Contracts Final Approach

I.

Consider what are the terms of the contract?

a. Parole Evidence Rule
i. When parties intend that a writing is the final expression of their bargain,
no prior or contemporaneous expressions (oral or written) are admissible
to vary the terms of the writing. No Parole Evidence if the contract is
fully integrated.
ii. Integration final and complete expression
1. If incomplete (partial integration), evidence admitted to
supplement
2. Merger clause (states agreement is complete on its face) is
evidence of full integration
iii. Evidence outside scope of the rule may be admitted
1. Evidence concerning validity (e.g. formation defects, conditions
precedent)
2. Evidence used to interpret (words used are uncertain or
ambiguous)
3. Evidence showing true consideration paid
4. Evidence in action for reformation
iv. Corresponding Restatement and UCC
1. RS 209-210, 212-218
2. UCC 2-202
v. Elements
1. Agreement must be collateral
2. Cannot contradict the contract
3. Must be one that parties would not ordinarily be expected to
embody in the writing
vi. Approach
1. Is the contract completely integrated? Y then no PE; NConsistent?
a. Four Corners Test what is written within 4 corners of the
page
b. Contextual Approach consider what the parties say and
the context in which the contract was developed
(relationship between parties, tendencies of those
relationships, etc.)
2. If not integrated, is the K consistent with what is recorded in
writing?
3. Is it within the scope of the original K?
vii. Cases
1. Mitchill v. Lath Four Corners approach
a. Facts: Mitchill contracted to buy the Laths property. They
discussed a provision where the Laths would remove an
icehouse across the street that Mitchill found unsightly, but
this stipulation was not put in the purchase contract. The
Laths did not remove the icehouse.

b. Holding: the requested change to the property would have

been so clearly connected to the sale that it was part of the
deal if true. Therefore, it should have been in the explicit
sellers duties listed in the sales contract. If it was so vital
to the purchase, it would have been in the writing. Parol
Evidence not permitted.
2. Masterson v. Sine partly about the familial relationship
a. Facts: Masterson deeded land to his sister, with an option
that he could buy back the land. He then went bankrupt,
his creditor tried to force Masterson to buy it back to sell it
off. Sister argued the grant was to keep land in family,
made by oral agreement.
b. Holding: Evidence of an oral agreement that would not
ordinarily be part of the deed should be admitted.
3. Alaska Northern v. Alyeska Inconsistent writing
a. Facts: Pl. wrote up a letter of intent to purchase industrial
parts from Def., left the price blank. Def. responded with a
similar blank-price letter of intent that required the owner
committee to make a final approval. The owner
committee rejected the proposal. Pl. argues that there was a
contract based on the matching letters of intent, and the
final approval was only regarding the price negotiations.
b. Holding: The letter was integrated, but only partially so.
Pl.s claim is inconsistent with language of letter. Parole
evidence excluded because it contradicts the language of
the integrated portion of the contract.
4. Suburban Leisure v. AMF Bowling K for parole evidence fell
outside the scope of the original K (Ks werent collateral)
a. Franchise: Suburban could use AMFs brand name to
market
b. E-Commerce: AMF equipment sold in Suburbans region
would be delivered by Suburban. Clauses in E-commerce
agreement - supersedes all prior agreements, & disputes
must be arbitrated in VA, using VA law
i. AMF violated the Oral Franchise agreement.
Suburban sued in Missouri, AMF argued that they
needed to use arbitration in VA.
c. Holding: Franchise K is independent to and collateral of
E-Commerce K. The arbitration terms in the E-Commerce
K do not apply to the Oral Franchise K. R.2d 213(2):
discharges prior agreements to the extent that they are
within its scope. Oral Franchise K was not within scope of
E-Commerce K.
b. Rules of contract interpretation courts use some general rules such as
contracts are construed as a whole, words are generally given their ordinary

meaning, written or typed terms prevail over printed, customer and usage in
business and locale is considered, court will try to find contract valid, and
ambiguities are construed against the contracts preparer
i. Pecking Order to Review Intent
1. Language of agreement words
a. Courts want to allow the intention of the parties as
expressed to stand
2. Express intent of parties what did they want
3. Negotiations leading to K that may express intent what were they
trying to get
4. Course of performance how did they perform
5. Course of dealing how did they perform in the past
6. Trade Usage how does the industry define terms of clauses of the
contract
ii. Ambiguity
1. Can be extrinsically interpreted if more than one meaning for a
particular word or phrase
2. The phrase or word must be interpreted reasonably (determined by
industry custom, prior cases, expert testimony
iii. Good Faith Covers performance and enforcement both RS and UCC
1. UCC means honesty in fact and observance of reasonable
commercial standards of fair dealing in the trade 2-103(b)
2. Restatement performances due at the same time unless noted
otherwise 234
3. Cannot prevent party from fulfilling the terms of the contract
iv. Conditions only enforceable if the circumstance arises
1. RS 224-228
2. UCC 2-306
3. Must perform in good faith
v. Cases
1. Pacific Gas v. GW Thomas Using extrinsic evidence to interpret
intention
a. Facts: PGE hired GW Thomas to replace a metal cover of a
steam turbine. Terms of the contract indemnified PGE
against all loss, damage, expense and liability During
performance, the cover fell and caused $25K in damage to
PGE equipment. GW Thomas argued that, as shown in
previous contracts with PGE, the indemnification term was
only meant to indemnify PGE against third parties.
b. Holding: Words are not statically defined, thus a contract
should not just be interpreted from its four corners
because different interpretations may exist. If the evidence
shows that the intentions of the parties was not the same as
the words of the K, the evidence is permissible to show the
interpretation of the parties motives, but not to alter the
terms of the K. Since the clause was reasonably susceptible
to a different meaning, the offered evidence is admissible to
prove that meaning.

2. Frigaliment Importing v. BNS International Trade Usage

a. Facts:Pries contracted for sale of small and large chickens.
The larger birds sent were older, (lower quality) chickens.
The purchaser argued that by contracting for chicken,
they meant broiler chicken. The seller claims that the term
chicken is broader in meaning, and should encompass all
kinds of chicken.
b. Holding: The term chicken refers to the broad meaning
of a classification of a bird, not the narrower meaning of a
young broiler chicken, versus a stewing fowl. Looked
at common usage of word chicken, trade usages, usages
in English & German (purchasers language), USDA
definition, price-per-pound (lower for heavier chicken).
3. Stolt-Nielsen v. Animal Feeds International Corp Arbitration
Agreement
a. Facts: AFIC used SNSA to ship goods. At AFICs choice,
the parties used a standard contract, which included an
arbitration clause. SNSA was charged with price-fixing, for
which AFIC and other companies sued. In NY, AFIC
initiated the arbitration proceeding. While the contract
required arbitration, it was silent on class action arbitration.
b. Holding: In an arbitration agreement, the parties
intentions control. Both parties must agree to the
arbitration, which is the case here, but the parties did not
reach an agreement as to class arbitration (silent).
While sometimes it can be implied that parties who agree
to enter arbitration implicitly agree to allow the arbitrator
to adopt certain procedures to give effect to their
intentions, the agreement to arbitrate cannot alone lead to
such procedural questions by arbitrator.
4. Centronics v. Genicom Good Faith
a. Facts:The parties agreed to arbitration if a price was not
agreed upon. An Escrow acct. was set up, to be paid out
appropriately with discretion. Ultimately, the parties did
go to arbitration, and it took longer than expected.
Genicom sued, claiming that during the arbitration,
Centronics should have paid out some of the escrow and
withheld it in bad faith, thus violating the entire contract.
b. Holding: Good faith only extends to properly carrying out
agreed-upon terms, not to terms that do not exist. There
were no terms that required partial payment during
arbitration. Genicom asks the court to add terms to a
contract that do not currently exist. This the court cannot
do.
5. In re Katrina Extrinsic Evidence for Interpretation
a. Facts: Plaintiffs insurance policies did not cover flood.
They argue that the word flood is ambiguous - the policy
does not specify that it does not cover sudden inundations

of water from negligence, only floods, which are the result

of natural disasters. They contend that the levee breakage
was not a natural disaster, but was caused by the negligent
design, construction, and maintenance of the levees.
b. Holding: Even if the flooding was due to negligence
regarding the levees, the policies are unambiguous with
regard to not covering for flood of any kind. The term
flood is not isolated to natural disasters. It is Louisiana
state law that unambiguous terms of a contract must be
upheld. The homeowners cannot recover from their
policies.
c. A term in only ambiguous is there is a reasonable chance
there is more than one interpretation/definition. Lack of
definition alone does NOT make a term ambiguous.
6. Omni v. Wells Fargo Reasonable Expectation (requesting party to
get coverage)
a. Facts: WF lent Omni $50m, Omni offered 5 hotels as
collateral. Contract required the hotels to have
comprehensive all-risk, flood, & earthquake insurance, and
that WF could make reasonable requests for additional
coverage. After 9/11, WF requested terrorist insurance. At
the time, it was very expensive. Omni claimed it was an
unreasonable request.
b. Holding: It is reasonable in the post-9/11 society to be
concerned about terrorist attacks in major cities. Since the
filing of the suit, the cost of terrorist insurance has dropped
significantly. It has become industry custom to obtain
terrorism insurance. The insurance would benefit Omni as
well.
7. Palmer v. Fox - Reasonableness
a. Facts: Palmer sold Fox a subdivision of houses. In the
contract, it was agreed that Palmer would finish street
construction within a reasonable time. Fox paid Palmer
in Installments. After several years, Palmer had not
completed all of the improvements it had promised. Palmer
refused to pay the last $709 because Fox had violated the
contract by not completing the work.
b. Holding: Courts will construe stipulations of contracts to
be dependent unless a contrary intention is clearly shown.
A party should not be forced to pay out money unless he is
getting what he paid for. Palmer materially breached the
terms of the contract when he did not perform in a
reasonable amount of time. Therefore, Fox does not owe
Palmer the remaining debt. (See RSd 234, Comment (a))
8. Market Street v. Frey Good faith
a. Facts: GE and Market Street agreed upon a sale / lease
with the following terms: MS (lessee) can request GE
(lessor) pay for certain improvements to the premises.

Upon receiving the request, GE is required to give a

reasonable consideration to it, and the parties are to
negotiate in good faith to determine a solution. If
negotiations fail, MS is entitled to re-purchase the land.
MS wanted to buy the land, so it sent GE an offer. GE
refused. MS then sent GE a letter asking for $2m in
improvements. GE refused. MS claimed it wished to exert
its buy-back clause b/c negotiations has failed.
b. Holding: It is entirely possible that Market Street was
acting in bad faith to trick GE, but when viewed in another
light it is possible they were acti gon good faith. To
determine good faith, one must look at the CEO of Market
Streets frame of mind when they asked for
improvements. Remanded to be reviewed by lower courts
with a focus on determining the CEOs state of mind.
9. Patterson v. Meyerhofer Good Faith
a. Facts: Patterson and Meyerhofer contractually agreed that
Patterson would purchase a block of 4 houses at an auction,
and then sell the block to Meyerhofer for a flat price of
$23K. Patterson also told Meyerhofer that he planned to
purchase a fifth house in the block and keep it as his own.
Meyerhofer showed up at the auction and outbid Patterson
on all 5 houses. She got the 4 in contract for $620 less than
the contract price.
b. Holding: Meyerhofer had no contractual agreement
regarding the 5th house, so she was free to purchase it. By
entering into the agreement, Meyerhofer implicitly agreed
that she would do nothing to prevent Patterson from being
able to purchase the other 4 houses at auction. She violated
this implicit agreement when she purchased the homes
herself. Patterson is owed $620.
i. Where a party stipulates that another shall do a
certain thing, he thereby impliedly promises that he
will himself do nothing which may hinder or
obstruct that other in doing that thing.
10. Billman v. Hensel Reasonable effort for Good Faith
a. Facts: Hensel entered into contract to sell Billman his
home. Included in the contract was a subject to financing
clause that stated Billman needed to get mortgage approval
for 35K. Billman never applied for a mortgage. He
claimed he was $5K short for the down payment, so Hensel
waived the $5K. Billman said he was still 1.5K short and
stopped payment of earnest money. Hensel sued for earnest
money (1K deposit).
b. Holding: The subject to financing clauses imposes upon
the buyer an implied obligation to make a good faith effort
to obtain financing. Billman did not make a reasonable
effort to secure the necessary funding. Hensel wins.

11. Neumiller Farms v. Cornett Using expert standard for

determination of satisfaction or reasonableness
a. Facts: Contract stated Neumiller would sell Cornett 12
loads of chipping potatoes for set price, stipulated the
potatoes must chip to buyers satisfaction. Buyer
accepted 3 loads, then price of potatoes dropped. Buyer
claimed 4th load did not chip well. Seller verified that
potatoes chip properly through testing & tricking buyer
with other potatoes, but buyer still claimed they were
unsatisfactory. Seller sued.
b. Holding: Because there was evidence that showed the
potatoes would chip properly, the claim of dissatisfaction
was unreasonable, made in bad faith, and constituted a
breach in contract. Seller wins.
12. Feld v. Henry S. Levy & Sons loss of profits does not excuse
from terms of contract being fulfilled
a. Facts: Output K for breadcrumbs for 1 yr. Before the year
was up, D stopped producing breadcrumbs and dismantled
machinery because the process was very uneconomical
due to the nature of the production equipment, but took no
steps to get better equipment.
b. Holding: While no amount was specified, there was still a
requirement to make crumbs (UCC 2-306). Defendant
can only stop making bread crumbs if the cessation was
done in good faith.
vi. Restatement and UCC Provisions
1. RS 200-204, 206-207, 205, 234, 224-228 (conditions)
2. UCC 1-102, 1-103, 2-101, 2-102, 1-303, 1-304, 1-102, 1201(19), 1-203, 1-205, 2-103(1)(b), 2-208, 2-301, 2-306
c. Article 2 Provisions
i. Gap-fillers if missing, Article 2 provides: price (reasonable at time of
delivery), place of delivery (sellers business), time of shipment
(reasonable), time for payment (receipt of goods), and assortment (buyers
option), and assortment (buyers option)
ii. Delivery Terms and Risk Loss
1. Noncarrier cases
a. Merchant seller risk passes to buyer upon taking physical
possession
b. Nonmerchant seller risk passes upon tender of delivery
2. Carrier cases
3. Shipment risk passes on delivery to career
4. Destination risk passes on tender at destination
5. F.O.B. risk passes on delivery F.O.B. location
iii. Warranties in sales of goods
1. Types title, against infringement, merchantability fitness, express
a. Implied warranty of merchantability (goods are fit for
ordinary purpose) implied in every contract by merchant of
goods of kind sold

II.

b. Implied warranty of fitness for particular purpose implied

whenever any seller has reason to know particular purpose
implied whenever any seller has reason to know particular
purpose for which goods to be used and that buyer is
relying on the sellers skill and judgment to select goods,
and does does in fact rely
2. Disclaimers
a. Title specific language or circumstances putting buyer on
notice that seller is not claiming title
b. Merchantability
i. Specific disclaimer must mention merchantability
and if in writing, must be conspicuous
ii. Also can be disclaimed by as is refusal to
examine or course of dealing
iii. Fitness for a particular purpose only by
conspicuous writing or general disclaimer (as is,
refusal to examine, course of dealing
iv. Express disclaimer not given effect
c. Damages difference between goods tendered and as
warranted
iv. Modifications of Terms
1. Common Law
a. Additional consideration needed
b. Written contract can be modified orally even if contrary
provision
2. UCC Article 2
a. No consideration needed so long as in good faith
b. Must be in writing if, as modified, contract is for $500 or
more
c. Gives effect to provisions prohibiting oral modification
Has performance been excused or discharged?
a. Has the condition (precedent, concurrent, subsequent) been excused?
i. Hindrance or failure to cooperate
ii. Breach of contract
iii. Anticipatory repudiation party unequivocally indicates he will not
perform before time of performance
iv. Prospective inability or unwillingness to perform doubts as to partys
performance
v. Substantial performance
vi. Divisibility of contract
vii. Waiver or estoppel
b. Has absolute duty been discharged?
i. Performance or tender of performance
ii. Occurrence of condition subsequent
iii. Illegality of subject matter after contract was made
iv. Impossibility, impracticability, or frustration of purpose
v. Rescission of contract
vi. Modification of contract

III.

IV.

vii. Novation (replacing parties) or substituted contract (replacing contract)

viii. Accord and satisfaction
Have the terms of the contract been breached?
a. Material or Minor Breach (Common Law)
i. Minor Breach obligee gains the substantial benefit of bargain so
aggrieved party must perform but right to damages
ii. Material Breach obligee does not gain substantial benefit of bargain so
no duty to perform, immediate right to damages and other remedies
b. Perfect Tender Rule (UCC) if goods or delivery fail to contract in any way,
buyer generally may reject all, accept all or accept any commercial units and
reject the rest
Defenses to Execution or Enforcement of Contract
a. Voidable Contract RS 7; Unenforceable Contract - RS 8
b. Incapacity to Contract RS 12-15
i. Infancy/Minors
1. Normally can void until the age of 18
2. Exception can enforce contract if for a necessity (determined by
judge and then jury)
3. Quanum Meruit allows major party to collect for any
performance rendered even if minor disaffirms
4. Case
a. Bowling v. Sperry
i. Facts: Bowling (16 years old) purchased car from
Sperry for $140. Put $50 deposit down, returned
later with aunt and grandmother. Aunt test-drove
car, lent Bowling remaining $90. 1 week after
purchase, Bowling discovered engine failure.
Attempted to return car, but Sperry refused.
ii. Holding: Bowling is not bound. He was a minor and
lacked capacity and the contract was therefore
voidable. A car is not necessary for a teenage boy
who has gotten along fine without one before the
purchase.
ii. Mental Incompetence
1. Voidable if at the time of the contract:
a. Unable to understand in a reasonable manner the nature and
consequences of the transaction Cognitive Test
b. Unable to act in a reasonable manner in relation to the
transaction AND the other party has reason to know of his
condition Volitional Test
2. Burden on party claiming incompetence
3. Case
a. Heights Realty v. Phillips
i. Facts: Mrs. Gholson contracted with Heights Realty
to sell her house for $250K. She declined an offer
for $255K. Heights sued. Family testified that over
the past 5 years Gholsons mental health had
severely declined. Gholsons Dr. stated that she was

suffering from a degenerative mental disease and

was likely incompetent within reasonable medical
probability. Heights testified that during the K
signing, Gholson understood everything and
corrected a misspelling in her name.
ii. Holding: Mrs. Gholson was mentally incompetent
to enter into a contract. Between family witness,
testimony and a doctors testimony after
examination, there was sufficient evidence to
overcome the presumption of mental capacity.
iii. Intoxicated person
1. Contract voidable if 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
b. He is unable to act in a reasonable manner in relation to the
transaction
2. Being drunk will not get you of K. sober person must know the
other party is drunk.
3. Case
a. Ervin v. Hosanna Ministry
i. Facts: Ervin sued Hosanna for sub-standard
facilities in their rehab center. Hosanna requested
summary judgment, claiming that upon check-in
Ervin had signed a contract which released Hosanna
from liability. Ervin claimed she was highly
intoxicated when she checked into the facility and
had no recollection of the agreement.
ii. Holding: There is a material dispute as to whether
Ervins signature was made freely and with full
comprehension, thereby demonstrating the
capacity to contract. Summary judgment denied.
c. Changed Circumstances:
i. Impracticability/Impossibility
1. Elements R 216:
a. After the contract was made, an event occurred, the nonoccurrence of which was a basic assumption of the contract
b. The effect of the even is to render the partys performance
unduly burdensome
c. The party seeking relief was not at fault in causing the
occurrence
d. The party seeking relief must not have borne the risk of the
event occurring (force majeure clause)
2. Consider:
a. What was the nature / impact of the risk event? Preexisting?
b. Was the party seeking relief at fault/cause the event?
c. Did the parties allocate the risks of such an event?

3.
4.
5.

6.

d. If there was no agreement in regard to the risk, how should

the court fill the gap?
e. What is the nature / scope of relief when R 261 and UC 615
are satisfied?
f. Would a modification make the contract enforceable?
Increased costs not enough
Does not affect entire K, just the impractical clause as long as it
does not effect the substantial performance of a contract
Force Majeure Clause frees parties from obligaton in some
extraordinary event (act of God clause)
a. Does not apply market price changing unless it is
unforeseen contingency
Cases
a. Taylor v. Caldwell Unexpected event occurred
i. Facts: Parties contracted for Taylor to provide a
music hall for 4 concerts by Caldwell. At no fault of
either party, the music hall burnt down before
performance.
ii. Holding: There is an implication in the contract
that the space must be there in order for the parties
to perform. If the parties has contemplated such a
risk, they would have included this stipulation.
Therefore, it will be implied, and the parties are
free from the obligations of the contract.
b. US v. Wedgematic Impossibility does not excuse the
Fault of one of the parties (should have had the technology
before the due date)
i. Facts: Wedgematic won a Govt contract for
computer equipment based on its advertised
revolutionary magnetic core system. The govt
stressed prompt delivery by June, with a $100/day
penalty for late delivery. Wedgematic did not
deliver, and in October admitted that its
revolutionary technology was not working, and
would cost several million dollars in development
costs. Wedgematic claimed it should be excused b/c
performance was practically impossible.
ii. Holding: Wedgematic is liable. A purchaser does
not assume the risk of development when it orders a
product. It is assumed the development process is
completed. Wedgematic should not have contracted
before development was complete.
c. Canadian Industrial v. Dunbar Molasses cannot hold a
third party responsible for its inability to procure the
needed material when you contract (bad business
precedent)
i. Facts: Parties contracted to buy / sell 1.5 million
gallons of molasses. Seller was acting as a

middleman, but never made a contract with the

source to guarantee the amount needed. The source
could not supply the seller with enough molasses.
Seller argued that he should be released from his
contract for unforeseen hardship.
ii. Holding: The buyer did not assume such a risk.
The seller did not act to secure its end of the
contract. The court will not allow this kind of
business precedent to be set. Failure of a sellers
supplier does not amount to impracticability.
d. Kaiser Francis Oil v. PGC force majeure clause does not
apply to market fluctuations
i. Facts: Contract for gas with a force majeure clause.
Market price fell, Buyer didnt pay, and claimed the
market price falling was included under FM clause.
ii. Holding: A decline in the market does not constitute
a force majeure event. This would allow one side to
back out of a contract when it is not convenient for
it. The other side would be stuck with all the risk of
production. Such a one-sided interpretation is not
ii. Frustration of Purpose R 265-272 (NO UCC)
1. Contract can be performed but the purpose of the contract is no
longer there so it makes no sense to hold the parties responsible for
contract
2. Case
a. Krell v. Henry
i. Facts: Henry rented an apartment from Krell for 1
day to watch the kings coronation parade. Krell
knew this was the purpose of the K. The king got
sick and the coronation was delayed. Krell insisted
on payment for the apartment.
ii. Holding: The purpose of renting the space was
frustrated, thus there is no contract obligation to
pay.
iii. permitted.
b. Washington Hop Procedures v. Goschie Farms
i. Facts: USDA mandated hop sales to be allotted
through hop bases. The WHP trust regulated these
bases, which became a valued commodity. In 1985,
after WHP allotted its annual hop bases, the USDA
lifted its requirement, rendering the hop bases
useless. The trust insisted that the growers pay for
the bases they were allotted.
ii. Holding: Growers not obligated to perform. The
purpose of the contract had clearly been frustrated.
This frustration does not stem from the drop in
price, but from the fact that the growers were
purchasing the hop bases because they were

necessary, and that basic inference of the contract

had become null by the USDAs actions.
d. Duress - R 174-176
i. Voidable by threatened party or automatically void if threatening party
physically mandhadles party
ii. There needs to be a threat threat goes beyond the legitimate rights of the
party applying the pressure, or that constitutes an abuse of those rights
iii. Subjective standard to determine if there was duress reasonable person
standard
iv. Economic Duress when party is forced into a transaction as a result of
unlawful threats or wrongful or oppressive or unconscionable conduct on
the part of the defendant which leaves the plaintiff no reasonable
alternative but to acquiesce, the plaintiff may void the transaction and
recover any economic loss
v. Cases
1. Rubenstein v. Rubenstein Physical Threat
a. Facts: Husband owned property outside of marriage. Wife
convinced husband to sign property over to joint ownership
by threatening gangster violence, arsenic poisoning, and
other things. Wifes father was in jail for murder via
arsenic poisoning, so Husband was particularly fearful.
b. Holding: Husband was induced to agree to the contract
because of the threats made by his wife, whether a normal
man would feel such a threat or not. Subjective duress,
contract is voidable (because no physical compulsion) by
Husband.
2. Austin Instruments v. Loral Economic Duress
a. Facts: Loral contracted with Austin to provide parts for a
radar set Loral was building for the Navy. Navy then
granted Loral a second K. Austin threatened to default on
first K (causing Loral to lose both Ks) if Loral did not sign
Austin to the second K. Loral requested parts from other
buyers, but none could deliver. Loral agreed to Austins
demands. Once Austin delivered on the first K, Loral
brought suit to void second K, claiming economic duress.
b. Holding: Contract is voidable by Loral. Loral did not
contract with Austin out of its own free will, had exhausted
its other options for suppliers, and did not want to face the
possible cancellation of its contracts (and future contracts)
with the Navy.
3. Machinery Hauling v. Steel
a. Facts: Plaintiff was a steel salesman (middleman). A buyer
refused to accept a load of faulty steel. Defendant told
plaintiff he must keep the steel, or defendant would cease
distributing to plaintiff.
b. Holding: There was no contract threatening to be breached
here. People are allowed to use harsh bargaining tactics.
No duress.

e. Undue Influence R 177

i. When party has dominion of another person or who by virtue of the
relation between them is justified in assuming that that person will not act
in a manner inconsistent with his welfare. Renders a contract voidable.
f. Unconscionability R 208, UCC 2-302
i. 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. A
question of law to be found by the courts. Allows courts to police
contracts without there being a threat, if the agreements are totally
unfair. Unconscionability is NOT strictly defined, as it is able to morph
to undermine of creative thinkers looking for ways to scam people.
ii. Almost always requires:
1. Procedural unconscionability unconscionability in the process of
reaching the bargain. 2 Factors: Oppression and Surprise
a. Lack of knowledge (surprise) the extent to which terms
are hidden. Lack of understanding of the K terms arising
from inconspicuous print or the use of complex legalistic
language and lack of opportunity to study the contract and
inquire about contract terms
i. Comes about from disparity of sophistication of
parties
b. Lack of Voluntariness (oppression) inequality in
bargaining power which results in an absence of
meaningful choice. Simple disparity of bargaining power
is not enough party with more power must have abused
its position
c. Factors
i. Belief by stronger party that there is no reasonable
probability that the weaker party will fully perform
ii. Knowledge of the stronger party that the weaker
party will not be able to receive substantial benefits
from the contract.
iii. Knowledge of the stronger party that the weaker
party is unable to reasonably protect his interest
because of infirmities, ignorance, illiteracy, age,
inability to understand the language of the
agreement, etc.
iv. Business Acumen and Experience / Relative
Bargaining Power
v. Whether the Terms were explained to the weaker
party
vi. Sharp practices and high-pressure tactics.
2. Substantive Unconscionability focuses on the content of the
terms and whether the are so one sided as to shock the conscience.
Terms that are harsh, unfair, or unduly favorable to one party
iii. Sliding Scale Need both Procedural and Substantive but more of one
means less of the other is needed

iv. The more sophisticated you are, the less likely you are able to use
unconscionability as a defense
v. Fees usually fine unless so high to shock
vi. Contract of Adhesion may make it more like to find unconscionability R
211
vii. Makes contract VOIDABLE
viii. Cases
1. Williams v. Walker Thomas Furniture
a. Facts: Williams was a single mother of 7 with limited
education on govt assistance ($218/month), which Walker
Thomas knew. Walker Thomas sold Williams several items
over a 5-year period. The terms of the contracts merged the
payments of each item into one payment, thus the title to
every item was held by Walker Thomas until the entire
debt was repaid (cross-collateralization). Williams did not
understand this concept. She had paid down a significant
portion of her debt and only had $164 in payments left,
when Walker Thomas sold appellant a $514 stereo system.
Williams went into default on the payments, and Walker
Thomas repossessed all the items. Williams sued claiming
that the contract was against public policy. The trial court
found for Walker Thomas.
b. Holding: -Lower Court: The lower court affirmed the trial
court decision because while Walker Thomass conduct was
irresponsible and exploitive, there was no legislation or
legal ground to find the contract against public policy. The
lower court suggested Congress consider corrective
legislation.
c. Holding -Court of Appeals: Between the lower courts
decision and the Court of Appeals decision, Congress
adopted the UCC. The court uses the UCC as persuasive
authority (ex post facto concerns), and finds that the lower
courts should have considered the element of
unconscionability.
d. (The court says that to determine reasonableness or
fairness, the contract must be viewed in light of the
circumstances existing when the contract was made,
including whether the terms are so extreme as to appear
unconscionable according to the standard business
practices of that time and place.)
2. Ferguson v. Countrywide Sliding Scale
a. Facts: Ferguson signed a mandatory employment contract
that included a severely limiting arbitration clause. She
later brought suit for sexual harassment and discrimination.
Countrywide petitioned for enforcement of the arbitration
clause.
b. Holding: Procedurally, Ferguson had unequal bargaining
power and could not negotiate the contract Countrywide

3.

4.

5.

6.

presented her. Substantively, Countrywides arbitration

agreement is extremely one-sided. Therefore, the clause is
unconscionable, thus unenforceable.
Zapatha v. Dairy Mart
a. Facts: Zapatha (educated businessman) ran a Dairy Mart
franchise. K included a clause that allowed either party to
terminate without cause after 90-day notice. Dairy Mart
explained terms to Zapatha and suggested he review them
with a lawyer. Zapatha stated they seemed clear and
explanatory, and signed the K. Later, Zapatha refused to
sign a new term of agreement. Dairy Queen gave him 90day notice.
b. Holding: Not unconscionable. Zapatha should not have
been surprised by the clause because it was unexplained to
him and not written in unclear language. It is not
oppressive because there is not unequal bargaining power.
Either party could terminate.
Coursey v. Caterpillar
a. Facts: Caterpillar sold Coursey machinery. K terms
included a standard exclusion for sellers liability of
consequential damages.
b. Holding: No procedural or substantive unconscionability.
(UCC 2-719(3)). Limitation of consequential damages is
not prima facie unconscionable for commercial goods (as
opposed to consumer goods).
Jones v. Star Credit
a. Facts: Jones were welfare recipients, bought a home freezer
unit from a door-to-door salesman. The purchase price was
$900, and they were also charged time credit charges, credit
life insurance, credit property insurance and sales tax for a
total of $1,234.80. The retail value of the freezer was
approx. $300. They paid off $619.88 and Star claimed that
$819.81was still due as a result of additional charges for
late fees, etc. Jones claims the inflated price is
unconscionable.
b. Holding: Procedurally & substantially unconscionable.
This body of law recognizes the importance of a free
enterprise system but at the same time will provide the
legal armor to protect & safeguard the prospective victim
from harshness. Having already been paid more than $600
toward the $300 refrigerator, Star had already been justly
compensated.
Fleet v. US Consumer Counsel
a. Facts: The USCC advertised that it could help people who
were at risk of bankruptcy. It then charged $195-$260 to
simply refer clients to attorneys, a service provided by the
bar association for free.

b. Holding: Unconscionable. Price is an element to consider

when deciding unconscionability. If the price charged is
grossly excessive in relation to sellers costs and if the
goods could have little or no value for the purpose
persuaded to buy, the price becomes a major factor.
g. Illegality and Public Policy Violations - R 178-186
i. Courts usually hesitant to strike down contact on public policy grounds
ii. Court can raise defense sua sponte on its own accord
iii. Court unlikely to enforce contract that has illegal component
iv. Over=Broad Terms, and Terms that violate public policy
1. Court more likely to rule provision public policy and not enforce
as opposed to voiding the entire contract
2. For over-broad covenants, courts can apply: (also for
unconscionable Ks)
a. Strict View contract wont be enforced at all
b. Blue Pencil View editing words out of contract to make it
reasonable.
c. Reasonably alteration View court can alter terms
v. Cases
1. Sinnar v. Leroy - Illegal
a. Facts: Sinnar was denied a liquor license by the state. He
asked his neighbor Le Roy, who had friends in the city
govt, if he could help in getting the license. Sinnar paid Le
Roy $450. Le Roy did nothing. Sinnar sued for the return
of his money.
b. Holding: LeRoy would have had to procure the license
illegally through bribery or some other illegal method. The
court will have no part in upholding an illegal transaction
and leaves the parties where they lie. R.2d 181
2. Homami v. Iranzadi - Illegal
a. Homami lent Iranzadi $250K for real estate ventures. The
note of the loan explicitly stated No Interest. Homami
claimed that the parties had made a verbal agreement of
12% annual interest, and this agreement was left out of the
note was so that Homami would not have to declare the
interest as income on his taxes. Iranzadi did not pay the
interest.
b. Holding: Homami purposely entered into this agreement in
this manner in order to commit tax evasion. The court will
not reward him for underhanded and illegal business
dealings.
3. Broadley v. Mashpee Neck Marina
a. Facts: Broadley leased a ship at the Marina. He signed a
boilerplate waiver that released the Marina from any
claims, demands, causes of action of any kind or nature...
arising out of any damage, loss, personal injury or death
suffered by him. Broadleys foot got caught in a gap
between the main dock and the floating dock, broke his

ankle. The marina denied any liability, claiming that

Broadley waived liability.
b. Holding: Boilerplate form is vastly overbroad and against
public policy. Marina cannot excuse itself from gross
negligence, recklessness, or intentional wrongdoing.
4. Data Management v. Greene
a. Facts: Greene signed a 5-year non-compete agreement at
the beginning of his employment at Data Management.
After he left the job, Data Management sued him for
violating the non-compete.
b. Holding: The non-compete is overly broad, thus limiting
the free flow of trade (against public policy). If the
overbroad covenant can be reasonably altered to render it
enforceable, the court should do so unless it determines the
covenant was not drafted in good faith.
h. Mistake - R 151-158 (No UCC equivalent)
i. A belief not in accord with the facts
ii. Elements: Material and who bears the risk?
iii. Mistake must have been when the contract was formed
iv. MATERIALITY not enough to show party would not have contracted
had it not been for the mistake, but also needs to show that the resulting
imbalance is so severe requiring enforcement would be unjust
v. Errors that are outside the scope of mistake:
1. Errors in judgment
2. Incorrect predictions of future events
3. Mistake of meaning / understanding
4. Market conditions or financial ability
vi. Two kinds of mistake: Unilateral v. Mutual
1. Mutual Mistake
a. Mistake by both parties
b. Elements
i. At the time of contracting, the parties shared an
erroneous belief concern a fact
ii. The erroneous fact was a basic assumption on
which the contract was made. It was so fundamental
to the shared intent and purpose of the parties that it
is reasonable to conclude that they would not have
made te contract at all or on the present terms had
they known the truth
iii. The mistake had a material effect on the agreed
exchange of performance
iv. The adversely affected arty must not have borne the
risk of the mistake
2. Unilateral Mistake
a. Mistake by one
b. Elements same as the Mutual except:
i. Bearing risk falls out if:

1. Effect of the mistake is such that

enforcement of this contract would be
unconscionable
2. The other party had reason to know of the
mistake of his fault caused the mistake
vii. REMEDIES FOR MISTAKE:
1. Voidable may move for unjust enrichment - 5
2. Rescission fixes a mistake in agreement.
3. Reformation rewriting of the contract to reflect mistake in the
writing of tems
a. Fies mistake in writing not agreement - 155
viii. Bearing the risk of mistake, consider:
1. Have parties allocated the risk via a term of the contract?
2. Is the party aware that he has limited knowledge, and treats this as
sufficient?
3. Is it reasonable because of the circumstance of the contract, that
the risk is naturally allocated?
ix. Cases
1. Boise Junior College District v. Mattefs Construction
a. Facts - Ds (Mattefs) erroneously omitted an item
representing 14% of its total bid submitted to P. P had
expected to pay $150,000 for the work and ended up
paying another contractor $149,000.
b. Holding: Court allowed recission based on 5 factors:
i. Mistake was material: because it greatly adjusted
the cost
ii. Enforcement of the K would be unconscionable:
substantial hardship on bidder where cost more to
comply with K than the profit gained from K, and
substantive unconscionability where is was harsh,
oppressive, and one sided
iii. Mistake didnt result from violation of a legal duty
or culpable negligence
iv. Party accepting the bid wont suffer any real
harm: no substantial hardship, and other bid offers
v. Prompt notice of mistake is given: you cant accept
an offer that you have reason to belief is suspicious
and then claim mistake.
2. Sherwood v. Walker
a. Facts: Walker agreed to sell a barren female cow to
Sherwood for a discounted price. Upon examination, both
parties firmly believed the cow was barren. Before
delivery, it was discovered that the cow was pregnant. As a
breeder, the cow was worth ten times more money. Walker
refused to sell.
b. Holding: The contract is voidable by the seller upon
discovery of a mistake in fact. Neither party would be
damaged by canceling the contract, each would achieve

the status quo. The whole substance of the agreement

hinged on the fact that she was being discounted off
because she was barren. The material substance of the K
has changed.
3. Beachcomber Coins v. Boskett
a. Facts: Boskett sold Beachcomber what was believed to be
a rare dime minted in Denver in 1916 for $500. Both
parties believed the dime to be authentic. The dime was
later proven to be a forgery. Beachcomber sued for
rescission.
b. Holding: A classic case of mutual mistake of fact. R.2d
152(1). Failure of a party to uncover the true facts does
not preclude rescission. The plaintiff could only assume
the risk of purchasing a forgery if the plaintiff had some
doubts as to the authenticity of the coin. Here, both parties
were sure that the coin was authentic.
4. OneBeacon Insurance v. Travels Indemnity Reformation of K
a. LAI (rental company) gave renters a choice of using their
insurance company (OneBeacon), or choosing their own
company. The K between OneBeacon and LAI stated an
insured driver to include anyone else while using with
your permission a covered auto you own. A client
(Capform) chose to use their own insurance (Travelers),
and was involved in an accident. Travelers learned of
LAIs policy with OneBeacon and sued, claiming the terms
meant that OneBeacon was liable for coverage of all
customers, even those who chose to use their own
insurance. One Beacon sought reformation.
b. ii. Holding: OneBeacon showed a thorough and consistent
line of evidence that proved that both OneBeacon and LAI
assumed that coverage did not include lessee vehicles that
were independently insured. Reformation should be
provided as an equitable remedy against Travelers attack,
and to ensure the K reflects the intent of the parties.
5. Lenawee County Board of Health v. Messerly term of contract
allocated risk to buyer
a. Messerlys sold to Pickles a property with 3 rental units as
is. The previous owner had unlawfully installed a faulty
septic system. Soon after purchase, the Pickles discovered
raw sewage seeping from the ground. The County
subsequently condemned the property until the sewage
system was repaired.
b. Holding: This was a mutual mistake, neither party was
aware of the condition of the land. Both parties are
blameless, however the Pickles assumed the risk of the
property when they purchased it as is. The Pickles
cannot void the contract.
i. Misrepresentation R 159-173

i. Definition assertion that is not in accord with the facts.

ii. Types:
1. Concealment intentionally conceal a fact
2. Non-disclosure when:
a. It is known that the disclosure is necessary to correct a
previous misrepresentation or mistake in writing
b. It is known that the disclosure is necessary to correct a
mistaken belief or assumption, and non-disclosure would
be a failure to act in good faith
c. When non-disclosure violates a fiduciary relationship
d. A statutory regulation requires disclosure
iii. Can be negligent or innocent misrepresentation negligent is subject to
parole evidence rule
iv. New Rule Reasonable standard the reliance on non-disclosure must be
reasonable in light of the circumstances and context of the case
v. Old Rule - Caveat Emptor Rule Buyer Beware
vi. Is Misrepresentation Material:
1. If it would be likely to induce a reasonable perform to manifest his
assent or if the make rknows that it would be likely to induce the
recipient to do so
vii. WHEN MISREP = FRAUD - 162
1. Party must have bad motive
2. When party acts with either the intention or gross negligence.
Need guilty state of mind
a. Knows / believe the assertion is not in accord with facts
b. Isnt confident he asserts the truth
c. Knows his statements have no basis
3. Types of Fraud
a. Fraud in inducement Fraud based on elements of K
b. Fraud in execution Fraud based on getting someone to
sign or perform entire K is void
viii. Inducement can be justifiable if:
1. A fiduciary relationship justifies the recipient of the opinion to
reasonably rely or where the parties do not deal at arms length
2. The recipient reasonably believes that the opinionated party has
special skill or judgment with regard to the subject matter
3. The recipient is insome other special way particularly susceptible
to misrepresentations of the type involved
4. Opinions: in general, one is permitted to express ones opinion
without assuming the other party will materially rely on it. A
certain amount of puffery is permitted in negotiations
ix. REMEDIES
1. K 164 Voidable if fraud rescission (avoid contract) and be
awarded restitution. Can also sue for damages
2. Void 163 if misrepresentation to essential term
3. Reformation

4. Cure 165 if the facts come into accord with the assertion before
the injured party notifies of his intent to avoid, the contract is no
longer voidable
5. UCC 2-721 remedies for material misrepresentation or fraud
include all rememdies available under this article for nonfraudulent breach
x. Cases
1. Hill v. Jones Hiding material fact
a. Defendant sold plaintiff a house without disclosing to the
realtor, inspector, or buyer of a past termite inspection.
Upon moving in, the buyers discovered an ongoing termite
issue, costing $5K in repairs.
b. Holding: Withholding material information is an assertion
that the fact does not exist. Thus, nondisclosure is equal to
fraud and misrepresentation. A termite infestation is a
material fact because it's disclosure could reasonably
induce someone to refrain from entering into contract.
2. Laidlaw v. Organ Acceptable under buyers beware
a. A peace treaty was unexpectedly made during the war of
1812. The treaty allowed for lifting of the embargoes on
New Orleans. Early in the morning after the treaty had
been announced, the defendant went to the plaintiffs shop
and requested to purchase 111K lbs. of tobacco. The lifting
of the embargo would cause the value of tobacco to rise
significantly. The plaintiff was not yet aware of these
changes to the trade market. He asked the defendant if
there was any reason why the market would have
fluctuated, but the defendant remained silent. The plaintiff
then sold the defendant the goods at a rate much lower than
the post-embargo rate.
b. Holding: Established Caveat Emptor as the standard
for trade dealings. Organ was not required to disclose the
information he had, despite his advantage by having it.
However, each party must take care not to say or do
anything tending to take advantage of the other.
3. Vokes v. Arthur Murray old woman dancing
a. Plaintiff was a 51-yr-old woman who had no rhythm. She
enrolled in dance classes through Defendant's school. For a
16-month period, the instructors falsely flattered and
advanced plaintiff through the program, in an effort to sell
her enormous amounts of dance courses at exorbitant costs.
No true improvement or ability existed.
b. Holding: This was not simply opinion, this is fraud. The
instructors had the ability to make qualified judgments
regarding the plaintiff's progress, and lied to her to induce
further purchases. (R.2d 169(b))

V.

c. Note: The amount of money was a key issue. If this were a

casual hobby and the instructors were giving her
compliments, this would likely be excusable sales puffery.
j. Assumption of the Risk 154
i. A party bears the risk of a mistake when:
1. The risk is allocated to him by agreement of the parties
2. He is aware at the time the contract is made, that he has only
limited knowledge with respect to the facts to which the mistake
relates but treats his limited knowledge as sufficient
3. The risk is allocated to him by the count on the ground that it is
reasonable in circumstances to do so
What remedies are available if contract has been breached?
a. RESTATEMENT Analysis of materiality (none for UCC)
b. What is breach?
i. Definition failing to honor a promise of performance when the
performance falls due.
ii. Ways to breach
1. Fails to perform, or deficiently performs without justification (nonperformance is breach)
2. Repudiates an unperformed obligation by words or conduct
3. Violates the duty of good faith by preventing ot hindering
performance of the other party or by failing to cooperate in
performing the agreed exchange
iii. Scope of Breach

iv. Breach is material if the failure or deficiency in performance is so central

to the contract that it substantially impairs its value and deeply disappoints
the reasonable expectations of the promise. Goes to the essence of the
contract.
1. R 241 one must consider the entirety of the facts and decide if
the defective or absent performance forms a significant party of the
consideration bargained form.
2. Factors
a. Extent that injured party will be deprived of reasonable
expected benefit
b. Extent that injured party can be compensated for the
deprivation of benefit
c. Extent to which party failing to perform will suffer
forfeiture

d. Likelihood that party failing to perform will cure his failure

e. Extent that party failing to perform actions comport with
standards of good faith and fair dealing
v. Total Breach 243 material and uncured / uncurable
1. Nonperformance 235
2. Substantial impairment substantially impairs the value of the
contract to injured party
3. Repudiation
4. Payment only if the duties performed but not paid, NOT TOTAL
BREACH
vi. Claim for damages 236
1. Total Breach for damages based on injured partys remaining
rights to performance
2. Partial for damages based on only part of the injured partys
remaining rights to performance

If breach is total and material

Promisee
may

-Withhold performance
-Terminate
-Claim full damages for breach

Breach is material but not total

Promisee
may

-Suspend performance
-Await cure
-Claim compensation for any loss
suffered

If breach is not material

(substantial performance)

Promisee
may

--Claim compensation for any loss

suffered
-BUT, still has duty to perform his/her
part of the bargain.

vii. Can breach by repudiating contract Anticipatory repudiation (R 250257) (UCC 2-610)
1. When a party clearly indicates that he will not perform the contract
party can treat this as a breach
2. Elements
a. The prospective action or inaction indicated by the
promisor must be serious enough to qualify as a material
and total breach of the contract 250 comment D
i. Advanced repudiation only gives the promise the
right to terminate if the threatened deviation is
material and total
b. The promisors statement or conduct must clearly indicate
to the reasonable promise that the promisor intends to
breach materially when the time for performance arrives

3.
4.
5.

6.

i. The promisors statement must be analyzed

objectively
c. The promisors statement or conduct in repudiating must be
voluntary i.e. deliberate and purposeful rather than
inadvertent or beyond the promisors control
i. Promisor should be given th opportunity of trying to
overcome obstacles to performance
ii. If it appears such obstacles are insurmountable, the
promisees remedy is to demand assurance of
performance
iii. Commends made to a third party are not clear
repudations
If you repudiate too early you can breach
a. Can go to court to see your rights under the contract before
repudiating
Unequivocal Repudiation clear and unequivocal no queston
about it 250 comment b
Assurances and Suspending Performance UCC 2-609, RS 251
a. If concern whether party will perform, party can request
assurance of due performance and suspend performance
until assurance is made
Case
a. Hochester v. Edgar De La Tour - Repudiation
i. Parties contracted for Hochster to go on tour with
DLT. Before start date of tour, DLT wrote that he
changed his mind and would no longer need
Hochsters services. Hochster sued to recover
damages in anticipation of future breach.
ii. Holding: As soon as De La Tour informed Hochster
of his intent to breach, Hochster was entitled to seek
damages for breach. When one party to an
agreement is informed by another party to the
agreement that the second intends to breach, the
first party has an option to file suit for damages
immediately in anticipation of the breach, or to wait
until the act was supposed to be done. (R.2d
253(1))
b. Taylor v. Jonson
i. Facts: Pl. and Def. contracted for Def.s stud to
impregnate 2 of Pl.s mares. Before performance,
Def. sold the stud and repudiated the K. Pl. rejected
repudiation and demanded performance. Def.
arranged for mares to be boarded at new stable and
bred. Breeding season ran through July. Because
mares were previously pregnant, they were unable
to breed until late spring. Several heat periods
passed, but the stud was unavailable at each time.
New owners assured Pl. his horses would be bred.,

but Pl. assumed the new owners would not breed

the horses before end of season and had his horses
bred with another stud.
ii. Holding: There was no repudiation. Plaintiff
breached contract. Original repudiation was
nullified. Second repudiation was not clear and
unequivocal. When plaintiff requested assurances,
the new owner promised performance.
Performance was still possible in the window of
time available.
c. AMF v. McDonalds
i. Facts: McDonalds agreed to buy 23 cash register
systems from AMF, delivery in June 1969. AMF
pushed delivery back to Jan. 1970. Installed
prototype had massive issues and failed. AMF had
massive problems, and as of May 1969 did not have
a single working machine. In July 1969 the parties
agreed to cancel the order. AMF then sued for
breach.
ii. Holding: AMF did not provide adequate assurance
of performance in its dealings with McDonalds.
Under UCC 2-609 and 2-610, the buyer had
reasonable grounds for insecurity, thus had a right
to cancel under 2-711.
iii. NOTE: If you ever question whether actions
amount to repudiation, you can always go to the
court and ask for a declaratory judgment before you
do anything.
d. Reliance Cooperage Corp. v. Treat
i. Facts: Defendant contracted to deliver 300K oak
bourbon staves by the end of the year. In October,
the Plaintiff expressed concern and asked for
assurance of performance. The defendant did
nothing. Plaintiff waited until January, and then
sued. Trial court claimed that plaintiff should have
mitigated in October.
ii. Holding: A party need not accept repudiation.
Thus, the contract is binding until the time of
performance expires and there is no duty to
mitigate before that time.
e. John Hancock v. Cohen
i. Facts: Cohen was beneficiary of a life insurance
policy that was to be paid out monthly over a 20year period. After 15 years, Hancock claimed there
had been a mistake and stopped paying. Court
found there was no mistake, thus Hancock had
committed an anticipatory breach. Ordered

Hancock to pay the entire 5-year value as a lump

sum at judgment.
ii. Holding: The K will be upheld. Hancock must
immediately pay back-payments plus interest, but
then may resume monthly payments for the
remainder of the time. The insurer made the
breach in good faith, believing there was an
error.
f. New Era Homes v. Forster
i. Facts: Plaintiff contracted to perform renovations.
Full price of $3075 and 4-payment installment plan
were agreed to. Third installment of $1500 was due
when rough-ins were completed, final installment
was due upon completion. Upon completion of
rough-ins, defendant refused to pay. Plaintiff
stopped work and sued for total remainder, then
reduced claim to $1500 for the third installment.
They showed no proof of damages other than the
fact that $1500 was due when rough-ins were
complete. Defendant conceded breach, but claimed
that the Plaintiff was only due value of damages
proven to have incurred.
ii. Issue: Did the staggered payments create 4 small
contracts fully due upon full performance of that
step, or one large K susceptible to payment of value
of part performance upon breach?
iii. Holding: The total price was the single
consideration for the whole of the work. The
language of the K, agreeing to a total price of
$3075, shows the understanding of 1 K with 4
installments of payment convenient to each party.
This is reasonable when considering the standard
renovation project is expected to be done
completely by one party. Thus, discovery for actual
damage is necessary
c. Specific Performance nonmonetary damages
i. If legal remedy is inadequate, court may order breaching party to perform
(land and rare or unique goods cases)
ii. Cases
1. Northern Indiana Public Service v. Carbon Coal contract only for
those who enter. Any party (i.e. employees effected fall outside
scope)
a. Facts: Parties contracted for NIPSCO to purchase 1.5
million tons of coal from Carbon Coal for 20 years at a
price of $24/ton, subject to upward escalation. By 1985 the
price had escalated to $44/ton, and NIPSCO was able to
buy electricity for cheaper than the cost of generating
power from coal. They sought efficient breach. The trial

jury awarded Carbon $181m, but Carbon filed an appeal to

seek specific performance instead.
b. Holding: NIPSCO has the right to exercise efficient
breach, i.e. to pay damages, rather than performing the
contract because its uneconomical. The court rejects
Carbons argument that specific performance is necessary
to protect its workers. Carbon is trying to win specific
performance to use it as bargaining leverage. Specific
performance denied.
2. ABC v. Wolf
a. Facts: ABC and Wolf entered into negotiations to discuss
renewing Wolfs contract. Wolf agreed to a period of
exclusive negotiations with ABC and granted ABC a right
of first refusal of offers, but violated these terms and made
an agreement with CBS. ABC sued, requesting an
injunction to delay Wolfs start date with CBS and
requiring specific performance for right of first refusal.
b. Holding: Though Wolf breached the agreement, ABC is not
entitled to equitable relief. Courts do not desire to restrict
an unfettered job market unless there is a compelling
reason to do so. The court will not force involuntary
servitude (13th Amendment). ABC is free to pursue
monetary damages.
d. Injunctive Relief - preventing a party from engaging in can action that would
result in damage to the other party. Party requesting injunction has burden of
proof
i. Criteria
1. Suffered irreparable harm
2. Remedies (legal) not adequate
3. Considering hardship, remedy is warranted
4. Public interest not disserved by injunction
ii. Cases
1. Walgreen v. Sara Creek
a. Facts: Walgreen rented retail space in a mall from Sara
Creek. The lease terms included a clause where Sara Creek
could not to rent another space in the mall to another
pharmacy. Sara Creeks anchor store went out of business,
and Sara Creek began negotiations to lease the space to
Phar-Mor, a deep-discount pharmaceutical store.
Walgreens requested an injunction.
b. Holding: Walgreens damages would be very hard to
calculate. Business projections and projected harm over a
10-year span is too speculative (R.2d 352). Injunctive
relief is more definite and would not require intense court
supervision to be maintained. Injunction granted.
2. Bertholet v. Stefanko Noncompete clause
a. Facts: Stefanko is a bail bondsman for Bertholet, whose
contract included a non-compete clause and provided for an

injunction in the event of breach. Stefanko left voluntarily,

started working for competitor. Bertholet sued for
injunctive relief. Trial court rejected Bertholets claim.
b. Holding: The court rejected Bertholets argument that the
contract provision forced the trial court to grant an
injunction. Such decisions are at the discretion of the trial
court. Here, Bertholet failed to satisfy the four requirements
for injunctive relief. Injunction denied.
e. Damages
i. Monetary Damages
1. Compensatory R 346-350, UCC 708-710, 713, 715
a. Necessary to replace what was lost
2. Expectation damages (benefit of the bargain) 347
a. Harmed party being granted the benefit of the bargain by
being put in as good a position would have been in had the
contract performed
b. Injured party may recover for damages that are foreseeable
and directly related to the K 351/2-715
c. Case
i. Sullivan v. OConner
1. Facts: Plaintiff, a professional entertainer,
brought suit against her surgeon for a
botched nose job. She brought a complaint
for tortious malpractice, as well as a
complaint for breach of contract. The
contract count claimed that the doctor had
entered into a contract in which he promised
to enhance her beauty through 2 rhinoplasty
procedures, but failed to do so. After 3
procedures, the nose was asymmetrical and
looked worse than before surgery. A jury
found for the plaintiff on the breach of
contract count.
2. Holding: The plaintiff is not limited to outof-pocket recovery (the expenses of the
surgeries). A plaintiff may recover for pain
and suffering from a breach of contract suit
if such a remedy seems warranted. The
emotional suffering from a botched surgery
is something a doctor may reasonably
foresee. The pain endured from the last
surgery is expected and not necessarily a
result of the breach, but it was pain endured
by the plaintiff for naught and can be
compensated. Compensation for additional
surgeries to repair the issue may also be
permitted.
3. Diminution in Value 348

a. Available where there has been substantial performance in

Good Faith but defects exist or where breach is incidental
to purpose of K and correction would result in
unreasonable economic waste
b. Calculating Damages alternative measure where breach
results in defective / unfinished performance and loss is not
proved with certainty may recover on diminution of
market price or reasonable cost of completeing
performance or remedying
c. Remember Court will consider economic waste (the
destruction of substantially completed building)
d. Cases
i. American Standard v. Schectman ECONOMIC
WASTE
1. Plaintiffs leased a factory to defendants
upon agreement that defendants would pay
lump rent sum and remove equipment,
demolish structures, and grade property to
specifications. Defendant did not perform
and sought judgment stating they were only
liable for diminution value.
2. Holding: Diminution is not a valid remedy.
The parties agreed to the performance as
part of the consideration for the contract,
meaning it was not incidental. The
defendant has no right to decide that
contracted-for performance would be of no
value to the plaintiff. There is no economic
waste - there is nothing to be undone, there
is only that which has been left undone. The
fact that the job may cost more than the
defendant expected does not constitute
economic waste.
ii. Peevyhouse v. Garland Coal ECONOMIC
WASTE (company contracted to clean up and didnt
do it)
1. Facts: Peevyhouse leased land to Garland
for 5 years to perform strip mining. Garland
agreed to remedial work to restore the land
at the completion of the lease, but failed to
perform this restoration. The cost for
remediation was $29K. Defendant argued
that damages were limited to diminution
value, and the difference between market
price of farm now and if remediation had
been performed was $300.

2. Holding: Peevyhouse only entitled to

diminution value. Remediation was not
material to the contract.
4. Reliance Damages (349) interest in being reimbursed for loss
caused by reliance on the contract
5. MITIGATE DAMAGES (350/2-712)
a. Lost Volume Seller if you have unlimited supply, no duty
to mitigate
6. If damages unforeseen at the time of the contract, cannot recover
ii. Liquidated damages 356 / 2-718
1. Actual damages difficult to calculate at the time of the contracting
2. Amount is reasonable forecast of the likely damages
3. Court can strike down if too high
4. Court may strike if easy to find the damages incurred
5. Cannot be punitive
6. Cases
a. Southwest Engineering v. US
i. Facts: Parties contracted for 4 projects that included
liquidated damages of $100-to-$150/day for delays
beyond agreed completion date. Exceptions to the
liquidated damages clause included where acts of
god or the govt caused the delay. Each project
was completed behind schedule, at a total of $8400
liquidated damages.
ii. Holding: No showing of unreasonable estimation
has been shown. The parties freely agreed to the
stipulations. They took a calculated risk. This risk
allocation is not wrongful.
iii.
iii. Sale of goods contracts
1. Buyers damages
a. Cover (difference between contract price and cost of
replacement goods)
b. Difference between contract price and market price
c. Warranty damages (if accepted nonconforming goods)
d. Consequential damages (if seller knew of buyers needs)
e. Perfect Tender Rule 2-601 buyer has a right to inspect
and reject any good that does not conform precisely to what
buyer ordered. Distinct from Restatement substantial
performance doctrine (no difference between material and
trivial breach). Both inspection and rejection must be
within a reasonable time.
i. Buyer can reject whole, accept or, or accept some
and reject rest
ii. Inspection buyer has right to inspect goods at
reasonable place and time in any reasonable manner
iii. Rejection must be made in reasonable time
iv. Acceptance of Goods:

iv.
v.
vi.

vii.
viii.

1. Occurs after reasonable time signifies to the

seller the goods are conforming or that he
will take or retain despite
2. Fails to make effective rejection
3. Does any act inconsistent with the sellers
ownership
f. After Acceptance 2-714 bouyer can recover for nonconformity of what was expected. Measure of damages
was difference between what was accepted and what would
have been the value of warranty.
g. CASES
i. Neumiller v. Cornett
1. The rejection must be in good faith. If the
goods conform, buyer is liable / seller has
remedies
2. Sellers damages
a. Difference between contract price and resale price
b. Difference between contract price and market price
c. Lost profits (lost volume seller)
d. Cure 2-508 permits seller to avoid final rejection of
nonconforming goods by curing the deficient tender
i. Mitigates the harsh effect of perfect tender rule
ii. Have to consider whether seller can complete cure
before delivery
Land sale contracts difference between the contract price and fair market
value
Employment contracts
1. Employer breached full contract price
2. Employee breached cost to replace employee
Construction Contracts
1. Breach by owner
a. Before construction builders prospective profits
b. During construction contract price minus cost of
completion
c. After completion full contract price plus interest
2. Breach by builder
a. Before or during construction cost of completion plus
compensation for delay
b. Late complete value of lost use
Avoidable damages nonbreaching party has duty to mitigate
Restitution 370-377
1. Prevents unjust enrichment measure is value of benefit conferred
2. Contract will be disaffirmed
3. For unjust enrichment
a. The defendant received a benefit
b. An appreciation of knowledge by the defendant of the
benefit

4.
5.
6.
7.
8.

9.

c. Circumstances that would make it unjust for the defendant

to retain the benefit without paying for it.
When is it inequitable for a defendant to retain a benefit conferred
by a plaintiff without the defendants request?
Did the plaintiff confer a measurable benefit on the defendant
retained the benefit, did the plaintiff five the defendant opportunity
to decline the benefit before it was conferred?
If so, and if the defendant retained the benefit, did the plaintiff give
defendant opportunity to decline the benfit before it was
conferred?
If so, the defendant did not object, the defendant is likely liable
based on the theory of consent. If not, plaintiff cannot likely
recover.
Measuring Restitution 371
a. Damages are not the grantors loss of expectation, but the
recipients gain. They are meant to approximate the
monetary value of what has been given to the recipient.
There are two principle ways in which enrichment can be
benefitted
i. Market Value generally a standard measure
1. Quantum Meruit as much as he
deserves. The reasonable market value of
services Restatement
2. Quantum Valebant As much as they are
worth. The reasonable market value of
goods UCC
3. Net gain the actual amount by which the
recipients wealth is created
4. Used when the circumstances make
recovery of market value either excessive or
inadequate
5. No gain = no relief 370
Case
a. Britton v. Turner
i. Parties entered into an employment contract that
provided the plaintiff would work for 1 year and at
the end of that year be compensated $120. Plaintiff
worked for 9.5 months, and then left the job for no
just reason. Defendant claimed breach, paid
nothing.
ii. Holding: The plaintiff can recover the value of the
services he actually performed through quantum
meruit. The value of the plaintiffs damages is the
expected rate of the services rendered ($10/month
for 9.5 months = $95), less whatever damages the
defendant suffered because of the plaintiffs breach
b. Bernstein v. Neymeyer

i. Facts: Plaintiff invested in renovating apartment.

Defendant agreed to pay difference in negative
cash flow. They both invested money. Despite good
faith agreement, defendant defaulted on its loans to
financiers of project, and could not pay Plaintiff its
negative cash flow guaranty. Plaintiff sued for
restitution of their interest.
Holding: Restitution damages are to keep the
defendant from unjust enrichment at the expense of
the plaintiff. When the breaching party does not
enjoy unjust enrichment (i.e. the breaching partys
increase in value of property or the advancement of
their interests), restitution damages are not proper.
Whether or not the breach of the guarantee
agreement was material to the contract is irrelevant
and has no bearing on whether the Plaintiffs are
entitled to restitution damages.
ii. Note: The objective [of unjust enrichment] is not
to put the injured party in as good a position as he
would have been in if the contract had been
performed, nor even to put the injured party back in
the position he would have been in if the contract
had not been made; it is, rather, to put the party in
breach back in the position he would have been in if
the contract had not been made.
f. Rescission and Reformation
i. Rescission contract voidable/rescinded if mutual mistake of material
fact, unilateral mistake that other party knew or should have known or
extreme hardship, misrepresentation of material factor, or duress, undue
influence, illegality, incapacity, or failure of consideration
1. Public works contract if:
a. Mistake is material
b. Enforcement of contract pursuant to the terms of the
erroneous bid would be unconscionable
c. The mistake did not result from violation of a positive legal
duty or from culpable negligence
d. The party to whom the bid is submitted will not be
prejudiced except by the loss of his bargain
e. The prompt notice of the error is given
ii. Reformation writing changed to conform to parties original intent if
mutual mistake, unilateral mistake and party knows of it and does not
disclose or misrepresentation
g. ECONOMIC WASTE
i. Cost of performance is the proper measure of damages if this is possible
and does not involve unreasonable economic waste
ii. The diminution in value caused by the breach is the proper measure if
construction and completion in accordance with the contract would
involve unreasonable economic waste

VI.

iii. REMEMBER HOUSE ABOVE SEA LEVEL HYPO

iv. Diminution of value usually considered for construction cases
h. Consequential Damages
i. When parties enter into a contract which, by its terms provides that the
time of performance is to be fixed at a later date, the knowledge of the
consequences of a failure to perform is to be imputed to the defaulting part
as of the time the parties agreed upon the date of performance Spang
Industries v. Aetna Casualty
1. Failure to pour concrete in time so party should know the
conseqneces
ii. Mental Anguish and Punitive Damages
1. Wont get mental anguish unless it causes serios emotional
disturbance R 353
HOW COULD THE PROBLEM BE AVOIDED