Beruflich Dokumente
Kultur Dokumente
1
Barry Adler Contracts Fall 2010
GENERAL THEORY
• Saying “meeting of the minds” b/t parties forms K is incorrect; subjective intent to agree is not
required for an enforceable K
What is req. is that ea. party behave in such a way that gives the other party reason to
believe that there is a bargain b/t them
o R.2d § 17: the formation of a K req. a bargain in which there is a manifestation of mutual
assent to the [bargained-for] exchange…” AND as a result of which…
o R.2d § 33: there is “a basis for determining the existence of breach and for giving an
appropriate remedy.”
o R.2d § 18: provides that “manifestation of mutual assent…requires that ea. party either make
or promise or begin or render performance”
o R.2d § 19: provides that, depending on the context, a manifestation of assent can be
conveyed by many diff. forms of conduct: writing, spoken, other acts, or (rarely) failure
to act.
If a party intentionally acts in a way that he knows or has reason to know another will
interpret as assent, the conduct is sufficient to bind the actor “even though he does
not in fact assent.
• Embry v. Hargadine (290) [P sought renewal of employment K • Question: whether the company,
through manager (D) granted K • P was later fired w/in what would have been the term of the
renewal]
o What was the business setting of the transaction?
According to P: the holiday rush, which P may be able to use as leverage
According to D: just before a major mtg, when D is unable to negotiate
o What do the parties agree was said?
That P would quit if not renewed
o P’s version of D’s response: “Go ahead, you’re all right and don’t let that worry you”
o D’s version of his response: “I have not time to take it up now”
2
Barry Adler Contracts Fall 2010
How would P interpret the “Go ahead…” response?
• As an assent to P’s proposal, otherwise he would not considered himself “all
right” w/o extension
How would D interpret the “Go ahead…” response?
• As a deflection of P’s request, an attempt to defer the issue, otherwise he
would have been more definitive (to make sure P was properly motivated)
o Holding: on P’s version of the facts [“Go ahead…”] there was a K as a matter of law
because “no reasonable man would construe D’s answer….otherwise than an assent to P’s
demand.”
• Lucy v. Zehmer (296) [re: the sale (or not) of a farm by D at a restaurant • After P bet D he wouldn’t
sell farm for $50k, D said he would (“offer”) • P accepts the alleged “offer” both orally and writing •
“Offer” signed by both D and his wife]
o D’s arg: No K b/c it was an agreement after “several” drinks, though perhaps not sufficient
for intoxication capacity D, is consistent with a joke/bluff
Also, the written “offer” (on the back of a restaurant check) was an unusual place for
a document memorializing the sale of land
o P’s arg: The is a K b/c D took steps that suggest his intent to sell the farm
Peharps the overall context was a joke, but these steps weren’t a part of it, P had no
reason to believe that he was being bluffed (besides challenged to come up with
money)
o Holding: D’s subjective intensions did not matter. P reasonably interpreted D’s actions as
assent
Consistent with the std. statement that K formation depends on “objective” theory
• K was under negotiation for 40mins
• Multiple drafts
• Signing by D AND his wife
• Sophisticated provisions re: examination of title, etc.
Would it have mattered if P had believed D was joking, even if a reasonable person
would not?
• Yes: if D took actions that failed to convince P that offer was seriousNO K
**Re: extrinsic evidence. another crt might decide the case on the “four corners” of
the signed writing alone, excluding evidence that that P knew it was a joke
Existence of an Offer
• R.2d §22: observes that “the manifestation of mutual assent to an exchange ordinarily takes the form
of an offer or proposal by one party followed by an acceptance by the other party or parties”
• R.2d §24: says that an “offer is the manifestation of willingness to enter into a bargain, so made as
to justify another person in understanding that his assent to that bargain is invited and will conclude
it”
• R.2d §33: provides that even if a communication takes the form of an offer, it can’t be accepted (and
serve as the basis of a K), unless the terms to be accepted are sufficient to form a K, that is “provide
a basis for determining the existence of breach and for giving an appropriate remedy” (also in
§1)
• UCC
o UCC hypo
e.g. BA says to me “I offer you some books” and I say “I accept”
• What books? At what price? How many books?, etc.
• Books=UCC
o BUT a crt may fill many gaps and thus enforce a lightly specified offer (see R.2d §204)
3
Barry Adler Contracts Fall 2010
o UCC §2-204: provides that a sales K “may be made in any manner sufficient to show
agreement”—i.e. w/o identification of an offer or acceptance—and does not “fail for
indefiniteness” despite open terms if there is merely a “reasonably certain basis for giving an
appropriate remedy”
The UCC is expressly permissive also in that a sales K can be formed despite, e.g.,
• The absence of a specified price (§2-305)
• The absence of a specified place for delivery (§2-308)
• The absence of a specified time for delivery or duration of the agreement (§2-
309)
• The absence of a specified time for payment (§2-310)
Cf. w/ R.2d §33, which treats the omission of terms as a possible manifestation that
no offer is intended
• Despite the ∆ in tone b/t the R.2d and UCC §, don’t be misled into thinking
that there is necessarily a ∆ b/t a case under the CL and one under the
UCC.
o The question is ultimately the same, whether there was a manifestation
of intent to be bound, if so, whether there is a basis for remedy in the
event of breach
Preliminary Negotiations
o Nebraska Seed v. Harsh (305) [D issued a letter to P informing them that he was willing to
sell a certain seed at a particular price, but was indefinite as to quality • P responds and “accepts”]
Note that UCC §2-206 provides that “unless otherwise or unambiguously indicated
by the language or circumstance, an offer to make a K shall be construed as inviting
acceptance in any many and by any medium reasonable in the circumstance”
• It was customary for farmers to receive flyers in the mail that were not offers
Why no K, given law’s general flexibility?
• Missing terms can be supplied if there is manifestation of an intended offer,
but the absence of terms may still be evidence that no offer was intended (See R.2d
§33)
Holding: that D’s communication was an advertisement, not an offer, noting the lack
of quantity—which a crt will not try to supply absent direction of the parties—and the
missing term for time of delivery
• There is little reason to think that the case would come out differently today
(at least w/ a like-minded crt)
• How might you re-characterize the ad as a valid offer (capable of acceptance)?
o (1) An implicit offer that could be accepted of approx. quantity, “while
supplies last,” perhaps reasonable b/c communication was individualized (not
like in Leonard)
o (2) An implicit offer for reasonable delivery terms that are unspecified
(like time)
• On ads in general, R.2d §26 provides that “a manifestation of willingness to
enter into a bargain is not an offer if the person to whom it is addressed knows or has
reason to know that the person making it does not intend to conclude a bargain until
he has made a further manifestation of assent”
o R.2d §29: makes clear that it is up to the offeror—through her
manifestations—to determine the “person or persons in whom is created the
pwr of acceptance” or, implicitly, whether there are any such persons.
E.g. communication that is best understood as an invitation to
consider offers from the recipient is an ad, not an offer, despite its
4
Barry Adler Contracts Fall 2010
form.
o
o Leonard v. Pepsico (308) [re: TV ad, which announces that various items were available to
ind. of amassed Pepsi pts • Pepsi pts via buying Pepsi products or buying the points themselves (10
cents/pt) • one item that was mentioned was a Harrier jet for 7MM pts]
Holding: crt finds that in a widespread communication (like TV commercial) there is
a presumption against an offer, to ob overcome only by clear, definite and explicit terms
• An application R.2d §33trying to fill in K gaps when the gaps imply that
there is no offer
• Also, the commercial refers to a catalog and the catalog does not include a
Harrier jet, while the commercial additionally states (in fine print) that the offer is not
available everywhere
• Further, the fact that an offer for a WMD in a soft drink commercial (for less
than 1/20th of its value) is obviously a joke, and that the P should have known this (see
Lucy)
Agreements in Principle
• We have to interpret “agreements in principle,” sometimes written in “letters of intent,” and
sometimes referred to as “agreements to agree”
• In connection w/ whether a communication is an offer or an ad, we looked at R.2d §26 (see above)
o Now consider R.2d §27, which provides that “manifestations of assent that are in themselves
sufficient to conclude a K will not be prevented from so operating by the fact that the parties
also manifest an intention to prepare and adopt a written memorial thereof; but the
circumstances may show that the agreements are preliminary negotiations.”
The task is to distinguish b/t an agreement w/ open terms and a preliminary
negotiation (that does not affect an agreement at all)
• 4-ways to approach “agreements in principle”
o 1) Do not enforce as binding K [Empro]
o 2) treat the areas of apparent agreement b/t the parties as binding even though the
negotiations continue as to supplemental terms [Texaco]
Either added by parties later on, or supplied by crt if parties fail to do so
o 3) Treat the open terms as options granted by each party to the other, whereby if the parties
do not agree each party has an option to enforce the K on the reasonable terms most
favorable to the other
R.2d §34(1): which provides that the terms of the K may be reasonably certain even
though it empowers one or both parties to make a selection of terms in the course of
performance.
o 4) Treat the parties as having agreed to negotiate in good faith
unlikely (ultimately) top bind either party in a meaningful way
• Empro Manufacturing v. Ball-Co (319) [re: “letter of intent” b/t P (Empro) and D to purchase D’s
assets • letter provided that P’s purchase shall be subject to certain conditions (inc. approval by P’s
board) • negotiation breaks down over collateral • P sues D to enjoin from selling assets to anyone
else]
o Holding: crt affirmed dismissal for lack of K b/c the agreement was “subject to” a later
definite agreement (Asset Purchase Agreement) and board approval
Based on what the crt sees as an objective interpretation of the letter’s terms
(regardless of parties’ subjective intent)
P was free to walk at any time, so there was no bilateral agreement
Crt also dismisses P’s claim for reliance expenditures, b/c there was no promise on
5
Barry Adler Contracts Fall 2010
which P could rely
• On reliance, why isn’t the reasoning of Anglia of benefit to Empro here?
6
Barry Adler Contracts Fall 2010
MIRROR-IMAGE RULE
• CL rule: to be effective on acceptance, it must be an unequivocal assent to all of the offer’s terms
o As above, a counter-offer even if in the form of an acceptance is the equivalent of a rejection
and so following a counter-offer the offeree loses the pwr to accept unless the initial offer is
renewed (or unless the offeree has a binding option)
7
Barry Adler Contracts Fall 2010
o Via R.2d §61 [counter-rule to UCC §2-207] an unequivocal acceptance that also proposes a
modification to a K formed by the acceptance, or that proposes additional terms, can be
effective (and thus would not, under R.2d §36, terminate the offeree’s pwr of acceptance)
BUT to be effective, the acceptance cannot be conditioned on the offeror’s assent to
the offeree’s proposal for different/addtl terms
• Ardente v. Horan (336) [P wanted specific performance of an agreement to sell real property • D
had agreed to accept bid, but the P sent down payment w/ letter “confirming” whether furniture was
included • D refused to sign agreement and returned deposit $]
o Holding: P’s letter of acceptance was conditional, it operated as a rejection of the D’s offer
and no K obligation was created
Based on facts, not likely to be an unequivocal acceptance with a proposal for addtl
terms (furniture) b/c Ps offered no more $ for addition of furniture into deal. Price
should have adjusted accordingly.
ACCEPTANCE BY ACTION
• R.2d §30 provides that while an offeror can condition acceptance in any way she like, including by
requiring a verbal promise, “unless otherwise indicated by language or circumstances, an offer
invites acceptance in any manner and by any medium reasonable in the circumstances”
o R.2d §32 follows this theme by providing that “in case of doubt an offer is interpreted as
inviting the offeree to accept either by promising to perform what the offer requests or by
rendering performance”
• R.2d §62 provides that “where an offer invites an offeree to choose b/t acceptance by promise and
acceptance by performance, the tender or beginning of the invited performance or a tender or a
beginning of it is an acceptance by performance that operates as a promise to render complete
performance
• Thus, it may be possible to accept by performance, or the start of performance, or a tender of either,
either because the offer expressly invites or requires such means of acceptance or, in the absence of
such express invitation or req, b/c the circumstance otherwise make it reasonable for an offeree to
accept by performance or the start of performance
• Partial-performance illustrations
o (1) Abel says to Baker: “if you want $10k to fix my roof you have to begin work on my roof
by Nov. 15”
Baker begins work on Nov. 12 (unbeknownst to Abel)
Abel cannot revoke on Nov. 13
• R.2d §54 provides that notice by promisee who begins performance is not
necessary unless the offeree “has reason to know that the offeror has no
adequate means of learning of the performance w/ reasonable promptness
and certainty”
o even in this case where offeror has no adequate means, acceptance
remains valid if the offeror learns in reasonable timeframe
o (2) Abel says to Baker: “if you want $10k to fix my roof let me know or complete the work
by November 15”
Baker begins work on Nov. 12
Abel again, cannot revoke on Nov. 13
• Via R.2d §62: “let me know” invited acceptance by either promise or
performance
o Baker performed
o An offer accepted by partial perf. creates a bilateral K b/c at the moment of formation, each
party (still) owed the other some performance
8
Barry Adler Contracts Fall 2010
• A unilateral K is one where, at the moment of formation, the offeree has fully performed leaving
only the offeror’s performance outstanding
o R.2d §45—imputes an option K, under which after the promisee begins to tender
performance, the promisor cannot revoke the offer (either specified in the offer or
reasonable)
9
Barry Adler Contracts Fall 2010
This is not a reward case, not a unilateral K case, not a case that includes an offer at
all
• “Prove me wrong” cases are not offers
10
Barry Adler Contracts Fall 2010
ACCEPTANCE BY INACTION
• R.2d §69 normally, an offeror cannot impose an obligation on an offeree, however, the words or past
conduct of an offeree can manifest assent to an arrangement through which the offeror can treat the
offeree’s inaction and silence as acceptance
o Also, keeping goods offered for sale, or the benefit of service when they might be easily
rejected, can also constitute acceptance (though beware statutory provisions to the contrary)
• Hobbs v. Massasoit Whip Co. (368) [P sent D eel skins and D retained them, but never formally
accepted them • D never used them and eventually destroyed them • Hobbs sued for value of skins.
o Holding: crt held that, based on prior experience, the buyer assented since he didn’t return
the eels in a reasonable time
Past practice b/t the parties manifested a buyer’s assent to accepting skins unless the
buyer returned them to the seller in a reasonable time
• Ex.: Record-of-the-month clubs, where a buyer expressly agrees to accept by
inaction future transactions
11
Barry Adler Contracts Fall 2010
o Maj. Rule
• Drop-out rule—the offeror’s term stays, the “different” terms drop
o What if the term was not “different,” but instead “additional”?
If the parties are merchants, the addtl terms would be added if not material
• What is material?
o Would a ltd time on offeror’s (Buyer) complaints be material?
Union Carbide suggests that it would if time is shorter than the
background rule b/c consent could not then be presumed
But UCC §2-207 [Comment 5] suggests that the test is
whether the term represents an unreasonable surprise
o Turn to the distinction UCC §2-207 makes b/t “acceptance” and “confirmation,” either of
which can operate “as an acceptance”
INTERNAL CONTRADICTION, a confirmation cannot act as an acceptance!
• A confirmation is intended to be of a pre-existing K—formed orally perhaps
Most sensible way to deal with confirmations is to run them through §2-207(2),
ignoring different terms
• The “knock-out” rule should apply to conflicting confirmations, but not to a
conflict b/t a confirmation and an agreement
o Once it is est. that there is a “definite and seasonable expression of acceptance,” a K is
formed by reference to the forms themselves.
o What if acceptance is conditional, and parties exchange goods for $?
The forms do not create a K
• But a reading of the UCC suugest that the parties’ transaction in the goods
invokes UCC §2-207(3), which allows for a K by conduct although the
writings do not est. one.
o A K formed under §2-207(3) consists of those terms that agree, with
everything else filled in w/ UCC background rules
**This is a rejection of the Last Shot Doctrine (the ∏ purpose
to begin with) and a sensible result
• BA-everything else is not necessary
• Step-Saver v. Wyse (457) [Step-saver (P) ordered software from TSL (D) • both agree over phone
followed by exchange of purchase order/invoice • forms match the telephone order, in neither case
referring to disclaimers of warranties • software package had “box-top license,” disclaiming a
warranty • box top also stipulated that “opening this package indicates acceptance…” • software
malfunction and dispute over warranty]
o Is the box top disclaimer a part of the K?
o P’s arg: the telephone convo formed the K and the box-top license was a confirmation w/
additional terms
Effect: Addt’l terms would not become a part of the K b/c they are material
• A disclaimer of a standard UCC warranty is listed under UCC §2-207
(Comment 4) as an example of a material alt.
o D’s arg: the phone convo and P’s purchase order constituted merely an offer, to which the
box-top was a counter offer
Effect: there is no BotF; P actually accepted the terms of the counteroffer, including
the warranty disclaimer, when it opened the box
• The crt disagrees with this reasoning in footnote 51
P’s counter arg: the box-top was no more than an ignored confirmation (going for
contents of box does not manifest assent)
• Also, D had told P that the box-top did not apply to it (not the typical
12
Barry Adler Contracts Fall 2010
customer), making the terms irrelevant in any case
o Holding: box-top was not an expressly conditional acceptance b/c there was no indication
that TSL (D) would walk away absent assent. It was a confirmation and b/c material, it is
rejected.
Crt gets confused on Comment 2
• Plausible/cleaner reading: a confirmation runs additional terms through §2-
207(2) and a notice that absent a pre-existing K, an expressly conditional
acceptance takes the case out of §2-207(1) & (2) altogether
• Union Carbide v. Oscar Meyer (470) [P sold plastic casings to D per a standing purchase order • P
filed a action against D for beach of K to recover sales tax it had paid on products it had sold to
defendant. P claimed that Oscar Mayer had agreed to indemnify it for all sales ]
o Both parties agree that D’s purchase order is the offer, and P’s invoice the acceptance.
Dispute is over tax indemnity clause and if part of K
o Holding: the sales tax indemnification clause is not effective
Indemnification would be a material alteration under UCC §2-207(2) and D never
actually assented to clause
Same result, if you treated invoice as a confirmation following shipment
• ProCD v. Zeidenberg (473) [**Easterbrook** P offered software directory w/K terms contained
inside the box and notice given on outside of box • option to return for refund if terms not accepted •
dispute over clause forbidding commercial use of the directory • D used for non-commercial uses]
o Holding: the prohibition on commercial use/refund opportunity were incorporated by
reference in P’s offer and thus accepted upon purchase
The terms were not unconscionable and were not otherwise unenforceable under
UCC
Crt reasoned that UCC §2-207 was not applicablesimple offer and acceptance by
conduct (the latter not proposing any addtl or different terms); no writings exchanged
o ∏: “deal now, terms later” transactions are common (e.g. insurance industry) and should not
be set aside by operation of a provision directed at the entirely different problem of
inconsistent forms
• Hill v. Gateway (479) [**Easterbrook** • P bought a computer over the phone • Box computer was
shipping in included a number of terms, including arbitration clause • If computer not returned w/n
30 days, terms deemed assented to.]
o Issue: Are the box terms effective as the K or is the K term-free b/c the order-taker did not
read any terms over the phone & elicit the customer’s assent?
o Holding: crt treats purchaser as an offeree (contrary to customary interpretation) charged w/
knowledge that computer will come w/terms. Placed on constructive notice that additional
terms will follow. Purchaser’s order is treated as acceptance of these implicit terms.
Same line of reasoning that D played in Step Saver
• Klocek v. Gateway (483) [**Vratil** P sues claiming D induced him to purchase computers and
special support packages by making false promises of technical support • D wants to enforce
arbitration clause.]
o Issue: How should box terms be treated?
o Holding: customer’s oral order is the offer under UCC §2-207(1), seller’s promise to deliver
(or delivery) is acceptance (non-conditional) or a confirmation. Terms in box are proposals
for addtl terms, which do not attach automatically b/c exchange is not between merchants §2-
207(2).
Written offer is not express pre-requisite to application of UCC 2-207(1).
• Doctrine aside, who b/t Easterbrook and Vratil has the better argument as far as ∏
13
Barry Adler Contracts Fall 2010
o Does the “utility of standardization” principle embodied in R.2d §211 support Easterbrook?
o Does concern about “unfair surprise” embodied in UCC §2-302 favor Vratil?
o Is UCC §2-207 the right provision to deal with this issue?
14
Barry Adler Contracts Fall 2010
Consideration Doctrine
• Historically, not every promise was enforced
o Question of whether a promise is “supported by consideration” was simply a matter of
whether the circumstances surrounding the promise (i.e. motivating factors) were such that
the law wished to enforce the promise—Simpson Essay
o Over time, the term “consideration” has taken on a more narrow, specific meaning
Now “consideration” = “a bargained-for-exchange” aka quid pro quo
• See R.2d §§ 1, 3, 17, 18…71: “performance or return promise…sought by the
promisor in exchange for his promise and…given by the promisee in
exchange for the promise”
o If the law enforces a promise w/o a bargain, as it freq. does, it is an
exception to the consideration req.
• ∏ justification: uncertain
o Solemnity and indication of intent to be bound to a promise?
But there are good substitues: the seal, or simply a signed
writing
o The importance of exchange to economic development—Smith essays
But bargains often go beyond business
• Via UCC §2-205, in the context where a merchant makes a firm offer, it
doesn’t need consideration to be binding
o Via UCC §2-209no consideration is needed for a modification to a
K
• Johnson v. Otterbein Univ. (620) [P signs instrument promising to pay $100 w/ interest to satisfy
indebtedness of the D • D accepts.]
o Holding: No consideration. In general, an executory K to give is w/o consideration, and a
promise to make a gift, can be revoked at any time prior to delivery of the gift.
P was not induced to act b/c they have to pay their debts anyway! Making it a
“condition” ≠ bargained for exchange
• But this test is misleading: Johnson might argue intrinsic value to U paying its
debt (something he could not have done unilaterally) and that it resisted
o These facts are unlikely
• Hamer v. Sidway (622) [Uncle promises nephew $5k to stop drinking and gambling • Enforced]
o D-estate arg: the K was without consideration because the nephew was not harmed, but
benefited, and insists that unless the promisor was benefited, no consideration
Otterbein test [apparently] rejected. But court points to nephew’s previous
engagement in the bad behavior as evidence that this isn’t a “sham consideration.”
Also, evidence that abstinence was actually in response (no inherent teetotaler) to
uncle’s offer, that is the nominal promise to give $ for compliance.
• R.2d §79: consideration requires no advantage to the promisor or detriment to
the promisee, or equivalence in the values exchanged; only an actual bargain
is necessary
• Motive for making a bargain is irrelevant to whether there was a bargain (i.e.
consideration) (R.2d §81)
o The fact that the uncle might have made a gift in the absence of a
bargain is irrelevant
15
Barry Adler Contracts Fall 2010
o Holding: the nephew had a legal right to engage in the contractually prohibited behavior and
that his abstention from doing so amount to a bargained for exchange.
Court says, “It is enough that something is promised, done, forborne or suffered by
the party to whom the promise is made as consideration for the promise made to
him’” and “‘In general a waiver of any legal right at the request of another party is a
sufficient consideration for a promise’” and “‘Any damage, or suspension, or
forbearance of a right will be sufficient to sustain a promise’”
16
Barry Adler Contracts Fall 2010
EXCEPTION: MODIFICATION AND PREEXISTING DUTY
Stilk v. Myrick (656) [Sailors offered wages of deserters while on roundtrip voyage from London to
Baltic.]
o Holding: agreement void for want of consideration, b/c sailors agreed to do no more in
exchange for the increased pay than the promisor was obligated to do under the original K.
Alaska Packers’ Assn. v. Domenico (658) [Fisherman demand higher pay due to what they believe
are inferior nets provided by Alaska Packers.]
o Holding: No valid consideration. A party who refuses to perform and thereby coerces a
promise from the other part to pay increased compensation for that which he is legally bound
to do, has taken an unjustifiable advantage of the necessities of the other party.
Trouble with Stilk/Alaska analysis: Promisors gave up their legal right to breach and to be
answerable only in damages when they voluntarily performed. This seems like a consideration—
employer has bargained for relinquishment of this right and performance on the K. So why doesn’t
the court think so? (seemingly Holmes would agree)
o Answer: Better characterization might be “bad faith” negotiations. If the modification is
wrong, it’s because it is extortion, (arguably) not due to a lack of consideration
o Preferred Rule: Enforce modification if fisherman would have performed anyway, but don’t
enforce if otherwise would not have performed. This saves Captain from being extorted but
also allows him to offer raises or changes if he so fits.
Fisherman hypo
o Fishermen claim request for higher pay is not extortion but a reasonable reaction to the
unanticipated quality of the nets (R2d §89)
Had condition of nets been known to fishermen at the time of K, demand for
increased pay for certainly have been in bad faithextortion
OTOH, had nets been so defective as to provide Fisherman an excuse from
performance, the modification would not have been in bad faith or extortion
Interesting case is the middle ground- Fishermen encounter an unexpected difficulty
in performance of K but are responsible to perform nonetheless (no excuse)
o Policy standard- when it makes sense to enforce and not to enforce contract modification?
Taken from view of protecting Captain (extortion victim), when and under what
circumstances would she want her promise of a pay increase to be enforceable and
when would she not want it to be enforceable?
• **If captain will be awarded fully compensatory damages and fishermen
are solvent, Captain does not care what the legal rule is because she has no
incentive to induce performance of fishermenwill get $ from either fishing
or damages (when breach)
o Fishermen will not even ask for a raise because they know Captain will
not grant
• If fishermen are insolvent (most likely in Alaska Packers) and that both
parties know the legal rule. If no option for a negotiated modification,
fishermen might (inefficiently) choose to breach rather than expend the effort
(cost) of performance—when there is room for negotiation b/t the captain and
the fishermen, you can make the Captain better off w/o hurting yourself by
negotiating (i.e. Captain can compensate you and still be made better off with
π)
17
Barry Adler Contracts Fall 2010
o Captain will want the option to make an enforceable promise of a
pay increase because she could lose more from breach than pay
increase
Factors that will induce fishermen to breach absent a
renegotiation option
• Initial contract price
• Realized cost of performance
• Assets subject to liability/damages
So, modification can be good (efficient), so when enforce?
• Captain hurt by rule that says never
enforcefishermen won’t agree to any modifcation
o Will get no damages (insolvent), no fish are
caught- she makes nothing!
• Captain also hurt by rule that says always enforce
o Fishermen will always try to get higher pay,
even when they would be willing to perform
w/o an increaseextortion
RULE- enforcement when otherwise (w/o modification)
fishermen would breach, but no enforcement when fishermen
would have done work without the price increase
• No extortion when fishermen are in distress and it in
not in their interest to perform
• Caveat to this rule- could the law instead simply
enforce all modifications, counting on the promisee
(Captain) not to make a concession where one isn’t in
her interest?
o Maybe, but one might worry that a promisor
(fisherman) could convince the promisee
(captain) that it will not perform despite its
incentive to do so, and induce a concession.
Fisherman: “I’m being hurt, but you are
really getting hurt”
Our rule protects promisee from a
threat of the promisorThe promisor
has no incentive to issue a threat if it
knows that any concession by the
promisee would be unenforceable
US v. Stump Home Specialties Manufacturing (671)Posner: the sensible course would be to
enforce contract modifications (at least if written) regardless of consideration and rely on the
defense of duress to prevent abuse. All coercive modifications would then be unenforceable, if
defense successful
o Consideration is an inadequate safeguard against duress because slight consideration might
be enough to enforce a contract but would be consistent with coercion → this must be
avoided
R.2d §89: A promise modifying a duty under a contract not fully performed on either side is
binding:
o (a) if modification is fair & equitable in view of circumstances not anticipated by parties
when K was made;
UCC §2-209: An agreement modifying a contract within this article needs no consideration to be
binding. [But the effective use of bad faith to escape performance on the original K is barred, and the
18
Barry Adler Contracts Fall 2010
extortion of a “modification” w/o legitimate commercial reason is ineffective as bad faith.
o Good Faith Test among merchants is “observance of reasonable standards of fair dealing
in the trade.”
See Johnson v. Otterbein wrt R.2d §90(2): a charitable subscription is binding under promissory
estoppel even w/o demonstrable reliance
Rickets v. Scothorn (723) [**Classic estoppel case**P quit job in reliance on her grandfather’s
granting of a note payable to her (gratuitous promise) and sued his estate (D) for payment after
death]
o No consideration b/c quitting work was not a condition of the promise (in fact she later
returned to work)—Cf. w/ Hamer
o Gratuitous promise is fully enforced (expectation dam.) under “equitable estoppel”
(although promissory estoppel works well too)
19
Barry Adler Contracts Fall 2010
P changed her position to her disadvantage, in reliance on promise (see R.2d §87)
20
Barry Adler Contracts Fall 2010
o (3) No promise (of store!), No K (to reimburse)NO REMEDY
Goodman v. Dicker (751) [D (dist only and not franchisor) thru conduct induced P (potential
franchisee) to incur expenses in preparing to do business under the franchise • D promised that
franchise would be granted]
o Holding: No K for the franchise, but the dist.’s representations justified a reliance remedy
via (equitable estoppel- broader than equitable estoppel)
Alt reading: an implicit promise by the dist. to cover the would-be franchisee’s
expenses—a bargain
• Consideration: Dist. had potential π to gain
Baird, Drennan and Hoffman, Goodman show that PROMISSORY (& EQUITABLE)
ESTOPPEL OUTSIDE OF THE GRATUITOUS PROMISE CONTEXT CONFUSES MORE
THAN CLARIFIES SITUATIONS
o Maybe there should be a stricter adherence to the consideration doctrine
STATUTE OF FRAUDS
• Statute of Fraud—provides that certain agreements are enforceable only if memorialzed in a signed
writing
o See R.2d §110 and UCC §2-201
o Agreements covered under SoF are important ones. E.g.:
Ks for sale of land
Ks that cannot be performed w/in 1 yr
Ks for the sale of goods above a specified price (UCC §2-201)
21
Barry Adler Contracts Fall 2010
22
Barry Adler Contracts Fall 2010
Incapacity
• R.2d §12: categories of potential incapacities to K fully:
o Guardianship [R.2d §13]-NO CAPACITY to incur contractual duties if under guardianship
for reason of mental illness or defect
Rationale: adjudication is a public event (assumption that everyone is aware); the
guardian maintains control.
o Mental Illness or Defect (but in the absence of guardianship) [R.2d §15]-A mentally ill
person who’s unable to understand the nature and consequences of a transaction can incur
ONLY VOIDABLE duties
HOWEVER, if a K is made on fair terms and the other party is unaware of the
person’s mental difficulty, then the person with the mental illness or defect cannot
avoid the contract if this would be unjust (such as where performance has begun)
o Infancy [R.2d §14]-Minors (<18) incur ONLY VOIDABLE duties (unless statute provides
otherwise)
No excuse for lack of knowledge
• Rationale: probably because being young is something that should be easily
observable
Some states opt out w/ statute (e.g. for performers)
o Intoxication [R.2d §16]-A person incurs ONLY VOIDABLE contractual by entering into a
transaction if the other party has reason to know that by reason of intoxication:
(a) he is unable to understand in a reasonable manner the nature and consequences of
the transaction, OR
(b) he is unable to act reasonably in relation to the transaction
Secret intoxication offers no shield
Duress and Improper Threat
• Duress: “unlawful confinement of another’s person, or relatives, or property, which causes him
to consent to a transaction through fear.”
o If physically compelled (duress), no contract formed—VOID [R.2d §174].
o Does NOT matter that the terms of the bargain is fair.
o Does NOT matter that the counterparty is aware of the duress (study guide)
• Improper threat: Duress by improper threat renders a contract VOIDABLE by the victim
unless the other party acts in good faith, without knowledge or reason to know of the threat, and
provides value under the contract or materially relies on the victim’s promise [R.2d §175]
o An improper threat includes a threat [R.2d §176]:
To commit a crime to tort, or to otherwise act in bad faith
Of criminal prosecution (even if for a crime that was actually committed)
To achieve an unfair exchange where the threatened act would harm the victim
but would not benefit the party making the threat (i.e. blackmail)
Undue Influence
Unfair persuasion of a party over who is under the dominion of the persuader, OR believes that the
persuader has a fiduciary resp. [R.2d §177]
• VOIDABLE by victim if the persuader is a party to the contract, but NOT if the
persuader is a third party and the contracting party acts in good faith. [R.2d §177(2)-
(3)]
23
Barry Adler Contracts Fall 2010
• Odorizzi v. Bloomfield School District (1012) [P, teacher, arrested for homosexual activity •
principal/super got him to resign from position • P sought to recind his resignation on basis that is
was procured as a result of duress, fraud, undue influence and mistake • Crt finds no duress or
menace; undue infl. still on table]
o Holding: undue infl. is valid because the emp took advantage of his “weakness of mind”
Two elements of undue influence: (1) “lessened capacity of the object to make
free contract” (i.e. weakness of mind), and (2) an “application of excessive strength
against a subservient object” (i.e. position of pwr)
• when no direct duty owed (employer vs. a guardian), hard to decide where
persuasion has “overblown normal banks/become oppressive waters”
“Excessive strength” factors
• Unusual place/inappropriate time
• Insistence on immediate decision
• Emphasis on consequence of delay
• Use of multiple persuaders vs. one
• Absent counsel and no time to consult
• Undue influence: New Orleans water hypo
o A hospital in New Orleans is cut off from water post-Katrina. A water tanker comes by and
offers water for $100/gallon. The hospital accepts and the tanker delivers, but later the
hospital refuses to pay the $100/gallon and instead offers to pay market price. The water
tanker sues.
Best analyzed as a case of diminished capacity to choose (rather than econ.
duress or undue influence)
Incentive effects for tanker, however, we don’t want to live in a society where
individuals exploit dire situations of others
• Cf dragnet clause in Williams
WRT Unconscionability
Definitions
• Unconscionability is a hybrid between unenforceability because of (1) substance (Shaheen, Baby
M) and (2) process (duress, undue influence, Odorizzi) of promise formation
o ∏: prevention of oppression and unfair surprise [R.2d § 208 Comment B; UCC §2-302
Comment 1]
• “the court may refuse to enforce the K, or it may enforce the remainder of the K w/o the
unconscionable clause, or may ltd the unconscionable term” [UCC §2-302]
o Same sentiment in [R.2d §208]
o “It is possible for a contract to be oppressive… even though there is no weakness in the
bargaining process.” [R.2d §208 Comment C]
• Form Ks: “where the other party has reason to believe that the party manifesting such assent would
not do so if he knew that the writing contained a particular term, the term is not part of the
agreement” [R.2d §211(3)]
o Form Ks are an efficient means of doing business with a large group of people
o BA: reflected in $-“it’s the price, stupid”
o See Carnival and Caspi
• BA: unconscionability is a fall-back for courts when duress and undue influence don’t apply but the
contract just “smells wrong”
• Williams v. Walker-Thomas Furniture Co. (1025) [D, a poor customer, agrees in a form k to a
dragnet clause (cross-collateral clause) for furniture purchased on credit • clause difficult to
understand and educational dynamics of D at play • after a payment default, P, retailer, sought to
24
Barry Adler Contracts Fall 2010
replevy all goods prev. purchased by D]
o Holding: The defense of unconscionability to action on a K is judicially recognized
“Unconscionability has generally been recognized to include an absence of
meaningful choice on the part of one of the parties together with contract
terms which are unreasonably favorable to the other party.”
• Unfair surprise-lack of edu may have played role in lack of
understanding
Worries about paternalism : Crt making value judgment on how D can spend
money/what she needs or doesn’t need
• This issue also goes to buyer’s ltd. choice
o Consequences of stricking down a pro-seller term?
Increased prices (if you assume a functioning mkt)
• Seller is taking risk by selling to this market, protection in the form of
these clauses
• Cf. with New Orlean’s hypo
• Seller may disappear from mkt
• Carnival Cruise Lines v. Shute (445) [P, sought to file suit in WA for a injury sustained on D’s
cruise • D had a forum-selection clause contained in ticket]
o Holding: A non-negotiated forum-selection clause contained in a standard contract (Form K)
is enforceable where the court determines it meets the requirements of fairness.
Term was reasonable/presumably reflected in the price of ticket (presuming a
mkt)
• Pro-seller term might be good for buyer because it lowers the price
• Caspi v. Microsoft Network, L.L.C. (453) [P claimed that the forum-selection clause in the online
subscriber agreement with D, online provider, was ineffective b/c it lacked adequate clarity and
notice]
o Holding: a contracting party may be bound by the terms of a form K even if he or she has
never read it
Only if the clause was a result of fraud or overweening bargaining pwr would
the clause be invalidated in NJ
Caspi was free to scroll thru to read before agreeing
25
Barry Adler Contracts Fall 2010
HIERARCHY OF INTERPRETATION
• Situation: each party attaches different meanings to an (objectively) ambiguous term, and neither
party had info that would make the other’s subjective meaning relevant
• Hierarchy Illustration: Dairy Farmer Delivery Hypo
o A dairy farmer agrees to make a weekly delivery of butter to a restaurant
Each delivery to occur “no later than mid-week”
o The K is supposed to run for 1 yr
o During the 1st 6mos of the K, the farmer delivers the butter sometimes on Wednesdays, but
more often on Thursdays
On each Thursday delivery, the restaurant expresses a desire for deliveries no later
than Wednesday, but accepts each Thurs. delivery after farmer apologizes
o After a Thurs delivery on the 7th month, the restaurant tells the farmer that the K is over.
o The farmer and restaurant sue one another for breach and dispute the meaning of “mid-week”
o R.2d §202 provides “where language has a generally prevailing meaning, it is interpreted in
accordance w/ that meaning” but adds, among other things, that “technical terms and words
of art are given their technical meaning when used in a transaction w/in their technical field”
Does “mid-week” have a generally accepted meaning, or is it a technical meaning
26
Barry Adler Contracts Fall 2010
w/in the relevant industry?
• UCC §§ 1-205 and 2-208 put the following interpretive factors in an order of
importance
o (1) Express terms
o (2) Course of performance
In this hypo, there is a relevant course of performance: for
6mos, the farmer delivered butter on Thurs and the restaurant
accepted delivery
• UCC §2-208(3) provides that “course of performance
shall be be relevant to show a waiver or modification
of any term inconsistent with such course of
performance”
o Does this help the dairy farmer? Yes as to
waiver of “mid-week” term, but—depending on
how the restaurant stated its “preference” for
earlier deliveries after each Thurs. delivery—not
necessarily as to interpretation or
modification
o The restaurant will arg: that it did waive ea.
weeks missed deliver, but that it didn’t
constitute a modification, but the restaurant
should have made it clear after every
deliver/waiver that it reserved the right to treat
the nxt Thurs. delivery as a breach by farmer.
o Cf. UCC §2-208(1) and R.2d §202(4), which
provide that acceptance of performance “w/o
objection” is given interpretive weight
o (3) Course of dealings
o (4) Usage of trade
• Raffles v. Wichelhaus (396) [K for cotton to be delivered on the ship “Peerless” • 2 ships named
“Peerless” • Peerless (Oct) arrives, but seller (P) tenders no cotton • Peerless (Dec) arrives later w/
cotton that seller tenders to buyer (D) • buyer refuses cotton, claiming K was for earlier ship]
o Holding: crt finds no basis to resolve the dispute and concludes that there is no K
Industry analysis at timeguidance on what parties should be deemed to have meant
• Gilmore: concludes that it is not relevant to the K whether the cotton was on
Peerles (Oct) or Peerless (Dec)
o The term “to arrive ex Peerless” was a term provided by seller in case
ship was lost in voyage, and thus voided the K (ltd damages paid by
seller)
• Simpson: disagrees w/ Gilmore. Argued that selection of ship represents a
gamble on arrival time that would be reflected in the price (speculation)
o The seller here (P) had a “winning” K (the price of cotton had
dropped).
o Seller should have been able to benefit (at least) from what turned out
to be the shipment most favorable to Buyer [Peerless (Dec)]
How might Seller (P) have benefited here, were the rule in Bush different?
• Seller could have stipulated that he did breach K in October [as D argued] and
sued for the negative damages as a result of the falling prices b/t Oct and Dec
(and thus savings to D).
o If permitted, would give incentives to D to take Dec. shipment (via the
27
Barry Adler Contracts Fall 2010
K)
If price had risen b/t Oct and Dec:
• Buyer would have accepted cotton on Peerless (Dec)
[winning K], no breach b/c Seller was ready to tender in
Dec
If price had fallen b/t Oct and Dec:
• In Dec: if Buyer claims Oct. breach by Seller, he would
have to pay negative damages
o Would be indifferent b/t paying neg. damages
based on Oct breach (in Dec) and accepting
delivery on loosing K in Dec, and will take in
Dec (after speculating on rising price)
• But no NEGATIVE DAMAGES via Bush!
• Oswald v. Allen (407) [Sale $50k of “Swiss Coins” agreed to in back of car • Seller (D) (says she)
meant a subset of rare coins shown that were from Switzerland • Buyer (P) (says he) understood deal
for all coins including those from “Rarity Coin Collection”]
o Holding: Applies Raffles rule”no sensible basis for choosing b/t conflicting
understandings”
BA—necessarily the case?
• On the seller’s purported understanding, if the collection was really to include
all coins including the “Rarity” coins, one might have expected a convo re:
those coins.
o OTOH: language barrier may have made this expectation unreasonable
GAP FILLING
• Some crts try harder than those of Raffles and Oswald to find a K
o Frigailment Importing v. BNS Corp (unassigned) [P ordered large quantity of chicken from
D • P intended to buy ‘young’ chicken used for broiling, but D assumed older chicken, which
was suitable for stewing only]
Holding: where extrinsic evidence revealed no clear basis for interpretation, the P
had “the burden of showing the ‘chicken’ was used in the narrower rather than
broader context”
• But no basis is offered for the choice of “broader sense” as the default
o Firgailment, etc. raise the question of gap filling and whether “interpretation” and “gap
filling” can be distinguished meaningfully
A term that needs interpretation may signal greater importance to the parties than
does gap filling.
• An express term that can’t be interpreted reliably, may justify negation of a K
even where a K w/ a gap would be enforced
o Cf. actual Raffles w/ a version of the case where no ship (or date of
sail) is mentioned (pure interpretation issue, vs. filling a gap)
• Traditionally two forms of judicial gap filling:
o (1) “implied-in-fact” terms: those that the parties actually, albeit implicitly, have agree to
o (2) “implied-in-law” terms: are thought to be imposed on parties w/o their consent
As a practical matter, where the parties are free to choose the contractual term, both
an implied-in-fact and an implied-in-law determination will typically turn on an
inquiry into what reasonable parties would have wanted under the conditions the
parties encountered.
Default rule: a gap is filled with a term that “is reasonable in the circumstances”
28
Barry Adler Contracts Fall 2010
(R.2d §204)
• You can K around default rules!
• Does having a default rule encourage parties to be more explicit? Thus, a ∆ b/t
implied in law and fact?
Mandatory (immutable) rule: may not be varied by consent and will override any
express clause to the contrary
• e.g. good faith requirement in UCC §2-306 and output Ks
• Sun Printing v. Remington (422) [Sun Printing (P) agrees to buy paper (1k tons/mo for 1st 4 months
and 16k in all) from Remington (D) • payment to be made on 20th of each mo • for balance (after 4
mos) the price of paper and length of term when price applied “shall be agreed upon” capped by a
Canadian index for large consumers • after 4 mos, D repudiates]
o P’s arg: supported by R.2d §34, which provides that the “terms of a K may be reasonably
certain even though it empowers one or both parties to make a selection of terms in the
course of performance”
P’s option would be part of a barained-for-exchange b/c P is bound for the 1st 4 mos
of the K
o D’s arg: the seller and buyer left the price to be paid and the length of time during which the
price would apply open
Agreement to one would be insufficient for K w/o the other.
• Even if you determine a price, you still need to know how long it would apply
(and is not specified
o Holding: that b/c the parties gave the crt no guidance on the term for which the price was to
apply, the crt had no basis on which to calculate remedy for breachno K beyond the 4
mos, despite the 16k total quantity bargained for.
The crt might have provided for a term on Sun’s option—particularly given the
quantity total in agreement—as P contended
• BUT the crt held that there was no agreement to grant such an option
The crt accepts that P might have prevailed had it provided evidence that the
Canadian index price was fixed for a year at a time (rendering irrelevant the interval
for the option!)
o Dissent: the parties expressed a clear intent to be bound, the crt should have found a way to
fill the gap on the term of P’s option—a year, mo-to-mo, or a match to the term of the
Canadian index
The “rule of reason” permits the crt to enforce a K here.
o Can you define for P the terms of an option that might have persuaded the crt to rule in
its favor?
BA—P might have claimed an option to buy paper at the Canadian index price at
successive terms set by D
• In Texaco v. Pennzoil P arg. that the agreement was lacking as far as essential terms
o The crt held that a jury was free to decide the gaps to be filled
o Can Texaco and Sun be reconciled?
Arguably, industry stds can be used to determine certain terms (e.g. determining
payment process, or penalties, etc), but not quantity (of shares) as applied to a stated
price
• There is a reference point thru industry standards
Illusory Promises
• Sometimes agreements are attacked as illusory or as lacking mutuality, or as too indefinite to
enforce.
29
Barry Adler Contracts Fall 2010
o A requirements or output K represents such an agreement, which can be recharacterized as
one with a gap—regarding one party’s obligation—that crts can fill if they choose (and freq.
do), invoking a mandatory duty of good faith or a statutory requirement
o New York Central Iron Works v. US Radiator Co. (429) [US Radiator (D) agreed to provide
(at a specified price) NY Central Iron Works (P) with its “entire radiator needs for the yr” • P
agreed to purchase exclusively from D • D refused to fill excess demand]
D’s arg: an implicit term of the agreement ltd the quantity “to an amt such as had
been called for in previous yrs of similar dealings b/t the parties”
Holding: The crt denied this arg b/c P’s needs could be “indefinitely enlarged” when
mkt conditions allowed it to undercut competitors
• It did not mean to imply that P had the right under the K to order goods at any
amt.
o Both parties are bound to carry the K out in good faith
i.e. could not use K to speculate
• A req. K w/ a speculator is one sided in a way that such
a K is not with an inherently constrained operating
business
• A speculator’s req. obligation is truly illusory, lacking
in mutuality, impermissibly indefinite, etc.
Would P—not a speculator—have prevailed under UCC §2-306?
• Even if P’s demand were in “good faith” it likely would be disqualified as a
“quantity unreasonably disproportionate to any stated estimate or in the
absence of such estimate to any normal or otherwise comparable prior…
requirements”
o There would be a K, but the quantity would be ltd
• The UCC drafters may have provided the best default rule for an output or
req. K, but parties might prefer to bet on mkts and inherent constraints rather
than a later determination of what is “in good faith” or “unreasonably
disproportionate”
o UCC §2-306 (Comment 2): “…good faith variations from prior req.
are permitted even when the variation may be such as to result in
discontinuance. A shutdown by a requirement buyer for lack of orders
might be permissible when a shutdown merely to curtail losses would
not.”
Imagine that you are req. buyer w/ competitors who buy
supplies at costs below yours
If you shut down b/c you have no demand for your product, is
this b/c you “lack orders” at a price that allows you to
cover your costs or b/c you choose a price to “curtail losses”
(max π in the circumstances)?
• Hard to say.
o Wood v. Lucy (434) [**Cardozo** P given exclusive agency on placement of D’s design •
when P learns that D was placing products outside of their agmt, sues for performance]
Holding: P’s promise to pay Lucy ½ π resulting from sale, and to render accounts
monthly, was a promise you use reasonable efforts to bring π and revenue into
existence
• “Best efforts” default rule under UCC §2-306(2)
• This imputed obligation of reasonable efforts saves K from lack of mutuality,
etc, and D is bound
o This is arguably the case b/c the obligation is only to expend
30
Barry Adler Contracts Fall 2010
reasonable efforts
However, maybe not, as the parties may have wanted to rely on
P’s incentives rather than on an enforceable obligation
EXTRINSIC EVIDENCE
Extrinsic evidence=reference to circumstances beyond the “four corners” of an agreement
TEST-When to admit EE?
• 1st question: Is the agreement an “integrated agreement”? [R.2d §209 (1): writing constituting a
final expression of one or more terms of an agreement]
o If yes, is it a “completely” or “partially” integrated agreement?
R.2d §210 (1) a completely integrated agreement is one adopted by parties “as a
complete and exclusive statement of the terms of the agreement; (2) a partially
integrated agreement is one “other than a completely integrated agreement”
UCC §2-202—uses “final expression of agreement” instead of “integrated
agreement” and “complete and exclusive statement of the terms of the agreement”
instead of “completely integrated agreement”
How to determine if “completely integrated”?
• Merger clause—bars use of EE by explicitly stating that agreement is final &
conclusive expression of all agreements b/t the parties and discharges all
others. If no merger clause, courts will sometimes hear EE to determine
whether agreement was final & conclusive.
• R.2d §214: “agreements and negotiations prior to or contemporaneous with
the adoption of the writing are admissible in evidence to establish (a) that a
writing is not an integrated agreement”, or (b) “that the integrated agreement,
if any, is completely or partially integrated”IMPLICATION of §216
o R.2d §216(2): An agreement is not completely integrated if the
writing omits a consistent additional agreed term which is (a) agreed
to for separate consideration, (b) such a term as in the circumstances
might naturally be omitted from the writing
Implication: an agreement is completely integrated WRT an
additional outside term if that term would not under the
circumstances naturally be omitted from the writing
If agreement is completely/partially integrated?
• Parol evidence rule (R.2d §213/UCC §2-202): a writing that is a final
expression of an agreement discharges any prior (or contemporaneous oral)
agreements that conflicts w/ the writing or that adds a term within the scope
of a comprehensive portion of the writing
o Underlying principle (∏): a final writing is the best evidence of an
agreement’s terms
31
Barry Adler Contracts Fall 2010
Where a writing is indisputably final, there is no reason for a
crt even to admit evidence of a prior conflicting agreement
o If no, you can admit the EE for consideration
• Thompson v. Libbey (488) [P sold logs to D • terms memorialized in writing • D later claims that the
two had agreed orally for warranty of the quality of the logs • D now claims breach of warranty and
that he is not required to pay the balance.]
o Holding: EE is not allowed to determine if an oral warranty was reached.
To admit evidence on a purported oral warranty as proof that a written sales K was
not intended to be comprehensive would be to work in a circle and permit the very
evil the rule was designed to prevent.
• Brown v. Oliver (489) [Replevin for hotel furniture • P purchased land from D on which stood a
hotel • dispute arose as to whether the land sale included the hotel furniture.]
o General Test for whether a writing should exclude a prior or contemporaneous oral
agreement is whether such agreement, if actual, would naturally have been included in the
writing. [see R.2d §216(2)(b)]
∏: to conserve resources and promote certainty, a claim likely enough to be a lie is
irrefutably presumed to be a lie.
R.2d §216(2): An agreement is not completely integrated if the writing omits a
consistent additional agreed term which is (a) agreed to for separate consideration,
(b) such a term as in the circumstances might naturally be omitted from the writing
• Sale of furniture presumably would have been mentioned, especially if
included w/in price set out in the agreement [§216(2)(a)]
o BUT there is also the fact that the seller seemed to wait a long time to
claim the furniture
o Applying the PER (or any restriction on EE) can have its costs as well
as benefits
o Holding: It was unclear from the agreement whether it was meant to cover one subject or the
entire range of their agreements. EE was properly allowed (which jury interpreted in favor of
P). The dispute over the furniture did not contradict anything in the writing; the writing was
therefore only a partial integration, complete with regard to the land only.
Court takes opposite approach than Thompson. Quoting Wigmore, a court can hear
evidence, then ignore it if the judge concludes that on the balance of the evidence the
writing was intended to be comprehensive w/r/t subject matter of such additional
terms.
• Nothing in the PER excludes EE in aid of interpretation of a writing
o R.2d §214(c) “agreements and negotiations prior to or contemporaneous with the adoption of
the writing are admissible in evidence to establish the meaning of the writing, whether
integrated or not”
o Yet crts differ on the use of EE even where permitted by rule
o Pacific Gas & Electric v. G.W. Thomas (494) [**Traynor**D agreed in writing to remove
& replace cover of P’s turbine • P attempts to recover for damage caused by falling cover
based on “indemnity clause” in agreement]
D’s arg: the provision applied only to third-party injuries not P’s own property
Holding: EE allowed. Rejects “four corners” approach—no matter how plain words
look, must look examine context
• Test: In order to determine whether a writing is “reasonably susceptible” to
alternative meanings, court must consider evidence including “testimony as
to the circumstances surrounding the making of the agreement, including the
object, nature, and subject matter of the writing.” Then, if, writing deemed
susceptible, EE as to meaning is admissible.
32
Barry Adler Contracts Fall 2010
o Trident Center v. CT General Life (497) [**Kozinsky ** P borrowed $56mm from D in a
highly complex loan agmt • agmt provides that P cannot repay loan for 12 yrs • when interest
rates plummet, T wants out of the agmt • attempts to interpret default clause option for
prepayment as permitting prepayment]
Holding: crt prefered not to allow the evidence given the plain and apparent meaning
of the clauses, but, citing Pacific Gas, words have no meaning in CA and thus EE
must be allowed (stare decisis).
o Traynor (Pacific Gas) v. Kozinsky (Trident Center)
It seems that Treynor would have invited evidence in Trident Center, but likely would
have dismissed the case absent proffer of evidence that something truly extraordinary
occurred
An Kozinski likely would have found the indemnification clause in Pacific Gas
ambiguous, justify EE
There are definitely ∆ in degree b/t Traynor and Kozinsky
• Who’s right as a matter of ∏?
o Traynor’s approach may be more likely to give the parties the K for
which they actually bargained—at least if crts are willing to discard
ambiguous/suspect EE and revert to the writing—but at the cost of
litigation expense and uncertainty that Kozinski’s approach would
avoid.
o Illustration
Imagine that in Trident Center the loan agreement recited
CT General’s right to collect 10% prepayment fee if it
accelerated the loan on P’s default, but was silent on whether P
had a prepayment option.
Merger clause
• Would P be permitted to prove this option via EE?
o In this case, even if loan docs had merger
clause, Traynor would presumably permit P to
present evidence supporting an “interpretation”
of the prepayment fee as one that includes an
option for P to prepay
o Kozinksi would likely see the matter differently
—would he see it as an omitted prior agreement
that should have been included, and thus
blocked by PER??
Given the flexibility of the PER, or more generally the tolerance for EE among some
judges, there may be less ∆ b/t the UCC, which adopts the PER and CISG, which
does not, than Barnhizer suggests
• ∆ based on judicial approaches rather the BLL stated.
33
Barry Adler Contracts Fall 2010
Breach
34
Barry Adler Contracts Fall 2010
o Case 4: P = $5, V = $10, C = $15
Because C > V, breach is efficient – society would gain $5
Abel earns P – C = - $10 if she performs, that is she loses $10 from performance
Abel pays V – P = $5 if she breaches
Abel breaches, as efficiency requires
o Case 5: V = $5, P = $10, C = $15
Because C > V, breach is efficient – society would gain $10
Abel earns P – C = - $5 if she performs, that is she loses $5 from performance
Because V – P = - $5, Abel pays nothing if she breaches
Abel breaches, as efficiency requires
o Case 6: V = $5, C = $10, P = $15
Because C > V, breach is efficient – society would gain $5
Abel earns P – C = $5 if she performs
Because V – P = - $10, Abel pays nothing if she breaches
Abel would perform, since she gains $5 from performance. This would seem to be a
breakdown of efficient breach theory, but the efficient outcome will still be achieved
because Baker would breach
• The reason Case 6 doesn’t come out right is the prohibition on negative
damages
• In real life, don’t always know V. In other words, contracts operate under imperfect information.
• To approximate, often fill in cost of substitute performance for V
PHILOSOPHY OF PROMISE
• Charles Fried: a promisor is morally bound to perform because by promising she has intentionally
invoked a social convention with a purpose to induce others to expect performance.
o Breach erodes the institution of promising.
o Liquidated damages clauses are inconsistent with this value
• Holmes: a promisor commits either to perform or to pay damages for failure, nothing else
35
Barry Adler Contracts Fall 2010
• R2nd §238: Treats obligations to perform simultaneously as conditions for one another.
• R.2d §241: rough guidelines on materiality including consideration of “the extent to which the
injured party will be deprived [by the failure of performance] of the benefit which he reasonably
expected” and “the extent to which the injured party can be adequately compensated for the part of
the benefit of which he will be deprived.
• Breach and Constructive Condition (and Damages) Hypo:
o A has agreed to paint B’s house in exchange for $10k
B has agreed to pay, only after A has completed the job
o A paints B’s house, but uses a lower quality pain than specified in the K
o If A’s failure to comply is a “material breach,” B is not obligated to pay for the work under
the K unless A cures
If A delays in cure—esp if time is of the essence—it may discharge B’s duty to
perform under the K
B would have a claim for damages for total breach (see R.2d §§242, 243)
• Assume that at all relevant times, the contractually specified paint job has a
mkt value of $8k, while the job as A performed has a mkt value of $7k.
• Also, assume that A and B agree to these facts, and B doesn’t claim any
idiosyncratic value to the work.
o What result if A is deemed to be in an uncured material breach that=a total breach?
B owes A nothing on the K (b/c B hasn’t paid A yet)
A owes B nothing on the K b/c B has not been injured by the breach
B owes A $7k in restitution
o What result if A substantially performed (no material breach), but do not cure the breach?
B still owes $10k on the K, but B owes $1k (the ∆ b/t the value of the work promised
and the value of the work delivered [R.2d §348(2)].
B owes A net $9k
• A crt arguably should not lightly determine that a breach is material unless the promisee is at risk of
losing the benefit of his bargain.
• A promisee w/in reason to believe that the promisor will commit a total breach of the K can
demand adequate assurance and treat the promisor as having repudiated the K if such assurance is
not forthcoming w/in a reasonable time (R.2d §§ 251, 250)
o UCC §§2-609—2-611: covers the right to adequate assurance of performance and
anticipatory repudiation
• Jacob & Youngs v. Kent (883)[P refused to make the final payment on a construction contract
because Reading pipe was not used throughout the house as contracted for • D refused to rebuild and
sued for the rest of the amount owed]
o Holding: Court holds that breach was “trivial and innocent” so D substantially performed
so P is obligated to pay under the contract.
Also, since breach was not material, P should recover damages which were the
difference between the market and contract price but, since the pipes were the same
price- damages are negligible.
Court holds that D’s breach was not willful, but dissent says that their gross
negligence was equivalent to willfulness and one might say that their refusal to
replace the pipe was willful.
• Groves v. John Wunder Co. (929) [Groves sells a plant and leases land to John Wunder who, in
return, agrees to pay $105,000 for the plant and upon removal of gravel, return the land to “uniform
grade.” Wunder breaches and Groves sues • At trial Court, he gets $15,000 (more than market value
of land) but appeals for cost of completion damages— over $60,000.]
36
Barry Adler Contracts Fall 2010
o Holding: Court holds that because breach was willful and in bad faith, groves is entitled to
higher cost of completion damages.
Distinguishes cases like Jacob and R.2d §348 and says that lower market-based
damages would be appropriate only if they reflected economic waste
Court reasons that economic waste occurs when one tears down a good building but
not when one restores land to original state, but this doesn’t seem to be true: why
spend 15k to increase land by 10k
Dissent believes that market-based measure for damages would give Groves benefit
of his bargain especially since the property was not unique or personal and he was
trying to get it in shape for sale.
• Peevyhouse v. Garland Coal Mining Co. (934) [Similar to Groves. Peevyhouses leased farm to
Garland who agreed to pay for the right to extract coal and would restore the land. Garland decides
not to restore land and Peevyhouses sue for cost of completion damages of $25,000. (Market-based
damages would have been $300)]
o Holding: Opposite of Groves. Court holds that it is highly unlikely that the ordinary property
owner would pay the $29k for repairs to increase value of land by only $300.
Because the Peevyhouses likely attached no idiosyncratic value to the restoration,
market-based damages of $300 are awarded.
o Dissent: Unless circumstances have changed since the time of the contract or it has been
revealed that there was a mistake in estimation, it is reasonable to assume that the parties
incorporated the cost of completion into the contract price.
So if cost of completion is greater than market value, the promisee would only pay it
if there were idiosyncratic value.
• So, one way to find appropriate measure of damages as 1) an interpretation of the parties’ implicit
bargain and as 2) an accurate measure of true expectation damages:
o Cost of completion damages: if no changed circumstances since time of contract, and no
mistake in estimation, cost of completion is likely incorporated into the contract price,
reflecting idiosyncratic value.
o Market-based damages: if changed circumstances and/or mistake is revealed, more likely to
fulfill the parties’ true bargain
• Don’t want to always award cost of completion because, if there is no idiosyncratic value, this
would give promisee’s a windfall or promisor’s a penalty inefficient investment
37
Barry Adler Contracts Fall 2010
38
Barry Adler Contracts Fall 2010
was but once seller found out, she wanted to buy it back for $1 + interest, but they refused and she
sued]
o Holding: Court held that there was no fraud, just mutual mistake. Conscious gamble (both
parties) implies no mistake. Original contract enforced.
Court assumed that the seller had better access to information about the stone
(although hard to believe since buyer was a jeweler).
• Laidlaw v. Organ [Organ had been negotiating with Laidlaw to buy his tobacco, when Organ
learned of the treaty of Ghent, which ended the War of 1812 and opened the British Market to
American Tobacco. He knew that this would increase the market price so he tried to make a deal
with Laidlaw before he found out. Laidlaw’s agent specifically asks if there is any news that will
raise the price and Organ is silent. Facts are revealed and Laidlaw seeks to rescind contract.]
o Holding: Court holds that they are bound to the original contract. Organ was not required to
communicate his extra knowledge and since he was not an agent of Laidlaw’s, his silence
(even if strategic) does not necessarily amount to fraud. Organ was an arms-length transactor.
See R2nd §161(D).
• Intervening impracticability (or impossibility): Issue that arises where a subsequent event makes
performance difficult (or impossible).
o Usually when something is more expensive, or harder to execute
• Hurricane Concert Hypo I
o A agrees to build a band shelter for B, that B will use for an upcoming concert
o The K price=$10k
o Prior to concert, a hurricane blows through, making it more expensive for A to construct
the shelter as promised
o A seeks to avoid the K based on “supervening impracticability”
o The storm is not A’s fault, but was the non-occurrence of its effect was a basic assumption.
o We can look to concept of least-cost avoider
Because A is in the better position to avoid loss from a storm, he may be the least-
cost avoider
If A is the LCA, then it is less likely that the implicit bargain includes, or should
include an escuse for the storm (whether or not A’s failure to prevent the cost-
increase counts as “fault”)
• Frustration of purpose: Issue that arises where a subsequent event makes performance less
valuable.
o Not necessarily harder, just pointless to performer.
• Hurricane Concert Hypo II
o Same facts and A has built shelter
o B seeks to avoid the K on the grounds that the storm has destroyed the instruments of the
musicians
Making it difficult to put on the concert and make $
o Who is the LCA?
LCA would be lest likely to be able to avoid the K.
• Paradine v. Jane (England) [Landlord sues for 3 years rent. Defendant tried to be excused because
he had been ousted from the possession of the premises. (Wasn’t there to enjoy land) Frustration
Case]
o Holding: Court holds that they are bound to the original contract. Just because lessee was
ousted doesn’t mean that the landlord should have to bear the entire risk of the loss. It
was not impossible for him to pay, just frustrating.
39
Barry Adler Contracts Fall 2010
• Taylor v. Caldwell (England) [Owners of music hall (D) agreed to lease the hall to lessees (P) for a
series of concerts, but the hall burned down. The lessees sued to recover their expenditures for
advertising and other preparations for the concert on a breach of contract theory. Impracticability
]
o Holding: Court holds that both sides are excused from the contract
This holding might not be right or wrong, but it could also be evaluated under the
least- cost avoider approach.
• Under least-cost avoider, lessor would be liable because he was in best
position to avoid destruction-by-fire of the music hall.
• Krell v. Henry [Henry (D) failed to pay the balance of the money owed to Krell (P) pursuant to an
agreement to rent his flat in order to view the coronation of Edward VII, due to the cancellation of
the ceremony. Krell is suing for balance. Frustration Case]
Holding: Court held that both sides were excused from the contract.
40
Barry Adler Contracts Fall 2010
Damages
Remedies are at the heart of what K law is
Damage calculation
• Damage Calculation: House Painting Hypo (Common law)
1. Baker agrees to paint Abel’s house for $100.
2. Abel gave him a $10 deposit and spent $5 prepping the house.
3. When Baker breaches, Abel finds another painter who charges him $120.
o Expectation calculation: $35
Formula: WEALTH W/ PERFORMED PROMISE – WEALTH W/ BREACHED
PROMISE
• Wealth w/ performed promise:
o Painted house MINUS $100 contract price MINUS $5 cleaning
expense
• Wealth w/ breached promise
o Painted house (cover) MINUS $120 cover price MINUS $10 cleaning
expense (inc. $5 sunk cost) MINUS $10 deposit (sunk deposit)
• Expectation damages: -$105 MINUS -$140 = $35
R.2d §347: includes the above calc., but “wealth w/ breached promise” includes (+)
any loss or cost avoided by breech
• Ex: in the above hypo, if Abel would have avoided $10 in loss with the
breach, that would offset the “Wealth w/ Breached Promise” by $10 (i.e. it
would have been -$130 instead)
o Reliance interest: $5
$5 spent on prepping house before breach
• But the $10 deposit might also be considered reliance
o Restitution: $10
The $10 spent as deposit
• Would likely be returned even if the contract was voided, such as if Baker
lacked capacity to form K.
41
Barry Adler Contracts Fall 2010
• Damage Calculation: Bicycle Hypo (UCC)
1. Wholesaler agrees to sell 250 bicycle wheels to Retailer for $100 per wheel.
2. Just before the delivery date under the contract, Wholesaler repudiates.
3. As a result, Retailer cancels a custom bike sale it had planned, rendering worthless $10 of
promotional materials.
4. Retailer then buys from alt source @ $110 per wheel
• UCC §2-712 –“Cover” [Retailer can claim damages $2,500 ($10 per wheel)]
1. Buyer may make good faith cover for loss from breach (by seller)—see Mitigation
2. Buyer may recover the ∆ b/t cost to cover and K price PLUS incidental/consequential
exps (see §2-715) MINUS expenses saved due to breach
3. Failure to cover does not bar buyer from other remedies
• UCC §2-715-Provides for incidental/consequential (and that the seller had reason to know) damages
[Retailer can claim $10 in promotions as consequential dam.]
5. What if Retailer declines to purchase substitute wheels, but nevertheless sues for breach?
• UCC §2-713-the measure of damages in this case is the ∆ b/t the mkt price @ the time of breach
PLUS incidentals (UCC §2-715) MINUS savings due to breach
6. What if the facts are the same, except that Wholesaler delivers 200/250 wheels before
repudiation, and assume that Wholesaler sues Retailer for payment on the wheels delivered?
• UCC §2-717- allows deduction of damages from price still due (by withholding payment) under K
on installment sales w/ partial breach]
• Tongish v. Thomas (86) [Tongish agrees to sell seeds to Co-op for $10 per hwt • Co-op agrees to
sell seeds to Bambino for $10.55 per hwt • Tongish repudiates w/ Co-op and sells seeds to Thomas
for $20 per hwt.]
o Holding:
Under UCC §1-106: remedies to be liberally administered so that aggrieved
party can be made whole as if promised performed
• The trial court uses this methodawarded lost profits of $0.55 per hwt
§1-106 vs. UCC §2-713
• Crt holds that §2-713 is the proper method to use
o Award ∆ b/t mkt price and K price= $10 per hwt
• “the measure of damages for non-delivery or repudiation by the seller is the
difference between the market price at the time when the buyer learned of the
breach and the contract price together with any incidental and consequential
damages… but less expenses saved in consequence of the seller’s breach.”
When SPECIFIC rule (§2-713) vs. GENERAL rule (§1-106)specific wins!
Rational #1: Even though doesn’t reflect actual loss, it discourages breach of
Ks
• Discouraging breach may not be desirable (see Efficient Breach
Hypothesis)
Rational #2: Buyer should get benefit of potential bargain. (i.e. Tongish could
have resold for mkt price, but chose not to)
How can we presume that Bambino had no K right to sue Co-op? (study
guide)—no consequential damages awarded in instant case??
If Tongish won, what would happen to similar relationships in the future?---
increased price for those Ks ??
Cf Allied Canners v. Victor-seller unable to deliver on raisins to middleman
b/c of shortage
• CA crt held that if seller knew the buyer had a resale K for the goods,
and seller didn’t breach in bad faith, then buyer ltd to actual loss under
42
Barry Adler Contracts Fall 2010
§1-106.
LIMITATIONS ON DAMAGES
43
Barry Adler Contracts Fall 2010
o Instead, under Limited Liability Default rule (i.e. Hadley rule)
Pooling equilibrium—letter carrier’s charge $10 (based on most common package)
Separating equilibrium--puts responsibility of declaration of value on the BB shippers
to differentiate themselves
• More efficient because fewer actual negotiations take place, and eliminates
free-riding shippers of BB
• Hadley takeaway: If there are special circumstancesnegotiate; if not,
leave the default rule
• Hector Martinez v. Southern Pacific Transportation (104) [P’ machinery was delayed in transit, he
sued D, transporter, for delay damages (i.e. the one-month rental value of the machine) • D argued
that lost rental value (i.e. that it would be rented vs. just sold) was unforeseeablenot recoverable
under the Hadley rule]
o Holding: the Hadley rule allowed for recovery of foreseeable damages – not that the
damages be the most foreseeable.
Rental rate is an appropriate remedy
BA: the court misses the point of why rental rate is an appropriate remedy-
• Whether he was going to use, rent, or sell the dragline: rental rate is roughly
the cost of cover, which applies to virtually any use.
• Does not take into account depreciation (in the case of a physical asset—
maybe not intellectual property)
• Morrow v. First National Bank of Hot Spring (109) [P, coin collector, robbed. • Sues D, bank, for
not informing him of the availability of a safety deposit box, as it had agreed to do • D knew abt
valuable coins • P claims theft was foreseeable]
o Holding: Tacit Agreement Test: foreseeable damages not recoverable unless promisor at
least tacitly agrees to extended liability (i.e. no “insurance” of 32k for box that cost a few
hundreds)
1. Foreseeable?—P must prove D’s knowledge that a breach of K will entail
special damages to P, and
2. Must appear that D at least tacitly agreed to assume responsibility.
• D didn’t agree to effectively issue a burglary insurance policy – the promise to
notify him of the availability of the boxes ≠ tacit agreement to be liable for
as much as $32k
o UCC rejects tacit agreement doctrine (§2-715, Com. 2)
o Tacit agreement jx vs. Express agreement jx
Every jx, employs Hadley forseeability test
• Tacit agreement jx (minority rule)—“has promisior tacitly agreed to liability
• Express agreement jx (majority rule BA likes)—“what did the parties
actually agree to in the case of breach
Would a crt that rejects tacit agreement test award damages?
• Prob. Not—amt of insurance policy would have been way higher than just
mkt price of box. –wouldn’t it not award b/c the agreement/ins policy wasn’t
in writing? Period?
44
Barry Adler Contracts Fall 2010
Uncertainty of Harm
Speculative Damages
• R.2d §352: Damages are not recoverable for loss beyond amt that can be est. w/ reasonable
certainty.
o P has right to damages for breach [but can be left with only nominal damages if uncertain-
R.2d §346(2)]
• R.2d §349: As an alt. to exp. damages, injured party has a right to reliance damages LESS any loss
that the breaching party can prove w/ reasonable certainty.
o Would supplement restitution
45
Barry Adler Contracts Fall 2010
Wasted Expenditures
• Anglia Television Ltd. v. Reed (Mr. Brady) (Eng.--125) [D agreed to perform in movie produced by
P • D repudiates K • production is cancelled and P sues D]
o Holding: Crt awards claim for pre- and post-K exps. (Contra Dempsey)
Crt believed that Reed must have known that exps. for movie based on him would be
wasted
BA reinterpretation: Crt could look at pre-K exps. as E(π) =at least $0 (so, E(π)=0)
• No evidence of what π would beassumes $0 π (i.e. broken even) [Cf.
Mistletoe]
o NOT RELIANCE DAMAGEEXPECTATION DAMAGE
• Mistletoe Express v. Locke (128) [D K’d w/ Locke (P) to perform pickup/delivery services • D
terminates K • P sues for recovery • P incurred exp. in prep.]
o Holding: only unrecoverable reliance exp. may be recovered (i.e. those that cannot be resold,
like cars, machines, etc.)
BA reinterpretation: look at as EXPECTATION remedy w/ E(π)=0
• To break even, awarded pre-K exp. (Cf. Anglia)
• D couldn’t prove lost π to get deduction via R.2d §349
Also works as a reliance case, b/c there was a K when expenditures made.
46
Barry Adler Contracts Fall 2010
• Rockingham County v. Luten Bridge (1929) [The county, D, K’d w/ P for construction of a bridge •
After political struggle, muni. board repudiated project in the middle of construction • P cont’d to
build until complete]
o Holding: After repudiation of performance by one party to a K, the other party can’t
continue to perform and the collect damages based on full performance
Stopping work in this case is not burdensome (via R.2d §350)
• Contra Parker
P could have claimed the work done up until time of breach in restitution
o Luten Bridge Hypo
Abel agrees to K w/ Baker to build wall for $200
Wall to be built in 2 sections, ea. $75
Baker builds first section ($75)Abel repudiates
Baker continues to build entire wall and sues Abel for $200
Crt: Baker gets the $75 from 1st section and $50 π ($200-150)=$125
Mitigation and Efficient Breach
• Mitigation & Efficient Breach Hypo
o Assume that:
K price=$100
Promisor (painter) costs=$150
Competition costs=$120
o It would be efficient for orig. promisor to breach (where there is someone who could do the
job for less)
If the promisor didn’t breach, there would be a $30 loss to society (Promisor, could
have saved 50 and lost only 20)
• This is especially so if the competition’s “costs” include “economic rent” and
the true costs are even less.
o Mitigation obligation ensures this efficient result
If promisor breaches, the promisee would have a mitigation obligation to cover
(with the painter w/ costs =$120)
• Expectation damages w/mitigation=$20
Promisor would SAVE $50, and only have to PAY $20incentives against
inefficient performance
o W/o mitigation obligation, may be able to negotiate on a release price somewhere b/t $20 and
$50, BUT
Transaction costs
Promisee may be overcompensated
Mitigation obligation allows unilateral termination ending in efficient non-
performance
47
Barry Adler Contracts Fall 2010
48
Barry Adler Contracts Fall 2010
$1.499MM (where D’s π would be barley positive, but positive)
Mitigation and Buyer Breach/Seller’s Remedy
• Goods w/o mkt price @ resale:
o UCC §2-706: in case of buyer breach, allows a seller to resale goods in good faith to
another, and can recover the ∆ b/t the resale price and the K price PLUS incidental damages
(§2-710) MINUS cost savings due to breach
Incidental damages (§2-710)=any commercially reasonable charges…
• Omission of “consequential damages”**is this that asymmetry?**
o Rare Coin Shipper Hypo (UCC §§ 2-706, 2-710)
Jan. 1: buyer agrees to buy rare coin for $10k
• Seller obliged to ship coins in 4 weeks
• Seller pays $100 shipping deposit on D1
Jan 8: buyer repudiates; seller begins search for replacement buyer
Jan 22 (2 wks later): Seller finds alt buyer willing to pay $9k
• Alt buyer lives closeno shipping costs
• Retrieves from safety deposit box (which cost $75/wk)
o Seller saves $75 from that last week
Hypo is silent on who has to pay shipment costs
• Buyer to pay:
o Damages= [$10k-$9k (from alt buyer)]+$100 (deposit)-$75 (1-wk
savings from box)
$1025
• Seller to pay:
o Assume total shipping costs = $150 (including $100 deposit)
o Damages=[$10k-9k]-$75k (safety dep. box)-$50 (shipping savings)
$875
o **key question: was the seller going to pay the shipping costs, if there
had been no breach? If yes, no refund**
• Goods w/ mkt price @ resale:
o UCC 2-708(1): provides that “the measure of damages for…repudiation by the buyer is the
∆ b/t the mkt price at the time and place of tender and the unpaid K price PLUS incidental
damages (§2-710) MINUS cost savings due to breach
(Same as common law expectations damages Seller gets benefit of bargain) SEE
SLIDE 194
Mkt price is measured at time of performance rather than time of repudiation
• Inconsistent with the seller breach/buyer remedy (§2-713), which measures
mkt price at time of repudiation
o BA: @ time of performance approach is more sensible
o Mkt price at repudiation leads to systematic overcompensation of
seller when buyer breaches
Math:
• K price=$75
• T0 (repudiation)-§2-713 mkt price=$100
• T1 (performance)-§2-708 E(mkt price)=$100 [.5(150)
+ .5 (50)]
• Damages w/ §2-713 (mkt price @ rep.)=$25
• Damages w/ §2-708 (mkt price @ perf)=$37.50
o .5(150-75) + .5(50-75) No negative
49
Barry Adler Contracts Fall 2010
damages!
Another example of UCC stepping on its own toes
o UCC 2-708(2): But if 2-708(1) is inadequate to put seller in as good a place as if
performance had been done, then measure of damages is lost π PLUS incidental damages
• Neri v. Retail Marine (154) [P (buyer) Ks w/ D (seller) for purchase of boat • P left unspecified
deposit with D • P became ill and repudiates K • D sold boat for K price to a 3rd party • P sues for
deposit]
• At first glance, it looks as if D must return all but $500 under UCC § 2-718(2)(b) (w/o
specified damage clause limits restitution of deposit to min{$500, 20% value of perf}), BUT
§2-718(3) permits greater refund if authorized by another provision§2-708(2) applies when
∆(mkt-K) “is inadequate to put the seller in as a good a position as perf. would have done”
• Holding: according to §2-708(2), the measure of damages is the expected π. Had P not
repudiated, D would have TWO π; therefore, D only owed P the ∆[deposit-lost π(s)]
o D is a “lost volume” seller [fungible goods lined up to go]
o No mitigation opportunity in this case (a substitute buyer is insufficient)
SPECIFIED DAMAGES
• “Specified damages” = “liquidated damages” = “stipulated damages”
• Inconsistent with Charles Fried’s notion that promises should be kept, and that the law should
encourage promise-keeping
• Purposes of Specified damages:
• Avoid uncertainty
• Avoid litigation exps
• Substitute for anticipated inadequate judicial award
• Provide incentive for economic efficiency
• Judicial economy and freedom to K (added by Wassenaar)
• ∏ against enforcement: specified damages may substantially exceed the injury and may justify an
inference of unfairness in bargaining or objectionable in terrorem agreement
• Tension b/t efficiency and potential penalty
• Specified damages that are ex post significantly higher than actual damagessubject to attack as
penalty
• LINE DRAWING PROBLEM: the distinction between allowable liquidated damages and an
unenforceable penalty
• Rule from Lake River v. Carborundum (173): liquidated damages “must be a reasonable estimate
at the time of contracting of the likely damages from breach, AND the need for estimation at that
time must be shown by reference to the likely difficult of measuring the actual damages from a
breach of contract after the breach occurs.”
• Ex-ante calculation and BOTH prongs must be satisfied
• If damages are easy to determine (at the time of K) OR the estimate (at the time of K) greatly
exceeds a reasonable upper estimate of what damages arelikely a penalty
• R.2d §356 (1) allows liquidated damages, but ONLY in an amt that is reasonable in the light of the
anticipated (ex-ante view like Lake River) OR actual loss (ex-post view retrospective) caused by the
breach AND the difficulties of proof of loss (also in Lake River)
• It seems that a stipulated amt that’s unreasonable wrt the anticipated loss may be
enforceable if reasonable wrt the actual loss (and vice versa).
• Comments suggest seem to suggest that the latitude of either prong diminishes the less well
satisfied is the other
o Both prongs must be satisfied, but b/c there is not bright line test for either, there is
50
Barry Adler Contracts Fall 2010
interaction (same with Lake River standard)
• Comments also suggest possible disqualification of liquidated damages on an ex-post view
alone
• What work is being done by test: to combat the likelihood of a penalty
• R.2d §355: punitive damages are not recoverable for a breach of K
o Extra high stipulated damages suggest penalty merely by amt.
o Easily provable damages—such as in a thick mkt—suggest a penalty rather than a
need to stipulate damages to avoid litigation expense
• UCC §2-718 (1): provides that “damages for breach by either party may be liquidated in the
agreement” b/t the parties, and §2-719(1)(a) provides that “the agreement may provide for remedies
that are in addition to or in substitution for” those otherwise provided under the UCC.
• With rare exceptions [like UCC §2-719(3), which restricts a seller’s right to ltd a consumer’s
personal injury claim], liquidated damages are not rejected on the grounds that they are
undercompensatory
51
Barry Adler Contracts Fall 2010
• Wassenaar v. Towne Hotel (165) [Hotel, D fired P prior to their employment K’s expiration date •
sued for damages under liquidated damages clause in K • P obtained alt. employment yet sued D for
stipulated amt]
• D’s arg: Full salary to a fired employee seems necessarily overcompensatory
o Damages are also easily calculable
• P’s arg: Intangible injury to personal assets like reputation means that full salary is not
necessarily overcompensatory
o Also, intangibles are hard to calculate (like good will)
• Holding: crt sides with P and rejects a reduction in stipulated damages for mitigation (i.e.
finding another job)
o Logically, stipulated damages preclude a mitigation obligation
• Remember the point abt the value of a certain remedy even where the remedy
would be easy to calc, but beware of crts that reject high damages measure
from hindsight alone.
o Wassenaar case is similar to Parker wrt guaranteed compensation clause (or would
have been had the Parker crt interpreted the clause the way Parker wanted it)
SPECIFIC PERFORMANCE
• Where a promisor would be simply required to perform (if it remained possible)
• R.2d § 357-provides for specific performance and for a negative injunction in order to avoid a
promisor’s “breach of duty”
o Negative injunctions can directly enforce a promise of forbearance or indirectly enforce
a positive obligation
o § 359 (1) specific performance or injunction will not be ordered if damages would be
adequate to protect the expectation interest of the injured party
• expectation remedy may be inadequate for multiple reasons:
• damages may be difficult to prove (including b/c there is no ready
substituteno mkt value for the contractual performance)
o Ks for the sale of unique objects or services (see
R.2d § 360)
• damages may be difficult to collect (maybe due to insolvency)
• Other reasons (beyond the inadequacy of money damages) to support specific
performance:
o It may be less likely that the cost of performance would exceed the benefit (i.e. efficient
breach may be unlikely)
o Cf. R.2d § 364 favoring specific enforcement absent “hardship”
• There is a presumption that real estate is unique, and thus, real estate Ks are
presumptively specifically enforceable
o See R.2d § 360 Comment e
o Do you argree that ALL land should be treated as unique for purposes of specific
performance
• UCC §2-716(1)—provides that specific performance “may be ordered where
goods are unique” (as well as in other “proper circumstances,” an implicit reference—at
least in part—to more general CL principles)
52
Barry Adler Contracts Fall 2010
• Loveless v. Diehl (198) [D’s leased a farm to the P’s w/ option to purchase at end of rental period for
$21k • P’s made improvements to farm • couldn’t but at end of term, but agreed to sell to third party
for $22k (even though the improvements increased the value more • D’s tried to repudiate and take
back land • P’s sued for specific performance]
o D’s arg:
• In old terms: there is equity in avoiding overcompensation
• In modern terms: because the P’s expectation interest can be easily measured (as
∆ b/t resale price and the option price)—there is no difficulty in proof and money
damages are thus adequate
o P’s arg:
• In old terms: Crts of equity grant specific performance as a matter of course
where no hardship is imposed
• In modern terms: (beyond the presumption re: RE Ks) true expectation is not the
K-resale ∆, which would be inadequate (esp. with the improvements)
• Recall Tonish—promisee should get full value of bargain (i.e. true
expectation damages)
o Holding: the crt sides with P’s dismissing the idea that resale price should determine
damages
• “P’s had a perfect right to resale the land if they wanted to. Whether they kept it,
sold it, or gave it away was of no concern to the sellers”
• Tongish analysis
• ∏: to refuse specific relief would est. an unsound precedent, diminishing the
transferability of property b/c future buyers will be reluctant to bind themselves to a
purchase K for fear that it’d be unenforceable
• **You could still argue that this land—in commercial use—should not be counted
as unique and that the real debate was over the amt of money damages, not specific
performance
• Cumbest v. Harris (203) [P sought an order specific performance to recover stereo equipment (w/
irreplaceable parts) that he tendered pursuant to an option K entered into w/ D]
• Holding: error in not finding the goods “unique” for purposes of specific performance
o LINE DRAWING PROBLEM: how many parts that are difficult/impossible to
replace, or what level of sentimental value sufficiently makes the good unique?
• Scholl v. Hartzell (206) versus Sedmak v. Charlie’s Chevrolet (208) [In Scholl, a 1962 Corvette was
not unique/special enough to justify specific performance, while in Sedmak a 1978 Corvette was
unique/ special enough]
o How can you reconcile these cases esp. when in Scholl there was a specific vehicle, while
in Sedmak it was one of 6,000?
• What was different abt the car in Scholl did not go to the essence of its value
(unlike the parts in Cumbest), while the “pace car” characterization of the car in Sedmak
did
• The mkt for “pace car” Corvettes is very thin, esp wrt a mkt for reg. used
Corvettes
o Principle: uniqueness, or other circumstances justifying specific performance, depend on
whether essentially similar goods are available for reasonably easy cover
• These factors also go to whether money damages would be easy to determine
adequately (thin vs. thick mkt wrt pricing)
• Uniqueness = a proxy for difficulty to cover
• Can’t be determined in a vacuum
53
Barry Adler Contracts Fall 2010
• Some personal services on one side of the uniqueness (remember: ease of cover!) spectrum—a
soprano who will sing at the opera—while others are at the other extreme—janitor
o Similar to goods, but there may be other considerations—the constitutional and public
policy considerations re: indentured servitude
• Mary Clark (212) [19th century Indiana • Mary Clark, blk woman, indentured herself as a house
maid for 20 yrs]
• Holding: this K was not specifically enforceable (and would not be despite any inadequacy
of the expectation remedy) b/c a promisee’s “continual right of command” over a promisor
would be degrading and vs. PP
o Today, indentured servitude violates the 13th Amendment; forced apprenticeships for
children are also unlawful
• Negative injunctions-Soprano opera singer hypo
• Agrees to perform for a NY opera company, then repudiates
o She will not be forced to perform, but in addition to paying expectations damagaes
may be prevented from performing for a competing NY (or NJ or CT) opera house at
the time she agreed to perform for the promisee
• She will not likely be enjoined from performing for a Russian company
even if she expressly agreed not to perform
• The key to enforcing a negative injunction where specific performance
would not be granted is that the effect is to prevent unquantifiable
injury to the promisee rather than compel performance
o See R.2d §367
• The Russia mkt is distinctly different than the NY mkt. A NJ or CT
mkt may have some overlap with the NY mkt, therefore we would
want to prevent the competition from benefiting. The goal is to
minimize the harm to the promisee. If the goal is to just strong-arm
promisee into performing (by cutting off access to all national mkts)
and not to minimize damage (there is no damage—presumably—from
the Russian mkt), the provision won’t be enforced
o Narrower covenants are more likely to be enforced:
Scope of activity (opera singing vs. all
work)
Geographical reach (NY vs. Russia)
Length of time (the contractual time pd
vs. forever)
o In the end, any enforcement of a promise, by damages or negative injunction, tends to
encourage performance, but in the absence of specific performance, perhaps
acceptably
RESTITUTION
• The restitution remedy can be best thought of as independent from a K remedy b/c it is not
necessary (or at least typical) to compensate a promisee for the promisor’s breach (i.e. you have
expectation and reliance damage)
o Crts, do, however sometimes invoke restitution in the context of K breach
R.2d § 373(1): provides that a victim of breach “is entitled to restitution for any
benefit that he has conferred on the other party” by way of performance
o BUT the avoidance of unjust enrichment, not compensation (i.e. benefit of the bargain), is
the goal
R.2d §371—measures the restitution interest by reference to the value of the
54
Barry Adler Contracts Fall 2010
benefit conferred (i.e. either the mkt value of the property transferred or services
performed, or the increase in the recipient’s wealth as a result of the benefit
conferred, the latter measure independent of the former only if there is no mkt
substitute for the property or services)
• Bush v. Canfield (250) [D agrees to deliver, and P purchase, a specified quant. of flour for $14k • P
pays $5k in advance (deposit) • at time of performance, D fails to deliver the flour, then worth $11k]
o P’s arg: sues on restitution after (implicit) election to “disaffirm” K
o D’s arg: the expectation remedy req. only a payment of $2k b/c that would yield P the
benefit of his bargain, a $3k loss ($14k-11k)
P’s counter-arg: NO NEGATIVE DAMAGES!!!
o Holding: promisor was unjustly enriched and should return the $5k to the promisee.
Promisor can not award negative damages.
Under some philosophical principles, the majority is correct b/c a breacher (promisor)
should not benefit from his breach
Efficient breach theory and the disallowance of negative damages
• Under Bush, the promisor will not breach and even though a fully informed
promisee will, there may be circumstances where the promisee does not know
to do so
o Bush No Negative Damages Illustration
@ T0 K price for Painter to paint Owner’s house=$100 (π=$0 for painter)
@ T1 Labor prices shoot down (to $60), so that Painter’s π=$40
• Painter also knows about 2nd potential paint job that only Painter can do.
• Job will pay $80 and it will cost Painter $60, π=$20
In the case of asymmetric information (only Painter knows)
• NO neg damages: Painter will not breach. He will not be able to collect the
$40 from the breach and would then only make a $20π from 2nd job.
$40π>$20πno breach
o He also does not have incentive to tell Owner abt the job, b/c she will
fire him, save $40, and pay $20 in expectation damages
o w/o that knowledge, Owner will assume there’s no mitigation
opportunity ≠ $60, and she’d have to pay the full $40π breach/no
breach, a wash.
• Neg. damages: Painter will be incentivized to breach. He could collect $40 in
negative damages from Owner and do 2nd job and collect $20 in π ($60π>$40π
from orig. job onlybreach)
o EFFICIENT RESULT: Two houses painted (inc. the one that only
Painter can do) are better for society than one
In the case of full (symmetrical) information
• No neg damages: Owner (only) will breach and pay the $20 in expectation
damages, and will save $40 from the breach
• Neg. damages: RACE TO BREACH by both Painter and Owner
o Also, an efficient result, BUT unlikely b/c information is not fully
symmetrical
**w/o Mitigation obligation/opportunity, the information symmetry becomes
moot, b/c Owner will not be able to save $40 and pay $20, she will be liable for
the entire $40π**
• This is NOT to say the negative damages should be allowed
o There are fairness objections
55
Barry Adler Contracts Fall 2010
Restitution for Breaching Promisor
• Can a breaching promisor collect in restitution?
o R.2d §374 (1)—permits a breaching promisor to collect restitution despite her breach (but
only “in excess of the loss that he has caused by his own breach”)
Goes to unjust enrichment and not benefit of bargain
o Britton v. Turner (256) [a laborer works under a 1-yr emp K for more than 9mos. • providing
labor worth $95, then quits w/o reason (breach) • laborer sues, not on the K, but in quantum
meruit (for restitution)]
P arg: To allow the employer to keep the $95 would allow emp. to retain more than
his expectation interest
• Cf. w/ Bush where the crt treats the breach party as a bad actor whom the law
need not rescue from the consequences of breach
• The employer (at least implicitly) accepted the benefits of performance as the
employee provided them, and thus should be bound to pay for them
o This distinguishes the case where a victim of breach might (w/in his
rights) reject and thus not benefit from part performance (e.g. on an
object to be created)
Holding: defines restitution as the default rule and that parties could expressly agree
to no-recovery-on-breach but should not presumed to have so agreed
• Although a crt may find that an agreement of forfeiture would be an
unenforceable penalty
o See Vines; R.2d § 374(2); UCC §§ 2-718; 2-711
• Restitution amt is to be offset by any “damage which the promisee has
sustained by the promisor’s nonfulfillment of the K
Britton illustration
• Laborer agrees to work for a year ($30/ quarter)
• Immediately after K is signed, the price of labor increases to $50/quarter
• After working—and without receiving payment for 3 quarters—laborer quits
w/o cause and seeks restitution
• What award if one looked at R.2d § 371 in isolation?
o The amt “it would have” cost Employer to obtain “what he received”
from “a person in claimant’s position,”
Mkt price of $50/quarter, or $150
The presence of a mkt price logically precludes an award for
increased property value ???
• What will be the award in fact?
o Begin w/ the K rate of $30/quarter$90
o MINUS the employer’s expectation damages from breach
The $20 ∆ b/t mkt rate of $50 and $30 for the 4th quarter.
• $90-20=$70
o §374(1) permits a promisor to collect restitution
despite her breach, but only “in excess of the
loss that he has caused by his own breach”
o $70 is also what the laborer would be awarded
were she permitted to sue for negative damages
on the K despite her breach (blocked by rule in
Bush)
Negative damages: (30x4)=120 (full K
56
Barry Adler Contracts Fall 2010
price for full yr)-50$70
• Vines v. Orchard Hills (260) [P k’d to purchase a condo • down payment was stipulated as
liquidated damages • P (moved to another state) reneged on the K • D kept down payment]
o Holding: the crt allows the buyer the chance to challenge the liquidated damages clause (as a
penalty) and would award restitution if challenge succeeded (i.e. the seller was unjustly
enriched by the deposit and clause is a penalty)
Consistent w/ R.2d § 374(2), which permits retention of a deposit (i.e. not award
restitution) if a liquidated damages clause is valid (same with UCC §2-718)
If actual damages are zero, this alone might justify return of the deposit, an
aggressive version of the penalty doctrine
Restitution & Quasi-K
• Cotnam v. Wisdom (265) [P (Dr.) operated on an unconscious patient, who died anyway • P sought
repayment for services • ex. of quasi-K]
o Again, restitution is sometimes awarded completely outside of a K
o Here: there is no K!!! A K involves (exchange of) promises. A quasi-k has no (exchange of)
promises
Quasi-K a/k/a “constructive K” or “implied-in-law K”
• An agreement that the parties would have reached had they the opportunity to
negotiate
o BUT not quite re: negotiating: the P’s wealth was not deemed a
relevant factor (i.e. would have an affect on the K price)
The law will estimate the value of services rendered w/o
reference to the patient
• The mkt value of services (of the effort) is the measure
of compensation (rather than benefit realizedb/c had
the patient lived he would not owe the Dr. his life)
• Fairness may require the beneficiary of another’s efforts in exigent
circumstances to compensate the benefactor for her effort.
o Benefit is measured ex ante (i.e. it doesn’t matter that patient died in
Cotnam)
• Economic justification for quasi-K is that efficiency may req. the beneficiary
of another’s efforts in exigent circumstances to compensate the benefactor for
services, or might not be provided at all in the future (If E(B)>C, will
perform, but w/o quasi-K, E(B) is dubious and therefore may not be >C)
• Application of quasi-K may be problematic
o e.g. in Cotnam, one might be unsure whether the average rate the P
charged should matter—as an indication of skill level and thus the
value of the services (surgeon v. resident)—or whether this should be
irrelevant to how society values the services
57
Barry Adler Contracts Fall 2010
o Cotnam Hypos
(1) Imagine a Dr that treats an unconscious patient not intending to charge a fee, but
later, after the patient recovers and is ungrateful, the Dr. sues for restitution. What
result?
• NO recovery, b/c the services were a gift the value of which it would not be
unjust to permit the patient to retain
o BUT, how can you prove this subjective intent is reality??
(2) Imagine a house painter who arrives at night and paints a house, then hands the
owners a bill in the morning. What result?
• NO recovery b/c there was an opportunity for negotiation, and thus no
moral/economic reason for the law to impose an obligation on the occupant
(3) A landscaper reinforces a retaining wall undermined by a sudden flood while the
landowner is out of the country. What result?
• LIKELY recovery if the landscaper had good reason to presume that the
landowner would have agreed to pay for the services were negotiation
possible
o A reasonable was to think of quasi-K is as inverted tort law
Tort law allows a victim to demand payment from a malefactor, while quasi-K
requires beneficiaries to pay a benefactor
58