“acknowledgement” w/ warranty terms, statement its terms controlled, provision that
silence=acceptance. Parties don’t address discrepancies and sale takes place. Dispute arises
when P requests warranty repairs.
b. Issue: Is the Acknowledgement, as a standard form K, a counteroffer or an acceptance?
c. Holding: For P(GZ). The Acknowledgment does not constitute a counteroffer and the trial
court must interpret commercial understanding of the parties to determine if it is an acceptance.
If it is, knock out rule should apply.
i. Was DB’s acknowledgment a counteroffer that GZ accepted when it paid for chillers
and DB delivered? [Is there a K?]
1. Common law – mirror image rule applies, it would be a counteroffer
2. Under 2-207(1), doc responding to offer is an acceptance, only a counteroffer
when terms differ radically or it is “expressly conditional on assent to the diff’t
or additional terms”
3. It is not enough to make it expressly conditional, DB (the offeree) would have
to clearly and unequivocally state that they will not enter into the bargain unless
the offeror assents to the new terms introduced. Make it a deal-breaker. DB
did not do this. It is not a counteroffer, it was only conflicting boilerplates
4. Dependant upon the commercial context of the transaction – parties’ intent –
did they mean to be bound? Obj judgment done by the lower ct
ii. Which terms control if DB’s Acknowledgment was an acceptance? [Terms ofK?]
1. How should terms be dealt w/ under 2-207(2) if the terms are “different?”
They decide on the KNOCK-OUT RULE, diff’t terms cancel each other out,
Art. 2 warranties control (this allows DB to have some effect on the warranty –
they don’t get what they want, but neither does GZ!)
iii. Note: if the clause WAS expressly conditional and they still went through w/ the
transaction, what would happen? DB warranties would be in the K – valid counteroffer
that GZ assented to and accepted. Not 2-207 land anymore.
2. Step-Saver Data Systems, Inc. v. Wyse Technology (1991) US Ct of App 3d Cir

a. Things to note here: this is the 2nd “track” of 2-207 – an oral K followed by a written
modification; the terms are additional here (added on after the telephone K), NOT diff’t
b. P would call D and place order for software over the phone, D would accept order and promise
prompt shipment. P would send purchase order detailing agreed-upon terms and D would ship
the order w/ an invoice including the same terms. Each box had a box-top license that had
warranty disclaimers, remedy limitations, integration clause (BTL is the final and complete
expression of terms), and opening package was acceptance of these terms. P has a warranty
issue
c. Issue: Whether BTL that buyer (offeror) didn’t expressly agree to becomes binding part of the
K b/t parties when repeated purchases are made?
20
d. Holding: Contract was sufficiently definite w/out box-top terms. D didn’t express
unwillingness to proceed w/out these terms. Repeatedly sending terms(in each order) isn’t a
“course of dealing” to be incorporated into contract under 2-207.
i. Performance demonstrates a K, so 2-207 applies. K was sufficiently definite here w/
necessary terms, BTL was additional.
ii. BTL was not a conditional acceptance under 2-207(1) b/c D wasn’t clear and
unequivocal
iii. Repeated sending of writing, whose terms would be excluded under 2-207 (they
materially alter) can’t establish a course of conduct that adopts those terms. There
was never a negotiated agreement based on these terms
3. Hill v. Gateway 2000, Inc. (1997) US Ct of App 7th Cir [J Easterbrook (mkt will take care of things)]
a. Rolling contracts: buyer orders, pays before seeing most terms, enjoys right to return for
limited time period. What controls are there for these consumers? Problem law hasn’t found a
solution to yet
b. P ordered computer over phone, paid via credit card, D ships, box has a shrink-wrap K – 30
days to return if unsatisfied, compulsory arbitration clause. P keeps the computer for 30 days
and then become dissatisfied
c. Issue: Are the terms effective in the shrink-wrap K if payment precedes revelation of the terms
of the K?
d. Holding: The terms are effective as part of the K b/c P kept computer for 30+ days and
accepted D’s offer, including arb clause
i. K need not be read to be effective; terms must be enforced
ii. ProCD controls here: terms inside of a box of software bind consumers who use
software after an opportunity to read and reject
iii. Cannot read terms over the phone at time of K (saves confusion and $$$)
iv. This is a bad reading of 2-207, says CB – arb clause shouldn’t be included under Step-
Saver
v. Why doesn’t 2-207 apply here? Judge says it is only one form, not a battle. Also,
could say that the arb clause would be part of the K b/c they accepted the K when they
kept it past 30 days, so 2-207 is n/a
vi. What options are available?
1. Magnuson-Moss Warranty Act: vendor must send copy of terms on request
2. Consult public sources – mags, websites
3. The right of return w/in 30 days (if not, K would be invalid)
4. C&J Fertilizer, Inc. v. Allied Mutual Ins. Co. (1975) SupCt Iowa
a. D insures P w/ burglary coverage that required “visible marks.” Definition in fine print to
prevent inside job. P broken into w/out visible marks and D refuses to provide coverage
b. Issue: Do reasonable expectations of policy holder negate the plain terms of the insurance K?
c. Holding: P had reasonable expectation to believe the loss was covered under “burglary” at the
time he purchased policy
i. The insurance agent did not expressly bring attention to this term, and you’d think that
most burglaries would be covered under a burglary policy. Insurance companies hope
(many times) that insured won’t notice such terms
ii. Reasonable Expectations Doctrine R2K § 211(3): where the other party has reason to
believe that the party manifesting assent would not do so if he knew that the writing
contained a particular term, the term is not part of the agreement.
iii. So the ct reads a term out of the K b/c it is unfair – boilerplate is suspect, especially
with insurance Ks – P has not assented to the fine print
iv. Dissent: P has duty to read, language is obvious
21
v. Chipokas v. Travelers 3 yrs later – reasonable expect doctrine n/a – no fraud, layman
could understand the exclusion clause if he only read the policy. This is a controversial
doctrine, rarely used
F. THE STATUTE OF FRAUDS

• Usually, oral Ks are enforceable. For some Ks, there is a REQUIREMENT OF A WRITING
o Because some promises are so impt that they should be evidenced in writing. Also, some
promises can be dangerous for promisors b/c they are unilateral and may be entered into w/out
much thought
o Something in writing must contain K terms, but a full-fledged K isn’t necessary!
• So, you must ask 1) is there a K at all? (use the rules we’ve learned) and then 2) is the potential K
enforceable against X?
• The answer to the 2nd question must first consider if a K is “within the SOF” (writing is req’d). If YES –
then make sure the SOF requirements are met
o If a K is “within the SOF” it means that the SOF is a defense to the enforcement of a K unless
there is an exception. K is unenforceable against a party who has not signed a written K
o If a K is “out of the SOF” then an exception applies or a writing has been made and SOF is not
a defense to enforcement of the K
• R2K § 131: the only party that needs to sign is the party that will be charged. Also, in addition to
evidencing a K, it must also evidence the main promises (content) w/in the K itself
• UCC § 2-201(1): Not necessary for all K terms to be in the writing, just proof that a K has been made –
not even the price.
• What Ks must be in writing?

o Ks for the sale of interest in land
o Suretyship Ks
o Ks for the sale of goods ABOVE $500 under UCC § 2-201
 Exceptions (oral K is sufficient):
• Receipt and acceptance of goods, (3)(c)
• Part payment, (3)(c)
• Special manufacture, (3)(a)
• Merchant exception: Confirmation sent w/in a reasonable time, signed by
sender, and no objection to w/ in 10 days (2) (see ConAgra below)
• Admission in court of a K, (3)(b)
o Ks that are not to be performed w/in 1 calendar year from their making
 Note: a K that is capable of being performed w/in 1 year, that will probably take more
than one year to perform is NOT within the SOF and it is enforceable even though oral
only
 See Klewin v. Flagship (1991)
• D and P enter into oral K for P’s construction of a development, no specific
terms established, hold a press conference and sign ceremonial written doc. D
is unsatisfied w/ P and replaces him after 1st phase
• Issue: If the oral K is of indefinite duration, is it outside of the SOF? Is an oral
K unenforceable when the performance will be more than 1 year but the K
doesn’t expressly negate the possibility of 1 yr completion?
22
• Holding: unless the agreement expressly and overtly says that the K will NOT
be performed in 1 yr, assume that it can be and therefore, no need for SOF to
apply and require a writing, K is not unenforceable
• Note a difference in philosophy b/t common law and UCC: 2-201 presumes that if there was an oral
agreement b/t the parties, we want to preserve that agreement as a K, so we will provide lots of
exceptions. Under common law, if you can invoke the technicality of SOF, you win, no K.
Promissory Estoppel Related to Statute of Frauds

Promise enforceable notwithstanding SOF if:
1.promisor is fraudulently invoking the statute (i.e. knew at time of oral agreement that he would
not fulfill its terms)
2.promise induced action or forbearance and justice demands enforcement
• Note that the issue here is that if one party fails to reduce the agreement w/ P to
writing, he cannot assert an SOF defense if P relied on that promise (equitable
estoppel)
R2K § 139(1) – Authorizes the enforcement of a promise which induced action or forbearance by a
promisee notwithstanding the SOF by allowing reliance to substitute for a writing. The remedy granted
for breach is to be limited as justice requires.
• Debate over whether a party can make a contract enforceable via reliance even when the
contract does not satisfy the statute of frauds.
1. Migerobe v. Certina USA, Inc. (1991) US Ct of App 5th Cir

a. P sells jewelry and D sells watches via traveling salesman. P agrees to buy 2,000 watches at $45
each. D records on order form. A week later, D calls P to reject order.
b. Issue: Are there writings sufficient to satisfy the SOF?
c. Holding: A memo shows that salesman was authorized to offer the discounted price to P, and
the order form and other memorandum show P’s acceptance of that offer – taken together, these
docs provide sufficient evidence to satisfy SOF
i. Writing must show K of sale is made, must be signed by party against whom
enforcement is sought, and must specify quantity
ii. Integration of several docs meets SOF: writing is separate docs incorporated by
reference to each other (even implied reference is okay)
iii. UCC 2-201(2): an exception that satisfies the writing requirement: b/t merchants, if
confirmation is sent in a reasonable time, it satisfies the requirements of the SOF unless
written notice of objection to its contents is given w/in 10 days of receiving
iv. Note: no K b/t parties here, no agreement – only order form was prepared, essential
terms uncertain
2. ConAgra v. Nierenberg (2000) SupCt of Montana

a. D calls P; P says they agreed on sale; D says he was checking prices. P filled out order sheet
and contends oral agreement by phone is routine. P held for 2 days, D didn’t show, so he mailed
it. D received w/in 10 days and it provided terms discussed. D sold wheat to another elevator
and didn’t notify P. D denied contract; asserted SOF
b. Issue: Is there an enforceable oral K here?
c. Holding: (1) An admission that a K for sale was made, as exception to UCC SOF, must be
deliberate, clear, unequivocal; (2) sellers’ trial testimony was not such an admission, but (3) b/c
P’s confirmation was received in a reasonable am’t of time and D did not object, the SOF
defense is NOT available to D, within the merchant exception to the SOF
i. Case is talking about UCC 2-201(2) and (3)(b)
23
ii. Look at merchants and usual practices – was the confirmation sent in a reasonable am’t
of time, and did D follow ordinary course of biz?
iii. Could still go back and admit that no enforceable K was made here
iv. This also fits under 2-207 – ADDITIONAL TERMS in the confirmation
v. Note that under 2-201(3)(b), you might want to submit an affidavit asserting no oral K
has been made. Could be sufficient no matter what is said in court
VI. FARMERS ARE MERCHANTS HERE
3. Lige Dickson Co. v. Union Oil Co. of CA (1981) SupCt of WA

a. P buys asphalt from D via phone orders, never written K. Prices rising, P requested D provide
oral guarantee against further increases affecting P’s existing contracts(w/its clients). D
promised but then said prices would be subject to change w/out notice, so P lost $39k.
b. Issue: Can an oral K otherwise within the SOF be enforceable on the basis of promissory
estoppel?
c. Holding: Promissory estoppel cannot be used to overcome the SOF in a case involving the sale
of goods
i. P wants ct to adopt R2K § 139 which allows enforcement of a promise based on
reliance theory in spite of SOF. Justified reliance is a common law principle – avoiding
injustice only by enforcing promise
ii. The precedent is not w/r/t the sale of goods, if it was, then it would circumvent the
UCC. Want to encourage writings, from a policy standpoint – cts want regularity
iii. P’s only remedy is breach of the oral K – equitable estoppel isn’t available
iv. Promise here: to price protect – encouraged reliance
CH. 4: THE CONTENTS OF THE CONTRACT
A. THE PAROL EVIDENCE RULE

• First, a K must be in WRITING for this to be considered (exam tip)
• When this rule is used, it prevents the introduction at trial of any evidence that would contradict
or, in many cases, add to the terms of the K in the writing
• Rationale: want a written K to create a sense of finality
1. Is the written K an integrated document? *Judge decides this (R2K § 209/210)

a. Completely integrated document: did parties intend their writing to be the complete
and final expression of their agreement?
b. Partially integrated document: did parties intend record to be a final statement of the
K in certain respects?
c. If YES – then parol evidence rule applies, and blocks external parol evidence
d. This allows for some flexibility
2. Then the admissibility of evidence is determined
• UCC 2-202: Stops you from adding a clause to the contract, but never prevents you from offering oral
testimony to aid in interpreting or “explaining and supplementing” words of the contract with
(a) course of performance, course of dealing, or usage of trade; and
(b) evidence of consistent additional terms unless the court finds the writing to have been intended
as a complete and exclusive statement of the terms of the agreement.
24
 UCC 2-202, comment (3): excludes only evidence of additional terms that are such that “if
agreed upon, they would certainly have been included in the document in the view of the ct.”
 Note that “inconsistent” terms have been held to be only those that basically negate a term in the
K – otherwise, they can be consistent (see Hunt Foods on p. 251)
• See R2K § 214: when prior agreements or negotiations are admissible!

• Merger clause: “this written agreement is the final expression of the intent of the parties”
• EXCEPTIONS: Evidence of oral agreement made prior to adoption of written K admitted if:
A. Collateral Agreement + Additional Consideration -

1. oral agreement is collateral (capable of being expressed in separate agreement), would
not have certainly been included in the disputed contract, and it does not contradict the terms of
the written contract and
2. the written contract fails to fully integrate and embody the parties’ understanding
Problem comes when prior oral agreements add to the obligations of one of the parties
(price higher) rather than contradicting a written term, but at the same time plainly fall w/in the
scope of the written contract b/c relates to same subject-matter. As in the Ice-house case! Ct
usually won’t allow this oral agreement in.
B. Subsequent Transactions – Evidence of oral agreements after the signing of the writing permissible
C. Fraud – a party may always introduce evidence of oral agreements showing fraud, duress, mistake,
lack of consideration
D. The written instrument was not effective until a prior condition has occurred (R2K § 217)
E. To explain or interpret, modification of the agreement, or a “naturally omitted” term
No Partial Integration Full Integration

Integration
R2d Oral Deals, Something written down, but not everything, Contract adopted by the
§ no written i.e. form Ks (even with merger clauses) parties as a complete and
210 terms exclusive statement of the
May be shown by: terms of the agreement
1. other writings • presence of a merger
UCC clause persuasive, but not
2. relevant evidence, oral or written, that
too! dispositive [R2d § 209],
an apparently complete writing
especially if the terms are
a. never became fully effective ambiguous.
b. was modified after initial
adoption.
R2d Always supersedes inconsistent terms of prior Supersedes inconsistent AND
§ oral agreements BUT proof of consistent additional consistent terms of
213 additional terms can be shown prior oral agreements
** Restatement less likely than UCC to allow parol evidence. **
R2d § 204, comment e: “The fact that an essential term is omitted may indicate that the agreement is
not integrated or that there is partial rather than complete integration, but omission of a term does not
show conclusively that integration was not complete and a completely integrated agreement, if binding,
discharges prior agreements within its scope.”
25
Parol Evidence Rule like the Statute of Frauds b/c offers illusory refuge of mechanical simplicity
• Differing opinions as to what extent courts should insist on particular forms of contract:
1. Formalist Position – insists on particular methods for particular outcomes, i.e. everything
should be written down (this may be on the rise in practice)
2. Anti-formalist position – judges should be actively involved in interpreting contract and
protecting people. Find exceptions in law. (Judge Traynor)
Formalist Analysis of Parol Evidence Anti-Formalist Analysis

Document Integrated  Evidence Inadmissible Credible Evidence of Prior Oral Agreement 
(Regardless of credible proof of prior oral Document not integrated  Evidence
agreement) admissible to add to contract.
Classic Parol Evidence Case (Formalist Four Corners Approach):
1. Baker v. Bailey
a. D and P have a lease on land that includes Water Well Use Agreement, which only provides
water to D. D thought the right to H2O would be extended to a “reasonable party” (b/c P feared
hippies) but the terms do not say this, no obligation to give new purchasers H2O. When D
decides to move, P won’t share H2O, property worthless, sold for $8K, worth $45K.
b. Issue: Is there a breach of K by P?
c. Holding: PER bars the Ds contention that terms not in K could be relied upon, thus no breach
of K
i. This is case where P and the ct didn’t care what understanding was – the agreement
clearly wasn’t in express terms of the K. The ct will look at the language – nothing for
the ct to construe, just apply language to facts and decide
ii. Even though D’s “understanding” is consistent with the express terms, it is still not
applied b/c there is complete integration, so terms do not matter. (R2K §210)
BUT: Traynor and Anti-Formalist Application (Intent Oriented):
2. Masterson v. Sine
a. Significance: Evidence of oral collateral agreements should be excluded only when the fact
finder is likely to be misled. (Credible Evidence of Side Oral Agreements  Partial Integration
 Admissibility of additional terms)
b. P(M) conveys ranch to D (sister-in-law) reserving option to purchase w/in 10 years for same
consideration plus depreciation value of improvements. P goes bankrupt. P’s trustee tries to
enforce the option.
c. Holding: For D – parol evidence must be admitted to determine what is meant by unclear
terms in K, collateral agreements show what parties INTENT was in negotiation, to see what
should be included or excluded, in order to determine integration
i. Ds claim that oral understanding was that it was non-transferrable outside the family
ii. Traynor says that the instrument itself can help determine integration – goes to step 2
before step 1 is completed. The credibility of the proffered evidence is the basis for the
decision. If circumstances deem that the oral agreement could’ve been entered
into separately from the written one, no need to frustrate parties’ intent! Good
policy
iii. Rest § 240(1)(b): permits proof of a collateral agreement if it “might naturally be made
as a separate agreement by parties” but they didn’t include it. (So, ct would have to
really be convinced that the parties could NOT have left this out of their agreement, in
order to use the PER)
26
iv. UCC § 2-202: permits proof if additional terms would certainly be included in the doc
in the view of the ct
v. No merger clause here, standardized form, signs of incompleteness.
B. INTERPRETING THE TERMS OF THE CONTRACT

• Interpretation – get at what the parties meant, right? But this goes against the objective theory
of K.
• Language can be hazy, some parties will leave broad terms to protect the deal and lower
transaction costs, and unexpected events do occur
• Parties may claim terms have special meanings – does this prevail over judge’s determination
about the meaning of the terms (plain-meaning)?
 General trend propelled by the UCC is the 2nd one, which has broadened concept of contract in very
important ways. See UCC 2-202! (Nanakuli below outlines this)
Fundamental difference of above opinions as to how integration and interpretation should be

approached:
Williston: Writing has a unique and Corbin: Writing has NO unique and
compelling force - Formalist compelling force (TRAYNOR)
Writing supersedes all previous undertakings Writing is integrated when the parties intend it
when taken as a whole appears to be complete to be integrated
and alleged additional terms ordinarily and
naturally would have been included in the
writing by reasonable parties situated as the
parties were to the writing
Writing which is integrated means what a Integrated writing means what parties intend it
reasonably intelligent person would understand to mean. As such, an integrated meaning could
it to mean have a meaning to which a reasonably
intelligent person could not subscribe
Thus, the judge can fix the legal relations of the Accords the jury a larger role in process of
parties w/o aid of a jury fixing contractual relations
This provides a measure of security Provides less security to written agreements
** Some cases have held that parties cannot insert a clause into their contract in order to prevent courts
from considering extrinsic evidence when interpreting it as void as against public policy.
Principals of Construction: Phila v Phila Transportation:

1. entire K should be read as a whole and every part interpreted w/ reference to the whole, so as to
give effect to its true purpose
2. the K itself must be read in the light of the circumstances under which it was made
3. where a public interest is affected, an read it to favor the public
4. specific provisions ordinarily will be regarded as qualifying the meaning of broad general words
in relation to a particular subject
5. unless contrary to the plain meaning of the K, an interpretation given by the parties themselves
will be favored.
Maxims of interpretation:
a. Primary purpose rule: If the primary purpose of the parties in making the K can be ascertained,
that purpose is given great weight. [R2K § 202(1)]
 Courts will try to interpret terms as consistent with each other [R2K § 202(5)]
27
b. All terms made reasonable, lawful and effective: An interpretation which gives a reasonable,
lawful, and effective meaning to all terms is preferred to an interpretation which leave a part
unreasonable, unlawful, or of no effect. [R2K § 203(a)]
c. Construction against draftsman: An ambiguous term will be construed against the drafter.
[R2d. § 206]
d. Dickered terms control boiler-plate terms: Where it is possible, separately negotiated or added
terms are given greater weight than standardized terms. [R2d § 203(d)]
e. Noscitur a sociis: a word is known by the company it keeps
f. Expressio unius – if you put it one place and not the other, you meant to do that
1. WWW Associates, Inc. v. Giancontieri (1990) Ct of App of NY

a. This is the 4-CORNERS, PLAIN-MEANING APPROACH
b. Ds K for sale of property to P, they sign a K of Sale which includes a reciprocal
cancellation provision (dependant upon the outcome of a litigation – if not over by a
certain date, either party can cancel the K). Ds wait until that date passes and then they
cancel the K, drag their feet in the litigation so they can get out of this K. P claims that
the cancellation provision was intended for their benefit only. D is silent about this.
c. Issue: Should an unambiguous term in the K (reciprocal cancellation provision) be
read in light of extrinsic evidence and only allow P to cancel the K?
d. Holding: Parties set their agreement in a clear, complete doc and that writing must be
enforced according to its terms; intent is inadmissible to change the writing.
i. Expressio unius argument: other parts of the K gave rights to P alone, and this
one did not. Therefore, the fact that it doesn’t MEANS SOMETHING.
ii. D relies on the language, and the ct agrees. P could have said that the merger
clause was NOT dickered, that it would’ve been there no matter what they did.
Only dickered terms represent real intentions.
iii. Court wants stability in Ks – don’t to create ambiguity in K w/ this extrinsic
evidence. Only look to this evidence if there is an ambiguity. See R2K §
203(d)
iv. Also, parties were sophisticated bizppl.
2. Pacific Gas & Electric Co. v. GW Thomas Drayage & Rigging (1968) SupCt of CA
a. This is the MODERN APPROACH (allow more evidence re: intent). Traynor.
b. D enters into K w/ P to perform work on steam engine, K includes an indemnity clause
where D indemnifies P against loss, damages, etc. resulting from injury to property
arising from work. Cover fell and injured exposed rotor of P – they want $$ for repairs.
D claims that the indemnity clause only applied to 3rd parties
c. Issue: Does plain language prevail or is external evidence req’d to interpret the K?
d. Holding: Traynor believes that you need to admit extrinsic evidence and look at
parties’ intent to construe a clause that can be reasonably susceptible to 2 meanings
i. This is classic language for a 3rd party indemnity provision, so Traynor
overrules lower ct; he thinks there is NEVER a possibility for perfect verbal
expression, so if the language of an instrument is reasonably susceptible to
multiple meanings, extrinsic evidence is necessary
ii. Do not just look at a doc on its face: the ct must sit and listen to a preliminary
consideration of all credible evidence re: intention of parties – rational
interpretation. Judges can’t decide themselves – trade usage/custom can alter
the meaning of a word.
28
iii. If you can show the judge that something can reasonably have a diff’t meaning,
then you are halfway home! As long as it isn’t a stretch, this is okay. This
shows that integration is susceptible to interpretation.
iv. R2K § 212: Interpretation of integrated agreement is determined by trier of fact
if it depends on credibility of evidence or a choice among reasonable
interpretations – otherwise, question of law. Meaning is almost never plain
except in a context (cmt b).
3. ZRL Corp. v. Great Central Insurance Co. (1987) App Ct of IL

a. This illustrates contra proferentem and noscitur a sociis (“it is known from the
company it keeps”)
b. P has an insurance K w/ D for their club, which includes personal injury provisions,
coverage is extended for all payments resulting from list of offenses, one if which is
“wrongful eviction” claim. When 2 blacks assert that they were evicted from the club
b/c of race, P asks D to cover litigation expenses and D refuses.
c. Issue: What is the correct interpretation of “wrongful eviction”?
d. Holding: Ct construes the term to include the “eviction” of prospective clients from a
biz establishment on the basis of racial discrimination
i. Normally, “wrongful eviction” is a property right – it would apply if Ps were
evicted from their building.
ii. Noscitur a sociis: construe the phrase by the company it keeps. Here, it is
surrounded by language re: patron torts – this is thought to be similar
iii. So, when a term in a standard K of adhesion is ambiguous, cts will usually
construe it in favor of the insured, not the insurer – contra proferentem.
PUBLIC INTEREST.
4. Nanakuli Paving & Rock Co. v. Shell Oil Co., Inc. (1981) US Ct of App 9th Cir
a. This illustrates how cts bring in TRADE USAGE to interpret Ks
b. P(N) bought all asphalt requirements from D under 2 long-term supply K’s. D abruptly
raises prices and does not price protect. P says it violates routine practice in trade in HI
and violates part of their K through performance. P also presents 2 occasions in which
D had provided it price protection. This is theory of incorporation argument.
c. Issue: How broad is trade usage to which D is bound? Did D’s price protection in 2
prior instances give jury sufficient evidence to find that this was course of
performance?
d. Holding: For P. Yes, there was trade usage evidence, course of performance, and
price protection was reasonably consistent w/ the express price term so it can be
included. D might have breached obligation of good faith.
i. Incorporation theory: is price protection included in the K even though it
didn’t say anything about it expressly? Must use UCC § 2-202: (a) says that
terms in writing can’t be contradicted, but they CAN be “explained or
supplemented” by course of perf, course of dealing, or usage of trade (§1-303).
This can be incorporated even if the parties included the K to be complete
and integrated!
ii. HIERARCY: Express terms trump Course of Perf trumps Course of Dealing
trumps Usage of trade (UCC § 1-103)
iii. So, the main point of this is that performance tells us about parties’ intentions.
(Pattern of late payment of rent can change a lease, for ex)
iv. Course of perf: in 1970 and 71, D price protected when they raised prices, 2 is
enough to establish this. (1 wouldn’t be)
29
v. Trade usage: trade is defined in terms of the BUYER. This is only binding on
members of trade who know or should know about it (those who regularly deal
w/members of the relevant trade and also members of a 2nd trade that commonly
deals w/members of a relevant trade), via §1-205(3). In HI, price prot was
standard b/c the gov’t wouldn’t allow P to pass on price increases.
vi. Express terms: look at commercial context – as long as they are consistent,
they are ok. Only way that they would not be okay would be if they totally
negated the express terms. Otherwise, “reasonably consistent.” Doesn’t matter
if K seems to be complete – instead, ask if the offered evidence can be
consistent w/ the terms.
vii. Good-faith req: D was obliged to price protect in the alternative (even if
incorp doesn’t work) b/c this was the commercially reasonable standard at the
time – see UCC § 2-305 (price to be fixed by seller must be fixed in good
faith). However, this is bad argument: D would lose $$ if they price protected
b/c price of oil went up so much. Why should they take the loss?
C. IMPLIED TERMS AND THE IMPLIED COVENANT OF GOOD FAITH

• Ks (almost) never contain all of the terms of every single promise b/t the parties
• R2K § 204: a term which is reasonable in the circumstances is supplied by the ct even if one
party objects
• List of “default terms” or “gap filler” grew gradually from case law
 One of these terms is an implied obligation of good faith and fair dealing, which is
adopted in:
UCC § 1-204 (sale of goods)
R2K § 205 (for all Ks).
Cmt D – gives examples of bad faith (think of it as the avoidance of BAD things)
• UCC § 1-203 – duty of good faith in perf or enforcement (not pre-K negotiations)
o Good faith as a source of DUTIES: § 2-309(2) (reasonable notification before a K is treated as
breached)
o UCC § 1-201 – what is good faith?
 Honesty in fact – subjective good faith (ex: if I K for my portrait, and then reject it as
unsatisfactory – I must look at it, can’t just decide I don’t want a portrait)
 The observance of reasonable commercial standards of fair dealing – more
objective part, measured against standards
COMMON LAW: What is Good Faith?—generally, it is the absence of bad faith.

• Majority viewpoint (unified theory) holds bad faith as the exercise of DISCRETION for the purpose of
recapturing opportunities foregone or bargained away at the time of contracting.
o So, if one of the parties has the discretionary power to impede performance or frustrate the
reasonable expectations of either party, then the party with discretion has a good faith obligation
not to use his discretion to recapture a right/money/etc… that he has intentionally bargained
away in the contract.
o This does not mean that b/c one party made a deal that put him at the discretion of the other
intentionally, that courts will rewrite the contract.
30
o How to test for bad faith? You must determine the intent of both parties at the time of
contract, and what each of them perceived to be giving up or bargaining away. Is one party
now trying to recapture what it is they may have (now regretfully) once voluntarily bargained
away?
• Minority viewpoint: Good faith is the absence of a number of specific forms of bad faith.
Robert Summers Robert Burton (majority opinion)

Specific forms of bad faith: Concentrates on discouraging “the exercise of
1. evading the spirit of the bargain discretion for the purposes of recapturing
opportunities foregone or bargained away at
2. failing to be sufficiently diligent
the time of contracting” (see Centronics)
3. willfully less fully performing obligations
4. abusing the power to specify terms
5. abusing the power to determine compliance
6. interfering with the other party’s performance
1. Haines v. City of NY (1977) Ct of App of NY

a. This shows that a “reasonable time” standard is read into Ks w/ no express duration –
court reads in terms to fill out the K when there are OPEN TERMS
b. P is land owner and town. D built sewage system for P in ‘20s to protect water supply.
D agreed to extend lines when “necessitated by future growth.” D expanded plant in
’58. Flow now exceeds capacity. P seeks to develop 50 lots and connect to system. D
refuses arguing no further obligation to expand. P says K perpetual duration.
c. Issue: If the K doesn’t have an express term re: duration of the obligation, how long is
that obligation and what is it?
d. Holding: D is obligated to maintain the existing plant (but not expand it) until they no
longer need the water
i. D argues that environmental issues make this K unnecessary – but these were
not in the minds of the parties at the time the K was made.
ii. Duration: ct invokes a principle of reasonability – one can infer from the
circumstances at the time the parties originally contracted that NYC should
maintain this system until NYC no longer desired the water
iii. Scope: K didn’t discuss new plants, just extending the lines of these plants – no
duty to expand.
1. If you were P’s attny: should use course of perf argument – say that
they refurbished it once already in 1958, and the K was to prevent
sewage backup w/ no limits on how this was to be done.
2. Centronics Corp. v. Genicom Corp. (1989) SupCt of NH

a. P decides to sell assets to D, price is at issue. K provided that if it was not agreed upon,
it should go to arbitration. During arb, escrow fund established where D pays $5mil but
the distribution of escrow not to happen until arb is over. Arb drags on, and P wants
distribution of $$ in escrow that is not contested, D refuses and P claims that this is b/c
they want to use it as leverage in the arb and get P to agree to a contested term.
b. Issue: Does obligation of good faith and fair dealing require D to release escrow
funds?
c. Holding: P did not insist on terms in K that would allow for early distribution of $$
and so this is a revision of the K and not the enforcement of good faith.
31
i. Griswold RULE: In an agreement that gives one party a degree of discretion re:
performance, which could deprive one party of a substantial portion of
agreement’s value, the parties intent to be bound raises an IMPLIED
OBLIGATION OF GOOD FAITH to be reasonable
ii. Ct says, P had to wait on outcome before it received escrowed funds. This
allows D to rely on P’s self-interest in limiting probable length of arbitration
iii. Cts will look at what was bargained for. Here, parties intended this arbitration
clause and just b/c P does not like how it’s worked out, doesn’t mean P’s
entitled to relief from the court
iv. The real issue: D had no discretion to withhold payout beyond the 10-day
limit in the K, thus depriving P of a substantial portion of the K’s value. That $
$ was as good as gone to them. Parties have joint discretion here – via
arbitration. If one party was dragging their heels however, this would be in bad
faith.
v. In Nanakuli, D was nice and price protected, but then they could not. Later, it
came back to bite them in the ass. Here, that might happen if D was just as
nice.
3. Shell Oil Co v. HRN, Inc. (2004) SupCt of TX

a. Shell and dealers have franchise agreement where dealers pay the DTW price for gas
(this is an open price term governed by §2-305) that changes. The price is w/in range
charged by other co’s but at the higher end, and dealers allege that the price is too high,
that it is set with the intent of running them out of biz.
b. Issue: Is the price fixed by a refiner for the sale of gas under an open-price-term K w/
dealers set in good faith as required by the UCC?
c. Holding: Shell’s posted price was commercially reasonable and fairly applied to
dealers, therefore they acted in good faith and there is no need to inquire about the
subjective intent/bad faith.
i. 2-305 – must set price in good faith, “honesty in fact and observance of
reasonable commercial standards of fair dealing.” The term, says the ct, is w/in
the range of other refiners (commercially reasonable) and applied uniformly
(non-discriminatory)
ii. Dealers concede that it is commercially reasonable, but want the court to look
at the subjective intent of Shell – price discrim is not the only way to rebut the
posted price presumption of Cmt 3 of § 2-305.
iii. The reason why Shell charges this price does not matter if the price is
commercially reasonable and non-discrim – safe harbor for Shell if they meet
the objective criteria of UCC.
iv. Not required to offer a competitive price here; ct is unsympathetic to dealers –
they chose this. Do not want judicial intervention, the UCC promotes certainty.
Isn’t a franchise agreement symbiotic though?
4. Donahue v. FedEx Corp. (2000) Superior Ct of Penn

a. P worked for D and after he blew the whistle about some bad practices, they treated him
badly, terminated him, he appealed through the employer’s GFTP process and lost at
every step.
b. Issue: What is the role of good faith and fair dealing in at-will employment Ks?
c. Holding: In an at-will employment K, the duty of good faith and fair dealing only
applies to contractual terms that exist BEYOND the at-will employment
relationship, or in the case of public interest, or when employee gave employer
add’tl consideration other than the services for which he was hired.
32
i. Note that the GFTP was not made expressly part of the K- no contractual rights,
either. So, no matter if it was conducted in bad faith.
D. EXPRESS AND IMPLIED WARRANTIES

• Express warranties: oral or written promises or affirmations of fact made my one party to the other
during the formation of the K. Can and do frequently enter the bargain, especially if there is a reason to
believe that the other party wouldn’t have agreed if such a promise wasn’t given.
o UCC 2-313: created via affirmation of fact, promise, description of the goods, sample or model.
No merchant requirement!
o Also, it is NOT necessary that the seller use formal words like “warrant” or “guarantee” or have
the specific intention to make a warrantee.
o Affirmation of the value of the goods or a statement that purports to be seller’s opinion does
NOT create a warranty.
o Basis of the Bargain - requirement that buyer rely on seller’s warranty
• Implied warranties: these arise through implication, they are DEFAULT terms of Ks for the sale of
goods. The UCC has three major such warranties:
o UCC 2-312: “the title conveyed shall be good”
o UCC 2-314: Implied warranty of Merchantability (“goods shall be merchantable”). Other
implied warranties can arise from course of dealing or usage of trade too.
o UCC 2-315: Implied warranty of Fitness for a Particular Purpose (“goods shall be fit for a
[particular] purpose”
• Disclaimers: To EXCLUDE or MODIFY an implied warranty – see UCC § 2-316:
o Merchantability – language must mention merchantability and in case of a writing must be
conspicuous
o Fitness – language MUST be by a writing and conspicuous. Ex: “There are no warranties
which extend beyond the description on the face hereof”
o 2-316(2)(c): implied warranty can also be excluded or modified by course of dealing/usage of
trade
o Conspicuous – so written, displayed or presented that a reasonable person against which it is to
operate ought to have noticed
• Limit Remedies - Sellers may limit the remedies available for breach of the implied warranty, where
there is not requirement that the limit be conspicuous. (2-718 and 2-719)
BUT: Magnuson-Moss Act – helps consumers. When a state has adopted this, it SUPERCEDES UCC § 2-
316. Seller cannot disclaim merchantability or fitness for a particular purpose if there is a written warranty
of a product.
How do you tell b/w:

Puffery = opinion Warranty
Kinds of words seller uses: i.e. this is my Statements of Fact, i.e. this is a 6 cylinder
opinion, I think, etc… (usually oral) engine
• It matters who the promises are being made to. Used Car Dealer’s statements more likely to be
warranties when given to an inexperienced car buyer versus an experienced auto mechanic.
1. Carpenter v. Chrysler Corp. (1993) Missouri Ct of App – PUFFERY vs. WARRANTY
33
a. P tells D he wants reliable car for daughter. D says car reliable, safe, etc. P buys and has
constant problems w/car. P returns for repair many times. P finally stops paying and car
repossessed. P brings for breach of warranty
b. Issue: Do seller’s words create an express warranty or are they mere puffery?
c. Holding: Because D made a material misrepresentation of a statement of fact, Ps have
sufficient claim for breach of express warranty.
i. P must prove 6 things (2 of which are in question):
1. D sold goods to P
2. D represented that goods were of certain kind/quality **
3. D’s representations induced P to purchase (was a material factor of purchase)
**
4. Nonconformity of goods to the representations made
5. P gave D notice of failure to conform in reasonable time
6. P’s damages
ii. P must show that there was some sort of reliance or change of position b/c of these
representations – and P asked for a reliable car explicitly. Uses § 2-313
iii. It is VERY hard for D to disclaim this, prevent salesman’s statements from entering
into the K. See 2-316(1) – tough standard. Be very specific in K that salesman’s words
are OPINIONS. PER doesn’t work here.
iv. Hard to tell what is PUFFERY and what is a warranty
v. Guess case: owner of a used car sells it, tells buyer what she knows, then problems
result. No statements of fact though b/c S and B were on equal footing. Seller
inexperienced – has a bearing on puffery vs. warranty.
2. Vlases v. Montgomery Ward & Co. (1967) US Ct of App 3d Cir – IMPLIED WARRANTY
(STRICT LIABILITY / WARRANTY OF FITNESS)
a. P constructs chicken coop for chickens to produce eggs, buys 2,000 day-old chicks from D,
takes good care of them but then the feathers fall off and they are diagnosed w/ bird cancer,
drug intoxication.
b. Issue: Is there an implied warranty of merchantability/fitness when seller cannot foresee a
problem?
c. Holding: It doesn’t matter if seller cannot foresee defects in goods, as long as P shows the
goods were defective and there is no conspicuous written negation of warranties, then there is a
breach of implied warranties – this functions to protect BUYERS
i. Implied warranty of merchantability (2-314) and of fitness for a particular purpose (2-
315). Must assume that they are MERCHANTS for 2-314 though
ii. There were no DISCLAIMERS (2-316) so there is an implied warranty here.
iii. All buyer needs to show is that the goods were not of merchantable quality or fit for
their particular purpose. Hard to know when an object of sale is not fit, though.
iv. Could also limit remedies here, but D does not. Damages would be the purchase price
plus consequential damages.
3. Massey-Ferguson, Inc. v. Utley (1969) Ct of App of Kentucky – CONSPICUOUSNESS
a. D purchases farm equipment from dealer, who assigns K rights to P, the manufacturer of the
equipment. D defaults in 1st payment and P brings action to get $$.
b. Issue: Does implied warranty survive a K disclaimer and if so, can it be used against an
assignee?
c. Holding: Implied warranty survives disclaimer b/c it was not sufficiently conspicuous
and it can be used against assignee b/c P participated in the sale enough to be
considered the “seller.”
34
i. Disclaimer must be in writing and conspicuous via 2-316 and here, it was not. Strictly
constructed. Type was the same size and font, the heading was not w/r/t the disclaimer
of warranties (just the making of them) and it was on the back.
ii. Note that on the internet, the disclaimer must in an emphatic heading, different
font/color – and if it is an e-form – can’t click through w/out accepting it
iii. 2nd part of P’s argument: buyer cannot assert against assignee any claim or defense.
However, the assignee was the manufacturer here (not a bank, who wouldn’t know
about the warranties and would not be liable, unless it was a consumer sale, where the
FTC would limit this). The manufacturer was involved in the sale and course of dealing
was to furnish blank Ks and then immediately get assigned the K. P is mostly a
“seller,” therefore.
E. MODIFICATIONS
• Under COMMON LAW, a modification to a K requires consideration for the modification to be valid.
• The Pre-Existing Duty Rule
1. A pre-existing duty may not serve as consideration for a modification – R2K § 73
 HYPO: If you are representing an NFL player in his K for a certain amount of $$, and
then he wins the MVP award, how can you get him more $$ and avoid the pre-existing
duty rule? Add a new consideration by adding a year to the K – which scraps the old
one and puts in place a new K w/ the terms wanted. They won’t inquire into the
sufficiency of consideration here.
2. If a party promises to do what he is already legally obligated to do or to refrain from
something which he is not legally entitled to do, then he has not incurred a detriment (in the
actual or legal sense) for the purposes of consideration.
3. This prevents the “hold-up” game in construction Ks
4. So, if 2 parties agree to modify a K for the benefit of one party, the modification is not
enforceable.
 However, the cts seem to be reluctant to apply this rule when party to a K hits
unanticipated difficulties and the other party (not under duress or coercion via R2K §
175(1)) voluntarily agrees to pay additional compensation
 R2K § 89: if a K is not fully performed, a promise modifying a duty is binding (a) “if
the modification is fair and equitable in view of circumstances not anticipated by the
parties when the K was made…(c) to the extent that justice requires, when there has
been a material change of position in reliance on the promise. (Promissory estoppel
here then)
5. Even if the K has a “no oral modification” term, if two parties assent to an oral modification,
and there is proof of such assent, one cannot hide behind the no oral modification clause to
claim a lack of necessity to comply (true for UCC too).
• UCC § 2-209
1. There is NO REQUIREMENT OF CONSIDERATION for an agreement to be binding. Pre-
existing duty rule is abolished.
2. Modifications cannot be accomplished w/out a signed writing
3. The SOF must be satisfied if the original K is within the SOF. If the modification doesn’t
satisfy the SOF, then the original K is in effect w/ no mod.
 Note that UCC 2-201 would apply here, and (3)(c) would satisfy the SOF if goods have
been received and accepted.
35
4. However, even if (2) and (3) are not met (it’s not in writing and doesn’t satisfy the SOF), it can
still operate as a WAIVER. This essentially alters the duties of the parties for at least some
time. [But until in writing, it is only a temporary waiver]
5. If a party has made a waiver though, they can retract it by reasonable notification received by
the other party that “strict performance” is required (unless that would be unjust b/c of reliance)
 Modifications must meet good faith requirements (no hold up game)
 UCC 2-208(1): “any course of perf accepted or acquiesced in w/out objection shall be relevant to
determining the meaning of the agreement”
-----This means that, there is a danger that the course of performance can alter the terms of a
contract through lax performance!
1. Angel v. Murray (1974) SupCt of RI

a. D provides waste pick-up for city of Newport for 5 years, before K is up, he requests
additional $10K b/c of unexpected increase of 400 units, previous increases were only
20/year. D agrees and does the same the next year. P is citizens’ group.
b. Issue: Are these additional payments to D illegal b/c they aren’t supported by
consideration under the pre-existing duty rule?
c. Holding: The evidence of unanticipated circumstances (large increase) kicks in R2K § 89
and the city voluntarily agreed to this modification, so the payments are valid.
i. Court doesn’t like the Pre-existing duty rule, modern rule brings in the Rest. view
of Ks.
ii. 3 important circumstances must be met though: the promise/modification has to be
made before the K is fully performed on either side; the underlying circumstances
warranting this modification must be UNANTICIPATED; and the modification
must be FAIR AND EQUITABLE (the ct has a basis for supervising here).
iii. The huge am’t of new units warrants this as unanticipated.
iv. If you are representing the D here – you have to be very careful with how you
approach the city. Cannot make them agree b/c of duress – must make it seem like
they have an option here, it is reasonable, and voluntary to agree.
2. Brookside Farms v. Mama Rizzo’s, Inc. (1995) USDC for SC TX

a. D enters into a requirements K w/ P for fresh basil (91,000 lbs), and the K has a clause that
forbids oral modifications and restricts the power of waivers. D requests that P remove the
stems from the basil, and P agrees, but b/c of the no-oral mod clause, D will also WRITE it
down on purchase orders and that’ll be sufficient. P then continues to ship basil, and there
are 2 subsequent PRICE MODIFICATIONS but D keeps paying until their check bounces.
P brings action for breach and D claims no payment due b/c P breached K by price
modifications.
b. Issue: To what extent does the K clause that requires modifications be in writing prevent
parties from making oral modifications and enforcing those, when performance follows
under the new terms?
c. Holding: Valid oral mod of the K happened both on estoppel and statutory grounds
because of the actual later conduct/performance of the parties.
i. Estoppel grounds: P reasonably relied on D’s promise to write down the new price
and accept basil at higher price, so P continued to ship and D cannot invoke the no-
oral-modification clause to bar claim that modification was valid
ii. Statutory grounds via the UCC. First, under UCC 2-209, oral mods to Ks w/in the
SOF are not okay, but this doesn’t limit the actual later conduct of the parties,
which was the acceptance of basil by the D. D may claim that the no-waiver clause
allows it to demand modifications to be in writing, but the parties thus made their
OWN SOF, and via UCC 2-201(3)(c), the modification can be in writing OR if the
36
goods are received and accepted, the SOF is met and D cannot get out of the new K
formed by their performance. The new price terms were effective for that basil
accepted and not paid for yet.
3. Asmus v. Pacific Bell (2000) SupCt of CA

a. D issues MESP (employment security) to managers (P), maintained as long as there is no
material change to D’s biz plan. 4 yrs later, P notifies ppl that they might discontinue
MESP, then 2 yrs later they say it will be discontinued 1 yr later. New layoff policy,
generous severance program, if you keep working though, better pensions. Ps chose to stay
for several years, got pension benefits. Sue now for damages of breach of K
b. Issue: Once an employer’s unilaterally adopted policy (which requires employees to be
retained as long as a specified condition doesn’t occur) has become part of an employment
K, may the employer then unilaterally terminate the policy, even though the specified
condition hasn’t occurred?
c. Holding: Ct says yes, they can unilaterally terminate the MESP w/ a condition if it is of
indefinite duration, and the employer effects the change after a reasonable time, w/
reasonable notice and w/out interfering w/ employees vested benefits.
i. Employer Ks are different here – hard to apply traditional K law
ii. The MESP is a unilateral K implied-in-fact. The issue is – how can the employer
get out of this if there is only a condition that has to happen, and it hasn’t yet? The
holding shows how the court seems to qualify this.
iii. Also, the court uses a theory of symmetry – since there was a unilateral benefit
offered, there can be a unilateral termination of that benefit as long as it is
reasonable. The dissent wants to argue the removal of that benefit under bilateral K
theory. There might be additional consideration (the pension) but this needs to be
determined.
iv. Continued performance (continuing to work) functions as the acceptance of both
the original MESP and its rescission. But then they could only reject the offer by
stopping employment.
v. Public policy argument: need employer to be able to manage its business, be
flexible. But they should’ve put something in the MESP that said it was revocable.
CH. 5: LEGAL REGULATION OF CONTRACTS
A. MISTAKE OF FACT
 misunderstanding: each party has different opinion that doesn’t coincide and no way to allocate risk
 mistake – both parties have same understanding, but something happens where it becomes obvious they
were mistaken and have to decide how to allocate the risk
• Successful mistakes are fairly rare!

• Only applies to mistaken belief about an existing fact, not something that was to happen in the future
• Mistake – “ a belief that is not in accord w/ the facts” R2K § 151

1. Mutual/bilateral mistake: both parties enter a K under the same mistaken belief R2K § 152
 Cts handle these mistakes more generously, holding that there is no K or it should be
reformed
2. Unilateral mistake: one party enters into a K under a mistaken belief R2K § 153
37
 Generally, no relief to the mistaken party
Mutual Mistake:
Three requirements to avoid the contract because of mutual mistake; R2d § 152:
1. Basic Assumption: The mistake must concern the basic
assumption on which the contract was made. It must be made AT THE TIME a K is made.
(Sherwood – Barren cow case)
2. Material effect: The mistake must have a material effect
on the agreed exchange of the performance and show that resulting imbalance in the agreed
exchange is so severe that he cannot fairly be required to carry it out.
 In the Ex above, the price of the cow would be drastically different so it materially
affects the bargain
3. Risk of Mistake: The adversely-affected party (the one
seeking avoidance) cannot bear the risk of the mistake via the contractual distribution of risks
Unilateral Mistake:
a. Modern View: courts less generous in allowing the mistaken party to avoid the
contract than in a mutual mistake situation.
• R2d § 153: The mistaken party must make the same 3 showings as for mutual mistake
(basic assumption, material effect, and risk on the other party), plus must show EITHER:
1) Unconscionability: enforcing the K would be unconscionable
2) Reason to know: the other party had reason to know of the mistake, or the
other party’s fault caused the mistake
1. Lenawee County Bd of Health v. Messerly (1982) SupCt of Michigan

a. Pickles buy property from Messerly w/ apt building on it – want to profit. Bd of Health
condemns after transaction, leaking sewage, insufficient septic tank. As-is clause in the K,
purchaser had inspected the property and agreed to it in present condition. Pickles want
rescission of the K based on mutual mistake.
b. Issue: Should buyers prevail in an attempt to avoid land K on the basis of mutual mistake?
c. Holding: Even though there was a mutual mistake, the circumstances of this case don’t warrant
rescission b/c the ct feels the buyers should shoulder the risk due to the “as-is” clause
i. There was a mistaken belief and it was at the time the K was formed re: the income-
producing capacity of the property.
ii. A&M Land: Messerly cites this, when the mistake was re: the value of the property, it
was not a basis for rescission
iii. Sherwood v. Walker (barren cow case): at the time of K, both buyer and seller think the
cow is barren so it is sold for $80, when seller discovers it is with calf, refuses to sell it.
Mistake was okay here because the very nature of the thing was the mistaken part.
Barren cow is not the same as a breeding one. No K if fact was known.
iv. These cases are unhelpful to ct – WHO SHOULDERS THE RISK? Ct determines this
if 2 equally mistaken parties and no fraud – the “as is” clause gave some allocation –
had to apply to defects at the time of K’ing.
v. Note how this connects to buying something w/ a warranty (implied or express).
2. Lanci v. Metropolitan Ins. Co. (1989) Superior Ct of PA
a. P in car accident, settles claims for $15K, after this he signs release. However, refuses to accept
settlement proceeds b/c they represent that the policy limits were $15K when they are actually
$250K. Memo from P’s attny to D confirming agreement that $15K was the max.
38
b. Issue: Should the release be voided after finding it was based on a unilateral mistake?
c. Holding: D knew, or should have known, that P accepted terms on a mistaken belief about the
policy limits, so P can void the K.
i. R2K § 153: K voidable if P doesn’t bear the risk of mistake under § 154, and (b) the
other party had reason to know of the mistake. Here, D got the letter stating the
mistaken belief and D knew P didn’t have a copy of the policy himself.
B. PUBLIC POLICY AND ILLEGALITY

• Courts have long reserved the prerogative to limit enforcement of contracts that transgress the
boundaries of “public policy.”
• R2K § 178(1): “A promise or other term of an agreement is unenforceable on grounds of public policy
if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in
the circumstances by a public policy against the enforcement of such terms.”
 Exs.:
o when statute directly prohibits enforcement
o contract furthers illegal activities
o contracts in restraint of free trade
o special protection accorded to family, marriage and sexuality generally
• When a term in a K conflicts with public policy, Courts can:
o Limit the scope of the term (full enforcement, with limitations)
o Blue-pencil rule (edit out offensive words, illusion that ct is enforcing the parties’ words, no
insertion of new words. Partial enforcement0
o Entire Contract UNENFORCEABLE (punitive)
• Rule of Reason re: non-compete clauses governed by R2K § 188

o Suspect b/c they restrain trade.
o Restraint is reasonable only if it is
(1) no greater than is required for the employer’s protection,
(2) does not impose undue hardship on employee, and
(3) is not injurious to the public
 Lost profits generally recognized as proper recovery for breach of covenant not to compete
1. Clouse v. Myers (1988) Missouri Ct of App

a. D rents bar to P. D has liquor license in her name. P wants to purchase but operate under
license, so they negotiate “employment K” which basically confers ownership in P. State liquor
control finds out and undoes the deal. P sues for refund of payment to D b/c he argues he was
induced to enter K by D’s false representation.
b. Issue: Was P induced to enter into K by false representations and if so, is K enforceable?
c. Holding: D did not induce P, since P was aware of the nature of the K and he knew about the
liquor license issue; both parties entered into an ILLEGAL K.
i. The K is illegal b/c it reinforces the statute as to illegality (law says that if you sell
intoxicating liquor, you need a license)
ii. The ct will not get involved b/c the P has UNCLEAN hands – don’t want to legitimize
an illegitimate act
39
iii. Note that under R2K §§ 197-199, it is clear why ct relies on P’s admissions that he
knew exactly what he was doing – he was not “excusably ignorant of the facts.” Also,
he only paid half of the total $15K price – if he had paid it all, ct might’ve considered
this “disproportionate forfeiture” and enforced the K.
2. Hopper v. All Pet Animal Clinic, Inc. (1993) SupCt of WY

a. D(H) K’s w/P to work as vet and signs non-compete agreement. D agreed not to practice small
animal med for 3 years w/in 5 mile radius of city. D leaves and violates, practicing small animal
med. P brings suit to enjoin her and recover damages.
b. Issue: Does the non-compete violate public policy and if so, is it unenforceable?
c. Holding: Partial enforcement of covenant for P, changing time limit to 1 year.
i. Use R2K §§ 185-88 – burden upon employer to show it is reasonable and necessary to
protect biz interests. Use RULE OF REASON (see above). Only protected against
UNFAIR competition (trade secrets, knowledge of the biz, particular customers in
town)
ii. Interested in protecting the employer’s legit interest, but make sure no undue
hardship to employee or the public
iii. Ps do deserve protection b/c there is lots of competition in a small town in WY.
iv. Note that they only seek permanent injunction – not temp – maybe trying to rack up
damages? But they can’t prove them w/ certainty, so they get nothing. Should’ve
gotten temp injunction.
v. Ct looks at 1) type of activity (she can practice large-animal med, public will not suffer
injury b/c of it), 2) geographic limits (reasonable), 3) time limit (too much, not
reasonably related to time it’d take P to mitigate the loss). Must tie time limit to
purpose of including one
vi. Ct decides to re-write term and limit its scope (3 yrs  1 yr)
3. AZ v. BZ (2000) SupJudicial Ct of MA
a. P (hubby) and D (wife) used IVF to get pregnant, had twins, they get a divorce and D tries to
get pregnant again w/out telling P. Each time eggs retrieved, P signs blank form, D fills in
terms and signs it, submits. If separated, embryos to go to wife. P tries to enjoin pregnancy.
b. Issue: Were the consent forms a binding agreement that would allow wife to have babies after
change in their relationship?
c. Holding: Agreement not a binding K and even if it was, the ct would hesitate to enforce it b/c
it compels one person to become a parent against his/her will, which is against public policy.
i. Change in circumstances doesn’t usually allow invalidation of the K.
ii. Even if they had found a binding K though, ct wouldn’t enforce: statutes and judicial
decisions make it clear that individuals shall not be compelled to enter into or
terminate familial relationships when such an entry or termination is not desired. Ct
respects freedom of personal choices in matter of marriage and family life
C. UNCONSCIONABILITY
• Stems from the idea that in an inequality of exchange for land transactions, if it is grossly unfair then no
specific performance will be awarded – unconscionable
• UCC § 2-302
o Response to the growing use of standard form Ks
40
o Gives cts sweeping statutory authorization to refuse to enforce all or parts of Ks for the sale of
goods if the ct finds (as a matter of law) that the K or a clause of was unconscionable AT THE
TIME IT WAS MADE
o Judges determine this
o (2): it is mandatory that parties be able to present evidence about the commercial setting,
purpose and effect.
 Comment: “The basic test is whether, in light of the general commercial background and the
commercial needs of the particular trade or case, the clauses involved are so one-sided as to be
unconscionable under the circumstances existing at the time of the making of the contract…The
principle is one of the prevention of oppression and unfair surprise and not of disturbance of
allocations of risks b/c of superior bargaining power.”
• This became a general contractual doctrine in R2K § 208: (w/out section (2) of the UCC)
o Not unconscionable just b/c the parties are unequal in bargaining power or that the risks are
allocated to the weaker party. Gross inequality of bargaining power, together w/ terms
unreasonably favorable to stronger party, may confirm indications that there is
deception/compulsion, a lack of meaningful choice, no real alternative, no assent
• There are 2 main types of unconscionability (from Williams v. Walker-Thomas Furniture)

1. Procedural Unconscionability
a. Defects in process of entering the K
b. No meaningful choice, ignorance of terms, lack of equal bargaining power, surprise and
oppression.
c. Ks of adhesion (take it or leave it) are suspect
2. Substantive Unconscionability
a. Unjust, one-sided Ks
b. Unilateral, lack of mutuality
1. Williams v. Walker-Thomas Furniture Co. (1965) US Ct of App for D.C. Circuit

a. P bought various household items, the last of which is a stereo. The K said that title on all of
them would pass when final payment is made (don’t own anything till all $$ is paid off).
Dragnet clause (default, can repossess all items not paid for). P defaults and D seeks to replevin
(seize property till resolution of dispute).
b. Issue: Is this K unconscionable?
c. Holding: Must look at commercial context and meaningful choice/bargaining power to
determine this – remanded.
i. The Judge invokes unconscionability, it is not obviously part of the common law –
Campbell Soup is used, where P tried to get specific performance and the ct would not
enforce the K b/c it was so oppressive. Diff’t than the present case
ii. Uses the ideas in 2-302 – at the time K was made, can show unconscionability by lack
of meaningful choice and K terms which are unreasonably favorable to the other party
iii. Element of paternalism here. Consider her welfare checks and wealth – no responsible
merchant would’ve sold to her, says the Ct.
iv. Establishes procedural (ignorance of terms, lack of education, complicated language,
should’ve been explained) and substantive (this might have been present no matter what
D did) unconscionability.
v. What can D prove upon remand? Maybe show that there is little credit in the suburbs,
but they must do this in the inner city b/c of the heavy use of credit. Also – establish
that you have no advantage – no larger profit margin b/c of this
2. Langemeier v. National Oats Co. (1985) US Ct of App, 8th Cir
41
a. P and D enter into written K where D will provide seed for popcorn and P will grow it and sell
to D. Paragraph 7 said that if damaged by freezing weather, D could reject it. D did not tell
them of a 20 day dry-down period required, and so corn is damaged by freezing, D rejects, P
brings action for breach of K
b. Issue: is the K unconscionable b/c of the failure to inform P of the dry-down period?
c. Holding: Clause is unconscionable b/c D misrepresented the growing time and P wasn’t aware
of the important dry-down period, so Ct can raise uncon under 2-302 and refuses enforcement
of paragraph 7
i. Ct claims that company misrepresented time needed to prevent freezing, and P was not
aware of this fact. They can also raise the issue of uncon sua sponte, and D did not
present evidence re: unconscionability, so it is struck down.
ii. This, however, seems to allocate risks b/t the parties – freeze was not predictable and
it’s a risk the P should shoulder. They did not actually misrepresent, just did not bring
P’s attention to this fact. And this arose later! Not at the time of K.
iii. Seems like duty of good faith would be a better argument here – didn’t tell P of a
crucial part necessary for the successful growth.
iv. Ct is wielding a huge sword here
3. Armendariz v. Foundation Health Psychare Services, Inc. (2000) SupCt of CA

a. Ps worked for D and a year later, were terminated and they claim it’s because of their
heterosexual orientation. Employment agreement had a mandatory arbitration clause, and
remedies were limited.
b. Issue: is an arbitration clause in an employment K unconscionable?
c. Holding: yes it is here. See below for each issue
i. Arbitration of FEHA Claims
1. Cannot be arb if the claimants have to forfeit statutory rights (FEHA = anti-
workplace discrim law)
2. Particular scrutiny – must have minimum requirements for the arb to be ok, and
this K has a damages limitation that is unlawful and against public policy
ii. Unconscionability (in general)
1. Graham: adhesion K/ is it in reasonable expectations of parties and even so, is
it unduly oppressive?
2. A & M: procedural/substantive uncon, sliding scale
iii. Unconscionability (in this case)
1. Adhesive K, where the ct must be careful if the arb agreement doesn’t seem to
be a voluntary means of resolving disputes
2. The problem here is that it is unfairly one-sided for employer to impose arb on
the employee but not to accept such limitations themselves. Unless they can
show business realities that provide reasonable justification for this unilateral
arb agreement (maybe trade secrets?)
iv. Severability of unconscionable provisions
1. Ct can either sever the offending terms, limit the clauses, or declare the whole
thing enforceable
2. Here, they decide that there is more than 1 uncon provision, and there is a lack
of mutuality, that cannot be avoided by striking any one clause. The uncon
permeates the entire K, so the whole thing is void!
v. Doctor’s Association: cannot apply diff’t standards to an arb agreement, cannot single
it out. Must apply general K law – cts cannot say that there is something inherently
wrong w/ arb that makes is suspicious from the get-go
vi. Imposing standards of FAIRNESS has made arb much more trial-like, even though its
benefit is to cut down on trials and disallow jury determinations
42
vii. Non-employement arb agreements are also now subject to unconscionability

determinations – where does this end?
4. Bank One v. Coates (2001) USDC, SD of Miss

a. D purchases satellite dish and gets financing (which signs him up w/ Bank One, unbeknownst to
him). Signs credit app and security agreement, Bank can change/amend terms w/ 15 days prior
written notice, they do so w/ an added arb clause, and they can reject the arb provision in
writing. D doesn’t do this, and so he claims that he never agreed so P cannot assert arbitration.
Unfair and unconscionable.
b. Issue: Is amendment to a credit card agreement compelling arb unconscionable?
c. Holding: There is no basis to refuse to enforce this arb provision, so grant Ps motion
i. Opt-out provision: procedurally unconscionable? Ct says no, D could reject it and
failure to read is not relevant (see Hill v. Gateway!) Continued performance =
acceptance, and Badie is distinguished b/c they had no option to reject. Is adding an arb
provision a different order of magnitude than other changes?
ii. Substantive – costs can be supplemented through state laws re: arbs, and these laws also
ensure the same remedies in arb as in a jury trial. Also, will appoint a 3rd party (fair)
arbitrator. No unfair advantage to P then.
iii. Note that fraud (D claims he didn’t know he was signing up for this) is only w/r/t the
original K, NOT the arbitration provision, so it is not relevant to D’s claims. If fraud
was specifically related to the arb provision, THEN the Ct would adjudicate the claim.
CH. 6: REMEDIES
R2K § 344: Judicial remedies under the rules stated in this Rest. serve to protect one or more of the
following interests of the promisee:
(a) expectation interest, (b) reliance interest or (c) restitution interest
Efficient Breach of K
• Encouraged to breach by the law b/c you can avert a larger loss by breach
• The profit from the breach is more than the profit from completing the K
• The anticipated financial gain from that breach is greater than the damages payable (including
litigation costs)
• Law should not discourage breach of K when it is truly efficient
• Pareto Superior
o I make a K w/ A to product 100,000 widgets at 10 cents/ea. B comes to me and would
like 25,000 widgets at 15 cents/ea. I sell him the widgets.
o However, I don’t complete timely delivery to A, so he loses $1K in profits.
o I did make $1,250 on the sale to B though.
o I am better off, B is better off, and A is no worse off after I reimburse him for that
$1K. THIS IS A PARETO SUPERIOR.
 Problem: transaction costs can mess this up
 Other issues: can K damages be precisely estimated in advance of the breach? Does the law
fully compensate the victim of the breach? Should the breaching party receive the entire profit
from the breach?
U.S. Naval Institute v. Charter Communciations

• Tom Clancy’s first book, Hunt for Red Oct. – Oct. 1985 is date of publication in paperback
• Berkley brought out the paperback 2 weeks early, so hardback sales went down
• P brought suit seeking all of publisher’s profits from pre-Oct. 1985 sales of the book
43
• However, ct only awards lost profits to P. Even though publisher willfully breached, no
difference. P can only get what they would’ve gotten had D fulfilled the K.
o Why? Giving P what the D saved from breach is PUNITIVE and not what K law wants
to do.
o Only want to put P in the position he would’ve been in had the K been performed
A. EXPECTATION DAMAGES
• Ps recover enough $$ to fulfill their economic expectations for the K. Put back in the
economic place they would have been in had the K been performed
• This is NOT punitive. The profits of the D that resulted from his breach will not be used to
calculate damages (unless they define P’s loss). We are more worried w/ Ps loss.
• R2K § 359: If damages are adequate, WILL NOT order specific performance
• Fixed costs are not avoidable and are not taken into account in damages
 R2K § 347:
DAMAGES = LOSS IN VALUE + OTHER LOSS – COST AVOIDED – LOSS AVOIDED
Loss in value: diff b/t what the injured party would have received under the K and what he did receive
Other loss: injured party’s costs resulting from the breach (arranging other perf, etc.)
Cost avoided: what the injured party does not have to pay out as a result of the breach (saved costs)
Loss avoided: saving the injured party may make after the breach
Ex: owner breaches K to build a house for $100K, contractor has already paid $20K for materials, they
can be returned for $18K and total cost to the contractor for performance is $85K
$100K + $20K - $85K - $18K = $17K total damages to contractor
So, generally --- P’s expectation damages are equal to the value of D’s promised performance (usually
the K price) minus whatever benefits, if any, P received from not having to complete his own
performance.
• Reasonable Certainty Requirement: R2K § 360 (determining if damages are adequate, cts
take into account difficulty of proving damages w/ reasonable certainty, etc.)
 P may only recover for losses which he establishes with “reasonable certainty.” P
must show that:
1. he would have made profits if not for the breach and
2. what the likely amount of those profits would have been
UCC on Certainty
1. Comment 4 to §2-715: “The burden of proving the extent of loss incurred by
way of consequential damages is on the buyer, but the section on liberal
administration of remedies rejects any doctrine of certainty…”
2. Loss may be determined in any manner which is reasonable under the
circumstances.
 In the case of an existing business, profits are usually not speculative, because
future profits can be estimated from past profits.
 However, it used to be that in the case of a new business, cts did not want to award
lost profits. Sometimes, though, the court will compare the biz with others in the area if
the P can show what the typical profit is. Be careful here.
44
• Duty to Mitigate: must take reasonable steps in mitigation. See R2K § 350: objective
standard, nothing to risky, humiliating, or unduly burdensome; injured party isn’t precluded
from recovery to extent he’s made reasonable but unsuccessful efforts to avoid loss (see
Manouchehri)
• CONSEQUENTIAL DAMAGES: Damages that are not direct damages, but above and
beyond – flow from a breach as a result of the buyer’s particular circumstances. Typically,
these are LOST PROFITS. See below for specifics
• R2K § 351: re: unforeseeability and related limits on damages. Foreseeable if it is “probable
result of a breach” in ordinary course of events or in special circumstances that party in breach
had reason to know.
Foreseeability
(Hadley) Consequential damages must either:
1) Arise “naturally, i.e., according to the usual course of things, from [the]
breach of contract itself…” or
2) Arise from “the special circumstances under which the contract was actually
made” if and only if these special circumstances “were communicated by P to D…”
In other words:
1) The court will impute foreseeability to D as to those damages which any
reasonable person should have foreseen, whether or not D actually foresaw them; and
2) The court will also award damages as to remote or unusual consequences, but
only if D had actual notice of the possibility of these consequences.
UCC DAMAGES IN Ks FOR THE SALE OF GOODS:

SELLER’S REMEDIES (buyer breaches)
• Seller’s expectation damages are the K price minus the cost saved
• Contract Price (specific performance) under UCC § 2-709
o Price of goods accepted by B (where the B is the defendant)
o Price of goods lost or damaged, after risk of loss has transferred to B
o Price of goods unable to be resold (after reasonable effort) [this would be custom-made
goods]
• Contract / Cover Differential under UCC § 2-706
o Difference between K price and price at which goods were resold
o If S can sell in good faith and in commercially reasonable manner
o Plus incidental damages (extra sale costs?) minus costs saved (shipping costs?)
o May keep extra profit if they can sell for more than original K price
• Contract / Market Differential under UCC § 2-708(1)
o This is when there is wrongful non-acceptance or repudiation by the B
o Recover difference b/t market price at the time/place for tender (time for performance)
and the K price (plus incidental, less any expense saved b/c of breach)
o It is not definite that S who has resold can claim this. They might prefer to, but if it
puts S in better position than had the K been performed (which it often does), then it
might not be appropriate.
 If measure of damages is inadequate to put seller in as good a position as he would have
been had performance been done, he will receive profit (2-708(2))
• Consequential damages (lost profits) under UCC § 2-708(2)
45
o LOST VOLUME SELLER: seller could’ve made an additional sale (would’ve been
profitable) in addition to original sale (ex: car salesman would’ve made 2nd sale)
 Three part test:
• It possessed the capacity to make an additional sale
• It would’ve been profitable to make an additional sale
• It probably would’ve made the additional sale absent the buyer’s
breach
o No consequential damages to seller, just buyer.
• Incidental Damages (§ 2-710)
o Commercially reasonable; stopping delivery, transportation, care, custody of goods
after B’s breach, in connection w/ return or resale of goods resulting from breach
BUYER’S REMEDIES (seller breaches)

• Buyer’s expectation damages measured by FMV of performance at the time and place of
promised performance
• Delivery of goods (specific performance) under UCC § 2-716
o Where the goods are unique or in other proper circumstances
• Contract / Cover Differential under UCC § 2-712
o Make in good faith and w/out reasonable delay, reasonable purchase of or K to
purchase substitute goods
o Damages are difference b/t cover price and K price
o Plus incidental/consequential damages, minus expenses saved as result of S’s breach
 Shipping costs
 Profits off resale of accepted goods?
• W&S say yes, must deduct
• Fertico v. Phosphate says no, would have made both sales
• In either case, D must prove that only one would have been made
• Contract / Market differential under UCC § 2-713
o Non-delivery or repudiation of S
o Difference b/t mkt price at the time the buyer learned of the breach and K price
o Plus consequential/incidental damages (2-715)
o This award for damages does not necessarily protect the B’s expectation interest. The
recovery may be either greater or less than the expectation measure, depending on the
market price.
o A majority of courts have concluded that the B is entitled to the full contract/market
differential even where this would put him in a better position than if the contract had
been fulfilled.
• Consequential or Incidental damages under UCC § 2-715
o Consequential damages have to have been foreseeable (within reasonable
contemplation – required that the nature and approximate extent could be
conceived of as a probability) (See Hadley v. Baxendale)
o Proximately caused by the breach
o Incidental damages have to have been in performance of the K and not just getting in
the place for performance
• Security interest for goods received (2-711)
o Only applicable in cases of reject/revocation of acceptance and the B has the goods
o B is entitled to possession if B is unable to cover and goods were either in existence
when K was made or were later identified to the K (2-711(3))
• Damages for breach of express warranty
46
BUYER BREACH (nonpayment) SELLER BREACH (breach of warranty)

Buyer Accepts
and Retains Seller recovers K price Buyer recovers value goods would have had
Goods PLUS if they had been warranted minus value of
Incidental damages goods accepted
PLUS
Incidental/consequential damages
BUYER BREACH (wrongful refusal of SELLER BREACH (wrongful failure to
goods) tender goods)
Buyer Does Seller recovers K price minus market price Buyer recovers market price at time B learned
NOT Accept at time and place for tender of breach minus K price
and Retain Or Or
Goods K price minus resale price Recovers cost of cover minus K price
Or Or
Or Lost profits (lost-volume seller Is entitled to specific performance if
requirements) appropriate (goods unique)
Seller does not Or Or is entitled to possession if buyer cannot
Tender Goods K price (if goods have been identified to K cover and goods were either in existence
and seller cannot resell) when K was made or were later identified to
PLUS the K
Incidental damages PLUS
Incidental/consequential damages
1. Freund v. Washington Sq Press Inc. (1974)

a. P submits manuscript, receives advance, if no notice of termination w/in 60 days he is entitled
to percentage of royalties, D fails to publish w/in 60 days after merging w/ new co., K is over
and rights back to P.
b. Issue: What are P’s actual damages and how far can he go in seeking remedies?
c. Holding: For D – cost of publication is not proper measure of damages b/c it is measured by
D’s profits from the breach, but instead should be measured by natural/probable consequences
of breach to the P. This is royalties, and P could not prove with reasonable certainty, so he
gets nominal damages only.
i. P wanted specific performance, but ct did not want to do this (if they did, they give an
order, and the parties try to settle, it gives P some leverage in case settlement offer is
not good, b/c he can force D to publish the book then). This helps decide what the
actual cost of the breach is to the suffering party.
ii. Cost of publication is not proper measure of damages b/c he did not K for the actual
books, but instead the results of that publishing (royalties). Thus, unlike a construction
K where damages can be the cost to owner of building the house. If he had paid $10K
to publish the books, that would’ve been different.
iii. Cannot measure by the profits to the D, either, b/c this would foreclose efficient breach
iv. Expected profits were too speculative, says ct. It is not always hard to do this, however
– look to others. He also had other books published before, those could be used to
compare.
v. If he had substituted performance somewhere else, and claimed that, he could get those
damages.
47
2. Peevyhouse v. Garland Coal Mining Co. (1962)

a. Ps leased farm to Ds for coal and strip mining at surface, and D agreed to perform
remedial/restorative work after lease ended, when they do not P sues for $25K. Mkt price of
farm would’ve only increased $300 if work was performed. Trial court gives $5K, this court
gives $300.
b. Issue: In calculating damages, should the ct look to “cost of performance” or “value of
performance” where one party breaches deliberately, and there is a gross disparity b/t value
gained and cost of performance?
c. Holding: The measure of damages is ordinarily the reasonable cost of performance where D
agrees to do work and doesn’t complete it. However, where K provision is not central to the
K’s main purpose and the cost of performance is grossly disproportionate to the economic
benefit, the damages are limited to the diminution of value resulting to the property due to
breach
i. If you own a car that is worth $700, and hit a moose, and restoration will cost $1700,
you shouldn’t get back the $1700.
ii. Do not want to force re-grading the land here, worst outcome, not sure if Ps even want
that.
iii. If P had contracted to fix the land for $25K, that would help their case. Cover, definite
damages
iv. Issue is between the value of performance ($300) and the cost of performance
($25K). Do not want undue expense here, look to relative economic benefit and use
value rule if the damages would be unreasonable (here 9x what the farm is worth!)
v. The K was for mining rights, NOT for the reformation of the land – incidental to the K
– this is very important. Not central to the K.
vi. R2K § 348(2): situations where breach results in defective/unfinished construction and
loss in value to injured party is not proven with certainty. Damages can be diminution
of property in mkt price b/c of breach, or the reasonable cost of performance if not
disproportionate.
vii. Hard to know what the actual cost was to the Peevyhouses of having their land
restored
viii. This was a Pareto Superior. If value to Ps was $25K though, this may seem inefficient
but instead, it is simply an improper transfer of wealth from P to D. (see note 3 p. 486)
3. Krafsur v. UOP (1996) [LOST VOLUME SELLERS]

a. P Ks w/ D to buy technology for their refinery; P goes bankrupt and RHC takes over the
refinery w/ D’s same technology, and then RHC and D set up new K for the tech. D then sues
for total amount that P would’ve paid if no breach. D claims they are a lost volume seller, and
therefore, no need to mitigate those damages and they can recover it all.
b. Issue: Is D a lost volume seller, with no duty to mitigate?
c. Holding: D is not a lost volume seller b/c absent P’s breach, D could not have sold tech to
RHP, who used same refinery, and damages should thus be mitigated.
i. Hypo: if you have a grotesque lamp and sell it on Ebay, someone buys, refuses to pay,
and then you re-list and sell to another, your damages are mitigated. B/c you only have
one. Neri case (w/ the boat) is the opposite, would’ve sold 2 boats if buyer hadn’t
breached.
ii. Wired Music: 3yr K w/ a buyer, who breaches 17 mos in; new tenant, new K for the
same services (music over the phone). Unlimited supply – Wired feels that they
would’ve sold another K to the 2nd buyer in another space. So the breach impacted 2
sales, not just 1. Licenses in Krafsur case are NOT unlimited, Wired’s music is
iii. UCC § 2-708 here
iv. 2 prong test: (1) capacity of seller to demonstrate that it has excess manufacturing
capacity (D had unlimited licenses to give out). BUT, (2) must show it is a wholly
48
independent sales event. Here, but-for P’s breach, D wouldn’t have sold those
licenses to anyone else – the licenses are specific to that refinery, and refineries are
limited. Not always a mkt for them.
v. As a part of (2) above: must determine if breach of original sale provided the
opportunity for the 2nd, must show the 2nd sale would’ve happened even if no breach,
and must show characteristic of the goods involved – if specialized, sale might only be
a replacement sale.
4. KGM Harvesting Co. v. Fresh Network (1995)

a. P sells lettuce to D, who sells it to others at COST PLUS. When price rises, P breaches K, so D
then has to cover at a higher price to satisfy obligations to its buyers. Those buyers pay for
cover cost ($656K) except for $70K
b. Issue: Should D (the buyer) recover damages when most of their losses were covered by
others? Can D get the full amount of cover?
c. Holding: Where buyer covers by making a good faith, no delay reasonable purchase of goods
in substitution for those promised by seller, buyer can recover damages that are difference
between K price and price of cover, no matter what.
i. BUYER SHOULD GET THE BENEFIT OF HIS BARGAIN
ii. Actual loss was only $70K. Buyer (D) could have either gotten difference b/t K price
and market price at the time he learned of breach (2-713), but instead he chose to cover
and get damages per § 2-712.
iii. Even if D was no longer interested in the K, he is still entitled to benefit of bargain.
iv. Never obliged to cover. However, P is invoking 1-106 to put D in as good a position as
if K was performed.
v. Allied Canners – Victor  Allied  Japanese purchasers.
1. Allied’s anticipated profit was $4.5K, Victor cannot carry out K b/c of rain, so
they are responsible. Allied did NOT cover (like D did in KGM), and Japanese
did not seek damages. Allied sues for market differential, only gets actual
profit. This is limited by 1-106, not 2-712 (cover).
2. So, why not give D actual losses? Encourage more efficient market, discourage
breach of K, encourage cover. Do not want P to breach speculating on the
K’s that D made with its cost plus buyers down the road! Don’t look at
those events when deciding damages. Not fair to let P off because D is covered
down the line.
5. Fertico Belgium v. Phosphate Chemicals Export Ass’n (1987)

a. D Ks w/ P to sell fertilizer, letter of credit executed, 1st shipment is late and P cannot sell it to 3rd
party, P covers for $700K, and when shipment does arrive, P had already paid so they re-sold
for $454K.
b. Issue: Does buyer’s measure of damages for cover under 2-712 permit recovery of cover in
addition to profits realized on renegotiated sale of accepted goods?
c. Holding: Yes, buyer can receive both cover damages and profit from resale b/c he would’ve
had the benefit of both Ks
i. P could have rejected delivery and sent it back, instead they re-sell. Damages should
not be offset, says the ct. They treat them as a lost volume seller, even though they
were the buyer. Seems strange. They end up better off. Choices usually are to cover or
to accept the goods.
ii. Do not get additional costs, 3rd party compensated them. This is not an expense saved,
b/c it was not a cost/expenditure that was reasonably anticipated had there not been a
breach.
6. Hadley v. Baxendale (1854)
49
a. P sues for the delay of the shipping of their shaft to be fixed, they lost profits as a result of its
tardiness.
b. This turns on the issue of whether the damages were foreseeable – only if parties contemplated
them at the time of the K as possible consequences.
c. RULE: When 2 parties make a K and 1 party breaches, damages should be those fairly and
reasonably arising naturally (usual course of things), from such breach itself, or such as may be
reasonably supposed to have been in contemplation of the parties at the time of the K, as the
probable result of the breach.
d. CONSEQUENTIAL DAMAGES
e. They suggest that the Ps had to pay more for this – if you are going to make a K that has severe
risks if it is not fulfilled, then you should contract for that. Shift responsibility of risk to the Ds,
and this is reflected in higher price.
f. This is an assumption about the significance of the breach of a K – not a big deal. We don’t
care why D didn’t care out his end of the bargain, if he doesn’t bear the risk, he can breach the
K with some security about the consequential damages at the end of the day.
g. Holmes suggests here that they should’ve been EXPRESSLY told. No tacit agreement. Can’t
just mention the possible consequence of breach, but must say that the mill will be shut down,
and I want you to accept that risk.
i. In Delchi case: would say that they had to expressly mention the result of the
nonconforming goods and what they’re used for in the K.
7. Simeone v. First Bank National Ass’n (1996)

a. P K’d w/ D to buy antique cars/parts for $400K, just before title is to pass, the debtor (whose
cars had been repossessed) got a TRO, the bank thought it had no obligation to sell to P so they
sold to SMB, and P bought one later for $470K from them instead. Total award is $2.4mil for
P, very high.
b. Issue: Is the damage calculation correct?
c. Holding: Yes. Market to be considered is the collector’s market, foreseeable that P would sell
or trade the cars, P was not expected to unreasonably mitigate the damages, consequential
damages award is not too speculative, and incidental damages are incorrect, that was actually
cover damages.
i. Expectation damages: Mkt value is not the repossession mkt value (as bank thinks it
is), but the antique car mkt. Take mkt price, subtract K price, gets $585K (UCC 2-713)
ii. He got a good deal – good bargain, so he is entitled to the benefit of that bargain.
iii. Consequential damages – UCC § 2-715 – profits P would have been able to get if he
sold the goods after. Issue is – did D have “reason to know” he would re-sell these? Ct
says yes. The ct determines this, but note how they use the higher mkt price – give P
the benefit of the upswing in the market (in 1987, arbitrary point to choose mkt price).
iv. Did NOT give P the cost of cover, gave him much more. Not sure why.
v. Only required to cover if at time and place, it is cheap or effective. Not in hindsight.
vi. Mitigation? No – ct thinks that it is unreasonable for P to expend $700K as D wants,
in order to buy these cars. The key word is reasonably. Injured party does not need to
take measures that are unreasonable or impractical or which require expenses that are
out of line w/ the loss sought to be avoided, or beyond his means.
vii. This falls short of Hadley standard – not really that foreseeable. The damages seem to
be piling up, and the formulas are going astray.
B. MITIGATION
• The general idea is that a victim cannot, after a breach or repudiation, continue to pile up damages
50
• There is no duty to mitigate when damages are measured under UCC § 2-708(1) or 2-713(1) b/c
they both assume mitigation
• UCC § 2-715(2): mitigation condition although not so labeled – one can get consequential damages
only if they could not have been reasonably prevented by cover or otherwise
• “Duty” – no contractual duty, the failure to do so is not breach of K
1. Madsen v. Murrey & Sons Co. (1987)

a. P(buyer) bought 100 custom pool tables from D (seller) for $55K, pays for $42.5K of it, but
then repudiates the K before delivery. Seller then dismantles and uses them for other tables
or firewood – no attempt to market/sell elsewhere.
b. Issue: Did seller have a duty to mitigate by trying to sell tables elsewhere, and does this
change damages?
c. Holding: Yes, seller had duty to mitigate and the mkt value of $21,250 is correct, but
damages should be determined by 2-708(1) and thus damages are changed
i. Resale value was $21,250 (low b/c tables were irregular, worth more to P than true
value). May be why seller did not attempt resale. This is the damages they are
entitled to, says trial ct – nothing more. No anticipated profits.
ii. The issue here is whether or not seller has a duty to look out for the other side –
isn’t his decision not to market the unused tables okay as a reasonable biz decision?
iii. The goods were never on the mkt so this is not like usual 2-708(1) decisions.
Anticipated profit would give a very different result
iv. Trial ct awarded buyer the price paid ($42.5K) minus damages owed ($21,250).
This court uses 2-708(1) to determine seller’s damages for non-acceptance or
repudiation by the buyer. There is a mkt that seller can use to mkt the goods (per
the trial ct) so DAMAGES are difference b/t mkt price and K price ($55.5K -
$21,250 = $33,750). So, buyer gets $42.5K offset by damages = $8,750.
v. Note prob. 6-7 (CB 557)
1. Seller sells electronics to buyer, delivers substantial portion on credit to
buyer who accepts on credit, but then they cannot pay. Seller sues for
unpaid price, buyer claims that S had to mitigate damages when it turned
down offer to return some of unpaid goods. Seller is looking for price (2-
709), where buyer has accepted goods. Duty to mitigate? Neri case – D
had to re-sell boat, could not scrap it. But buyer here accepted the goods.
No duty of seller to mitigate by accepting goods back once they have
been delivered and accepted.
2. Manouchehri v. Heim (1997)

a. P purchases x-ray machine for $1900, warranty on it (D promises it will be 100/100 and it is
100/60). Trial ct gave cost of machine in direct damages, and $2,500 for lost x-rays
(consequential). D claims P should’ve mitigated by getting another machine
b. Issue: To what extent may injured party reasonably rely on other party’s promises before
mitigating?
c. Holding: For P. No duty to mitigate, because he reasonably relied upon seller’s assurance
to repair defective goods, lost $$ in the meantime, satisfies duty to mitigate
i. P gets $1900 back b/c machine is worth nothing to him.
ii. D claims mitigation under 2-715(2)(a), but P reasonably relied on D’s promises so
duty is satisfied. Not much consequential damage awarded, P should’ve realized
and secured another machine after a month or so
iii. R2K § 350 is the standard here for mitigation.
iv. Efficient breaches: Posner (if you can sell to another at higher profit, you should
breach, sell, pay damages – expectation damages encourage efficient and
discourage inefficient breaches) vs. Friedman (this is “efficient theft” and it is
51
wrong to get profit from this. However, expected goods are no property right.
Common law doesn’t care) See 11/16/05 notes re: prob 6-8
C. RELIANCE DAMAGES
• R2K § 349: Alternative damages – injured parties can recover based on reliance interest, including
expenditures made in prep for performance, less any loss the party in breach can prove w/
reasonable certainty that the injured party would’ve suffered had the K been performed. (try to
prove that if K was performed, there would’ve been a LOSS, so reduce reliance damages)
• These try to put P back in the place he would’ve been in had the K been performed
• Why would you want these?
o If you cannot prove profits or losses w/ reasonable certainty, at least you get put back in
original position; if you realize K would be a losing K anyway
• Security Stove v. American Railways Express Co.

o D was to transport parts of furnace to convention, one part doesn’t show up and thus it is
impossible to show furnace at convention – ct awarded damages as reliance damages –
expenses pad – P wanted profit, but realized he couldn’t prove these w/ certainty so he
should get expenses back instead.
• Prob 6-10, CB 560

o Construction K for $100K, contractor starts working and expends $30K on it. Anticipates
profit of $15K. If customer says to stop work, he cannot keep going, and damages are total
of expenditures in reliance and the profit ($45K). Expectation damages.
o However, if contractor cannot prove $15K profit, gives expenditures (reliance) instead.
o Would have to deduct any amounts paid already to the other side, and cost of materials to
be used elsewhere
o If they can show lost opportunities, then might get more damages in the problem.
D. RESTITUTION DAMAGES
• Goal: restore to injured party the benefit that was conferred by the injured party on the other as a
result of partial performance or reliance. Aimed at preventing unjust enrichment.
• Rarely sought – don’t get any profit
• Used in quasi-Ks, where no actual K
• Generally these are more generous to the party not in breach
• R2K § 371
o Measures of restitution damages have 2 choices:
 Reasonable value to the other party of what he received, in terms of what it
would’ve cost him to obtain it from another source (cost of attaining elsewhere)
 Extent to which the other party’s property has been increased in value or other
interests are advanced
• Restitution by Injured Party (R2K § 373): injured party can get restitution for benefit conferred on
breaching party by way of partial perf or reliance. Not available if injured party has performed all
contractual duties and breaching party owes no perf other than payment for definite sum of $$
52
• Restitution by Breaching Party (R2K § 374): where aggrieved party justifiably suspends
performance on the ground that other party’s breach discharged his remaining duties, breaching
party is entitled to restitution for any benefit he conferred in excess of the loss he caused aggrieved
party by his breach
 A, a carpenter, contracts to repair B’s roof for $3000. A does part of the work at a cost of $2000, increasing the market
price of B’s house by $1,200. The market price to have a similar carpenter do the work done by A is $1800. A’s
restitution interest [whether he is the breaching party or not the breaching party] is equal to the benefit conferred on B.
The benefit my be measured either by the addition to B’s wealth from A’s services in terms of the $1200 increase in the
market price of B’s house or the reasonable value to B of A’s services in terms of the $1800 that it would have cost B to
engage a similar carpenter to do the same work. If the work was not completed because of a breach by A…..$1200 is
appropriate. If the work was not completed because of a breach by B…$1800 is appropriate
1. Palmer Construction v. CSE (1991)

a. P and D enter into K for work, at price of $235,137. P starts work but breaches. At this
time, P had supplied goods and services = $204,845. D had paid $115K of that already.
D also had to pay $126,673 to complete the work (to someone else), so they have paid a
total of $241,432 for a job K’d for at $235,137. So, damages are the difference
($6,295). District ct goes further, says that P had only received part of what it had
spent, so it should get the rest of that $$ less the damages to D.
b. Issue: How do you determine damages for a quasi-K?
c. Holding: For D (they get the $6,295). Where innocent party has paid more than the K
price for goods and services ordered from breaching party, the innocent party (D) can
get that overage. Breaching party cannot, however, get a quasi-contractual
recovery from innocent party.
i. Why? Innocent party is not unjustly enriched when it receives what it
bargained for and pays no more than K price.
ii. Note that the P had already been paid some $$ - if they hadn’t, they could’ve
gotten the difference.
iii. The innocent party should never wind up paying more than the K price itself -
the ultimate loss of the bargain is shifted from breaching party to innocent party
and that is bad. See R2K § 374.
E. SPECIFIC PERFORMANCE
• At common law (R2K § 359) and UCC 2-709 – seller, UCC 2-716 – buyer) only available where
damages are inadequate
o K to purchase something that has some sort of sentimental value
o K to sell land where buyer seeks order to direct seller to convey
o Maybe if goods are unique? Hasn’t been applied much
o SEE R2K § 360 to see if damages are adequate
• Argument pro: damages under compensate, that a promisee requests specific performance implies that
damages are inadequate and parties are in a better position to predict whether performance would be
satisfactory
• Argument anti: amount of payment to remove injunction bears no relation to the costs of the failure to
perform, and creates bilateral monopoly with possibly unlimited transactions costs, court time and effort
1. Walgreen Co. v. Sara Creek Property Co. (1992)

a. P operates pharmacy in D’s mall, exclusivity clause that D will not lease space in mall
to anyone else operating a pharmacy, but needs new anchor tenant and will install store
w/ pharmacy near P. P sues for breach and PI
b. Issue: Is injunctive relief (specific performance) sufficient, or are damages better?
53
c. Holding: Costs of the damages remedy would exceed costs of injunction

i. Posner does cost/benefit analysis of the problem. Ps who want injunction have
burden of persuading why damages wouldn’t be adequate
ii. Benefits of SP: shifts burden of determining cost of Ds conduct from ct to the
parties (there is a price for dissolving injunction that makes both better off,
private negotiation is cheaper), and free-market system shows that mkt more
accurately determines them
iii. Costs of SP: many injunctions require continuing supervision by ct, may
impose 3rd party costs.
iv. Another cost: bilateral monopoly: no competition for prices, 2 parties face off
against each other and try to get as much as they can – inefficient sometimes,
and break down.
v. Here, Ps damages are too uncertain to determine over next 10 yrs, no harm to
3rd party, no judicial supervision costs, etc.
F. LIQUIDATED DAMAGES AND AGREED REMEDIES

• In a K, liquidated damages clause = provision that specifies the amount of damages to be awarded if
there is a breach (trying to limit what cts can do, so they disfavor these)
• Basically, either other party must perform or pay a penalty (they’ll want to perform usually)
• R2K § 356(1): permitted as long as they are a reasonable am’t, if they are too large, they are
unenforceable on public policy grounds. COMPENSATORY, NOT PUNITIVE
• UCC § 2-719: Agreed remedies (see handout)
o Enables limitation of buyer to return of goods and refund of price, or repair and replacement
of non-conforming goods or parts
o No need to be conspicuous (like warranty disclaimers must be)
o However, under 1(b), resort to remedy is OPTIONAL unless the remedy is expressly agreed
to be exclusive, in which case it is the sole remedy
o Under (2), if limitations fail their essential purpose, then limits can be challenged. If you
have a car and can only get repairs or replacement, and probs cannot be cured, then remedy
fails of essential purpose
o (3) has specific rules on limiting consequential damages – must be careful, can be uncon
o In sale of goods – LOOK TO 2-719 w/r/t REMEDIES; LOOK TO 3-316 w/r/t
DISCLAIMERS
• UCC § 2-718(1): damages for breach may be liquidated but only at an amount that is reasonable in
light of the anticipated or actual harm caused by the breach. A term fixing unreasonably large
liquidated damages is void as a penalty. The amended version of this provision – use 2-719 to
determine enforceability of term that limits but does not liquidate damage (trying to encourage
them, but not if a penalty – will not survive).
• Note that it may turn out that liquidated damages are unreasonable in light of anticipated
harm, but reasonable in light of ACTUAL harm, so in principle they are acceptable and can
be used by Ct instead of calculating damages . The reverse of this can also be true.
1. ePlus Group v. Panoramic Communications LLC (2003)

a. P leases D computer equipment. D has trouble w/payments. Parties agree purchasers of
D would take over some leases. P then wrote letter saying D in default and demanding
payment of unpaid rent, late fees, casualty value. A provision allowed D credit against
liquidated damages in event equipment was re-leased based on a formula.
54
b. Issue: Is the liquidated damage clause a) enforceable and b) reasonable?

c. Holding: The liquidated damage clause was NOT enforceable and reasonable b/c P
could collect both property and value of future rent, which places it in a superior
position and is invalid, and casualty value is unreasonable
i. Using the idea that the amount of liquidated damages must be REASONABLE.
One formula is that proceeds from a sale or re-lease will be credited against the
total amount of liquidated damages, as it was here.
ii. Here, P did not show it was reasonable – if lease was fully performed, P would
have gotten equipment back, or sold equipment to D for FMV, and also will get
full amount of lease. Double benefit.
iii. If the clause was enforced, then, P gets $$ back way in excess of rent they
would receive if K was carried out. More incentive to get a breach to occur,
perhaps.
iv. Casualty Value here was 3x as high, way over the FMV, grossly overstated.
Formula used for crediting D’s liquidated damages by the am’t of proceeds
from re-sale only credits portion of sale ABOVE the Casualty Value, so D
would never get any credit (b/c the Casualty Value is so high)
v. Note that these kinds of clauses usually get into Ks simply by acceptance, one
party doesn’t think too seriously about the consequences, D might not be
thinking about what might happen (and P obviously was). The formula may be
buried in the K.
vi. A reasonable liquidated damages agreement that has proved in hindsight to be
an inaccurate estimation of loss is not invalid. So that even if the injured party
is in actuality receiving more than their loss, the intent of the clause must have
been to put the injured party in a position as if the breach had never occurred.
The idea is that liquidated damages clauses takes the guess work out of
damages. But this was not reasonable, and it would put P in a much better
position
CH. 7: CONDITIONS AND SELF-HELP REMEDIES DURING PERFORMANCE

• R2K § 224: Condition is an event, not certain to occur, which must occur before performance
under a K becomes due
• Conditions arise during the course of a K’s performance
• There are also rights, or self-help remedies, that arise IF A CONDITION DOESN’T OCCUR
o Include suspension of performance, cancellation of the K, rejection of goods and
revocation of acceptance of goods
o Generally, UCC § 2-601 through 2-608 re: buyer’s right to reject, revoke acceptance on
seller’s failure to deliver conforming goods
• Note differences b/t CONDITION and PROMISE

o Condition: A provision the fulfillment of which creates or extinguishes a duty to
perform under a K. “I agree to mow your lawn once a week for a year if I continue to
live in this town.” Result of non-occurrence = party not fulfilling does not breach K or
incur liability. Other party’s performance is excused.
o Promise: An undertaking to perform or refrain from performing a certain act. “I agree
to sell you my care for $10K.” Result of non-occurrence = nonperforming party
breaches K and incurs liability. Other party’s performance MAY be excused.
55
 Therefore, insurance co’s will like conditions – no need to pay, it is clear, no

problems arise from its non-occurrence.
• If a promissory condition (express or implied): party must take steps in good faith to fulfill
condition
• Even if not a promissory condition party must, in good faith, not prevent condition from
occurring
A. EXPRESS CONDITIONS
• Consequences of failure to occur:
o Failure of a condition precedent prevents a duty from arising
o Failure of a condition subsequent discharges a duty already existing (switches burden of
proof)
o Damages for breach for non-performance of a promise
• Condition of satisfaction must either be by some objective standard or expressly subjective and
decided in good faith – otherwise illusory promise (court will be more likely to enforce if it
makes economic sense)
• R2K § 229: If a K term is clearly a condition, ct can still excuse it if non-occurrence causes
disproportionate forfeiture
• Strict compliance required for express conditions (also with implied conditions, but some
wiggle room for interpretation of the nature of the condition) – e.g. notice within 60 days for
insurance claim. Duty cannot arise for notice on 61st day.
• Condition precedent must be plainly required w/ clear language
• Simple fixing of the time for performance (especially payment) is not a condition
• Condition may be excused
o By waiver w/out consideration under common law if right relinquished is non-material
o By waiver w/out consideration under UCC (no consideration due for good faith mod of
K)
o Waivers
 Looks like modification of K, but no need to be in writing
 Intentional relinquishment of a known right
 Must be clear and unequivocal
 Can arise from non-verbal conduct (actions)
 Condition can be re-instated if reasonable notice is given and party hasn’t
materially changed position
o By forfeiture if strict enforcement of a condition technical or procedural in nature
would result in unfair, disproportionate, and harsh deprivation of rights and an unfair
benefit would accrue to party whose performance is subject to the condition
1. Howard v. Federal Crop Insurance Co. (1976)

a. P’s tobacco crop is damaged due to heavy rains, unusable, so they plow under the stalks for a
cover crop. When P tries to get claim on insurance from D, they deny b/c they did not inspect
the damage. K said that it was a condition precedent that insured provide info re: the loss, and
in the next paragraph, that they crops should not be destroyed until Corp makes an inspection.
b. Issue: Does the latter paragraph create a condition precedent or a promise?
56
c. Holding: For P, if the latter paragraph were supposed to be condition precedent, it would’ve
been labeled as such, as the other paragraphs were. This is a promise, and so P does not forfeit
coverage.
i. Note that this can be construed as a condition precedent (where performance would not
be required by the D – no insurance discharged, on money for damages, nothing
happens) or as a promise (covenant, where P promises something but if they don’t do it,
they still get coverage, but the Ds can sue for damages resulting from inability to
inspect crops).
ii. The ct seems to decide this on policy. Where doubtful, it is a promise in an
insurer/insured K.
iii. Lessons from this case: must mark condition precedent VERY CLEARLY, no elegant
variation, clear guidance in the event of an K issue.
iv. Note: I agree to sell you a lot in Ann Arbor, on the condition that I am able to obtain a
zoning variance so you can construct something on the property. If I do not seek the
variance, break the promise. Promise is to (in good faith) seek it, and condition is that I
will obtain it (if I don’t, no sale).
2. Morin Building Products Co. v. Baystone Construction, Inc. (1983) POSNER

a. GM hires D to add addition to plant, and D hires P (Morin) to do the aluminum wall for it, and
all work is subject to the approval of GM’s agent. In sunlight, not uniform and GM rejects it, D
does not pay P and they bring suit for balance.
b. Issue: Should the jury instructions go on a reasonable person standard (objective) or whether or
not GM’s agent was in fact satisfied (subjective standard)?
c. Holding: The standard is reasonable person, objective, because the K was for factory,
aesthetically pleasing aluminum siding does not seem to be important here.
i. Reasonable person standard – when dealing w/ commercial quality, operative fitness,
mechanical utility. (This was a factory – and the aluminum K’d for was not uniform)
ii. Subjective is a standard of good faith – if the other party is IN FACT satisfied. This is
for personal aesthetics or fancy in a K. Not whether owner was satisfied in fact, but
whether he SHOULD HAVE BEEN satisfied from p.o.v. of a reasonable person.
iii. Look to language of the parties – it seems to be subjective, so Posner is giving this
decision with some hesitation. But, he is saying GM should just be REALLY REALLY
clear in its language about satisfaction.
iv. Note that even if he had used the subjective standard, P could’ve shown that GM was
unreasonably dissatisfied, grounds for doubt that GM could win even on a subj standard
B. IMPLIED OR CONSTRUCTIVE CONDITIONS

• Implied or Constructive Conditions: reciprocal promises to perform, which create an implied
condition that any material failure by one party gives the other the right to suspend and, eventually
to cancel the contract (R2K § 237)
o EX: Right to stop performance w/o breaking the contract when performance becomes
impracticable
o Illustration: A Ks to build a house for B, who will make progress payments each month.
W/out justification, B fails to make a progress payment. A stops work on house, week goes
by. This is not a breach. B’s failure is an uncured material failure of performance which
operates as the non-occurrence of a condition of A’s remaining duties of performance. If B
offers to make the delayed payment and it isn’t too late to cure the material breach,
A’s duties to continue working are NOT discharged. (A can claim partial damages for
delay)
57
 However, if B does not give assurances to pay for a month, and it is too late for B to
cure the material failure of performance, A’s duties to continue the work are
discharged. B’s failure to make payment was a breach, and A has claim against B
for total breach of K (§ 243)
• Order of Performance
o Probs when K’ing parties postpone performance
o If there is not express conditions setting out performance, judges will step in and impose
CONSTRUCTIVE conditions of exchange
 Simultaneous performance – each party’s perf is impliedly conditional on at least
the tender of the other party’s perf
 R2K § 234(2): DEFAULT RULE. Where the perf of only 1 party is ongoing, his
performance is due at an earlier time than the other party, unless lang indicates
otherwise [so, contractor can’t demand progress payments as the work advances
unless it is in the K explicitly]
 Must bargain for something other than default rule
 When does law impose conditions not expressly agreed upon?
• Material breach
o What happens when one party does NOT perform? Small breach can be ignored in the flow
of the K (even though it gives rise to damages) but we are worried about breach that is so
large, it intrudes on the back-and-forth of the K. This is MATERIALITY.
o What makes a material breach? R2K § 241
 a) the extent to which the injured party will be deprived of the benefit which he
reasonably expected;
 (b) the extent to which the injured party can be adequately compensated for the part of
that benefit of which he will be deprived;
 (c) the extent to which the party failing to perform or to offer to perform will suffer
forfeiture;
 (d) the likelihood that the party failing to perform or to offer to perform will cure his
failure, taking account of all the circumstances including any reasonable assurances;
 (e) the extent to which the behavior of the party failing to perform or to offer to perform
comports with standards of good faith and fair dealing.
 To determine when remaining duties are discharged, see R2K § 242
Obligations with regards to gravity of Breach:

Minor Breach Material Breach TOTAL Material Breach
Other party has to perform, Other party can stop performance Other party can cancel if material
but can deduct damages. until problem fixed. default goes on too long.
• CAN’T SUSPEND • SUSPEND • CANCEL
Total Breach - when it becomes clear that party can’t or won’t fix what it has done or that it can’t
perform contract.
• Repudiation (or anything that makes you incapable of performing contract) is a total
breach
• Independent vs. Mutually Dependent Conditions

o Independent – if the parties intend the performance by each of them no way to be
conditioned upon performance of the other. Exchange promises for promises
58
o Dependent – if the parties intend performance by one to be conditioned upon performance

by the other (creates implied condition). Can be precedent, subsequent, or concurrent.
MODERN VIEW
• ANTICIPATORY REPUDIATION
Occurs when one of the parties to a bilateral K repudiates the K:
1. Express Repudiation – clear, positive, unequivocal refusal (by words or acts) to
perform the whole contract.
2. Implied Repudiation – results from conduct where the promisor puts it out of his
power to perform so as to make substantial performance of his promise impossible.
 This is from R2K § 250
**REMEDIES FOR ANTICIPATORY REPUDIATION
When promisor repudiates a contract, the injured party faces an 2 remedies:
1) He can treat the repudiation as an anticipatory breach and immediately seek damages
2) Can treat the repudiation as an empty threat, wait until the time for performance arrives
and exercise his remedies for actual breach if a breach does in fact occur at such time
 If injured party disregards repudiation and treats K as still in force and repudiation is
retracted prior to the time of performance, the repudiation is nullified.
 See R2K § 253(2)
**UCC § 2-610 re: Anticipatory Repudiation

o When either party repudiates w/r/t a performance not yet due (the loss of which will
substantially impair the value of the K to the other), aggrieved party may:
 For a commercially reasonable time wait for performance
 Resort to remedy for a breach (2-703 or 2-711), even though he’s notified
repudiating party that he will await performance and has urged retraction
[immediately seek damages]
 In either case, suspend his own performance or proceed in accordance w/ 2-704 (re:
seller’s right to identify goods to the K notwithstanding breach or to salvage
unfinished goods) [suspend performance]
o Retraction of repudiation UCC § 2-611
 Can retract repudiation UNLESS the aggrieved party has cancelled OR has
materially changed his position OR has otherwise indicated he considers the
repudiation final
• UCC 2-609 – Adequate Assurance of Performance

o REMEDY FOR PROSPECTIVE BREACH – this basically IMPLIES a condition that
party not cause the other party apprehension re: performance
A. When (in sale of goods K) one party has reasonable grounds to doubt that the
other party will be able to perform, the doubting party may demand adequate assurance
of due performance
 Among merchants, the reasonableness of grounds for insecurity and adequacy
of any assurance is determined according to commercial standards, from facts as
they would appear to a reasonable merchant.
B. Party may then, if commercially reasonable, suspend any performance until
receiving such assurance
C. Failure to adequately answer a justified demand w/in a reasonable time (no
more than 30 days) is a repudiation of the contract.
D. No need to wait for actual breach – just show that you reasonably believed that
such an event might occur
59
So, (1) reasonable grounds for insecurity re: perf  (2) seek assurance  30 days  (3)
no adequate assurance? Can suspend performance until they get this)  (4)
repudiation
- Note that R2K § 251 requires a total breach, complete inability to

perform/repudiation (no writing requirement though)
- This demand for assurance is RISKY – must be careful. If you do this, and you are
wrong, you can be in breach yourself.
o Partial Breach = Substantial Performance. SP, rather than exact or strict performance of the
K’s terms, is sufficient to entitle a party to recover. If a K has been partly performed by one
party and the other has derived a substantial benefit, the latter may not refuse to comply with the
contract's terms simply because the first party failed to complete performance. This is because
strict compliance with every specification is not of the essence of a contract, unless made so by
the contract's terms or necessary implication. However, the substantial performance rule does
not apply where the parties, by the terms of their agreement, make it clear that only strict or
complete performance will be satisfactory. The doctrine of substantial performance also may
not be invoked to avoid remedies stipulated in a contract.
• PERFECT TENDER RULE UCC § 2-601

o If the goods or tender of delivery fail in any respect to conform to the K, the buyer may
reject the whole, accept the whole, or accept any commercial unit(s) and reject the rest.
o THIS REJECTS SUBSTANTIAL PERFORMANCE (see Jacob & Youngs)
o INSTALLMENT Ks – see UCC § 2-612 – exception. Can only reject if non-conformity

substantially impairs the value of the installment and can’t be cured
• CURE UCC § 2-508
o IF goods are rejected as non-conforming, the seller can reasonably notify the buyer of
intention to cure
o Must be before time for performance is up!
o Where the seller has reasonable grounds to believe a nonconforming, rejected tender should
be acceptable, the seller can have a further reasonable time to substitute conforming goods,
if he notifies buyer
 SEE FLOWCHART FOR ACCEPTANCE OF GOODS UNDER UCC
1. K&G Construction Co. v. Harris (1960)

a. P is a general building subdivision; K’s w/D to excavate in “workmanlike manner.” D damages
wall of house and refuses to pay. P does not make next progress payment; 1 month later, D
quits. P hires new sub and pays extra.
b. Issue: Does P have the right to withhold progress payments due to D b/c of D’s failure to
perform in a workmanlike manner?
c. Holding: For P. Promise and counter-promise under consideration were mutually dependent
upon one another, and so the parties intended performance of one (payment) to be conditioned
on performance of the other. D’s promise was explicitly PRECEDENT to promise of payment
by P.
i. P thought they could stop payment, put D on notice, put the pressure on. D kept
working though, for some reason.
60
ii. When D stops work, this is a non-curable MATERIAL breach, and so P can declare the
K over and look for other performance and get damages for cover.
iii. P faced peril that D’s actions might not have been material breach. R2K § 240 – failure
to pay one month’s worth is not necessarily material breach w/r/t the entire K, unless it
is a large amount of $$ or large breach
iv. Ct decided that D’s damage to wall was a MATERIAL BREACH of promise to
perform in workmanlike manner (damage was 2x the payment due, so they say it’s
material). P gave D time to cure, and they did not.
2. Taylor v. Johnston (1975)

a. P owns 2 horses and K’s to breed w/ D’s stud in 1966. In 1965, D sells that stud and informs P
that K is off. P refuses, wants performance, so D makes arrangements for P to breed at new
owner’s. P transports mares, but they are in foal and can’t be bred at first. When P attempts,
stud is always busy, P breeds w/ diff’t stud then and sues for breach
b. Issue: Was there an anticipatory breach?
c. Holding: For D (trial ct had ruled for P). There was no express repudiation by D, and no
implied repudiation unless it was out of D’s pwr to perform, and thus NO ANTICIPATORY
BREACH.
i. 1st: D released P from the K, P could have accepted and gotten damages. This would be
a repudiation by D, which would then be treated as anticipatory breach by P. However,
the Ds then RETRACT this repudiation by offering them to breed w/ new owners. No
longer a repudiation. (P is limited to remedies that arise at time of performance)
ii. 2nd: K is still on. Before K term is over, still opportunity to breed w/ D’s stud.
However, “run-around” by Ds is an anticipatory breach – is P entitled to conclude from
actions of Ds that they will not carry out the K? Ct says hell no. Not express, and no
implied repudiation b/c Ds did not put it out of their pwr to perform. Instead, P could
still breed mares w/ stud but for his own actions. (P wanted, however, to get horses
bred ASAP b/c of timing issue and age).
iii. Until one party acts on a repudiation, there is NO BREACH. Issue is how it is
treated.
iv. The issue is that P does not have to sit around and wait for the beginning of a K before
he can declare D in breach – take it as final and stop K. No duty to mitigate, but it is
preferred. Aggrieved party must tell the other party that repudiation is final.
3. Koch Materials Co. v. Shore Slurry Seal, Inc. (2002)

a. P bought D’s plant in return for payment over time and assurance D would purchase asphalt
requirements from P. D notifies P owner would be retiring and turning over accounts to new
company. P asks for assurance K would be performed; D is offended and refuses. P sues
seeking to treat D’s failure to give assurance as repudiation.
b. Issue: Did P have reasonable basis for seeking assurance w/ the letter, and if so, did D
adequately assure P?
c. Holding: For P. P had commercially reasonable basis to demand assurances, and D did NOT
adequately assure P. Therefore, P’s motion for SJ is granted, P can terminate K and seek
damages.
i. This is UCC § 2-609: letter for assurance must be in writing (but this has been relaxed)
and they can suspend performance until they receive it. Might want to include an
express citation to 2-609 in the letter too.
ii. This is more than a threat –must be very careful. What if the grounds are not
considered “reasonable” upon determination of the ct? The letter would be a
repudiation and breach of the K! P must be careful.
61
iii. The issues are: reasonable grounds to doubt, adequate assurance w/in reasonable time
(here, Capoferri’s reply was NOT adequate). These are determined from pov of a
reasonable merchant.
iv. Ct says that yes, P had reason to doubt performance, since they didn’t know the new
purchaser, or their need for P’s products, etc. D’s answer was too evasive here.
4. Jacob & Youngs, Inc. v. Kent (1921) Cardozo

a. P built house for D. Year later D learns some pipe not Reading, as K called for. D demands P
rip up house to replace pipe. P demands rest of money D owes. Pipe used was same quality,
appearance, cost/value as Reading.
b. Issue: To what extent may one deviate from the express terms of the K w/out liability for
breach?
c. Holding: For P. Though some promises are dependant and thus conditions, when there is a
departure in point of substance, they will be viewed as INDEPENDENT and collateral when
departure is not significant (see substantial performance)
i. The issue here is one of degree – no change in K will be tolerated when it is so
dominant or pervasive as to frustrate the purpose of the K. However, look at the
situation – if the omission is trivial, then ct will be more lenient. Defect was
insignificant in relation to project. Therefore, it is not a breach of condition followed
by forfeiture.
ii. Omission was neither fraudulent nor willful. This weighs on the decision. The
difference here is not great enough where one can stop paying. And, this was in good
faith, which weighs on the materiality of a breach (SEE R2K § 241 above)
iii. After looking at purpose to be served, desire to be gratified, excuse for deviation,
cruelty of enforced adherence, then the ct can tell if literal fulfillment is to be IMPLIED
BY LAW AS A CONDITION. This was not clear (not express condition that they must
repair or replace).
iv. The problem is with the disproportionate forfeiture. The P had substantially
performed, and the significance of the default was grievously out of proportion w/
forfeiture.
v. Substantial performance: economic waste (tearing down building), low increase in
value, forfeiture, willfulness. This is a failure to perform, don’t get exactly what they
K’d for but they look away (condition satisfied by equivalent pipe, not different than
Reading in any real way).
vi. At some pt, insistence on conditions can become unreasonable and ct will step in and
help.
vii. THE LARGER THE FORFEITURE IS, THE MORE LIKELY THE JACOB &
YOUNG RULE WILL BE INVOKED.
5. Wilson v. Scampoli (1967)

a. P buys TV from D, pays and brings it home, discovers red tint, calls D and they send a
repairman. He cannot fix it at the home, needs to take it to shop, P refuses this, wants a NEW
set, not repaired one. D refuses to refund price, but renews offer to adjust and repair or replace
if it can’t be fixed.
b. Issue: To what extent is seller required in curing non-conforming goods by substituting goods
that are new, or goods that are repaired?
c. Holding: For D – D might have liability to P, but he was denied reasonable opportunity to
CURE (repair) and P hasn’t shown a breach of warranty entitling new TV set or rescission. D
can try to repair.
i. The trial ct used PERFECT TENDER RULE (UCC § 2-601)
ii. Under certain circumstances, repairs/adjustments are contemplated as remedies under
implied warranties
62
iii. UCC § 2-508 – cure (if goods are rejected as non-conforming, seller can reasonably
notify buyer of intention to cure)
iv. Presumption is that tint rendered entire TV set non-conforming, she inspected it, and
she rejected it. Even if a scratch, P could reject (no substantial performance in sale of
goods)
v. No great inconvenience to buyer, so seller can make minor repairs or reasonable
adjustments, and P refused to let D remove the TV. Didn’t give adequate opportunity
to cure. If P needed goods for a specific purpose, then D would not be able to cure.
C. IMPOSSIBILITY, IMPRACTICABILITY, FRUSTRATION

• K allocates risk expressly, implicitly, or not at all – parties don’t perceive the risk and can’t provide
for everything that may happen
• Impossibility – IMPRACTICABILITY
o Perf depends on continued existence of person or thing, implied condition that this
impossibility excuses performance
o K that parties think is possible turns out to be outright impossible, or so difficult to achieve
that it makes no sense to enforce K
o UCC § 2-615
o R2K § 261: “without his fault”, “basic assumption” (this is open for interpretation), “unless
language or circumstances indicate the contrary”
• Frustration of purpose
o Purpose that the parties might have had in mind (coronation cases)
o R2K § 265 – “Principal purpose” and “basic assumption”
• These are only available where parties have not themselves allocated a risk expressly or by
implication. Cts aren’t eager to use these
• Must be very careful – think of issues down the road when K is put together, although biz people
are reluctant to do so
1. Karl Wendt Farm Equip. Co. v. International Harvester Co. (1991)

a. IH goes out of biz after dramatic downturn in mkt for farm equipment, had K w/ P to establish P
as dealer of goods (specific provisions for termination) – IH sells equipment to Case, who does
not award franchise to P, who sues for breach of dealer agreement
b. Issue: Is impracticability a defense when there are mkt shifts or financial inabilities that happen
down the road in a K?
c. Holding: No defense of impract in the circumstances of this case b/c economic loss or hardship
and mkt changes are not enough to excuse performance
i. Economic loss, hardship, mkt shifts or financial inability are not, generally, a valid
reason for impracticability
ii. For frustration of purpose, must show it was (a) principal purpose of the K, (b)
substantial frustration, and (c) basic assumption of K. This was not principal purpose
of the K, mutual profitability would always be if they allowed this. K also said it
was to “establish dealership and the terms of interaction.” Ks allocate risk. WOULD
HAVE TO BE EXPLICIT, or not say anything at all.
iii. Implied term of dealership agreement is ability of dealer to go out of biz, says IH.
There are terms in this K for termination.
iv. This would be a windfall to IH if they could get out of this.
v. Alcoa:
1. Long term K, lots of investment. Estimate of mkt cost of aluminum was part of
the payment – electricity costs SOAR and it was nearly impossible for Alcoa to
63
deal with this. Would be destroyed. Ct rules in their favor, this was
controversial, they settle before appeal.
2. Cts are not usually very sympathetic, but at a certain pt, might step in and help
if things go WILDLY diff’t than anticipated.
2. AL Football v. Wright (1977)

a. P and D entered into a 3-yr K where D would pay professional football for P in the WFL, pd D
a $75 K signing bonus, then P and WFL cease to exist. D wants rest of $$, and P wants return
of the $75K.
b. Issue: Is the bonus supported by consideration? Does the entire K fail due to impract and
frustration of purpose, or is it viable, breached, and require damages?
c. Holding: For D on bonus, no damages for rest of K price though. The benefits P got at signing
are consideration, parties excused from performance b/c there was unexpected contingency, risk
that was not allocated, and performance impossible
i. P got benefits of D’s name recognition, forbearance from other opportunities, etc.
Bonus was in exchange for signing. Consideration
ii. If D got another job w/ the Cowboys – must mitigate
CH. 8: THIRD-PARTY RIGHTS AND RESPONSIBILITIES
A. THIRD PARTY BENEFICIARIES
• UCC § 2-318 – when a 3rd party has a benefit. States can chose A, B, or C.
• Intended beneficiaries (can enforce)
• Incidental beneficiaries (cannot enforce K, this is most ppl)
• UCC § 3-305: beneficiary can assert defenses too
• One party to a K creates rights in a 3rd party by assigning or delegating rights (UCC § 2-210)
• THIRD PARTY BENEFICIARIES
o Privity of K – just b/c you benefit, you might not be a party to a K. Rights arise to contracting
parties are between themselves
o R2K § 302
 (1)(a) – CREDITOR BENEFICIARY
• Lawrence v. Fox : Holly gives Fox $300, Fox promises to pay that to Lawrence
in return for a debt that Holly owes Lawrence. $$ is not passed on, and
Lawrence sues. He was not a party to the K, but he is creditor beneficiary
o Fox promised Holly for benefit of a 3rd person, so this implies a
promise to pay 3rd party.
 (1)(b) – DONEE BENEFICIARY (promisee intends to give the beneficiary the benefit
of the promised performance) – donate the performance, not satisfying any obligation.
 (2) incidental beneficiary
o R2K § 310: remedies of the creditor beneficiary
o R2K § 309: defenses of the beneficiary. We require (in order for duty to arise) that there is a K
b/t promisor and promisee. Must be consideration, etc. If K is not binding anymore, rights of
beneficiary are discharged/modified
o R2K § 311: parties to K can modify the K as long as beneficiary has not relied (borrowed
against it)
64
Government contracts: When government makes a contract with a private company for the performance of a
service, a member of the public who is injured by the contractor’s non-performance generally may not sue.
Exceptions: a member of the public may sue (1) if the party contracting with the government has explicitly
promised to undertake liability to members of the public for breach of the contract; or (2) if the
government has a duty of its own to provide the service which it has contracted for
EX: Martinez v Socoma Companies: City contracts with D to get a company going in the ghetto that will
bring job training to the portions of E.LA population that most need it. City provides subsidy to D to make this
happen. D defaults and provides very few jobs, leaving a few thousand people (P) who had expected, as a
result of the contract between the city and D to receive job training and employment.
HOLDING: P is an Incidental Third Party Beneficiary; so he may not sue D.
---- P sued as a DONEE BENEFICIARY
Significance: Only under fairly particular circumstances can a 3rd party bring suit for the failure of a
governmental contractor to perform. “The fact that plaintiffs were in a position to benefit more directly that
other certain members of the public from performance of the contract does not alter their status as incidental
beneficiaries.”
R2K § 313: public policy reasons against 3rd party beneficiaries in GOV’T Ks
RULE: A 3rd party beneficiary’s rights rise no higher than the party in contract with which the beneficiary is
connected to.
65

Contracts Frier Fall 2005

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Contracts Frier Fall 2005

Hochgeladen von

Copyright:

Verfügbare Formate

Contracts / Frier / Fall 2005

CH. 1: A ROADMAP FOR CONTRACT LAW

• Delchi Carrier Spa v. Rotorex Corp. (1995) US Ct of App 2nd Cir

 This is a fundamental breach because it substantially deprives P of what it expected and

CH. 2: THE BARGAIN THEORY OF CONTRACT

The law recognizes a promise as resulting in legal duties in 2 ways:

2 Interpretive devices to see if a promise is enforceable:

1. Hamer v. Sidway (1891)

2. Fiege v. Boehm (1956)

3. Petroleum Refractionating Corp. v. Kendrick Oil Co. (1933)

4. Harrington v. Taylor (1945)

5. EMU v. Burgess (1973)

6. Fisher v. Jackson (1955)

1. Ricketts v. Scothorn (1898)

2. Cohen v. Cowles Media Co. (1992)

3. Midwest Energy, Inc. v. Orion Food Systems, Inc. (2000)

[DISSENT: no promise, just a statement of intent to work together. Regular biz

C. THE RESTITUTION INTEREST

1. Bailey v. West (1969)

CH. 3: NEGOTIATION AND FORMATION OF THE CONTRACT

A. THE ROLE OF THE COURTS

B. OFFER AND ACCEPTANCE

o If either party dies or becomes incapacitated

• ACCEPTANCE is defined in R2K § 50

• Ks accepted by offeree’s performance

• Acceptance by Part Performance

• When is a contract formed?

• Option Ks are different

• Firm offers under UCC § 2-205

• What if there is a misunderstanding?

• Ks Concluded by Exchange of Letters (or other communications)

1. Ford Motor Credit Co. v. Russell (1994)

2. Davis v. Satrom (1986)

3. Oswald v. Allen (1969)

4. Ardente v. Horan (1976)

5. Mid-South Packers, Inc. v. Shoney’s, Inc.

6. Arango Construction Co. v. Success Roofing, Inc. (1986)

C. NEGOTIATION AND CLOSURE

1. SMS v. Malouf, Inc. (2000)

 R2K § 27 - lists circumstances to determine if there is actually a K or not

2. Arnold Palmer Golf Co. v. Fuqua Industries, Inc. (1976)

3. Empro Manufacturing Co., Inc. v. Ball-Co Manufacturing, Inc. (1989)

 How do you distinguish Arnold Palmer and Empro?

4. City of Kenai v. Ferguson (1987)

D. GOOD FAITH IN CONTRACT FORMATION

When there might be a duty of good faith in pre-K circumstances:

1. Racine and Laramie v. Dept. of Parks and Rec (1992)

2. N.E. Insulation Co. v. General Dynamics Corp. (1988)

E. PROBLEMS WITH STANDARD FORM CONTRACTS

A Guide to using § 2-207: THE BATTLE OF THE FORMS

3. NO CONTRACT WAS FORMED, but parties behaved as if there was one.

1. Gardner Zemke v. Dunham Bush, Inc. (1993) SC of NM

2. Step-Saver Data Systems, Inc. v. Wyse Technology (1991) US Ct of App 3d Cir

F. THE STATUTE OF FRAUDS

• What Ks must be in writing?

Promissory Estoppel Related to Statute of Frauds

1. Migerobe v. Certina USA, Inc. (1991) US Ct of App 5th Cir

2. ConAgra v. Nierenberg (2000) SupCt of Montana

3. Lige Dickson Co. v. Union Oil Co. of CA (1981) SupCt of WA

CH. 4: THE CONTENTS OF THE CONTRACT

A. THE PAROL EVIDENCE RULE

1. Is the written K an integrated document? *Judge decides this (R2K § 209/210)

• See R2K § 214: when prior agreements or negotiations are admissible!