WHAT IS LAW?

 Facts: the factual set up

o Historical background
o Relational background
 Doctrine: the rules and principles that equal law
o Rule: tells us exactly what to do
o Principle: gives reason to do something; the bigger picture
 Theory: the basis of doctrine - informs the doctrine but is not applied

CONTRACT: a legally enforceable promise; a promise or a set of promises for the breach of which the
law gives remedy

PROMISE: a manifestation of intent to act or refrain from acting in a specific way, so made as to justify
a promise in understanding that a commitment has been made

WARRANTY: a promise that a proposition of fact is true and a promise to indemnify for any loss if the
fact warranted proves untrue

SPECIAL CONTRACT: an express contract

Three Principle Elements of Action for Breach:

Mutual Assent --> Enforceability --> Breach

Shaheen v. Knight - "blessed event" + vasectomy

 P went to D for vasectomy. D explicitly said to P that he would be "immediately and effectively"
sterile. Seven months later, P's wife becomes pregnant. P is suing for damages for unwanted 5th
child
 Arguments
o P: there is a K btwn P and D - "I will do an operation on you"- and a expressed warranty of
cure that the operation will make P sterile
o D: has 6 points; successful one -- there are no damages
 Court = takes a public policy-based argument. It would be against public policy to award
damages to P for having a healthy child.
o P would be unjustly enriched
 Default Rule: there is no implied warranty of cure for doctors due to the liability it would create --
do not want to ensure expected outcome for patients

Jordan v. Knafel - extortion + paternity suit

 Extramarital affair. Knafel - pregs.; Jordan asks her not to file a paternity suit and upon his
retirement, he will give her $5 mill. Jordan later refuses $5 mill later, so she sues
 Arguments:
o Jordan: K is unenforceable b/c $ for silence = extortion = against public policy
o Knafel: K is not void; gave up right to file a paternity suit
 Court = Jordan ultimately wins the suit because he is not the father of Knafel's child
o Knafel gave up her right to file a paternity suit --> not extortion (not $ for silence)
 Kaplan: based on an honest belief in good faith claim of action. W has right to sue H's
gf (affair) for alienation of rights, which would have led pics to surface anyway. W
forewent a lawsuit --> not extortion
o Jordan argues that if he knew he is not the father, he would not have made the K
  Yao: EXTORTION; $ for silence. Threatens D that if he doesn't pay him for the rest of
his life, he will send out homosexual pics
 Helps Jordan - Knafel said even if he knew he wasn't the father, he would have paid -->
this shows $ for silence = extortion = void

Option: partial performance is not acceptance, it JUST creates the option. Full performance is
acceptance. If you don't complete contract in reasonable time, you do not have a contract. But you are
entitled to relief - unjust enrichment or promissory estoppel
 Separate question of unjust enrichment theory of damages. But there is no contract.

DAMAGES
Always go to expectancy first. If there is a story -- going to the other damages
Start out with expectation; ask if it would be adequate under circumstances
You get the most under expectation, but sometimes there is a limit (if we can't actually measure the
damages, then maybe could measure reliance damages). If money has already changed hands and you
want it back = restitution

Theory of Calculation: (what you expected to get) - (what you did get)

EXPECTANCY DAMAGES
 Damages rewarded to put the promisee in the position that he would have been if the promise was
performed as intended
 Most dominant in contracts - "benefit of the bargain" measure
 Loss of value caused by nonperformance + incidental losses - any loss/cost avoided
 Gross Expectancy = total value of the contract
 Net Expectancy = total value of the contract minus any loss/costs avoided
 Summary
o If entire responsibilities of K are fulfilled --> gross expectancy
o If some responsibilities of K are fulfilled --> net expectancy + expenses incurred
o If no responsibilities of K are fulfilled --> net expectancy

RELIANCE DAMAGES
 In the perspective of the promisee, to put the promisee back in the position they were before (as if
K had never been made)
 For "special circumstances" - when expectancy damages are difficult to calculate (too many
unknowns) and the promise is only enforceable because the promisee relied on the promise -->
reliance
 If the money that has been spent on reliance of the contract doesn't necessarily go to the breaching
party, but it is still money spent at the detriment of the party who acted in good faith

RESTITUTION DAMAGES
 In the perspective of the promisor, to put both parties in the position they were before
 Breacher is giving back what he wrongfully kept
 Linked with unjust enrichment - keeping something that they are not entitled to

CABINET CASE TO GO OVER DAMAGES - separates damage theories and goes into some detail
on why you don't get certain inputs
Consequential vs. Incidental Damages
 The difference between incidental and consequential damages is the cause of the expense or
loss. Incidental damages are the direct result of one party's breach of contract. Consequential
damages are more indirect, being incurred not as a result of the breach itself, but due to the end
result of the breach.

 Incidental:
o Cabinet cases – direct result of one party’s breach of contract.
 Consequential (special damage): when there is some "input"
o If you are buying something and the seller breaches

Hawkins v. McGee - "the hairy hand" + expectancy

 P has injured hand; D is the family doctor. D warrants "the perfect hand, 100% good"
 Arguments:
o P: warranty of cure by D's statement of "perfect hand"
o D: no reasonable man would believe that he could guarantee 100% success
 Court = default damages are expectancy damages (value of the perfect hand - value of the
hand now)
o The court is reviewing the jury instructions (error in delivery)
o (1) Error in including pain and suffering (contracted for at the outset)
o (2) Error in giving reliance (difference between value of the hand now and value of the hand it
was before)

Nurse v. Barns - mill + reliance

 The damages are in line with what was invested by P based on his reliance on the promise made by
D
 Special damages may be awarded even if they are more than the consideration given for the promise

Sullivan v. O'Connor - "the botched nose" + reliance

 P and D contract for 2 nose job surgeries. D botches it and P has to undergo 3rd surgery to fix the
damage
 Arguments:
o P: expectancy damages
o D: confined to recover out-of-pocket expenses; no pain/suffering from 3rd op.
 Court = reliance damages because expectancy are too difficult to calculate
o One can recover damages for unforeseen pain and suffering as a breach of K
o P contracted for the 2 surgeries, so could not receive damages for pain and suffering, but the
3rd surgery was not contracted for

J.O. Hooker & Sons v. Robert Cabinet Co. - cabinets + expectancy

 P and D = contractor K. Breach of subcontract for cabinets. P sues for damages.
 Court = expectancy damages are the default to incentivize parties to fulfill K
o Affirms administrative costs and lost profit, but decreases storage costs
o Article 2 is inapplicable; cabinets are goods, but K deals with services for them
o Storage Costs reduced - P had to pay for the rent anyway; did not have to rent additional
space to place cabinets. If $ was awarded = unjust enrichment
o Administrative Costs - time spent on breached contract was wasted. Employee was a lost
profit b/c he could have been working on other successful projects
 Employee = "extra space he would have had to rent"
 o Lost Profits: value of contract - savings + expenses incurred by upholding part of K (net
expectancy damages)

LIMITATIONS ON EXPECTANCY DAMAGES

REMOTENESS OR FORESEEABILITY OF HARM

 Majority View: Foreseeability creates a rebuttable presumption that liability is voluntarily assumed
if the parties are silent
o Natural Condition - damages are awarded if the injury is in the ordinary course of events to
which it is foreseeable to a reasonable person
o Express Notice - special damages are awarded if notice was given
o If the breaching party knew, or had reason to know, of the special circumstances, which gives
rise to damages
o Hadley; Martinez
 Minority View: Tacit Agreement - Foreseeability is a necessary condition, but not a sufficient
condition (only in Arkansas)
o There must be foreseeability and some implied consent to assume liability
o Morrow

Hadley v. Baxendale - the mill + foreseeability

 P's shaft breaks. P's agent tells D that they need shaft ASAP. D says that if they deliver b4 noon
shaft will get there next day, so P does it. But something happens w/ delivery and shaft isn't fixed
for couple of days. P's mill can't run w/o it, so P sues for lost profits
 Arguments:
o P: D assumed a duty of care to deliver shaft promptly and breached that duty
o D: denied making promise
 Court = D is not liable for lost profit because the consequences were unforeseeable
o In situations of silence for special losses/circumstances, they must be explicitly said or
thus foreseeable. If neither, P is held responsible
o When does something need to be foreseeable? At inception of K because parties need to
know how much liability they are willing to incur
 The parties do not need to actually contemplate the outcome
 It must only be reasonable that the parties could foresee it

Hector Martinez and Co. v. Southern Pacific Transportation - dragline + foreseeability

 Dragline gets damaged on transit/arrives late. P sues for damages for wrongful deprivation of
dragline's use during delay.
 Court = It is naturally foreseeable that a dragline would not be able to function and therefore,
damages would incur as there would be a loss of use value from delay.

Morrow v. First National Bank of Hot Springs - coins + tacit agreement

 P collects coins + tries to move to safety deposit box, but all full. Coins get stolen; P finds out that
safety deposit box was available 4 days prior.
 Court = the bank is not liable under the tacit agreement
o Plaintiff must prove more than the defendant's mere knowledge that a breach of contract will
entail special damages to the Plaintiff. It must also appear that the defendant at least tacitly
agreed to assume responsibility.
o Bank's mere promise that they would let P know of availability does not amount to tacit
agreement of liability for loss.
Default Rules: when conditions of the contract are silent, we set the default rule against the repeat player.
 The repeat player, or the loss volume seller, has information asymmetry
o They have knowledge of the market; they know the legal rules to be contracting around (since
they do it over and over again)
 FedEx example - FedEx has contracted around the Hadley rule so they are not held responsible for
a package not getting there on time/not being delivered at all
o There is also an agency problem - workers making promises; contracting around to control
their agents creating liability

CERTAINTY OF HARM
 When there is no standard to calculate profits (no certainty of harm) since its subject to too many
contingencies and are too dependent upon the fluctuations of the market, it should be deemed
incapable of legal computation
 Nominal damages may be provided

Chicago Coliseum Club v. Dempsey - boxer + certainty of harm

 Coliseum contracts with Dempsey for boxing. K says he can't fight between date of agreement and
until after match is over. Dempsey breaks K.
 Court = P's expenses are only recoverable in furtherance of the general scheme.
o Expenses like lost profit are subject to too many contingencies and are not recoverable
o Expenses like signing/injunction happened outside the K and are not recoverable

Winston Cigarette Machine Co. v. Wells-Whitehead Tobacco Co.

 When there is no standard to calculate profits, it should be deemed incapable of legal computation
 When you cannot foresee what the profits would be, the uncertainty leads to no reliance interest

Anglia Television LTD v. Reed - Brady Bunch + certainty of harm

 Minority Rule - demonstrates the opposite of Hadley
 Anglia makes expenses to create show. Reed contracts to be lead role in show, but then cancels.
Anglia ends up cancelling show b/c couldn’t find a replacement
 Court = Anglia is entitled to expenses incurred before the contract
o It was reasonably contemplated at inception of contract that there would be waste if the
contract was broken

AVOIDABILITY OF HARM
 Plaintiff must do something to avoid damages/mitigate damages
 For public policy purposes, mitigation is upheld to avoid encouragement of idleness of party who
suffers breach
 You are not required to accept a job that is "different or inferior"
o Why? Individual liberty
o But, if you accept a job that is different or inferior, the damages will be offset by the salary
made by the new position

Rockingham County v. Luten Bridge Co. - bridge + avoidability of harm

 P wins K for building bridge. City ends up breaching, but P keeps building. P sues for damages for
building the whole bridge.
 Court = P is only entitled to damages for expenses incurred up until breach. Once there is a
breach, P is required to stop and recover damages.
o Cannot continue to rack up damages; P can only obtain expenses caused by another, not
additional expenses caused by themselves
 o Public Policy: we do not want to incur social waste

Shirley MacLaine Parker v. 20th Century-Fox Film Corp. - Bloomer + avoidability EXCEPTION of
"different or inferior"
 Shirley contracts with 20th Century to make a movie. They contract for her time; states $$
regardless if movie is made. 20th Century cancels movie, but offers another role. Shirley denies it.
20th Century later writes that they will not pay her for 1st movie. She sues.
 Court = Shirley is not required to mitigate damages
o The K says she has no duty to mitigate - K says she is getting $ regardless
o Court focuses on if the movies are comparable - under this argument, Shirley is still not
required to mitigate b/c movies are "different or inferior"

Neri v. Retail Marine Corp. - boat deposit + avoidability EXCEPTION of multiple profits
 P buys boat from D and leaves $4,000 deposit. P cancels K and asks for deposit back. D refuses and
P sues for restitution damages (in perspective of breacher, as if K was never made)
 Court = inexhaustible supply of goods allows D to make multiple profits instead of one
o P receives his restitution damages but offset by the sellers damage of losing profit of the boat
and the $ spent for storage and upkeep
 Distinction between Neri and Shirley
o Shirley for personal services and uniqueness --> there is only one lost profit
 Unjust enrichment if you get full value of performance and leisure
o Neri for inexhaustible supply of goods --> there are multiple lost profits
 NOT unjust enrichment because the boat company could order more
 If the deal with Neri went through, they would have received that profit and the second
buyer's profit (= 2 profits)

Liquidated Damages and Penalties

Liquidated Damages: writing set damages for a breach

Such a breach would be hard to calculate, so we are going to say its 1000 pounds
Penalty Damages: writing too much for damages for breach
Probably not difficult to calculate
If the contract is too general; doesn't specify what the damages are for

Kemble v. Farren - English comedian + penalty damages

 P and D enter into K for D's comedy performance. Clause = if either breaches K for whatever
reason, the other has to pay 1000 pounds
 Court = if K deems excess amount of damages, they will be considered penalty and void
o Regardless if the clause states liquidated damages, if the amount is too much = void
o Problem = the breach was miniscule
o You could have assessed damages

Wassenaar v. Towne Hotel - hotel employee + reasonableness test

 P and D enter into K for employment. K is for a 3-year term w/ liquidated damages - if D terminates
early, D must fulfill entire financial obligation. D breaches with 2 years left.
 Court = uses the reasonableness test -- determines that the award is not unreasonable because
harm to the employee is foreseeable and easy to calculate
o The reasonableness test
 (1) Did the parties intend to provide for damages, or for penalty?
  (2) Is the injury caused by the breach difficult or incapable of accurate estimation at the
time of the formation of the contract?
 (3) Are the stipulated damages a reasonable forecast of the harm caused by the
breach?
o If the award provided in the clause is "grossly disproportionate" to the injury actually suffered,
the award is unreasonable
 HYPO: if the hotel had breached within 3 days, the court would probably assess the damages as
penalty

Lake River Corp. v. Carborundum Co. - in favor of penalty clauses (POSNER)

 Penalty clauses will discourage efficient breach
o Efficient breach = net social gain for all parties
o If there is a penalty clause, there will be an inefficient breach and therefore, more contracts
will be fulfilled as expected
o Instead of everyone being better off, the penalty clause will stop
 Penalty clauses will encourage earnest of performance
o Increase promisees = insurance clause
o Harshness of the penalty clause will lead to the promisee relying on the promisor
 Bonds them because it leads the promisee to believe promisor will perform
 (+) effects on promisor = builds credit (others will want to go into promises)
o More deals will be available to promisor and at a lower price
 The promisor will be less risky --> less cost
 In the context of penalty clauses, contract terms get priced in the market
 The cost of contracting will go down; more deals available
 If you don't have penalty clauses, the price of contracts will go up

SPECIFIC PERFORMANCE
 Form of relief to fulfill the contract --> not based on money damages
 Distinction between law and equity that leads to certain outcomes

Specific Performance as an Equitable Remedy

 When damages are adequate = given/decided by court
 When they are inadequate, who has to prove uniqueness:
o In land, uniqueness is presumed
o In goods, uniqueness must be proved by the person seeking specific performance
o In personal services, what is the service, and how unique is it?
 If the contract restricts someone --> unenforceable (but possible damages)

Specific Performance for Land

 Usually exclusive to real property due to uniqueness of land
 Relates to the fact that land cannot be found anywhere else (can't cover)

Loveless v. Diehl - Dr. Hart + specific performance for LAND

 P and D are L-T. In K, option for D to buy land for $21,000. D doesn't have $ after making
improvements on land, so they try to sell to Dr. Hart for more. P ruins the deal and sues for $. D
counters with specific performance.
 1st Court = IN EQUITY - D is entitled to the $ they lost from P ruining the deal w/ Hart; P is
entitled to $ D owes from the milk machine
  2nd Court = ON REHEARING - damages are insufficient b/c P is unjustly enriched from
improvements made by D
o The court rules this way in matter of public policy --> it would be detrimental to move from
the default rule of specific performance for land in interest of prospective buyers like
Hart
 Prospective buyers would be deterred from buying land in fear of losing it
o Also hurts uses of option contract (not allowing promisor to revoke offer for certain amount
of time):
 The contract holder would be met w/ less prospective buyers, or lower prices
 Dissent = the sole beneficiary is Hart - Diehl's didn't value uniqueness of land b/c they were going
to sell to Hart anyway = no specific performance

Specific Performance for Goods

 Personal Property or Goods
 Default rule for goods is money damages since they are easily replaceable (take $ to buy the same
good again)
 Specific performance is granted for goods when: (1) no remedy in law (2) uniqueness of good is
established

Cumbest v. Harris - fancy radio + specific performance for GOODS

 P and D enter into K for sale of radio that P made. P had option to repurchase radio before certain
date and time. D fraudulently avoids P; P sues for radio back.
 Court = radio satisfies general principle of specific performance for goods; there is no specific
performance for personalty except when:
o (1) When there is no adequate remedy at law
o (2) Where specific articles or property are of peculiar, sentimental, or unique value
 Took P 15 years to build the radio; has sentimental value
o (2) Where due to scarcity the chattel is not readily obtainable
 Took P months/years to obtain individual parts - replaceable, but difficult

Scholl v. Hartzell - private Corvette + specific performance for GOODS

 P and D enter in K for sale of Chevy. Private deal. P gives deposit; D breaches. P sues for specific
performance for the car.
 Court = the car fails to be classified as of the unique good as by UCC §2-716
o Possible other influence - status of the seller (private man)
o D (seller) may not have readily access to info regarding price and market for car

Sedmak v. Charlie's Chevrolet, Inc. - car dealership Corvette + specific performance for GOODS
 P is car enthusiast. D is car dealership. Enter in K for purchase for limited edition Corvette. D sets
price at $15,000 (low). When car gets to dealership, D breaches and asks for bid. P sues for specific
performance.
 Court = grants specific performance for search costs --> would take a lot of effort to find
another car; money damages would not be sufficient
o Sleaze Factor (the doctrine of unclean hands)- distinguishing from Scholl case, seller is the
dealership = REPEAT PLAYER. D has info asymmetry - should have known how much the
car sells w/ easy access to market
 If you're in a court of equity, that is something the court
 A defense in equity - the point is that the plaintiff who is also a wrongdoer cannot sue for
breach of contract if they have unclean hands
Specific Performance Inhibits Efficient Breach
 Specific performance inhibits efficient breach by changing distribution of profit (compare to
penalty clauses that completely override efficient breach)
 Efficient Breach = S profits, B1 receives damages, and B2 gets car; specific performance stops
this --> S would have to give B1 the car for the price agreed upon prior
 Difference in Distribution: Why cant B1 sell to B2 and make the profit?
o Problem of additional transaction costs --> B1 doesn't know B2 and doesn't have info
asymmetry

Contracts for Personal Services

The Case of Mary Clark - slavery + specific performance for SERVICES
 Mary is a slave. Indiana is a free state. Owner wants to keep her; enter K for indentured servitude.
She breaches K by applying for discharge. P sues for breach of K.
 Court = specific performance can't be upheld for personal services in form of slavery
o Specific performance would take away her personal liberty; he doesn't sue for damages
because she was a slave so she has no money
o Did not say that K was void, but they refuse to enforce = slavery
o Distinguish from apprenticeship = no slavery = "parental relationship"

Lumley v. Wagner - opera + specific performance for SERVICES

 P has K with D for her opera exclusively for 3 months. D efficiently breaches - enters K with
competitor of P for more $. P sues for injunction (specific performance for a negative covenant)
 Court = will not grant SP for services; but will grant injunction
o Court does not allow for personal services -- they cannot compel D to perform for P
o BUT, Court allows for (-) injunction for her not to perform service for another party
o They are not forcing her to do anything; they are stopping her from doing something
 Negative covenant was in the contract
o Court holds this case a warning, not a precedent; courts do not like performing specific
performance for personal services
o The Court of Equity previously ruled that it could not impose injunction because it was merely
a K for hiring and service

Corsetti: it is difficult to enforce; difficult to ascertain what is the singer's "absolute" best if she is
compelled to sing; they would have to hire someone to ensure she was not singing out of her own liberty

Ford v. Jermon - opera + specific performance for SERVICES

 Same as Lumley v. Wagner case; P and D enter K for D to perform only in his theatre. D breaches; P
sues for D to perform and also be enjoined from acting at any other theatre
 Court = SP nor negative covenant for personal services will not be granted
o "A contract for personal services thus enforced would be but a mitigated form of slavery" -
based on precedent
o Cannot uphold SP for services and negative covenant b/c it would prevent someone's liberty;
negative covenant = indirect compulsion
o Impossible to know if someone was performing under K sincerely w/o hiring someone to
oversee the performance
o This court says that Lumley is an outlier; the jurisdiction cannot enforce the indirect method of
compulsion even where it is so stipulated

Duff v. Russell - actress + specific performance for SERVICES

  P is theatre manager; D is singer/actress. Enter into K for D's services. K says that D will appear in
show 7 days a week. P announces role and spends $; D breaches.
 Court = injunction previously granted is sound; K does not require a negative covenant to
enjoin someone from the act - INJUNCTION GRANTED
o "The court is bound to look at the substance and not the form of the contract" - reasoning
behind their ruling w/o inclusion of negative covenant clause
o D agreed to appear in show 7 days a week; it would make it impossible for her to appear in
other services w/o violating K --> effect of

Dallas Cowboys Football Club v. Harris - quarterback + specific performance for SERVICES
 D signed 1st K with LA Rams - K was assignable. D signs 2nd K w/ Dallas Texans, but 1st K gets
assigned to Dallas Cowboys (P). P files injunction to prevent D from playing for Texans
 Court = a party who has a unique skill can be prohibited from performing for others;
INJUNCTION GRANTED
o "Where one party agrees to render personal services to another, which requires and
presuppose a special knowledge, skill, and ability… so that in case of a default the same
service could not be easily obtained from others… its performance will be negatively enforced
by enjoining its breach"
 UCC Test of uniqueness applied to services (persuasive authority)
o D is unique enough that he is not easily replaced

Summary: modern day non-competes - coupled with severance packages in order to not ruin
someone's livelihood; courts will typically uphold them if they are reasonable, or strike them in part
- reasonable aspect in these provisions
 Specific performance = equitable remedy = discretion of the court

RESTITUTION DAMAGES
Theory underlying restitution = unjust enrichment --> why it is promisor's perspective

Restitution and Reliance are very similar; but they can lead to different calculations
Painter Example
 Restitution = promisee would only get their deposit back
 Reliance = promisee would get deposit back + hotel expenses

Damages: in law
Equity: specific performance; restitution for party in breach; implied contract; estoppel

Three Theories of Restitution:

(1) Alternative remedy for damages (expectancy is the presumptive remedy; restitution is the alternative)
(2) Equitable remedy, not a remedy at law
(3) When there is no contract at all; "quasi-contract"

Restitution for Breach of Contract

Bush v. Canfield - New Orleans flour + restitution
 P and D enter written K for sale of flour. K specifies price for barrels, but charges more ($7)than
market value ($5.50). P pays $5000 in advance; D doesn't deliver flour. P sues for $.
 Court = restitution > expectancy to ensure P is not at a loss
o Does not award expectancy - the value of flour decreased from $7 to $5.50
 o "P has been disappointed in their arrangements; D has neglected his duty; and retains in his
hands $5,000 of the money of P, without consideration. Nothing can be more just than that he
should refund it"
 Dissent = not all K are winning; P filed wrong suit - should get damages for suit filed
o P filed suit for breach of K --> expectancy
o P should have filed to rescind K --> restitution
o MODERN RULE: P can pick which remedy they want for suit filed

Restitution to the Party in Breach

Britton v. Turner - quantum meruit + restitution
 P and D enter into K. P works for D in exchange for $120. P works for some time, but then
breaches. P sues D under quantum meruit ($ for work already done)
o Quantum meruit "as much as he deserved" is an equitable remedy, not contractual
 A reasonable amount of money to be paid for services rendered, or work done when the
amount due is not stipulated in the contract
 Court = where the party receives value, he is liable to pay a reasonable worth of what he has
received - UNJUST ENRICHMENT
o RULE: "Binding the employer to pay the value of the service he actually receives, and the
laborer to answer in damages where he does not complete the entire K"
o The party who attempts performance would otherwise be placed in a much worse situation
than he who wholly disregards the contract
o Public Policy -- promote productivity -- encouraging contracting
 Restitution for the laborer who did partial work since he would be worse off than the
laborer who did no work at all
 Ex-post opportunism on the other side- the employer could make conditions that would
make you want to quit and then you would earn nothing at all
 If you are not able to recover anything, they would not form contracts at all
 Default Rule = people are entitled to labor earnings
o Sunk cost: (payment for the work done) - (damages for not fulfilling K)

Restitution: UNJUST + ENRICHMENT

1. No recovery unless D receives measurable enrichment
2. No recovery if P intended to act gratuitously
3. No recovery if D refuses to accept the benefits, unless it is an appropriate performance of legal duty
4. No recovery conferred without suitable opportunity to decline in absence of reasonable excuse for
failure to afford opportunity
5. No recovery for benefits incidentally conferred

Vines v. Orchard Hills, Inc. - condo + restitution

 P contracts to purchase a condo + leaves down payment. P has to move for a job, so breaches K by
writing letter to seller, but K has a liquidated damages clause stating that if breach, seller keeps
deposit. P files for recovery of down payment.
o At the time of the trial the condo was worth more than at the time of breach of K
 Court = a purchaser who breach is not willful has a restitutionary claim to recover monies
paid that unjustly enrich his seller
o Court of Equity = willfulness is important; if they were willful (efficient breach), the
liquidated damages would be enforced because we are in equity
o Unjust enrichment = D retains more $ than he should; more $ than he would be entitled to if
there was a breach of K
 o Court does not rule on whether P receives deposit or not. Trial Ct. erred in calculating
damages (did at time of trial, not at time of breach). Remanded for P to prove at the time of
breach that value of the condo was more than down payment (no damages). If P fails to prove
it was more, liquidated damages clause is upheld.

Restitution and "Quasi-Contract"

 Quasi-Contract = Implied Contracts
 Implied-in-Fact: there is an implied contract through the conduct of the parties; there is a contract,
which arises where the parties agree upon the obligations to be incurred but their intention, instead
of being express in words, is inferred by their acts in surrounding circumstance
o When one requests that another perform services, it is intended that they pay for them (Section
107)
 Implied-by-Law: creation of a contract through legal fiction; the law requires the obligations for
reasons of justice

Cotnam v. Wisdom - doctors + restitution

 P are physician; D is Harrison's executor. Harrison is thrown from car, suffers injuries and P are
called to scene to perform difficult surgery. Unsuccessful and Harrison dies. P sues for recovery for
services of operation
 Court = damages can be awarded through an implied contract
o Public Policy -- restitution is appropriate b/c we want doctors to perform surgery
 We want doctors to receive payment so they continue to perform in emergency situation
o Party may recover for medical services rendered in good faith to another party while that other
party is incapacitated or unable to assent
o They are NOT volunteers: they were summoned to the emergency situation - reasonable
expectation of payment
 Implied in Law

Martin v. Little, Brown and Co. - implied in fact + restitution

 P is a law student. Finds plagiarism in book and tells D. P offers to send them his notes. P files to
recover damages from copyright infringement suit.
 Court = there is no implied contract when info is voluntarily given
o A promise to pay for services is only implied if there is reasonable expectation for payment of
services -- P failed to show that he reasonable expected $
o VOLUNTEER - no right to restitution if they are in a position that is not usual charged for
o Elements for Restitution of Implied K (where we expect to see restitution):
 (1) Performance (2) with element knowledge (3) useful (4) normally charged and (5)
recipient does not avail himself from service
o How we get the default rule = we do not want to set up the rule that supplants bargaining; if
you don't say you expect to get paid (volunteer), the other party can't contract around it

Tortious Interference with Contract

Lumley v. Gye - opera mayhem + restitution
 P owns a theatre; D is rival theatre. D convinces performer to break K w/ P. P sues D for damages
suffered
 Court = the person who maliciously creates destruction of K should justly be made responsible
for the damage suffered
o "He who maliciously procures a damage to another by violation of his right ought to be made
to indemnify"
 Dissent = action for remedy of breach of K is limited to contracting parties.
 o Creates a slippery slope for others to search for the source of breaching contracts and demand
damages from them as well
o It is the breacher's decision to breach
o Why should malice make a difference? C may have influenced B, but there can be other
factors; what about D, E, and F?

Texaco v. Pennzoil - Getty stocks + restitution

 Pennzoil has K with Getty to merge. Getty talks to Texaco and they offered more $ to get the deal.
Pennzoil deal gets rejected; sues Texaco for tortious/malicious interference
 Court = there was sufficient evidence to support that Texaco knew of the agreement and
actively interfered with deal (interference)
o Main Takeaway: KNOWLEDGE - "to be subject to liability the actor must have knowledge of
the contract with which he is interfering"
o Texaco must pay Pennzoil damages

Difference Between Lumley and Texaco

 Lumley = role of malice
o First time the tort is recognized; very rare
 Texaco = existence of contract and knowledge on part of the defendant; doesn’t care about intent

ASSENT, OFFER, AND REVOCATION

 Two Part Test:
o (1) Objective Assent: what would a reasonable person understand the words to mean?
 Contract law evaluates a promisor's intent to contract objectively - it will enforce an
agreement when a reasonable person would believe the promisor intended to be bound
 How is this determined? By evaluating the circumstances
 Language of alleged agreement
 Length and setting of negotiations
 Subject matter of the contract
 Previous conduct of the parties
o (2) Subjective Assent: what did the person actually think the words to mean?
 What the promisee actually believes from the interaction

Mutual Assent
Embry v. Hargadine, McKittrick Dry Goods Co. - employment K misunderstanding+ assent
 P is employee; D is pres. of co. P's K is going to end soon; tells D that he needs a renewed K or he is
leaving job. D says "go ahead, you're all right; get your men out and don't let that worry you." P gets
notified that work K ended. P sues.
 Ct. = It is not the true intentions of the mind; it is the intention that can be interpreted from
the actions of the party, even if those intentions are wrongly interpreted
o Reasonableness standard - what would a reasonable person interpret it to be?
o Ct. judges by outward expression, and excludes unexpressed intentions
o A reasonable man would have believed his employment is renewed --> K is present
 Ct. remands to see if P understood in the way a reasonable person would

HYPO - if D sent a letter to company stating what the convo between him and P was, it would help with
intent not to enter into K and evidence to how the convo went, but it is useless unless P was included in
the letter at the time of formation <-- its not what the true intent of D was, its how a reasonable person
understood it to be
Lucy v. Zehmer - drunken deal, mere jesting + assent
 P wants to buy D's farm. Makes/writes K in bar. D refuses to sell - say it was a joke. P sues for
specific performance.
 Court = a person cannot say that he was merely joking/drunk when his conduct and words
warrant a reasonable person in believing that he intended a real agreement
o All seriousness that occurs when signing K occurred here
o P is reasonable to believe it and warranted to believe it
o Specific performance granted

Offer
 Expression of willingness to enter into a bargain made in such a way that a reasonable person would
believe they could conclude the bargain merely by giving a cent in the manner required by the
bargain
 Requires (1) intent and (2) definiteness of terms

Nebraska Seed Co. v. Harsh - bushels + offer

 P is a corporation; D is a farmer. D sends letter for 1800 bushels. P accepts offer and buys all. D
refuses to deliver - says it was only a bid.
 Court = the general and ambiguous language of the letter does not constitute an offer
o "1800 and thereabouts" - no fixed amount + no fixed time for delivery + sent to multiple
people = LACK OF INTENT TO BIND (showing of indefiniteness)
o If a proposal is nothing more than an invitation, it is not an offer that can turn into an
agreement by acceptance

**Lefkowitz v. Great Minneapolis Surplus Store, Inc. - fur coats + offer

 D makes 2 advertisements in paper for fur coats - "first come first serve." P is first both times, but D
denies sale. D says that there was a house rule "women only."
 Court = the ad is a written offer because it is clear, definite, and explicit
o Whether the facts show some performance was promised in return for something requested -->
first come, first serve. D cannot orally amend a written offer.
o An offer is clear, definite, and explicit, and leaves nothing open for negotiation to which
acceptance will complete the contract
o The first one was unclear as to the price (up to $100), so P doesn't get damages
o The second one's value was clear (price to $139.50), so P gets damages

Leonard v. Pepsico - Harrier Jet + offer

 P sees Pepsi commercial + wants Jet. Sends Pepsi 15 points and check w/ bottom of order writing
"Harrier Jet." D rejects P's submission and returns $. P sues for SP.
 Court = a reasonable person would not believe that this was a true offer
o Whether an offer has been made depends on the objective reasonableness of the offeree's
belief that the ad was intended as the offer
o There is no need to reach the subjective assessment of the test because objectively, a
reasonable person would not believe that they could get the Harrier Jet

Empro Manufacturing Co. v. Ball-Co Manufacturing Inc. - letter of intent + written contemplation
 P and D are discussing selling of D's assets. Letter of Intent, which both sign. P learns that D is
negotiating with someone else. Files suit.
 Court = parties who make their pact "subject to" a later definitive agreement have manifested
an objective intent not to bound
 o Language AND structure of letter does not suggest one-sided commitment
o Public Policy -- do not want to stop people from entering into K/business negotiations with
fear that they will be forced to remain in K
o Parties did not intend to be bound until formal agreement
o The default - courts will not be super aggressive in interpreting letter of intent; parties need to
be able to transact in stage

Revocation
 Restatement sections essentially say that the offer gives the offeree the power of acceptance until the
power has been terminated
 Power of acceptance can be terminated by:
o Rejection or counter offer by the offeree
o Lapse of time
o Revocation by the offeror
o Death or capacity of the offeror or offeree
 Option Contract:
o Standard option contract - I am going to give you this mortgage option for a period of time
with the option of paying it early with a discount
o Option contract by performance - option contract cannot be revoked when performance has
begun

Dickinson v. Dodds - land sale + train station + revoking an offer

 P and D- sale of land. D writes letter saying P has until day/time to accept offer. P hears D is selling
land to someone else; gets this confirmed. P runs to station to tell D he accepts. D says he already
sold it to another. P sues for SP.
 Court = "There is neither principle nor authority for the proposition that there must be an express
and actual withdrawal of the offer, or what is called a retraction"
o The offeror took definite action inconsistent with the intent of entering into the contract - and
the offeree required reliable information that the contract was already revoked
o It is not so much the meeting of the minds; the offeror manifested his termination indirectly by
selling to another
o Letter only showed an offer, NOT an option K because no form of consideration. Indirect
comm was enough to revoke the offer

Note on the UCC §2-205: an offer by a merchant to buy or sell goods in a signed writing which by its
terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time
stated or after a reasonable amount of time

What is Acceptance?
1. Acceptance that Varies Terms
Ardente v. Horan - house items + Mirror Image Rule
 P and D agree on sale of house. P sends agreement, deposit, and letter asking that items remain w/
house as part of sale. D rejects and refuses to sell house. P sues for SP.
 Court = to be effective, an acceptance must be definite and unequivocal
o The language used in letter does not unequivocally state that even w/o items, P is willing to
complete K.
o Language included is counter offer - confirming that items are part of transaction
 The acceptance may not impose additional conditions = counter offer
 o The only exception is if the conditional language is clearly independent of the acceptance ("we
also hope that you give us these pieces of furniture, but our acceptance is not conditional on us
wanting these things")

The Mirror Image Rule: contract is only formed when acceptance matches the offer exactly
 An offer of a bargain by one person to another imposes no obligation upon the former, unless it is
accepted by the latter according to the terms on which the offer was made.
 Any qualification of or departure from those terms invalidates the offer, unless the same is agreed to
by the party who made it
 Where the negotiations are by letters, they will constitute no agreement unless the answer to the
offer is a simple acceptance, without the introduction of any new term

2. Acceptance by Correspondence
The Mailbox Rule
 The time of acceptance of an offer is when the acceptance is mailed, not received.
 If acceptance is lost, or delayed, there is still a contract
 Shifts the burden onto the offeror - they hold allocation of risk
o Offeror can contract around the default rule --> makes a provision that notice of acceptance is
required for there to be official acceptance
 Only for bilateral contracts (since unilateral contracts are accepted by performance)
 When the offer is in the form of an option, the acceptance is only operative upon receipt (the
existence of an offer limits the offeror's ability to revoke)

3. Acceptance by Performance of Unilateral Contracts

Unilateral Contract: acceptance of an offer by performance (does not require notice of acceptance;
requires notice AFTER performance)
 E.g., offering a $100 reward to the person who returns your missing dog

Bilateral Contract: acceptance of an offer by notice (REQUIRES NOTICE)

Carlill v. Carbolic Smoke Ball Co. - influenza + unilateral contract

 D posts ad for 100 pound reward for anyone who gets influenza by using their ball. P fulfills the ad
and asks for reward. D refuses. P sues.
 Arguments:
o D - contract isn't binding b/c it was made to the whole world; they should be notified of
acceptance; it doesn't make sense to promise money unless you could superintend their actions
 Court = ad created a unilateral contract - ad is the offer, performance is acceptance
o Ad created a promise - showed sincerity through deposit in bank (not mere puff)
o It is an offer made to all the world, but contracting with those who accept
o The ad does not specify acceptance - accepted in any reasonable way including by
performance which no notification is necessary
 Ex ante- should have required notice before performance
 What Carbolic did after --> required notice to retract offer before full performance (e.g., "come into
our office to start the performance")

White v. Corlies & Tifft - performance by wood + bilateral contract

 K for P to build D's offices. D sends letter "work at once upon agreement" but revokes next day. P
got first note, buys wood, starts work. When he got 2nd note, P brings suit.
 Arguments:
o P = unilateral K (by buying wood, P began performance)
 o D = bilateral K (required a formal notice of acceptance)
 Court = language/words "upon agreement" create a bilateral K. It is P's duty to notify
acceptance
o Mailbox Rule = BILATERAL K ONLY

Petterson v. Pattberg - mortgage note + unilateral contract

 P has mortgage on land. D has bond on it. D creates unilateral K - P pays mortgage in full at
discounted rate on or before [date]. P goes to pay mortgage before date, but before P gives $, D says
he already sold it.
 Court = an offer to enter into a unilateral K may be withdrawn before act requested is fully
performed, however brief the interval of time between the two acts
o D revoked the offer before P fully performed = no K
o Acceptance of unilateral contract = completed performance

Restatement §45: once the offeree tenders the beginning of performance, it does not bind the offeree but
it does give them the free offer to finish

4. Acceptance by Silence
**Hobbs v. Massasoit Whip Co. - eel skins + silence
 P and D contracted before. P sends D skins, but doesn't receive response, so assumed D accepted. D
rejected the sale- never notified P, never sent it back, and destroyed it. P sues for damages to recover
$ from skins sent
 Court = contract was created by silence
o P was no stranger to D - D accepted sale 4 or 5 times before and paid; current skins were
same standard as past skins. Sending furs imposed a duty on D to act on it. Silence warranted
P to assume acceptance.

HYPO: if a book is sent to you in the mail - if there is no prior relationship with the book company, the
company cannot expect you to pay them money. If you end up reading the book, it is unjust enrichment --
> company may be able to recover restitution damages

E-COMMERCE AND MUTUAL ASSENT

These cases weave together objective assent, assent by performance, and assent by silence

Register.com v. Verio - WHOIS + e-commerce assent

 P controls WHOIS database. D accesses info. P sues for restriction on commercial gain.
 Court = constructive notice is applicable to mutual assent
o "When a benefit is offered subject to stated conditions and the offeree makes a decision to
take the benefit w/ knowledge of the terms, the taking constitutes an acceptance, which
becomes binding"
o D accessed info daily = knew the restrictions that applied; had opportunity to reject them and
didn't (silence + inaction = acceptance)
o ASSENT = agreeing to the terms at the outset - could not continue on the screen w/o accepting
terms = assent (browsewrap)
 What matters is what they actually know - the terms come after, but after D continued
acting already knowing the terms and chose not to reject
 Relation to Eel Case (Lefkowitz) - silence taken as acceptance
 Minnesota Fur Case - the defendant could make the argument the first time (P knew the "house
rule")
Nguyen v. Barnes & Noble - arbitration + e-commerce assent
 P orders tablet from BN. BN cancels order. P tries to file class action lawsuit, but BN says they're
bound by mandatory arbitration clause. P files for form of relief - law suit.
 Court = browsewrap texts do not give constructive notice
o The arbitration clause is not binding. Because no affirmative action is required by the
website user to agree to the terms of the K other than use of website, the validity of the
browsewrap K depends on whether the user has actual or constructive knowledge of a
website's terms and conditions.
o If P knew the arbitration clause, he would be bound by it. D tried to argue that P should have
known since he operates a website and has a similar terms and conditions. But the court rejects
saying that its based on what a reasonable person would know/have inquiry notice
 Based on whether a reasonable person would have inquiry notice
o BN did not provide notice to users to take affirmative action to demonstrate assent - close
proximity to hyperlink is not enough to demonstrate assent
o Policy - if no one reads the terms in the licenses, what is to keep company from putting terrible
terms in them?
 The market ramifications in doing so - want to keep you as a customer. If one company
puts terrible terms, customer will go to a company that does not put terrible terms

Ambiguous Terms
 When a word refers to more than one thing --> no meeting of the minds --> no contract
 E.g., "the right to bear arms" = does arms mean "arms" or guns?

Raffles v. Wichelhaus - Peerless ship + ambiguous terms

 P and D enter into K for sale of cotton. K said the cotton was on ship "Peerless." D wanted Peerless
sailing in Oct., but P thought Peerless sailing in Dec. When cotton came, D refuses to accept the
goods.
o Ambiguous Term = Peerless
 Court = no contract because of the ambiguous term; no "meeting of the minds" (mutual
assent)

Oswald v. Allen - Swiss coins + ambiguous terms

 P is a coin collector; D is a coin seller. D has 2 coin collections. P thinks buying both, while D
thinks buying 1 collection.
o Ambiguous Term = Swiss Coins
 Court = no objective trade usage for "Swiss coins"; no reason to know that either party meant
something else --> NO K

Vague Terms
 Questions of degree; if something fits into the "circle" under the word
 E.g., "the right to bear arms" = does it include machine guns, pistols, etc.

Weinberg v. Edelstein - the history of dresses + vague terms

 P and D both rent retail space. P's lease has exclusive right to sell dresses. L enters into lease w/ D
on P's approval. D is allowed to sell other women's wear. D starts selling matching skirts and shirts.
P sues on breach of K.
 Court = rules against P's restrictive covenant. "Dress" was a vague term. Based on the trade
usage of the word "dress" (objective definition) the matching skirts and shirts did not violate it.
o Restatement §202(3)(b)- "technical terms"
Frigaliment Importing Co. v. BNS International Sales Corp - chicken + vague terms
 P and D enter into 2 k's for sale of chicken. D is NY; P is Swiss. P thought it was getting young
chicken for broiling and frying; D sent stewing chicken or fowl. P argues that the trade usage of the
word "chicken" is in favor of their narrow definition
 Court = P wants the narrower definition + he is experienced in the trade, so he is the party
burdened to delivered specifics.
o Where a vague term has a specific trade usage, the burden is on the party in the trade to prove
that the party outside the trade knew or should have known the accepted trade usage
o D is new to the trade -- needs P to include specifications
 Court's Hierarchy of Evidence - look at the contract itself before going outside to find information to
make the contract speak
o Words of the contract itself
o Course of negotiation
o Course of performance
o Course of dealings
o Usage of trade

RESTATEMENT FLOW CHART: Subjective Understanding

FILLING THE GAPS: AGREEMENTS TO AGREE + ILLUSORY PROMISES

Agreements to Agree
 Leaving an essential term to be determined makes the contract unenforceable until the parties
actually reach an agreement on the relevant term unless it is a minor term
 UCC allows for this, so long as the contract is intended to be concluded
Sun Printing & Publishing Ass'n v. Remington Paper & Power Co. - paper + agreements to agree
 P (Buyer) + D (Seller) create K for sale of paper - specifies pricing for first 4 months, and then after
that period is over, P + D have to decide on price. K states that the price will not go over the
standard Canadian price. After 4 months, D refuses to sell paper.
 Arguments: D argues that the K fails to solidify essential terms, so no K; P argues that the price
would automatically go to standard Canadian price if no agreement.
 Court = the K fails in indefiniteness = no K
 o (1) Option K - P has the option of buying paper from someone else. No where in K says that P
can only buy from D.
o (2) Time Issue - price, an essential term of K, is assumed to fluctuate with the market; even
assuming that they agreed on Canadian price, there is no definite duration/length of time the
price would apply. D would never know the price since it fluctuates with market so, price is
too ambiguous to be binding.
o An agreement to agree on terms where K is not clear and not actually agreed upon is not
sufficient to bind the parties.
 Dissent = parties have agreement to agree, so court should fill in gaps and create a K for the 12
months based on Canadian price. In a way, dissent proves Cardozo's point. The 4 ways they show to
fill in the gaps all come to a different price (ambiguous)

Illusory Promises
 An apparent commitment that actually leaves a free way out
 Agreements allowing one party to supply or determine a material term
 Implied promises for more interactions
 Requirements or output contract

**New York Central Iron Works Co. v. United States Radiator Co. - radiators + illusory promises
 P and D enter into K for sale of radiators that furnish P "with their entire radiator needs for the
year 1899" at a fixed price. D fulfills orders, but P continues to send in more, totaling to 100,000 ft.
D refuses to send orders b/c they were excessive amount.
o Assumption: the market price for iron was increasing. P wanted either to (1) resell the metal to
make a profit, or (2) stockpile iron to make radiators
 Court = Definite terms will not be implied in a contract when it does not expressly contain
definite terms, but all parties are expected to act in good faith
o D has to show P ordered excessively in year 1899 and that P's actions weren't contemplated at
formation of K. BAD FAITH.
o But, D didn't show what it needed to --> judgment affirmed

***Eastern Air Lines, Inc. v. Gulf Oil Corp. - jet fuel + illusory promises
 D supplies P with aviation fuel in specific cities. D demands that P pay increase price, or it will shut
off supply. P refuses b/c they're in K. P sues.
 Arguments: D argues that K is not valid b/c it is vague and indefinite
 Court = K is not indefinite b/c it is held in good faith output or requirements of buyer
o The change in profitability does not excuse you from the contract
o UCC §2-306(1): A term which measures the quantity by the output of the seller, or the
requirements of the buyer means such actual output or requirements as may occur in good
faith, except that no quantity unreasonably disproportionate
o K has an estimate for one city + parties have remained in good faith for years + over the last
couple of months, they discussed estimates = K IS BINDING
 Sun Printing comparison - the price was indefinite = ambiguous
o K is about the price of oil, not the quantity
 Central Iron Works comparison - the quantity of iron was in question

Wood v. Lucy, Lady Duff-Gordon - fashion designer + illusory promises

 D is a famous fashion designer - she licenses her trademark for profit. Hires P for exclusive right to
place endorsements and gets 1/2 profit. In exchange P promises to keep account of monthly profits
and take out copyright. D places her own endorsements and refuses to share profits with P. P sues
for breach.
  Arguments: D = no K b/c lack of mutual promise - no reasonable efforts/best efforts clause
 Court = there is a fairly implied promise of best efforts
o What allows for implied promise? P promising to keep account of monthly profits and taking
out copyrights. This wouldn't make sense unless there was an implied promise to make best
effort
o Implied consideration - valid b/c it contains an implied good faith term/obligation for P to
use a reasonable effort [implied consideration] to produce and market products and bring in
money
 D was actually induced to perform for the exclusivity
 P induced D to perform

FORM CONTRACTS
 Challenge our notion of assent - "take it or leave it"
 Form contracts = contracts of adhesion

Carnival Cruise Lines v. Shute - cruise ship ticket + forum selection clause
 P purchase tickets to go on a Carnival cruise ship. The ticket has a forum clause that states all suits
brought need to be filed in Florida. While on cruise, P (Mrs. Shute) gets injured. They file a suite in
Washington (State)
 Court = the forum selection clause is enforced as to its reasonableness
o Florida was not random - Carnival has their headquarters there and its their main spot of
business
o Forum selection clause decreases transaction costs - P saved money as they didn't have to
spend it negotiating terms. The price of the ticket also decreases
o The clause limits location of litigation (people from everywhere use the line)
o Offer and Acceptance - P had the choice to either accept the terms or return it and reject
the offer

Caspi v. Microsoft Network - MSN plan + forum selection clause

 Class Action Lawsuit - P rolled over into more expensive MSN membership plan. They sue.
Microsoft forum selection clause states litigation has to be brought in Washington.
 Court = forum selection clause is valid and enforceable
o P was free to scroll through the terms before agreeing - they could have read them to know
what they were agreeing to
o There was nothing extraordinary about the terms (not hidden/small font)

Standardization
 The Benefits:
o Saves transaction costs - costs that would have been incurred over and over again by
negotiation of terms
o Allow company to control lower agents by denying them authority to change the contract
 Three Possibilities of "I Agree"
o (1) Manifestation to be bound by key negotiated terms (price, quantity, time of delivery, etc.),
but no boilerplate terms not read
o (2) Manifestation of intent to be bound by any term, no matter how unreasonable or
unexpected
o (3) Manifestation of intent to be bound by terms read as well as terms not read, provided those
terms are not objectively unreasonable
 What Carnival essentially determines
Common Law vs. UCC
Common Law = The Last Shot Rule
 Part of the mirror image rule
 The party who is the last to send terms over governs the agreement

***UCC §2-207: Battle of the Forms***

 Does not allow the last shot rule
 What does 2-207 do:
o Decides when you're in a contract
o Decides what the contract says
 Section (1):
o Does not require you to be a merchant
o Gets rid of the mirror image rule for UCC contracts - your acceptance can contain different
terms and still be an acceptance (common law that is not the case - different terms would be a
counter offer)
o This is true unless acceptance is made expressly conditioned on assent to additional terms
(mirror image rule)
o The end of 1 is the counter offer
 Section (2): when terms get incorporated or not
o The offeror is the master of the offer
o (2)(a): the operative offer - the contract is only possible under these terms
 Take place at different times of the contracting process as 1
o (2)(c): step-saver case
 HYPO: what if the original offer includes all these terms and says "only subject to this offer, no
alteration per 2a
o Under 1, yes we accept, but expressly conditioned on these terms = no contract; counter offer
that is never accepted
 When does the UCC apply? To all goods
o Even if you are not a merchant, the UCC kills the mirror image rule
 When does 2-207(2) incorporate terms - only between merchants
o The battle of the forms question under 2 is only between merchants
o Terms only come in automatically between merchants, UNLESS
UCC §2-207
(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a
reasonable time operates as an acceptance even though it states terms additional to or different from
those offered to agreed upon, unless acceptance is expressly made conditional on assent to the
additional or different terms
(2)The additional terms are to be construed as proposals for additions to the contract between merchants
such terms become part of the contract unless:
(a) The offer expressly limits acceptance to the terms of the offer
(b) They materially alter it
(c) Notification of objection to them has already been given or is given within a reasonable time
after notice of them is received
(3) Conduct by both parties, which recognizes the existence of a contract, is sufficient to establish a
contract for sale although the writings of the parties do not otherwise establish a contract. In such case, the
terms of the particular contract consist of those terms on which the writings of the parties agree, together
with any supplementary terms incorporated under any other provisions of this act

Step-Saver v. Wyse Technology: software merchants + battle of the forms

  MERCHANT V. MERCHANT. P buys software from TSL and then sells it. The shipment from D
to P has a box-top license, but their deals were set over the phone. P gets sued from consumers for
system failures. P wants to bring D into the lawsuit.
 Arguments:
o P - box top materially altered the terms. They did not accept the terms, so it didn't apply
o D - the acceptance of P's phone offer was conditioned on P's acceptance of the box-top license
 Court = the terms of the original contract were materially altered, so warranty disclaimer is
invalid
o Applies UCC §2-207(2)(b) - the parties' contract is not sufficient to establish consent if the
terms of the writing either add to, or differ from, the terms detailed in the parties' earlier
writings or discussion
o Presence of additional or different terms
 (1) Looks at communications between P and D. D tried to get P to sign 2 contracts, but P
refused. D continued to perform
 (2) D waived certain terms from the box top. This is not consistent with all the terms
being binding. Box top license is not fully enforced

Union Carbide Corp. v. Oscar Mayer Foods Corp.: Oscar weenies + battle of the forms
 Contract for sale of plastic casings. P sells to D with an added 2% sales taxes, applying to sales
originating in CHI. D tells P that another supplier has lower price by sending to outside location, so
P does it and deletes sales tax. 8 years later, IL changes law and orders P to pay the $. P sues D to
recover.
o Offer = sending purchase orders sent by D to P
o Acceptance = P accepting purchase order
 Court = increase payment from back taxes is a material alteration to the contract, which D
never consented to. Clause is ambiguous about indemnification, so consent can't be inferred. D
is not required to pay.
o Applies UCC §2-207: a term is ineffectual… (2) if the new term (a) makes a material
alteration in the sense that consent to it cannot be presumed, (b) there is no showing that the
offeror consented to the alteration, whether (i) expressly, or (ii) by silence against background
of course dealings
o The opportunity to buy from somewhere else - if D saw the taxes on 1 invoice, they have
the opportunity to pay, but then decide to stop working with P.
 To assume responsibility for taxes is different than assuming an open-ended, incalculable
liability for back taxes

Terms that Follow Later

ProCD v. Zeidenberg: commercial vs. consumer user + shrinkwrap license
 P compiles info for phone directories. Sells 2 versions - one for consumers at lower price, and one
for commercial buyer at higher price. D buys the consumer version, ignores the terms, starts a
business, and sells info on the Internet for cheaper price. P sues.
o Restrictions: Every box says "further restrictions included." Before using the software,
restrictions come up on screen and you need to press accept.
 Arguments
o P - the offer was D purchasing it, taking it out of the box, and using it. The acceptance was
him noticing the term and pressing accept. If he didn't like the terms he could reject the offer
and return the item.
o D - the offer is placing the package on the shelf. The acceptance is D purchasing it. Added
terms were not included in the acceptance.
  Court = "Notice on the outside; terms on the inside" - this is ok because the offeree can reject
the terms and return the item. Upholds shrinkwrap license.
o UCC §2-606: definition of acceptance of goods - "A buyer accepts goods when, after the
opportunity to inspect, he fails to make an effective rejection under §2-602(1)"
o Policy - it would be impractical for companies to put all the terms on the outside, or have the
company recite the terms to the consumer.
o 2-207 is when there is multiple forms (battle of the forms), and this is not a battle of forms.
One acceptance.
 "Buy now, terms later"

Hill v. Gateway: Gateway computer + terms inside the box

 P buys computer over the phone; computer gets shipped directly to house. Terms inside box had 30-
day return police but after 30 days pass, computer starts to malfunction. P wants to bring class
action lawsuit, but D argues mandatory arbitration clause
 Court = upholds ProCD precedent. Arbitration clause upheld.
o P ordered it over the phone --> they know the box will have important terms from prior
relationship
o P didn't seek to discover the terms in advance, or after they received the computer --> by
keeping it (silence) P accepted the terms. P has opportunity to reject it and return the
computer.
 Distinction between ProCD and Hill
o ProCD: terms on the outside; customer is roaming the aisle
o Hill: terms are not on the outside because its coming in a shipping box
o Deviates from "notice on the outside, terms on the inside"

Klocek v. Gateway: Gateway computer #2

 P buys computer and has 5 days to return it. D promises it would be compatible with certain Internet
services, but it wasn't. P brings suit. D tries to uphold arbitration clause.
 Court = does not uphold arbitration clause. Gateway did not inform P that transaction would
be conditioned on acceptance of terms. P is not a merchant, so needs express agreement
o Lumps together the decisions in ProCD and Hill
o Who is the offeror and the offeree
o UCC §2-207: applies because there is no battle of the forms. Only one contract.
 "A definite and seasonable expression of acceptance or a written confirmation which is
sent within a reasonable time operates as acceptance even though it states terms
additional to or different from those offered or agreed upon, unless acceptance is
expressly made conditional on assent to the additional or different terms."
Two Approaches:
 Easterbrook Approach --> "notice on the outside, terms on the inside"
o Take evidence and assume that Gateway is the offeror
 Klocek (Kansas) Approach --> require that Gateway prove they are the offeror
o In the opinion, they treat the purchaser as the offeror (offering to buy the product) and the
vendor as the offeree (accepting their inquiry to buy)
o Gateway must make a counter-offer (become the new offeror) to dictate the terms
 Differences between Gateway cases: where they saw the offeror and the offeree

WRITTEN AGREEMENTS
PAROL EVIDENCE
 Admitting oral evidence to alter the contract with outside information
o When parol evidence is inapplicable - means that oral evidence comes in
  No extrinsic evidence can be used to contradict/vary/add to a valid written instrument, except when:
o Agreement is not final (not integrated)
o Agreement is incomplete (partially integrated)
o Agreement is ambiguous (multiple meanings)
o Agreement is invalid
 Question to ask: does the final writing purport to contain all the prior promises?
o If it doesn't, prior promises are not integrated
 The promise that you're litigating over needs to be included in the writing
 If the agreement is final, but not completely integrated - you cannot contradict the contract,
but you can add stuff
 If it is fully integrated, which is final and includes all the terms, you cannot add to it and you
cannot contradict it
 What if we are interpreting the contract? Trident Center Case
o Any time that a court needs to interpret a provision - interpretation at all you can use parol
evidence (since judges are always using parol evidence to interpret)
 Fully Completely Integrated: final agreement and completely immortalizes the terms of the
agreement
 Partial Integration: not on its face everything the party intended, but admits some essential terms
 No Integration: "obviously incomplete"

Interpretation does not add to contract - if it is interpretation, you are asking a different question
 Whether the interpretation would contradict the writing
 Parol evidence can come in for interpretation, but parol evidence cannot contradict the writing

Tensions between classic and modern versions of parol evidence

Classic - look at the contract at face value. The 4 corners rule. Anything that is outside the 4 corners is
parol evidence and not admissible
 If anything is ambiguous is asked based on the 4 corners of the document
 NY follows this
Modern - depends on what the party says is ambiguous
 What California follows

Thompson v. Libbey: logs + parol evidence + classic version

 P is the owner of logs; P and D have an agreement for its sale. Later, D refuses to pay for the logs
due to quality. P sues for breach of contract
 Arguments:
o P - breach of contract and must pay
o D - verbal warranty of quality (parol evidence)
 Court = parol evidence is inadmissible. Warranty of quality of logs not established.
o Classic version: Court looks at contract at face value to find what the parties INTENDED
from the terms
 Integrated agreement = is the contract complete? Are the necessary elements there to
create a transaction? Is the contract full enough to be enforceable and contains all the
essential terms not to fall into indefiniteness?
 Implies an "entire agreement" provision
o Policy - parol evidence is to prevent fraud and incentivize parties to include all the terms in the
written contract
o A written contract may not be impeached

Masterson v. Sine: intra-family deal + parol evidence + classic version

  P owns piece of land. Conveys it to D (intra-family deal). Deed creates an option contract (P has
option to rebuy land), but P goes bankrupt and the trustees want to exercise the option (sell land and
give $ from that to creditors). D wants to include parol evidence that the land was supposed to stay
in the family. On appeal.
 Court = parol evidence is admissible for extrinsic evidence #2
o Extrinsic Evidence #1: allowed by the district court. Contract is incomplete - it doesn't include
fixed price amount for how much P will buy back the land for.
o Extrinsic Evidence #2: not allowed by the district court, but appellate confirmed. Option to
purchase land was to stay in the family.
o Structure of Deed: family transactions lack all the elements of contracts - wasn't thinking about
the future and small details.
o Rule: "When the parties to a written contract have agreed to it as an integration - a complete
and final embodiment of the terms of an agreement - parol evidence cannot be used to add or
vary its terms. When only part of the agreement is integrated (partial integration), the same
rule applies to that part, but parol evidence may be used to prove elements of the agreement
not reduced to writing."

Pacific Gas and Electric Co. v. G.W. Thomas Drayage & Rigging Co.: turbine steel covers + parol
evidence + modern version
 P is the contractor; D furnishes labor and equipment to remove and replace a steam turbine. The
contract says that D performs work at its own risk and expense, and to "indemnify" P against all
loss, damage, expense, and liability resulting from injury. During work, the cover falls and injures
one of the rotors. P brought suit to recover $ for repairs.
 Arguments:
o D - the intention of the indemnification clause was to protect 3rd party property, not P's
property. Proved by oral evidence from P's agents.
 Court = the modern view - parol evidence is admissible if interpretation is AMBIGUOUS; if the
interpretation is NOT ambiguous, parol evidence doesn't come in.
o Lower Court = although provisional language is typical of 3rd party indemnification clause,
the "plain language" covered P's property too. Refused to admit extrinsic evidence that would
contradict interpretation.
o APPEALED - "if the court decides, after considering this evidence, that the language of a
contract is fairly susceptible of either one of two interpretations… extrinsic evidence
relevant to prove either is admissible"

Trident Center v. Connecticut General Life Insurance Co.: big co. loan + parol evidence + modern
version
 P and D contract for $56 mill loan to construct office-complex. K says that P cannot prepay loan for
first 12 years, but in years 13-15 the loan can be prepaid subject to fee. In case of default, D can
accelerate note and add 10% prepayment fee. P wants to refinance the loan because interest rates
dropped, which made interest rate on loan unfavorable. D won't let P prepay, so P brings suit.
 Arguments:
o P - (1) Language of contract is ambiguous and (2) Even seemingly unambiguous Ks can be
subject to modification by parol or extrinsic evidence under Cali law
 Court = allows admittance of evidence (unwillingly)
o (1) Language is not ambiguous "on the fact of the contract". K gives discretionary authority to
D, so D has exclusive right to accelerate note.
o (2) "Doing justice" approach --> allows the extrinsic evidence because if the rules are
unpredictable, there is no rule of law
  Why modern version of parol evidence works here --> parol evidence must be very convincing to be
admitted; if not, door will close on it.

STATUTE OF FRAUDS
 Contracts must be in writing and signed by the party charged if:
o It is for sale of real estate
o Contract takes over one year to complete
o Sale of goods over $500
 Exceptions to Statute of Frauds:
o Quantum Meruit (unjust enrichment)
o Providing services during the life of another
 When people use the statute of frauds defense, they are trying to say there is no K
o Intended to protect the offeror

HYPO: a letter for the sale of goods is sufficient to indicate a contract vs. invitation to bid is an offer, and
not sufficient to make K

Boone v. Coe: Kentucky farmers + statute of frauds >1 year

 P are farmers in Kentucky; D owns a farm in Texas. They make oral K for P to move to D's farm for
12 months - habitable dwelling, suitable barn, P cultivates on farm and receive portion of crops. P
goes from KY --> TX. On arrival, D refuses to let P move onto farm.
 Form of Relief: RELIANCE DAMAGES; wants payment for travel
 Court = P gets no damages. K wasn't in writing + D was not unjustly enriched.
o UCC §2-201
o Exceptions to Statute of Frauds is not applicable.

Riley v. Capital Airlines: 5-year airline contract + statute of frauds > 1 year
 P is a proprietorship; D is an airline. Enter into 5-year oral K for supplying fuel to D's local airport.
P fulfills some purchase orders, buys special equipment. D breaches.
  Arguments:
o P - partial performance
o D - void under Statute of Frauds
 Court = contract is void under Statute of Frauds. But awards damages(promissory estoppel)
for equipment P had to purchase specifically for K.
o UCC §2-201
o (1) Statute of Frauds applies - K is longer than one year
o (2) Not Partial Performance + No Unjust Enrichment - K seems to be individual subcontracts.
D would place order, P would receive it and make fuel, D would pay for amount provided. P
received $ for fuel made.

Schwedes v. Romain: retirement land + statute of frauds = sale of real estate

 P wanted to buy D's land for retirement. D sends offer of $60,000 to which P verbally agrees. D
hires a lawyer to handle transactions and P offers to send full payment, but lawyer said unnecessary
until closing date. D sells land to 3rd party for more $.
 Form of Relief: specific performance
 Arguments:
o D - partial performance by contacting bank, getting mortgage loan, offering $
 Court = contract is void. A promise to pay for sale of land needs written contract.
o UCC §2-201
o Oral promises are not sufficient for land; can be sufficient for other contracts
o D did not partially performance b/c those acts are in contemplation of performance

HYPO: If P just sent in the money, this is not enough for specific performance b/c offeror can revoke it
HYPO: If P sent in the money and the party accepts it --> specific performance

Cloud Corp. v. Hasbro: underwater toy + statute of frauds = sale of goods > $500
 D was selling toys that had gel. P contracted with D to make it. Toy was decreasing in market value,
so gives D a new formula to use less linoleum. D ends up making double amount of gel, was talking
w/ D's agents. D refuses to pay for packets. P brings suit.
 Argument:
o D - the contract is void because Statute of Frauds
 Court = there was consent to modify the contract via email --> writing
o UCC §2-201
o The emails do not have to be physically signed since there is no question on its legitimacy -- D
is not arguing that emails are fake (fraud)

THIRD PARTIES
ASSIGNMENT
 Transferring a right that you have from another party
 Assignments must be irrevocable:
o Need incentive to go after the payer
o If the assignment was revocable at will, it poses a risk to others:
 Risk of multiple payments - it would be a problem for e.g., insurance companies b/c they
could end up paying twice (paying the 1st person, but then realizing the revocation of
assignment, so also need to pay 2nd)
 Multiple claimants
DELEGATION
 An obligor's empowering of another person to perform the obligor's duty
 Duty to perform on a contract
  Obligor still performs unless the other party releases him or her

Kelly Health Care v. Prudential Insurance Co.: insurance $ + assignment

 Green has health group health insurance policy w/ Prudential. Incurs expenses as patient at Kelly.
Kelly submits bills to Prudential, which they refuse to pay. P sues.
 Form of Relief: payment of bills owed
 Issue: whether Kelly and Prudential have relationship through assignment of rights
 Court = the documents presented by P are only authorization, not assignment, because they
are revocable = no error, no assignment
o Controlling authority is the intent of the transferor - the assignor must intend to transfer the
present ownership and must not retain any control over fund or property assigned
o (1) Payment Agreement for Contracted Services - only allows P to collect $
o (2) Authorization of Benefits to Kelly Health Care - only allows power of attorney to deliver $
to P

In re NANCE: football player gone broke + assignment

 Nance is a professional football player. He opens accounts/obtains loans from bank and doesn’t pay
it off. Bank sues to recover loans.
o P signed two agreements:
 (1) Assignment of Contract signed in 1970 - refers to players for contract for 1970, 1971,
1972 seasons
 (2) Declaration of Revocable Trust signed in 1972 - designates bank and Myers (Nance
manager) as trustees with "full and absolute power over al monies"
 Court = no assignment of or order for wages other than one subject to the preceding section
(future wages) shall be valid
o (1) Assignment of Contact is INVAID - contract was signed in 1970 and gave wages from
1971 and 1972 seasons - this designates future wages and therefore, invalid
o (2) Declaration of Revocable Trust is VALID - enforceable b/c the wages from 1970 and 1971
seasons were already earned.
 Nance really had deferred income, so he didn't have the actual $ but it was already
considered earned
 Employer Responsibility - wouldn't make employee unhappy because he already earned
it (if employee knew that his wages were not his before he earned them, it would lead to
discontent and lack of work)
 Doesn't deprive the assignor - his current salary would not be influenced

Sally Beauty Co. v. Nexxus Products Co.: beauty product takeover + delegation
 D has contract with Best to sell product. Pand Best merge, so P acquires Best's contract with D. D
cancels contract
 Arguments:
o P: breach of contract
 What they could have argued: Best is still there under different name since they merged.
Not clear delegation
o D: speculative agreement that P will breach best efforts clause. Contract was not assignable, or
in the alternative, not assignable to Sally
 Court = Obligee has the right to stop the delegation; affirmed K cancelled
o The delegate was not bargained for and the obligee need not consent to the substitution; if
there is a change in distributor, the party can leave the deal
 o UCC §2-201(1): A party may perform his duty through a delegate unless otherwise agreed to
or unless the other party has substantial interest in having his original promisor perform or
control the acts required by the contract
 Dissent by Posner:
o Best efforts clause was not contracted for ex-ante: D did not argue for it, so they should not be
awarded its protection as a defense.
o Sally is not a monopoly: they cannot reap monopoly benefits; if they tried so, this would
violate anti-trust laws and end up hurting themselves
o No speculation: does not want to speculate that Sally will not fulfill contract to the best of their
abilities

DONEE BENEFICIARIES
If A owes B and B wants to give C a present, A can promise to make the gift to C
If A doesn't make the gift, and breaches the promise, C can sue A

CREDITOR BENEFICIARIES
If A owes B, and B owes C, A can promise to pay C to extinguish the debt
If A breaches, C can sue

RULE: the first two categories of beneficiaries (donee and creditor) are entitled to enforce directly
contractual promises intended to be for their benefit, even though they are strangers to the contract (not in
contractual privity)

Seaver v. Ransom: promise for a house + 3rd party, donee beneficiaries

  P is Mrs. Beman's niece - Mrs. Beman is about to die so her husband draws up her will. She wanted
the house to be left to P, but her will didn't include it, so husband swore he would leave P enough in
his will to make up house's value. When husband dies, he doesn't include provision for P. P sues
executor for value of the house.
 Court = P is eligible to sue because she is a donee beneficiary
o P is not a 3rd party in contractual privity - the promise was from husband to wife and P was
not a party to the promise
o But, since husband promised wife to make gift, P is eligible to sue

Sisters of St. Joseph of Peace, Health, and Hospital Services v. Russell: medical services + 3rd party,
creditor beneficiaries
 D hurts himself and P provides medical treatment for a year. D didn't know who his employer was,
but ends up being a settlement between D and Aetna for insurance. P is not part of the settlement
and doesn't get $ for treatment. P sues.
 Issue: whether P is an intended beneficiary --> Yes
 Court = there was an intention between D and Aetna that the latter would pay D's
outstanding bills
o Agreement = Aetna would pay past bills and D would pay future bills --> intent to pay the
hospital for the bills D racked up

CONSIDERATION
(promise has consideration + consideration must be bargained for)
 To be enforceable, a promise must be supported by consideration; it must be bargained for exchange
 There must be some detriment or benefit to one party resulting from inducement by the other party

The Bargain Theory of Consideration

 Makes a promise legally enforceable
 The promisor requires something from the promisee in return for the promise
o E.g., homeless person - A promises to buy a homeless person clothes if the person walks to a
clothing store a few blocks away. The promise is bargained for only if A had a motive to get
that person to walk to the store
 If A owned a restaurant and wanted the homeless man to leave premises = enforceable
promise
 If A did not have that extra motive, would only be a gift promise
 In a bargained-for exchange, a promise is said to be supported by consideration b/c the promisor
gets something in exchange for his or her promise
o The promisor must "bargain for" or request the consideration supplied by the promisee in
exchange for the promise
 Consideration: "The price of the promise"
o Vs. a simple gift promise - unenforceable b/c not supported by consideration
 (1) The promisor must have a motive for making the promise
o Courts assess this objectively, so the actual motive is irrelevant
 E.g., a reasonable person must believe that your motive for making the promise of the
piano was to obtain a return of $400
o The motive does not have to be the primary or substantial reason for making the promise, it
just needs to be one of the reasons
 (2) The promise must actually induce the promisee to deliver that consideration
o If the promisee has a different motive for promising or performing, the promise is
unenforceable
Past Consideration
 A promisor's gratitude for the promisee's past good conduct or services does not constitute
consideration because the promisor is not extracting and the promisee is not supplying anything as
the price of the promisor's promise

Moral Consideration

Johnson v. Otterbein University: university $ + consideration

 Johnson (D) signed and delivered to Spangler, agent of Univ. (P) a promise to pay $100 "to be used
exclusively" to help pay off the debt. D never sent money so P sues.
 Argument:
o P - the consideration was the inducement to pay off its indebtedness
o D - the note was without consideration
 Court = D's money did not induce the Univ. to pay off its debt - they had to pay it off
regardless. D's money is only a gift
o An executory contract to give is without consideration and that a promise to pay money as a
gift may be revoked at any time before payment
 If this case was brought after the intro of promissory estoppel, there could be enforcement to pay
(don't need consideration)

Hamer v. Sidway: nephew stops drinking + consideration

 P is William Sr.'s nephew. When P was 15, his uncle promised him $5,000 plus interest if he
refrained from "drinking, using tobacco, swearing and playing cards or billiards for money until he
became 21." P upheld the promise and told uncle. P is suing uncle's executor for the $.
 Argument:
o D - there is no consideration b/c (1) there is no benefit to the uncle and (2) there is no harm to
P since he benefitted from refraining/upholding promise
 Court = there is bargained for consideration
o Uncle induced the promise to get P to stop drinking; he benefitted from P's performance
o P was induced by the promise to forbear his right to drink, smoke, etc.
 Consideration is the forbearance from refraining what someone has a legal right to do
o "Consideration means not so much that one party is profiting as that the other abandons some
legal right in the present or limits his legal freedom of action in the future as an inducement
for the promise of the first"

HYPO: Uncle tells nephew to walk across the street for $1,000. Promisee does it. Is there consideration?
 Promisee was induced: he walked across the street for $1,000
 Depends on whether the uncle wanted the nephew to walk across the street, or if just that the money
was there

Kirksey v. Kirksey: widower moves to brother's land + consideration

 P was D's brother's wife. She was a widow; D wrote to her to move in with him. After 2 years, he
kicks her off the land. P sues.
 Court = this was nothing more than a conditional gift
o The promisee was induced to move, but the promisor was not inducing to gain
o The only way for P to live on the land was if she moved there
o The question is whether just moving was part of the bargain or not (and its not)
 Dissent: calls for detrimental reliance - P relied on the promise and moved to her detriment
 Bargained-For Theory of Consideration:
 o The court reads the deal to be if you come to this land I'll take care of you = gift, no bargain =
no consideration
o The way the court DIDN’T read it - bargain = if you come and increase federal land claim,
then I'll take care of you and you can have some portion of it

Dahl v. HEM Pharmaceuticals: experimental trial + consideration

 P has some syndrome. D enrolls them in experimental program to test new drug. "If you submit to
our experiment, we will give you a years supply of drug at no charge." After a year, D refuses to
give drug. P sues.
 Court = there is consideration
o (1) D induced promisees to get them to do the experiment
o (2) Promisee was induced by promisor to submit to it
o Option contract - once performance starts, D can't revoke because it becomes an option
contract
o Unilateral contract - once performance was fulfilled, there is a binding contract

Moore v. Elmer: psychic + past consideration

 P is a psychic who predicts D will die before 1900. D enters into agreement and provides note
whereby he promises to pay P the balance of her mortgage note if her prediction came true. D died
before 1900 and P sued for enforcement of agreement.
 Court = past consideration is not bargained-for consideration --> not enforceable
o What is missing? Payment of services and recognition of services
o The promise is the debt owed for services - D never paid for the original reading
o "That which is done as a favor cannot be later turned into consideration by request"

Mills v. Wyman: father-son duty + moral consideration

 P takes care of D's son. P sends note telling him he is doing it. D writes a letter back telling him he
promises to pay for his son's expenses if his son doesn't. Son doesn't pay. P sues.
o Important fact: the promise came AFTER the son was taken care of
 Court = a promise based on a moral obligation but made without legal consideration is
unenforceable unless it is tied to a preexisting legal obligation
o Father does not have legal obligation to his son b/c his son is of age
 Since moral obligation only works if there is a pre-existing legal obligation, it doesn't
work here
o There is no promise to pay b/c no inducement. The promise did not induce P to take care of
D's son. The performance was completed before D made the promise

Boothe v. Fitzpatrick: bull + moral consideration

 D's bull escapes and goes on to P's pasture. P takes care of the bull, tries to find true owner, and ends
up finding D. They meet, D tells P he would pay, but doesn't take bull immediately and leaves bull
with P for months. D gives note to P, but P rejects note and tells D to leave $ with someone else. D
never does it. P sues.
 Court = D's subsequent promise to pay is binding under unjust enrichment
o There is bargained for consideration from costs incurred for keeping the bull after P met
D.
o Unjust enrichment: P expended resources to take care of bull, which benefitted D. Bull
increased in value to D's benefit
o A promise to pay based on past consideration is binding on basis of unjust enrichment
o Recovery = restitution
Webb v. McGowin: construction site + moral consideration
 P works at a construction site. Saves D's life by diverting cinder block, but ends up with permanent
injuries. D promises to pay him $15 every 2 weeks (and keeps it). Then D dies and the payments
stop. P sues testator.
 Issue: whether D's estate should continue to pay - Yes.
 Court = moral consideration is not enough to enforce a promise without a legal duty. But the
economic benefit of life is unjustly enriching D --> promise enforced
o There is no inducement of promise (not like before he fell there was negotiation), but there is
economic benefit to life
o If the promisor received a real pecuniary or material benefit, moral obligation
constitutes valid consideration for a subsequent promise
 D received a material benefit when P saved his life. D acknowledged his benefit and
promised to pay.

Contract Modification and Pre-Existing Duty Rule

 Another window into consideration
 What underlies the following cases: party takes advantage of the other party in the course of
performance for increased wealth

Harris v. Watson: sailor case #1 + contract modification

 P was sailor; D was captain. D promised to increase wages for extra work. When D doesn't end up
paying, P sues.
 Court = contract modification to increase payment is unenforceable
o Public Policy justification - this would lead to problems in the future of sailors refusing to
work in dangerous times unless captain increased wages

Stilk v. Myrick - sailor case #2 + contract modification

 2 sailors abandon the ship, so P, the other sailors, have to do more work to get to destination. P
demands for increased wages. D doesn't end up paying
 Court = the contract modification is unenforceable
o From original K, sailors know it is possible that others will die or desert the ship
o Desertion is considered an emergency situation (already contemplated at the time of the
original contract)

Alaska Packers Ass'n v. Domencio - sailor case #3 + contract modification + preexisting duty
 P contracted with D, fishermen. P refuses to complete the agreement unless D increases wages from
$50 to $100. D agrees b/c its too late in the season to find new fishermen. When P goes to get the
money, D's company refuses to pay
o P said nets were defective, but Ct. rules this info out since they weren't
o D is part of a company - told P that he doesn't have authority to increase wages
 Court = contract modification based on a pre-existing duty is unenforceable due to lack of
consideration
o Fishermen already had the pre-existing duty to work on the ship; they asked for more wages
based on this duty with no additional performance
o A party cannot benefit from his or her own bad faith by refusing to perform party of the
contract unless there are new terms for no additional performance
 No new consideration for the additional payment = no modification
o If the nets were defective --> P would win because it is foreseeable that nets would have to
work for fishermen to do their job. If they didn't work, P would do work not included in their
original contract
Brian Construction & Development Co. v. Brighenti - post office + contract modification
 P is contractor; D is subcontractor. K to build a post office, but when D starts digging, they find
underground rubble. Neither party knew rubble was there. D refuses to work, but P makes oral K
with D to continue for more $$. D starts work, but then abandons and refuses to continue. P sues.
 Court = contract modification is enforceable since rubble was not anticipated in the original
contract
o Neither P nor D anticipated the rubble prior to the start of construction. The contract included
additional compensation for additional work. D's failure to perform is a breach of contract -->
reversed for damages
o When unforeseen, burdensome condition arises during performance, the promise of
additional compensation for additional work is a separate, valid agreement.
o The parties' mutual promises constitute valid consideration as each party is subjected to
legal benefit and detriment on account of the promises

United States v. Stump Home Specialties Manufacturing - Posner on contract modification

 Finding consideration in contract modification is not the right way to test out criterion
 It would be better to enforce contract modification regardless of consideration and rely on duress as
a defense to prevent abuse
 At the time of modification, the normal evidentiary function is to see if there is coercion

Nominal Consideration
 Option contract is more flexible on nominal consideration

Schnell v. Nell - gift promise + nominal consideration

 P's late wife had a gift in her will, but didn't have enough $ to pay it. D entered into K with P
(multiple) to get them $200. The agreement had consideration as 1 cent. D refuses to make
payments. P sues.
o Nominal consideration = 1 cent
 Arguments:
o P - consideration was the promise to pay 1 cent, D's love for his wife, and past services she
rendered
 Court = a promise to make a gift for nominal consideration or out of moral obligation is
unenforceable for lack of consideration
o Courts do not typically look at the adequacy of consideration, but this was 1 cent for $200 -->
this is unconscionable and not enforceable
o Moral consideration = D's love for his wife and her wish to make the payments --> but not
sufficient for consideration
o Past consideration = past services

Jolles v. Wittenberg - shows formal purpose of consideration

 Whether the $1 was delivered or not
 Introduction to parol evidence - if there was a dispute over whether the $1 was delivered

DOCTRINE OF PROMISSORY ESTOPPEL

 These are not contracts - only promises
 Key words: detrimental reliance
 It is some other reason other than consideration to enforce the promise (reliance)
RULE: "A promise which the promisor should reasonably expect to induce action or forbearance of a
definite and substantial character on the party of the promisee and which does induce such action or
forbearance, is binding if injustice can be avoided only by enforcement of the promise"

Family Promises
 Families tend to lack formality when making promises
 Doctrine of Promissory Estoppel came about because of this
 Bargained-for consideration was an inadequate focus

Ricketts v. Scothorn - granddaughter quits job + family promissory estoppel

 P is Rickett's granddaughter. D is Rickett's executor. Rickett gives a note to P saying "I promise to
pay on demand $2,000 and 6% per year," to enable her to quit her job. He paid her 1 year worth of $
but then dies. Executor doesn't want to continue payments. P sues.
 Form of Relief: EXPECTANCY DAMAGES - enforcement of full promise
 Court = the court enforces the bargain
o The promisee was induced to perform, but the promisor did not induce the promise
o The promise was not dependent on abandonment of employment - there was an expectation
that she would not work, but $ was not conditioned on her not working
o The court still enforces the bargain based on estoppel
o There was a promise - Yes
o Intent to induce reliance was there - Yes, Rickett wanted P to quit her job
o Reliance reasonably foreseeable - Yes, it was probable P would quit
o Promisee relied to her detriment - Yes

Equitable Estoppel - what promissory estoppel came from

 Based on FACTS
 E.g., if you call a bank and ask if the check is deposited. They tell you it has, and you go and spend
the full paycheck to later find out that the bank made a mistake and the check was never deposited.
The bank is estopped from collecting from the parties that were lied to - parties are shielded

Promissory Estoppel
 Based on PROMISES
 Statement of INTENT
 The statements don't have to be true

Greiner v. Greiner - mom conveys land to disinherited son + family promissory estoppel
 Frank (D) was disinherited by his father. Maggie (P), his mom, promised him that if he would move,
she would give him property, though she did not specify what or how much. D moves and begins
occupying 80-acre tract, but deed was never executed. P said she was going to give D the deed, but
another son gets in the way. P wants to evict D.
o Father's will gave $5 to disinherited sons - this is included for unambiguous intent - didn’t
want kids to argue that there was silent intent to include them in the will
 Court = silence made it reasonable for Frank to rely on Mom giving the land
o There is no consideration - there was no bargain
 P had intent to make D equal to those not disinherited
 She was not inducing D to move onto the land - she offered him $2,000 first, but he
declined, so then she gave him the land
 D moving was not induced by P's promise - to get to live on the land, he had to move
o BUT, it is reasonable for Frank to rely on Mom giving him the land
  P kept saying she would write the deed, but never did (influence from other sons). While
P didn't give the deed, she never told D it was her land and not his
 P also moved the house to the 80-acre for D to live
o "Silence in the face of reliance"
o A promise through words and/or conduct that a reasonable person would understand as
an intention to make a promise can constitute the basis for breach

Pension Promises
Feinberg v. Pfeiffer Co. - P's faithful service + pension promissory estoppel
 P works for a company for many years. Board meeting promises her an increase in salary, and upon
her retirement, she will receive $200/per month for the rest of her life for her hard work and faithful
services. After the pres. dies, new people want to stop paying.
o Key facts that show no consideration:
 (1) The retirement pension was a complete surprise to her
 (2) She would have continued working for the company
o Past consideration: long and faithful service
o Moral consideration: "exceptional skill and…"
 Court = if injustice can be avoided only be enforcement of the promise --> P retired earlier than
she was going to b/c of the promise of $
o It was foreseeable that P would rely on the promise b/c of security
 The money for the rest of her life gave her a security blanket that she wouldn't have to
continue to work
o P is unemployable - can't get another job b/c she's elderly and sick with cancer
 The injustice wasn't caused by the promise - her having cancer was not caused by the
promise to pay her until she dies
 Usually, the injustice cant be independent from D, but the court will give the money
anyway under promissory estoppel
o A gratuitous promise is a binding and enforceable contract if the promisee reasonably
and detrimentally relies on the promise
o Public Policy: enforce pensions to keep people working/taking care of elderly

Pitts v. McGraw-Edison Co - independent contractor + pension promissory estoppel

 P is an independent contractor. P gets letter from D basically firing him - "You are on retirement
effective July 1st." D offers P money for retirement. After 5 years, payments stop and P sues.
o Key Fact: P WAS FIRED
 Argument:
o P: offer and acceptance. Consideration was handing over account info and P would not work
for other competitors
 Court = to induce reliance, there must be a change in position in reliance of the promise; must
show alteration for detrimental reliance
o Here, P didn't have a choice - he must retire. He can choose to deposit money or not, but he did
not choosing his position based on the promise
o He did not change his position based on reliance --> no detrimental reliance

Construction Promises
 Allocate risk clearly - contract should not be silent on revocation

James Baird Co. v. Gimbel Bros., Inc.- PENN miscalculated bids + construction promissory estoppel
 P is a contractor; D is a subcontractor. D submits a subcontractor bid to contractors, including P, to
supply linoleum, but then realizes he underestimated by miscalculation. D retracted offer and
 submitted new offer that’s twice as much, but P already submitted his bid that included D's original
price. P was awarded the bid from county, and accepts D's original offer 2 days after retraction. D
refused. P sues for damages.
 Court = D withdrew the offer BEFORE it was accepted; the offer was revocable - P never
promised to take linoleum or pay for it. Parties did not intend to be bound.
o Acceptance was not using D's bid in their calculations.
 The offer that is withdrawn cannot be accepted
 When there is offer and acceptance, intent to be bound (consideration)
o Offers are revocable until they are exchanged for consideration - need some counter-promise
or some act
 "Absolutely guarantee" after acceptance
 There was no consideration - P didn’t promise to take linoleum and pay for it, so no
doctrine of promissory estoppel
o No option contract either
o Doctrine of promissory estoppel will make offer irrevocable if promisee acted in reliance upon
the promise
 (1) Partial Performance in unilateral K
 (2) Acceptance
 Reliance is not reasonable if you know it is no longer an offer --> contractor should not
place bid on something they know is rescinded
o Learnhand's Theory: promissory estoppel should enforce promises when parties intended to be
bound 9solution as to consideration substitute)

Drennan v. Star Paving Co.- subcontractor + construction promissory estoppel

 P is a contractor and is bidding on a contract. Customary for subcontractors to offer bid and then
contractor makes general compilation on the lowest ones. D offers low bid and P uses it. P gets
contract. D refuses to do it for the price. P sues.
 Court = enforces the promise b/c D should have reasonably expected P to rely on its bid
o Promise = the price by subcontractor bid --> performance
o Reasonable reliance = relied on price to make overarching bid; D reasonably believed that P
would rely on price (substitute for consideration)
 Didn't need consideration b/c it was reasonably foreseeable for D that P would rely on its
bid if it was the lowest
o Induce action or forbearance = P included the bid price in his own bid
o Avoid injustice = goes hand in hand with reliance

Charitable Subscriptions
Allegheny College v. National Chautauqua County Bank of Jamestown- scholarship fund+ charity
promissory estoppel
 Quid pro quo = exchange
 P is a university. D writes that she will give $5,000 for P to create a scholarship fund in her name.
"In consideration of Christian Education and in consideration of others subscribing." She gives
$1,000 and the rest will be given upon her death. Before she dies, she rescinds promise. After she
dies, P brings suit.
 Court = enforces the promise for charitable purposes
o Constructs the request to make the fund in her name as consideration to show a deal
 Legal detriment = P having to use P's name through the fund
 Legal benefit = P getting D's initial donation of $1,000
o The initial donation constitutes valid consideration for D's promise to donate remaining money
 o Acceptance of $1,000 by P was valid consideration in support of P's promise to maintain
scholarship fund in D's name and D's promise to donate remaining $4,000
 Dissent: not enforceable = promise is merely a gift
o The college has not set up the fund --> she can revoke until performance is completed. The
fund is hope/expectation (the words are merely expressions).
o How to get it to work as consideration: "In consideration of Mary Fund…"

"The Death of Contracts"

 Contract is really tort
 Liability premised on detrimental reliance will subsume the enforcement of contract
 We are letting detrimental reliance eat up consideration
 Promissory reliance - insistence of a promise

Promissory Estoppel is the alternative to bargained-for consideration

Every time consideration fails, can look at promissory estoppel

ELEMENTS OF PROMISE AND RELIANCE

PROMISE
Blatt v. University of Southern California- law school club+ promise element
 P graduates from law school at the top of his class. D told him that if he was top 10% he would be
eligible for the club. Doesn’t get it when he graduates and sues.
 Arguments:
o P - first argues that there is a K. When Ct. says no consideration, no k, he changes it to
detriment - argues that he relied to his detriment. He wouldn't have worked as hard.
 Court = D never gave a guarantee that he would get in. Failure of a promise
o D only said that he would be eligible for election if he had the position in his class, not that he
would actually be admitted
o There was also no injustice - no promissory estoppel. He is a law school, he should work hard
anyway so it didn't induce definite and substantia character

Spooner v. Reserve Life Insurance Co.- bonuses promise + promise element + illusory promise
 P is an employee. D makes an announcement promising bonuses - "voluntary contribution… it may
be withheld, increased or decreased or discontinued, individually or collectively, with or without
notice." P sues when D refuses to give bonuses.
 Arguments:
o P - relied on bulletin for performance
o D - no enforceable promise to pay in the bulletin
 Court = in order to look at promissory estoppel, there must be a promise. There is no promise
in the bulletin.
o Labels bulletin promise as an illusory promise - "A suppose promise may be illusory because
it is so indefinite that it cannot be enforced or by reason of provisions contained in the promise
which in effect make its performance optional or entirely discretionary on the part of the
promisor"
o Court warns D about actions - like fraud

Ypsilanti v. General Motors- version #1 + promise element

 D made cars in Ypsilanti and had tax abatements. D wanted to close down factory and relocate
operations to TX. P sues to stop them.
 Court = enjoins D from transferring to other facility.
o Bases on injustice - people will lose their jobs if the facility closes
Ypsilanti v. General Motors- version #2 + promise element
 ON APPEAL
 Court = there is no commitment to be legally bound (no promise) + no reasonable reliance
o No promise: "Subject to favorable market demand" = these words, based on the speech they
gave at the meeting, makes the promise conditional
o Reliance is not reasonable: they said that it was subject to market conditions
 It could not be that D was promising to continue employment

REASONABLE RELIANCE
Alden v. Vernon Presley- Elvis case + reasonable reliance
 P is Ginger Alden's mom. Elvis promises to help her settle her divorce by giving her $. P begins
filing it, but then Elvis dies. Elvis's estate (D) tells P that they aren't paying for it. P goes through
with divorce and then demands $.
 Court = P's reliance was not reasonably justified
o D already told her that they were not paying for it and she still went and filed it

IMPLIED DUTY OF GOOD FAITH PERFORMANCE

NOTES
 The allocation of right determines on who builds it
 Property right does not matter on who benefits
 Coase Theory: as long as transaction costs are close to 0, it does not matter where you set the
entitlement if there is efficiency at the end
 What are ways to deal with risk? Best Efforts Clause
 Transaction cost of incompleteness --> solving this by implying good faith and fair dealing clause in
contract
 What does good faith mean?
o Why are you doing the act? The reason behind it, not what the act is
o Need to make it the sole purpose - there can be no other purpose for it
 We do not want to take good faith so far as to create a fiduciary duty

Goldberg 168 Corp. v. Levy- lease case + good faith

 P is the lessor; D is the lessee. Enter into a lease for rental of premises, which includes rent +
percentage of profits. There is a clause that if D falls below $101,000, D can break the lease. D falls
below, cancels K and P sues.
o Why have the percentage of profits? To decrease the amount of fixed rent price
 Arguments:
o P - D negligently or willfully permitted the business to become mismanaged and diverted
channels to other store to be able to cancel lease
 Court = implies good faith and fair dealing
o The lease did not talk about good faith or fair dealing - missing piece

Mutual Life Insurance Co of New York v. Tailored Woman- fur bergdorf goodman + good faith
 P and D have 2 lease agreements. Rent + percentage of profits for #1, but not #2. D moves fur
department to 2nd lease premises and P sues. (fur dept. was making more $)
 Court = there is nothing in the main lease to forbid moving the fur dept. - no restrictions to
particular merchandise being sold in one part of the building over another
o There could have been other reasons than the divert $ from lease that made D do it, it was not
the sole purpose - fur is exclusive, people were getting distracted from other merchandise,
business decisions
 o D is merely exercising a right
o Doesn't want to create a term in the 2nd lease that isn't there - this would be giving P
something they did not contract/bargain for
 Dissent: D's sole purpose for moving dept. was to divert $
o The furs were "on, in, or from" the main premises - the furs were stored in the basement,
prepared there for shipment, and the advertisements showed that the fur department was in the
first leases address

Stop & Shop, Inc. v. Ganem- supermarket + good faith

 P leased premises to D for rent + % of profits. P opened another stop and shop a mile away and
wanted to close this one. D wanted to enjoin P from closing it - injunction to keep operating it.
o P also had to record all sales, keep accurate books, and furnish statements (attempt to deal with
fraud)
 Court = there is no implied covenant for P to continue operating business
o Sometimes a covenant will be implied when fair rental value is grossly below fair market
value, but this is not the case.
 If the fixed rate was 0, the % would be dependent - D would become a "partner" that
would require fiduciary duty since they would be completely relying on the %. But when
there is % + fixed rent, this is not the case
o P had adequate purpose - good faith in their dealings
 Maybe it was easier to reach customers, property was bigger, etc.
 Vs. if they opened across the street --> this would show closing was not a sound business
decision

Food Fair Stores, Inc. v. Blumberg - judicial principle toward parsimony on implied covenant
 Not going to write the implied promise for the parties that failed to explicitly write it
 Where the sole purpose is not to injure the other side --> sound business judgment

The Original Great American Chocolate Chip Cookie Co. v. River Valley Cookies, LTD
 PURPOSE: AS LONG AS YOUR MAIN PURPOSE IS NOT TO "STICK IT" TO THE
OTHER SIDE = ACTING IN GOOD FAITH
 Not reasonable rule - we are not asking commercial reasonableness
 There is no requirement for parties to behave altruistically toward each other
o Only a duty not to act in bad faith
 Bad faith = "avoid taking advantage of gaps in a contract"

ANTICIPATORY REPUDIATION
 Before performance is due
 You can demand adequate assurance. If the party does not provide it, you can anticipatory repudiate
the contract, and "blame it" on the other side

**Albert Hochster v. Edgar de la Tour - courier + anticipatory repudiation

 P was a courier. D asked P to accompany him on tour that would begin June 1st. After a month, D
declined P's services and refused to compensate. P filed action on May 22nd (2 weeks after notice)
 Arguments:
o D - premature action; there could be no breach of contract before day of services were to start
 Court = can sue for damages immediately when K is breached.
o It would be unwise to adopt a universal rule that no action can be brought for breach until the
day when the act was supposed to be done arrives - this would be a social cost
 It is important when rights attach because of the possibility of mitigation
  Court also worried about waste
o If P can't sue for damages until the day when he agreement with D is supposed to be
performed, he will miss out on opportunity to mitigate damages by seeking other
employment
o Present: no right to present performance --> compensatory damages
o Future: the cost of cover with D's other employees

Harrell v. Sea Colony, Inc. - sale of Sea Colony condo + anticipatory repudiation
 P and D enter into K for sale of condo. P gives deposit and signs promissory note. Later, P cant
afford condo, so he requests that K be cancelled only if he can get his full deposit back. D cancels
K, but says they are keeping deposit as per liquidated damages clause of K and then sells condo to
another party. P sues.
o P also sues Freeman who was the agent he was talking to --> Freeman is let off the hook
because he is an agent and has no liability when acting for principle (Sea Colony) -->
protection from contract law
 Timeline of Offer/Acceptance
o Offer of Modification of K: "If you give me my deposit back, I will give you my contract to
sell at a higher price"
 There is consideration here**
 Right to sell condo + right to get deposit = inducement
o Oral communication with agent
o Subcontract being formed with agent
o Counter Offer: P gets letter sent about processing request based on reasons described
 Mirror Image Rule: changes terms from oral K
 This is the form D wants to stand in court
o Counter Offer: P adds term of giving back the deposit
o Last Shot Rule (common law): P's letters including new terms
 Form of Relief: deposit + increased price that D was able to sell condo
 Arguments:
o P - D repudiated contract and sold condo to another buyer for more $
o D - P already repudiated the contract through his letters
 Court = P neither repudiated or breached; remands to figure out damages
o (1) Why is it not repudiation = contingent on P getting his deposit
 Repudiation must be unequivocal and definite that they will not complete terms
 A mere request is not by itself enough for repudiation
o (2) P did not breach = the letter about the attorney is not a breach of the term
 In the contract, it was the seller's choice of attorney
 It was the courtesy of the seller to allow P to pick attorney most convenient
 This is not a breach of the term
o Remanded: either mutual rescission or breach by D
 Mutual rescission = no money from sale of condo, only deposit return
 Breach = would get the money from the sale of condo

HYPO: if D had breached, what is the damages calculation?

 P receives net expectancy which includes the deposit b/c the deposit is included in the full price he
pays. The amount he is awarded is based on the fair market value of the condo on the day of the
breach
 **$5,000 deposit, total price of condo is 20,000; fair market value is 40,000 = $20,000 in damages?

Scott v. Crown - seller/buyer of bushels #2 + anticipatory repudiation

  P sells D bushels. K states that payment for grain is due after 30 days after delivery. P and D
complete K#1, but then P suffers from finance probs. and is told by bank that D has had complaints
concerning payments. P stops performance, tells driver that he won't give rest of delivery until
assured D will pay, P tries to get in contact with D and can't. P finally gets in contact and tells D to
assure performance. D cancels K and P sues for breach.
 Did seller have reasonable grounds? Yes
o (1) Had bad prior experience with other seller not paying
o (2) Active complaints against D of defaulting on payments
o (3) D failed to make personal contact
 What did the seller do wrong?
o Demand for assurance was faulty/inadequate
 Timing, form, and content
 Seems that seller is attempting to change terms of K
 Time: wanted to change the date of when price was paid
 Content: desire to enter into negotiation to modify K
 Form: it is not in writing
 Assurance does not have to be in writing, but courts prefer it
 E.g., McDonalds case - oral demand for assurance, BUT they were talking to the
right people
 P made oral demand to the driver
 Also, there was no prior communication- subsequent interactions do not support
that oral communication was clear
 Grounds for repudiation if assurances aren't met are the same as grounds for fraud
 Same idea as Statute of Frauds for formation
 Court = demand for assurances is flawed, so seller breached. Seller unjustifiably refused to
perform

When Assurances Excuse Non-Performance

 When reasonable time is given to the other party to respond
o As long as it is in writing --> no performance is required
o This can even be if its 2 hours before performance is due (short period of time)
 What assurances can buyer give?
o Evidence of facts/extra information
o Would be tied to the doubt in the first place (e.g., if there is litigation with other sellers, buyer
can give explanation as to why he didn't pay)
 SUM:
o Demand for assurances must be in writing
o Response is not required to be in writing

MATERIAL BREACH
 Material breach = substantial performance
 When finding material breach, allows non-breaching party to suspend performance under contract
 Present vs. Future
o A breach that gives the victim a good reason to doubt future performance

B&B Equipment Co. v. Bowen - shareholder takeover + material breach

 P is looking for someone to take the place of one of the soon-to-be retired shareholders. They find
D. D had to buy 100 shares to be eligible, which he couldn't afford so the co. buys it and makes a
payback plan. At first, D does a good job and is paying off the co., but then starts lacking. P wants to
rescind K; P brings suit when D wants the rest of his paycheck.
  Arguments:
o P - D breached by not fulfilling his full time and effort, not properly bookkeeping, and not
paying the remaining $800
o D - the breach did not go to the substance of K. K was for the purchase of the stock, not the
employment
 Court = the contract is not just for purchase of stock, but for employment
o Relies on Restatement §275 - goes through the 6 factor test to determine whether it is material
breach or not
o The principle purpose was Ds employment and his performance of services; it was NOT the
purchase of the 100 shares of stock

Lane Enterprises, Inc., v. L.B. Foster Co. - steel maker + material breach
 P manufactures steel bridge components and gets a contract. D coats steal, so P and D contract for D
to supply the bridge components. D had to make coating in compliance with specifications. The first
stage fails, so P finds someone else and D pays the difference, but P still owes D $. Then P asks D to
reassure them they will commit to stage 2. D says they will not discuss stage 2 until they receive $
from stage 1.
 Procedure: P and D both sued each other. This one is about D suing P.
 Court = P did not materially breach.
o P failed to pay an insignificant portion of the whole contract (only 5%)
o Once P is not in reach for the $7,000 owed, D is refusing to perform. P is asking for assurance
and not getting it, so P had to hire someone else
 D is responsible for paying those damages for the increased labor

Shawn Kemp and Reebok

 Kemp is nearing the end of his contract. Does an interview where he endorses Nike instead of
Reebok
 Did the interview breach the contract?
o Exclusivity clause; non-disparagement clause
 Not a material breach - there is no doubt in his future ability; he is simply talking about the past in
the interview
 This is Reebok working in bad faith --> Kemp no longer had the market value when they started the
contract and they want to end it

SUM:
 Bowen - breaches by being a lousy worker --> material breach in that one doubt his ability to
perform in the future
 Lane - it is not a question about P's ability to pay (not material breach); it is a question of whether D
will perform in the 2nd stage (material breach)
 Kemp - Reebok was acting for another purpose, to get rid of K with Kemp

Ramirez v. Autosport - trailer + material breach

 P buys a trailer from D; traded in their old trailer that was discounted off the price. D told them they
would get it in 2 weeks. After 2 weeks not ready. Calls D multiple times and can't get in touch. P is
told its ready, but when they go to see it still not ready (cushions are wet, etc.) so they reject it.
Comes back some weeks later and no one helps them for hours, so P leaves. P comes back with an
attorney and wants to rescind K and get trailer back.
 Court = P is entitled to restitution damages for the value of their old van.
o P never accepted the goods and D never cured
o Reasonable time passed, so P can rescind the contract
 o UCC §2-106; Restatement §2-601
o Perfect Tender Rule: if it is not perfect, the buyer can reject
 If the goods do not conform to the contract
o Seller has the chance to cure the defect within a reasonable amount of time
 Before buyer accepts - buyer can send goods back and force seller to cure
 Failure to cure = cancel the contract/rescind
 If the buyer rejects after acceptance, buyer can only revoke if there is a substantial defect
o The rule is different between before and after acceptance because of opportunism

REVISITING EXPECTATION INTEREST

Cost of Completion vs. Diminution in Value
 Cost of Completion: "the owner is entitled to the money which will permit him to complete, unless
the cost of completion is grossly and unfairly disproportionate to the good to be attained. When that
is true, the measure is the difference in value."

Groves v. John Wunder Co. - plant premises #1 + cost of completion

 P and D are commercial agents. P owns land that has a plant on it for excavating and screening. D
owns one similar nearby. P leases to D for 7 years. D agrees to use it, but to leave property at
substantially the same grade as before. D takes all the good stuff and leaves the land broken, rugged,
and uneven. P sues for the amount to fix land ($60,000)
o The value of the land was only $12,160, but cost of completion of K was $60,000
o Purpose of K = commercial; extracting resources
o D's benefit = gets rid of a competitor (P)
 Court = cost of completion for damages is awarded (expectancy vs. restitution)
o The value of the land is no proper part of any measure of damages for willful breach
o The correct doctrine is the cost of remedying the defect - D said he would level the land, so he
has to do it
o Basis of Reasoning: reasoning by analogy
 (1) contractors - would never value based on land (THIS SITUATION)
 (2) trespassers - the recovery is limited o the value of the property. You can't take more
than there is so you can only get the value of the good (not this)
o Waste: if you order someone to do something you force sunk costs; distributional costs for this
case
o Public Policy: to avoid the willfulness of D - police opportunism

Peevyhouse v. Garland Coal Mine Co. - plant premises #1 + diminution of value

 P owns a farm that has coal deposits. Leases it to D for 5 years. D agrees to perform usual covenants
plus certain restorative and remedial work at end. D fulfills everything except the remedial work,
which costs $29,000. P sues.
o P is a farmer
o D is a commercial party, coal miner = REPEAT PLAYER
o Purpose of K = economic recovery of premises after use
 Court = rules in favor of D. Where lessee agrees to perform some remedial work and doesn’t,
the reasonable cost is the cost of completion. But when the economic benefit is grossly
disproportionate to the cost of completion, the damages are limited to diminution of value
o Problem in this case = opportunism
o Willfulness = bad faith if D is just trying to trick the farmers. They bid less, and then just pay
the difference in the value of the property
o Allocating the burden of high cost at the end
 Transaction costs:
  Negotiation
 Info asymmetry - knowledge of likelihood of price of damage
 Cost of knowing the legal rule
o Negative influence in future
 Farmers wont contract with coal miners
 The prices for the lease will increase to account for the price later to clean up
o Coase Theory: doesn't matter where you allocate the burden if the transaction costs are near 0,
since you will get to the same place (priced in the cost of the lease)
 But here, the transaction costs are not 0, so we tend to go against the repeat player;
burden them to let P know to contract around it
o This is NOT an efficient breach because they are not paying the damages
 Dissent: the main purpose of K was to leave the land as it was before

DEFENSES
How Defenses Work:
 P = asserts prima facie case --> mutual assent + enforceable + breach + entitled to remedy
 D = can be either:
o Denial = factual rebuttal (denial of the facts)
o Demurrer = even if what P said is true, they do not add to remedy because P has not shown the
elements of the law
o Defense = plea in avoidance; puts burden of P to deny the defense

DEFENSES BASED ON IMPROPER WAYS OF OBTAINING A PERSON'S ASSENT TO

CONTRACT
INCOMPETENCE
 Defense in that one cannot contract with someone who is incompetent

Ortelere v. Teachers' Retirement Board of New York - retirement plan + incompetence

 P is wife's executor. W suffers from mental illness and is seeing a psychiatrist. She suddenly dies,
but before she does, she changes her retirement plan for election of more benefits during life, but no
benefits after. P sues to set aside the change in application
o Larger payouts during life and no money for estate vs. smaller payouts during life and then
some leftover money for estate
 P's defenses:
o Her psychiatrist argues that she was not competent at any time under his care
 Court = the system for retirement application should have been fully aware of W's condition.
The conditions for avoidance are satisfied
o "A person incurs only voidable contractual duties by entering into a transaction if by reason of
mental illness or defect… (b) he is unable to act in a reasonable manner in relation to the
transaction and the other party has reason to know of his condition"
o Court is sensitive to the evolution of mental capacity in law
o Court accepts psychiatrist testimony + reasons that the party should have known
o Policy Interest: choice depending on other people in your life (single vs. having people to
financially care for)
 Since W's husband quit his job to take care of her. The only source of income would be
W's benefits
 Dissent: she was competent at the time she changed her plan
o (1) Submitted letter that shows knowledge of the retirement system
o (2) Larger payouts during life to care for 2 retired persons --> it was a sudden death, she didn't
know she was going to die
INFANCY
 Defense in that one cannot contract with someone who is underage
 The only time this defense will not work is if the contract is for a necessity
 Does not require knowledge that the person is an infant
 Ask for consent from parents/guardian and then sign a contract WITH the infant
o Because the infant can void the contract
 Once you get beyond the window period of 18 you cannot void the contract
 Common law rule = Brooke shields could void the contract
o Brooke shields case statutory interpretation that she couldn't revoke b/c of parents consent

Webster Street Partnership, LTD v. Sheridan - apartment rental + infancy

 P leases to 2 minors, D. D pays first month and some of second but defaults. D vacates premises. P
sues for damages - rest of rent. D countersues for return of security deposit.
 Court = an infant does not have the capacity to bind himself absolutely to a contract
o Only if there is a necessary can a minor contract for it
 E.g., food, shelter, etc.
 But in this case, the apartment was NOT a necessity - the boys knew they were able to go
home whenever they wanted to
o Prima facie case = contracted for lease; breaches lease; defense - underage, exception -
necessary
o Policy Interest: discouraging adults from contracting with minors. We want to protect children
from being taken advantage of. We also want to protect parents because they are legally
responsible for their children
 This is the effect of making contracts with minors unenforceable

Brooke Shields v. Gross - child porn + infancy

 Mom gives permission for photographer to take porn pics of P. When P turns 17, she finds out that
pics are being used in French magazine. Wants to stop the future use of the pics.
 Court = use of photographs are invasion of privacy unless there is consent
o CL allowed infants to disaffirm written consent, but this was overridden by legislature
 Legislature enacts Section 50 and Section 51: ensures consent and protects invasion of
privacy
 Mom gave consent for D to use pics of P - P cant override it
 Contract didn't have any clause to disaffirm
 Legislature Section doesn't allow minor to disaffirm consent
o Court found that the pictures were not pornographic
o Restatement §14: minors need to revoke consent while they are still a minor
 Dissent: the main priority is to protect children - statute was to protect privacy and now it is being
used in the opposite way. Worried about the possibility of parents exploiting their children.

MISREPRESENTATION OF FACT
 This is considered FRAUD
 Two remedies available for a party that is fraudulently induced into entering K:
o (1) Contract Action: he can rescind K and recover what he has already paid
o (2) Tort Action: he can affirm the contract and sue for tort damages in deceit
 In contracts, only need to prove that it was materially misrepresented. Do not need to show intent of
the other party. In tort, need to show that it is both false and spoken with intent to deceive

Halpert v. Rosenthal - termites + fraudulent misrepresentation + CONTRACT ACTION

  P and D are entering into K for sale of land. D puts down deposit and asks if there are termites. P
says no on 3 different occasions (oral representation). Before signing, D does inspection and finds
there are termites, and notifies P they are rescinding. P sues.
 Issue: whether this misrepresentation requires intent? NO
 Court = a party is entitled to rescission when the other party has made a fraudulent or
material misrepresentation, whether it be innocent, negligent, or fraudulent
o The misrepresenter's good faith is material; the focus is on the person to whom the
misrepresentation is made --> innocent party should not suffer the injury
 Merger clause doesn't matter
o Why is there no statute of frauds violation? The representations were given orally and there is
a written contract
 The information is not altering the provisions - it is destroying the contract
 It is not about what the contract says, it is what the contract should be
 The result is voiding the whole thing, not changing the terms
o The misrepresentation has to actually induce the party - doesn't need to be the necessary
clause, only the substantial cause
 Situated differently about knowledge of thing - seller; best position to know about the house;
comparing to Wood v. Boynton
o Economic intuitions about who is the least cost avoider

Byers v. Federal Land Co. - Wyoming land + material misrepresentation + CONTRACT ACTION
 K for sale of land - P communicated with brokers. P was to buy the land, and immediately lease it to
another party and subsequently pay off the cost in installments. P gets letter from another co. and
finds out they actually own land. Also finds out that the worth was $15, not $35. P sues.
 Arguments:
o P - D fraudulently represented to him that:
 (1) Misrepresented as to the ownership of the land
 (2) Misrepresented as to the value of the land
 (3) Misrepresented as to the possession of the land
 Court = only the delivery of possession was material misrepresentation, not ownership or
value of land.
o Possession: the conduct can give rise to inference that leads to misrepresentation
 Conduct = the permission to take and lease the land to another
 Possession would have to be immediately at closing to go through with K
 The whole deal was dependent on possession - how P was induced to go into contract;
the promise was implicitly implied
o Ownership: this was not a material misrepresentation
 D could still comply with the contract regardless if they actually owned it
 They were going through the necessary steps to own the land
o Value: an honest opinion as to the value of property is not fraudulent misrepresentation
 The valuation of land is an opinion, vs. the termites, which was fact
 Opinions can be basis of misrepresentation:
 (1) Fixed value dependent on market price (e.g., bonds)
 (2) Special reliance on knowledge - superior knowledge of speaker
 (3) Speculative value ** this is what this case is
 The land did not have a definite market value, the brokers did not have superior
knowledge as to the value of the land, and the value was speculative b/c the land was
situated in prairie land, not good for farming but also close to a major city

Vokers v. Arthur Murray, Inc. - dance lessons + fraudulent misrepresentation + extreme case
  P begins dance lessons at D's studio. She is a widower/going through mid-life crisis. P ends up
signing 14 Ks with them and spends close to $31,000 - D tells her she is improving, she has
excellent potential, etc. P sues after she finds out she isn't improving.
 Court = D had superior knowledge as to whether P had "dancing potential"
o Element of bad faith in the background
o If you give an opinion being the higher authority party (statement from party with superior
knowledge) this will be regarded as statement of fact
o You must tell them the truth when there is inducement - at the point of sale
o Fiduciary Duty: Court holds that D had fiduciary duty to P
 Executor of Will
 Guardian-Child
 Corp CEO-Shareholder

DURESS
 Modification and doctrine of good faith
 Consent to contract is not binding if it was obtained by use or threatened use of force

Hackley v. Headley - logs + duress

 P and D contract for logs. P does the work and gives D price, but D denies and says that they will
only pay $4000 ($2000 less than what P asks for). P says that D needs to pay $6200, but D tells P to
"sue him". P takes $ and signs a release b/c he is in financial hardship. P sues for full compensation
 Arguments:
o P - accepted the money under economic duress b/c he was in financial hardship
 Court = duress was not the cause because D did not cause P's financial hardship
o Refusing to pay + the financial constraint does not equal duress
o D had a lack of knowledge of P's financial problem
o Although D is withholding the payment, he did not cause the problem
 It is not like he is holding the logs captive
o Policy: we want to be careful in encouraging contracts with parties that are financially
constrained
 Contracting ends when people who need money cannot contract
 There is a fear that if you're dealing with lesser wealth, contracts will become voidable
 (1) Party that has financial hardship wont be able to contract
 (2) Party would never know when the contract would hold because of the possibility of
the duress argument
o How it would be duress:
 D had knowledge of P's financial hardship
 P would not have the ability to cover

Austin Instrument v. Loral Corp. - delivery of radar parts + duress

 D has 2 contracts with the gov't to supply radar parts. Seeks subcontractors for K#2- P being one of
them. D awards contract to P for some of the parts, but not all. P refuses to accept offer less than all
40 bids and tells D they will cease all deliveries unless D consents to increase prices. D tries to find
other subcontractors but fails, so accepts P's increased price. D doesn't pay, so P sues for money.
 Argument:
o P - the cause was the gov't, not P. D only looked at a small number of vendors to cover when P
had a longer list.
 Court = there is clear duress
o There is knowledge of D's vulnerability - P knew that D was contracting w/ gov't and there
would be severe penalties (D had liquidated damages clause)
 o There is an inability to cover
 Urgent circumstances
 D couldn't risk being late with the shipments
o A contract is voidable on grounds of duress when it is established that the party making the
claim was forced to agree to it by means of a wrongful threat precluding the exercise of free
will
o There is a lack of business motivation on P - what was the party's motivation in increasing
prices?
 P is acting in bad faith
 Distinction from Hackley: the threat is more problematic here (and easier to see)

United States v. Progressive Enterprises - machine 15 day acceptance + modification + duress

 D anticipated in winning gov't contract for machine. P makes an offer, but requires acceptance
within 15 days. D doesn't get gov't contract until 15 days after due date; accepts P's price when it
gets it. P notifies D that the price increased b/c of increased material costs (modification) and D
accepts. Later, D refuses to pay increased price. P sues
 Court = there is no duress and consideration was not required for modification of K
o UCC §2-209 - a party may seek modification for legitimate commercial reasons
 P had a reasonable business purposes - the expenses increased
o D never protested to the new price - kept their intention secret to make sure the other party
performed
 D acted in bad faith using the strategy of secrecy

UNDUE INFLUENCE
 Special vulnerability + occasioned by something else that mirrors a threat

Odorizzi v. Bloomfield School District - homosexual teacher + undue influence

 P is an elementary school teacher and is criminally charged with homosexual activities. He is
arrested, doesn't sleep for 40 hours, and is then released. D comes to P's house after release and tells
him he must resign immediately. If he doesn’t, they will suspend him and publicize his dismissal -
"extreme embarrassment and humiliation." The charges are dropped, and P sues.
 Issue: whether the resignation was made under undue influence? Yes
 Arguments:
o Duress: threat to life, limb, and property --> the conversation had no duress
 There was no illegal threat
 The education code held that D could file and fire P in connection with crime. It was not
illegal to begin the proceedings
o Fraud: there was no misrepresentation
 Constructive fraud --> no fiduciary duty present between employer-employee
o Undue Influence:
 Elements:
 Excessive force and pressure: when there is an advantage over other party (not as
strong as duress)
 Undue susceptibility: there is some temporary incapacitation for some reason (less
than full incapacitation)
 Total weakness of the mind = incapacitation/incompetence
 Court = there was undue influence when D spoke with P
o P had emotional turmoil and hadn't slept for weeks (undue susceptibility)
o D had advantage over P in extreme embarrassment and humiliation
 UNCONSCIONABILITY
 Two parts:
o Procedural unconscionability: the process of contracting
 Whether one party has bargaining power over the other
o Substantial unconscionability: the resulting contract terms
 Whether there are unfair or oppressive terms
o The "slippery slope"
 Must have BOTH procedural and substantive unconscionability

Williams v. Walker-Thomas Furniture Co. - furniture store items + unconscionability

 P, low income, buys stuff from D. D is a furniture store that sells household items. The K between
them says P can pay for items in pro rata installments, but if P defaults, D can repossess all the items
purchased. P defaults and D tries to repossess.
o Pro rata: the money gets divided evenly between each thing
 E.g., if P gives $400, the $ wont pay off one whole thing, it will be divided between the 3
items so they each still have a remaining balance.
o Gives the seller extra rights b/c they can ask for everything back that wasn't paid off
 Court = adopts the rule of unconscionability for contract of adhesion (form contracts)
o (1) Absent choice - procedural - gross inequality of bargaining process since it’s a form
contract
o (2) Unreasonable towards on party - substantive - the terms
o Contract of Adhesion = "take it or leave it"
o There is clear unfairness in the transaction - D knew that P didn't have the money but still sold
her the stereo. They know P's susceptibility
o Finds that the contract's terms and bargaining process was unfair (unconscionable)
o Possible Defense for D:
 D is aware that she is a high risk - P had low credit score. This is the only way that she
can get what she wants.
 D is allocating the risk P poses through this contract provision instead of increasing the
price so she can't afford it

In re REALNETWORKS - clickwrap agreement + unconscionability

 P wants to bring suit, but D has a clickwrap with mandatory arbitration clause
 Arguments:
o P - (1) Procedural - failed to prove fair notice of its contents and doesn't give reasonable
opportunity to understand terms before enforced and (2) Substantive - clause chooses
Washington state as forum
 Court = the contract is neither procedural nor substantively unconscionable
o (1) Procedural: arbitration clause is not buried - placed in final paragraph and same size font
as rest of agreement. Doesn't matter that its labeled something else since D has no requirement
to draw attention to it
 Contract is also printable - P has all day to read it
o (2) Substantive: court will not require D to arbitrate anywhere

California Cases***
Discover Bank v. Superior Court - credit card arbitration clause + unconscionability
 P gets credit card from Discover Bank. There was no arbitration clause when he opened his account.
Later, D sends email saying terms are amended, includes new mandatory arbitration clause that
invalidates class action arbitration suits. D writes if customers don't accept new terms, must notify
bank and close their account; if customer is silent, D will assume they accept terms. D also has a late
 fee on payments ($29), but doesn't tell customers that the late fee will be charged at 1pm the day it is
due. P wants to sue for class action suit.
 Court = An adhesion contract that disclaims class relief entered into by consumers and large
corporations, is essentially a contract disclaiming liability for fraudulent conduct and
therefore, is contrary to public policy under Cali law.
o Contract of adhesion has elements of procedural/substantive unconscionability
o Procedural: the cardholder agreement is in the form of a "bill stuffer"
 After the relationship between P and D is already initiated, customers can only accept or
close the account
o Substantive: the class action arbitration waiver is an exculpatory clause
 Exempts D's responsibility from his own fraud
 Goes against policy
o Policy: (positives of this ruling)
 (1)Compensation: no individual claimant would pursue the claim due to small
individual amounts. Class action allows people to bring suit
 (2) Deterrence of Fraud: prevents future fraud - companies will know that if they cheat,
they are threatened by class action lawsuits
 (3) Emotional element to "sticking it to the man"
 Dissent: the cardholder had other means of resolving the fraud (calling the bank and getting them to
give them the money back). The clause is no exculpatory, just need different means

Gatton v. T-Mobile, USA, Inc. - cancellation fee, arbitration clause + unconscionability

 P had to pay $200 fee for cancellation. D locks their phones to prevent subscribers from switching to
providers without having to purchase a new phone. P wants to bring class action suit against T-
Mobile.
 Distinction from Discover Bank: the arbitration clause is in from the beginning
 Court = introduces the sliding scale. Substantive unconscionability makes clause invalid
o Procedural: there is an oppressive element since this is a contract of adhesion, but not surprise
element (since clause has always been included)
 Doesn't matter that there were other market options
 Immediately gets to the substantive part by identifying as form contract
o Substantive: overly-harsh and one-sided results
 T-Mobile isn't filing a class action suit against customers

AT&T Mobility v. Concepcion - FAA + Supreme Court Decision + unconscionability

 P bought a phone from AT&T. D advertised "free phones," but really charged $30 for sales tax. P
wants to bring suit, but D brings forth arbitration clause/arbitration clause that prohibited class
action. P argues arbitration clause is unconscionable.
o FAA: act that refuses discrimination against arbitration clauses. Passed b/c courts were being
hostile towards it
 Issue: does the FAA preempt Cali's that law arbitration clause waiving class action are
unconscionable?
 Court = the Discover Bank rule is preempted by the FAA
o Arbitration is designed to be informal, speedy and less costly = achieve by procedure
informality (gets you to a substantive decision faster)
o If you allow class action arbitration, this increases procedural steps - this sacrifices the
advantage of arbitration
 Do the issues in common between parties dominate their differences?
 Is the representative an adequate representative of the whole?
o The rule against class action discriminates against arbitration
  Discover Bank rule is that a contract of adhesion between consumer and company with
superior bargaining power, that included arbitration provision waiving class action, was
unenforceable b/c the waivers are unconscionable
 When a state law prohibits the arbitration of a particular type of claim (in this case
contracts of adhesion) the conflicting rule is preempted by FAA
 The Discover Bank rule interferes with arbitration b/c it allows any party to a consumer
adhesion contract to demand class-wide arbitration when damages are predictably small
o BUT, there is a limitation to the FAA
 A written provision in any maritime transaction or a contract evidencing a transaction
involving commerce to settle by arbitration a controversy thereafter arising out of such
contract or transaction… shall be valid, irrevocable, and enforceable, save upon such
grounds as exist at law or in equity for the revocation of any contract
 This second portion allows arbitration agreements to be unenforceable when there is
fraud, duress or unconscionability

Samaniego v. Empire Today, LLC- employer-employee contract + unconscionability

 P thought they were employees of D, but were really signing independent contract agreements. P
were Spanish employees - barely knew English. D did not allow them a Spanish translator, fee
shifted to P, shorten SOL for arbitration claim.
 Court = works around the Concepcion rule. Finds clause unconscionable and arbitration
clause denied
o How they work around the rule: this contract is not unique to arbitration and it is not
discriminating against arbitration. The terms are unconscionable.
o Procedural: D had an unfair advantage - didn't give P time to read document, didn't give them
a Spanish translator.
o Substantive: SOL was only 6 months instead of the standard 3-4 years. Didn't give P the AAA
rules. Fee shifted to P.
 Fees --> D would probably not be able to collect $ anyway

DEFENSES BASED…
FAILURE OF BASIC ASSUMPTION

Mistake of Present Existing Facts

 Mistaken assumption about basic facts at the time of contract formation

DOCTRINE OF MUTUAL MISTAKE

 Presently existing material fact + mutual mistake = grounds for rescission
Sherwood v. Walker - barren cow + mutual mistake
 P and D enter into a contract for the sale of a cow. Both thought at the time of the contract the cow
was barren, but turns out it was with a calf. D refuses to deliver. P sues.
 Court = the mistake went to the whole substance of the agreement as to be able to rescind it
o Comparison to Raffles - "Peerless" ship. There was a misunderstanding as to an ambiguous
word so the court declared that there was no contract.
 Here, there is a perfectly valid contract, but there is an assertion of the defense of mistake
as to rescind it
o "But it must be considered as well settled that a party who has given consent to a contract of
sale may refuse to execute it or avoid it after it has been completed, if the assent was founded
or the contract was made on mistake of material fact"
 Dissent: the mistake was not mutual because P believed that the cow would breed. P had the
expectation that what D said about the cow being barren was not true.
Nester v. Michigan Land & Iron Co. - quality/quantity wood+ mutual mistake
 P and D enter into a contract for the sale of logs. D gave estimates, but did not warrant that they
would be correct. P has his own agents estimate the wood. When the quality/quantity of the logs
lack, P sues.
o Mistake as per estimates = the quality and quantity of the wood
 Argument:
o P - mutual mistake as to the quality and quantity of the timber at the time of the contract
formation.
o D - there were negotiations, but D never warranted the estimates of quality of logs were
correct. P bought them anyway.
 Court = upholds the full contract. The contract is silent on warranting the quantity or quality
of the wood - P assumed the risk.
o There is evidence that P has his agents take estimates of the wood prior to purchasing it. P
asked D for the warranty and D declined, but P still bought it anyway. He is assuming the risk.
 This is the story that comes out of oral evidence (parol evidence)
o Court declines allowing P to enter parol evidence that includes discussion of warranty clause.
But allows extrinsic evidence on D's side.
 You can use extrinsic evidence to uphold the contract, but not to make the contract
speak.
o Warranty:
 (1) There is a warranty --> then the buyer would win
 (2) "As is" Clause --> then the seller would win

Wood v. Boynton - diamond + mutual mistake

 P owns a small stone and doesn't know what it is. She goes to D, an owner of the jewelry store, and
inquires about it. He says he isn't sure what it is, but offers her $1 for it, which she accepts. Later
turns out the stone was really a diamond and was worth $700. P sues.
 Argument: prima facie case
o P argues mutual mistake
o D argues no fraud
 Court = contract for the sale of diamond is upheld.
o P assumed the risk. She did not take the extra effort to investigate the stone's value prior to her
sale - she knows she doesn't know what it is, but goes through with the sale anyway
 Restatement §154(b): "A party bears the risk of a mistake when 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

HYPO: if P goes to the store and asks what the stone is, and D knows that it is a diamond, but tells her he
doesn't know and offers $1, P will win on action based on fraud. D lied to P about a material fact

Reoccurring theme through mistake cases: courts letting the mistake fall where it does
 Letting the chips fall where they may
 If the parties do not allocate by the contract, let the risk allocate the way the mistake is
 Similar to Coase theory - if transaction costs are at zero, the risk will allocate efficiently

Lenawee County Board of Health v. Messerly - septic tank + mutual mistake

 Septic tank installed illegally. Raw sewage was leaking from the ground up. Health board
condemned property. Mutual mistake as to the intended use of the property. Pickles (last buyer)
initiated suit to rescind the contract
  Court = although there is a mutual mistake as to the habitability of the premises and its
generation of income, the remedy of rescission is insufficient because the purchasers allocated the
risk in the contract
o The contract has an inclusion of "as is" clause - express allocated risk of mutual mistake onto
purchasers
 Restatement §154(a): A party bears the risk of mistake when the risk is allocated to him by the
agreement of the parties

HYPO: If P asked about the problems and D said there were none, knowing that the property septic tank
had problems --> FRAUD

UNILATERAL MISTAKE
 Contracts that are made based on unilateral mistake are enforceable, but if party A knows that the
assent of party B is based on a mistake, the contract is voidable at the will of party B.
 Party A has a duty to disclose the mistake

Tyra v. Cheney - subcontractor formal-informal bid + unilateral mistake

 P is a subcontractor; D is a contractor. P is too late to submit formal bid - told to submit informal,
which he includes correct price. Then P is told he can submit a formal bid, but forgets certain
amount. P is awarded the bid, but brings suit to recover $1,000 due to mistake.
 Court = if one party is aware of the contract of which the other party is unaware, the parties
cannot enter into a binding agreement
o D had knowledge that P made a mistake, but didn't bring it up.
o Comparing to Drennan v. Star Paving - here, the court held that the mistake on submission of
bid was not grounds to rescind. Distinction is that P did not know that D made a mistake on
the bid
 Restatement §153(b): A mistake of one party at the time of the contract as to a basic assumption of
a contract that materially affects it is voidable if he does not bear the risk as under §154, and the
other party has reason to know of the mistake or his fault caused the mistake

Laidlaw v. Organ - end of War of 1812 + duty to disclose

 P and D were negotiating the sale of tobacco. D asked if P knew any reason that market price of
tobacco would change; P said he didn't, but the influence of the war possibly ending soon would
double market value (no more trade embargo). When D heard news that the war was ending, D stole
the tobacco back from P. P sued.
 Court = the knowing party must not lie, but has no obligation to inform the other party
o Material fact = the end of the War of 1812
o When the information goes to the subject of the bargain - requires sharing
o When the information is speculative - does not require sharing
o This is a business transaction --> no fiduciary duty to one another
o The buyer of the tobacco = geologist
 By requiring to share information, the incentive to find the information in the first place
would be lost (e.g., the search costs)

FRUSTRATION OF PURPOSE --> looking at the future

 Impracticability = a supervening event that was unforeseen that alters the contract

2. Changed Circumstances
Krell v. Henry - coronation of the king + frustration
  P and D enter into a contract for the use of a room for 2 nights to see the Coronation of the King.
Coronation gets cancelled b/c King was sick; D refuses to pay remaining balance.
o How did D know about the room? AD IN THE WINDOW**
 Ad specifically advertised the view. The room was only available during the day and you
could specifically see the coronation from the window
 Court = although the contract does not say that the room was conditioned on the coronation
occurring, the event was the central part of the contract.
o The court puts it into the contract b/c it is implied through the ad
o Purpose of contract was frustrated --> therefore, voidable
o To be able to rescind based on frustration, it must be central to the contract

HYPO: A is going to a Bruce concert in Albany. He gets a hotel room for one night; the only reason he is
in Albany is for the concert. The concert hall cancels. Does A have the right to rescind contract with the
hotel? NO
 You are not viewing the concert from the hotel room

Lloyd v. Murphy - leased property for cars + frustration

 D leased property from P to sell and repair cars from the leased property. Restriction that P had to
obtain D's consent to use property for any other reason. There is a supervening event - WWII
restriction on sale of cars. P offers to release restriction and D says no, backs out of contract
 Court = a party's performance under a lease cannot be excused for frustration of performance
when the frustrating event was reasonably foreseeable and the value of the lease was not
completely destroyed
o The party who is seeking the excuse must show:
 (1) The frustrating event was not foreseeable by the parties at the time fo the lease
 (2) The value of the lease was totally destroyed
o Court finds that D failed in showing this:
 Foreseeable consequences were up ahead - P and D entered into K which Congress
passed Act a year prior. It was commonly known that restrictions were going to be put in
place on automobile industry
 Value was not completely destroyed - the restrictions didn't make the sale impossible,
just made it less profitable.

Restatement §265: Discharge by Supervening Frustration

Where, after a contract is made, a party's principal purpose is substantially frustrated without his fault by
the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was
made, his remaining duties to render performance are discharged, unless the language or the
circumstances indicate contrary
 Where should we allocate the burden where the risks are unforeseeable?
 Ability of one party to mitigate the risks; allocate to the least cost avoider

3. Allocation of Risk in Long-Term Contracts: how should we interpret a contract when its been
going on for a long time?
Aluminum Company of America v. Essex Group, Inc. - impracticability
 ALCOA supplies to Essex. Prices are fluctuating based on an index, but there is a cap. Suppresses
the amount to charge where the indexes are lagging indicators. ALCOA's costs are increased
substantially, but the index price didn't cover the costs. ALCOA is the disadvantaged property, and
Essex is the advantaged party.
o What could ALCOA do?
 (1) Keep performing and suffer a massive loss
  (2) Breach - but the money damages will be great. There is a huge gap between the index
and the market price. D would mitigate the damage, but the prices are going to be very
high. P would have to pay the difference.
 (3) Modification
 Why would D want to negotiate if they are the advantaged party?
 Rescission on the basis of impracticability --> risks of the bad outcome of
litigation. The court ruling that the contract is void - they would lose out on the
benefits rather than just modifying.
 Arguments: P - (1) mutual mistake, (2) impracticability, (3) frustration. Prices have changed
dramatically.
 Court = a party can seek excuse of performance or K modification where performance under
original terms would be impracticable
o Question on whether the prices are changed enough - increased costs alone will only excuse
performance if the rise in cost is due to unforeseen contingency that alters the nature of
performance
o Remedy: (1) Rescission, (2) Restitution for amount already paid, or (3) Modification - the
court invents terms out of the contract (reformation)
o Adopts normative theory - changes around the contract so as to preserve the relationship
between P and D
 Invented - courts will not make contracts for parties. The court rationalizes creating
terms here by looking towards the UCC and judge actions in business transactions. UCC
provides some leeway to add terms, and court finds that judges decide business decisions
ex-post all the time, so should be able to do it here
 Griffith Summary:
o The price term did not allocate the risk
o Judge is acting as the legislature acting like a party
o The courts role is to maintain the parties' relationship when the parties intentions are
unclear/exhausted
o Reformation can relieve parties of hardship caused by changed circumstances
 POLICY: instead of litigating, the advantage party may want to negotiate since the disadvantage
party has the threat of rescission. But when reformation becomes an option, the downside risk to the
advantaged party decreases. It changes the incentive - what is to get the advantage party to the
negotiating table?
o Judges aren't that good at deciding what parties would have decided if they negotiated
themselves - after ALCOA ruled, parties negotiated the terms after the case.
o Maybe courts are best at applying formalistic rules and worse when thinking like a legislature.

Northern Indiana Public Service Co. v. Carbon County Coal Co.

 P agreed to buy certain amount of coal from D every year for 20 years at a fixed price, but subject to
escalation. There was also a force majeure clause - P could stop buying coal for a reason beyond
reasonable control. Instead of P buying electricity off the market and selling it to consumers, they
used the coal to generate the electricity. P negotiated with the gov't that they would only charge
customers the price of the electricity as on the market. The price of coal escalated, and P found a
cheaper supplier. Stops buying from D.
o This is a regulated industry by gov't entity
 Arguments:
o P - (1) The action of the gov't prevents P to utilize the coal by requiring them to sell it at
market price, (2) there is no contract due to frustration, impossibility, or impracticability
o D - specific performance
 Court = the force majeure clause is not a buffer to a party against normal contract risks
 o (1) These were normal risks to a fixed-price contract
 If the gov't had forced the closing of a plant --> force majeure clause
 But it is normal for market prices to rise or fall; the whole point is to allocate risk when
associated with fixed-price contract
 This is also a regulated industry - gov't action was pervasive already when they entered
into the contract
o (2) These defenses are only available when the allocation of risk is silent
 Here, it is not silent - its fixed price, which is contemplated at the time of the contract
o But the court rejects specific performance and only allows damages
 Doctrinal - you only get specific performance when damages are inadequate
 The court finds that damages are perfectly fine here
 Specific performance inhibiting efficient breach argument:
 This is an efficient breach - P's cost of performance is more expensive than breach
 If P was required to perform, they would have to buy the coal from D, but they
can't use it to generate electricity, so they would have to sell it to a 3rd party. The
problem is that P doesn't know who to sell it to, but D would (thinking about the
transaction costs)
 SP wouldn't inhibit efficient breach, but may increase transaction costs
 Griffith Summary:
o Price term allocated the risk
o Courts role is to enforce the parties presumed intent
o Traditional "all or nothing" enforcement (or excuse) creates the right incentive for parties to
order their relationship ex ante, or modify them ex-post

SUMMARY on contracts and economic analysis

 (1) Descriptive: courts interpret, they do not invent
o When judges are applying doctrine, they are thinking about economics
o Claim is that every contract becomes silent over time
 (2) Normative: judges filling gaps of a contract
 Economic Analysis of Law
o Least cost avoider
o Different incentives
o Info asymmetry
 Posner is the most straight forward judge when it comes to discussing these principles
o Combines doctrinal rules and economic rules