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Circumstances can indicate a party’s intention not to be bound
If circumstances show that one has gone through the process of agreement solely for
amusement, the agreement will not be enforced.
o Ex. Drunk farmers
Agreements Leaving Terms for Agreement
Traditional Premise: No contract
Second Premise: The price is the same price as would be implied if nothing is said as to
price. A reasonable price at the time for delivery. §2-305
Konic International v. Spokane Computer Services
Ambiguity Test: Everyone Loses, no commerce happens.
The court found that both parties’ understandings were reasonable and both parties were
equally at fault
There was not meeting of the minds and therefore no contract was ever formed.
Peerless Doctrine: (§20)
Where a phrase of a contract is reasonably capable of different interpretations there is no
contract
The doctrine applies only when the parties have different understandings of their
expressions of agreement
The doctrine does not apply when one party’s understanding, because of that party’s
fault, is less reasonable than the other party’s understanding.
Intention Not to Be Bound Until Later Writing:
Some courts examine the language to support a finding that the parties intend to be bound
before a later writing is signed
Courts will also examine the completeness and formality of the writing
The amount of specificity expected will depend on the nature of the parties
and magnitude and complexity of the transaction.
The fact that the parties’ understanding is entirely oral may suggest an intention to be
bound, especially given the size or nature of the transaction.
Factors that Courts Consider for Intent to Be Bound
Whether the contract is of that class which are usually found to be in writing
Whether it is of such nature as to need a formal writing for its full expression
Whether it has few or many details
Whether the amount involved is large or small
Whether it is a common or unusual contract
Whether the negotiations themselves indicate that a written draft is contemplated as the
final conclusion of the negotiations.
Effect of Conduct
Some courts will consider prior course of dealing.
Courts will examine the parties’ behavior after making the preliminary agreement.
Mistake In Language
Courts usually allow recovery for loss of expectation if one party made a mistake in the
use of language
Texaco, Inc. v. Pennzoil Co.
Factors to Determine Intent to be Bound:
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Whether a party expressly reserved the right to be bound only when a written
agreement is signed
Whether there was any partial performance by one party that the party disclaiming the
contract accepted.
Whether all essential terms of the alleged contract had been agree upon
Whether the complexity or magnitude of the transaction was such that a formal,
executed writing would normally be expected.
Test: Matter of objective intent
a. What is clear intent/language?
b. Did they ever have contract rights?
Presence of a contract:
o Yes:
Essential terms are agreed upon.
o No:
“Subject to”
Complex merger
Later definitive writing
A contract is the ultimate trust
A jury lacks the expertise to comprehend this complex issue
Texas court applying New York Law
“In principal”
Look at the article Texas common law massacre.
When you have fuzzy law you can argue yes or no
o Do we want shaky contract thrown into tort law?
o Competition v. trust
The term “subject to” may be used carelessly and not be a true indication of intent
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INTEPRETATION:
The Process of Interpretation:
Interpretation: refers to the process by which a court determines the meaning that the
parties themselves attached to their language
o The bargain of the parties as found in their language or inferred from other
circumstances
Construction: refers to the process by which a court determines the meaning that will be
given to the language of the contract in giving it legal effect.
Vagueness and Ambiguity:
Vagueness: A word that is vague to the extent that it defines not a neatly bounded class
but a distribution around a central norm.
o Examples: “removal of all dirt.” Does this include sand from the subsoil;
“chicken.”
Ambiguity: A word that may have two entirely different connotations.
o Examples: The ships Peerless
Reasons for Lack of Clarity:
o Difficult to foresee the problems at the time of contracting
o Some lawyers prefer not to bring up unlikely scenarios that might slow down the
process
o Drafters sometimes deal with foreseeable problems with general terms.
Choice of Meaning:
The search for meaning begins with the meaning attached by both parties to the contract
language.
Same Meaning Attached (Meeting of the Minds):
o Sometimes both parties in a contract had the same meaning mind at the formation
of the contract.
o Objectivist Solution: An objective standard of reasonableness should always be
applied to determine the meaning of a term.
Sacrifice the actual expectations of the contracting parties to a supposed
objective meaning
o Prevailing View: Restatement §201(1)
Where the understanding is mutual, it ceases to be the “private”
understanding of one party.
Since each party attached the same meaning to the language, there is no
need to apply an objective standard of reasonableness.
Actual Knowledge (Misunderstanding of a Term):
o One party (and only one party) actually knows that the other party has attached
another meaning and knows what that meaning is.
o The courts will go with the term as understood by the second party.
o Rationalized by the belief that a party that makes a contract knowing of a
misunderstanding is sufficiently at fault to justify that party’s being subjected to
the other party’s understanding.
Reason to Know (Misunderstanding of a Term):
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o If neither party had actual knowledge of the misunderstanding, and one party (and
only one party) had reason to know that the other party has attached another
meaning and to know what that meaning is.
o Same general rule as the prior scenario.
o This approach as the advantages of predictability and certainty.
Frigaliment
o Definition of what “chicken” meant. Young chicken or chicken for stewers.
o The seller did not have reason to know of the narrow definition of young chicken
used by the buyer.
o The court reasoned that the buyer had the burden of showing that chicken was
used in the narrower rather than the broader sense
Raffles v. Wichelhaus (Peerless Case)
o Neither party had reason to know of the meaning attached by the other.
o The court found that there was no consensus and therefore no binding contract.
o Neither party could sustain the burden of showing that its meaning should prevail
Restatement §20:
o There is no contract for lack of assent when the parties attach materially different
meanings to their manifestations and neither party knows or has reason to know
the meaning attached by the other.
No Meaning By Either Party:
o Interpretation cannot turn on meanings that the parties attached if they attached
none
o The interpretation must turn on the meaning that reasonable persons in the
positions of the parties would have attached if they had given the matter though
Fundamental Principles of Interpretation:
Circumstances:
o The plain and ordinary meaning doctrine is at the heart of contract construction
o The court will look at all the relevant circumstances surrounding a transaction.
o Includes:
Writings, oral statements, and other conduct by which the parties
manifested assent
Prior negotiations
Applicable course of dealing, course of performance, or usage
Dictionary Definitions:
o May be of help in showing the general use of words, but they are not necessarily
dispositive
Purpose Interpretation:
o Courts will try to resolve doubts in favor of a meaning that will further the
purposes of the contract.
Interpretation depends on the attitude of the particular court.
Rules In Aid of Interpretation
Most courts start with the assumption that the parties have used the language in the way
that reasonable persons ordinarily do and in such a way as to avoid absurdity.
General Rules of Interpretation:
o When the parties list specific items, without any more general or inclusive term,
they intend to exclude unlisted items (expressio unius est exclusio alterius)
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o When the parties list specific items, followed by a more general or inclusive term,
they intend to include under the latter only things that are like the specific ones.
o Assumption that the parties intended every part of the agreement to mean
something, although not necessarily to be legally binding.
o Words used repeatedly have meaning that is the same throughout the contract
o If two provisions in a contract conflict so that both cannot be given full effect, it is
assumed that the more specific the provision, the more likely it is to reflect the
parties’ intention
o The greater the attention devoted to negotiating a term and reducing it to writing,
the more likely it is to reflect the parties’ intention
o Separately negotiated terms are given greater weight than standardized terms
General Rules of Construction:
o Help to determine the legal effect of the language.
o An interpretation which sacrifices marginal interests of both parties in order to
protect their major concerns is preferred over the converse.
Assumption of a fair bargain
o If language supplied by one party is reasonably susceptible to two interpretations,
one of which favors each party, the one that is less favorable to the party that
supplied the language is preferred
Contra proferentem
This is not applicable if the language is unambiguous
Used as a rule of “last resort”
o If the language is reasonably susceptible to two interpretations and only one
favors the public interest, this interpretation will be preferred.
Evidence of Prior Negotiations
All courts agree that the parol evidence rule allows evidence of prior negotiations even
though the agreement is integrated, as long as the language itself is ambiguous or vague.
Plain Meaning Rule:
o There are some instances in which the meaning of language, when taken in
context, is so clear that evidence of prior negotiations cannot be used in its
interpretation.
o The majority of courts retain some kind of plain meaning rule
o Two Stage Process:
The court makes a preliminary determination of whether the language in
dispute lacks the required degree of clarity
Is evidence of prior negotiations admissible to aid the court in its
preliminary determination?
Restrictive View: evidence of prior negotiations is inadmissible
Liberal View: evidence of prior negotiations is admissible during
the first stage for the purpose of enabling the trial judge to
determine whether the language in dispute lacks the required
degree of clarity. Only for the purpose of interpretation: resolution
of ambiguity and vagueness
The interpretation stage
o Under the plaint meaning rule, evidence of surrounding circumstances is
distinguished from evidence of prior negotiations
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Pacific Gas & Electric:
o The test not whether the writing appears to the court to be plain and unambiguous
on its face, but whether the offered evidence is relevant to prove a meaning to
which the language of the instrument is reasonable susceptible.
Evidence of Course of Dealing, Usage, and Course of Performance
o Course of Dealing:
A sequence of conduct concerning previous transactions between the parties to a
parties to a particular transaction that is fairly to be regarded as establishing a
common basis of understanding for interpreting their expressions of the contract.
Conduct may have an effect beyond mere interpretation of those terms.
o Usage of Trade:
Practice or method of dealing having such regularity of observance in a place,
vocation, or trade as to justify an expectation that it will be observed with respect to
the transaction in question.
A party commonly shows a usage by producing expert witnesses who are familiar
with the activity or place in which the usage is observed.
A party must prove that the other party is chargeable with knowledge of the usage.
The party can be actually aware of the usage or should have been aware of the usage.
If a party is engaged in the vocation or trade in question, it is presumed to have the
requisite knowledge. (U.S. Naval Institute v. Charter Coummunications)
o Course of Performance:
The conduct of the parties after the contract is made.
Involves repeated occasions for performance by a party and the other party with
knowledge of the nature of the performance and opportunity for objection to it,
accepts the performance or acquiesces in it without objection.
Ambiguity not required
o Code Hierarchy:
Express termsCourse of PerformanceCourse of DealingUsage
o Only language consistent with the agreement is admissible under “custom and usage.”
o Nanakuli:
Total negation test.
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IMPLICATION
Once the court has determined through interpretation that it is faced with an omitted case,
it must supply a term to deal with that case.
The courts supply an “implied term” through the process of implication
Two Basis:
Actual Expectations of the parties
o Application of an objective test of whether one party should reasonably have
known of the other’s expectation
o Examine the agreement itself
o Course of performance, course of dealing, or usage, or from prior negotiations.
Justice:
o A court seeks a fair bargain
o A bargain that an economist would describe as maximizing the expected value of
the transaction.
Default Rules:
Penalty Default Rules:
o Rules that are designed to give at least one party to the contract an incentive to
contract around the default rule
Burden of Expression:
o A court should consider the realities of the negotiating and drafting processes and
supply a term that will put the burden of expression on the party that can better
cope with it because of bargaining power and drafting skill.
Certainty:
Where the terms of a contract are not sufficiently definite to determine with reasonable
certainty the extent of the promisor’s contractual duty the court lacks the information
necessary to rule on the issues.
A contract must be sufficiently definite to lead to a clear conclusion as to the full duties
required to constitute compliance or to permit the accurate measurement of damages for
its breach. Action Ads, Inc. v. Judes (medical insurance program)
An offer which appears to be indefinite may be given precision by usage of trade or
course of dealing between the parties
Joseph Martin:
o For a court to provide remedy, it must appear that the promisee assented to the
obligation in question
o A mere agreement to agree, in which a material term is left for future
negotiations, is unenforceable.
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OFFER
Three Requirements
Intent to make an offer §24,26
Clarity/Certainty of Terms §33
o Reasonably Certain
Communication: §50,52
o Properly communicated offer
Other Notes/Requirements
o Conduct that would lead a reasonable person in the other party’s position to infer
a promise in return for performance or promise may amount to an offer.
o An offer is not effective until it reaches the offeree
Family Relationship:
o Courts apply a presumption of gratuitousness similar to that applied in restitution
cases.
o The presumption can be rebutted
Intention:
Issue of whether the one to whom the proposal was made had reason to believe that it
was intended as an offer.
Factors:
o Prior communications
o Completeness of the suggested bargain
o The number of persons to whom the proposal is addressed
o The courts’ attitudes towards vague offers
Nebraska Seed Co:
o The language was general
o The letter as a whole shows that it was not intended as a final proposition, but as a
request for bids
o Can solve the problem by adding clear terms that indicate offer or preliminary
negotiations
Clarity/Certainty
Language:
o Whether the proposal contains language suggesting that it is within the power of
the recipient to close the deal by acceptance.
o The more terms the parties leave open, the less likely it is that they have intended
to conclude a binding agreement
o The insertions into a proposal of a clause that reserves to its maker the power to
close the deal is a compelling indication that the proposal is not an offer
o Fairmount Glass Works:
The true meaning of the correspondence must be determined by reading it
as a whole
The defendant could not have failed to understand that the plaintiff wanted
to know at what price it would sell
Failure to Limit Quantity:
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o A proposal will not usually be interpreted as an offer if such an interpretation
would expose its maker to the risk of liability for performance far beyond the
maker’s means
o The recipient of such a proposal would not have reason to believe that its author
intended exposure to the risk of being bound to deliver an unlimited quantity.
o The risk disappears if the proposal specifies a range or an upper limit and gives
the recipient the power to make a selection within it.
Failure to Limit Recipients:
o Usually a proposal is not held to be an offer if is made for a limited quantity and
has been sent to more persons than the maker could accommodate.
o Can be avoided by “subject to prior sale”
Proposals Made to the Public:
o Proposals made through advertisements, posters, circulars, etc.
o A customer would not usually have reason to believe that the maker intended
exposure to the risk of a multitude of acceptances resulting in a number of
contracts exceeding the inventory
o Does not apply if the proposal is qualified by language as “subject to prior sale,”
“first come first served,” or “while they last.”
o Lefkowitz v. Great Minneapolis Surplus Store:
Whether the facts show that some performance was promised in positive
terms in return for something requested
The contract must not leave anything open to negotiation
You may not impose new obligations ore conditions after acceptance
o Izadi v. Machado: He did not like this
Small print v. big print
Ignores the four corners approach.
If the two prints contradict, go with big print.
Entertainment of Bids
o When an auctioneer puts property up for sale to the highest bidder, the auctioneer
is taken to be interested in entertaining offers in the form of bids, not in making
an offer
Each bid is an offer that the auctioneer may accept or reject.
o UCC 2-328(2): Accepts by the fall of the hammer or in other customary manner.
Well v. Schoeneweis
o With Reserve: All items are presumed to be with reserve unless they are
expressly stated to be without reserve.
o Without Reserve: Putting up an item for bids amounts to a commitment,
irrevocable for a reasonable time, to sell the item to the highest bidder.
Master of the Offer:
An offer can be accepted only by one that the offeror has invited to accept. §29
The offeror enjoys a freedom from contract except on the offeror’s own conditions
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ACCEPTANCE:
Who Can Accept An Offer
The offer can only be accepted by the one that the offeror has invited to accept.
A purported acceptance by one who is not the offeree may itself amount to an offer
Acceptance by a Promise or by Performance
The offeror enjoys a “freedom from contract” except to the offeror’s own conditions.
The acceptance must be in a way that the offeror sought in making the offer.
Bilateral Contract
o If the offeror sought as consideration a return promise
o The offeror is bound by the return promise.
o In a case of doubt, it is presumed that an offer invites the formation of a bilateral
contract. Davis v. Jacoby
o Determination based upon the inent of the offer and the facts and circumstances
of each case
Unilateral Contract
o If the consideration sought is some performance
o Offeror is not bound until performance but the offeree makes no commitment to
undertake the return performance.
o It is elementary that any offer to enter into a unilateral contract may be withdrawn
before the act requested to be done has been performed.
Petterson v. Pattberg
o Mortgagee offered to discharge the entire debt if the mortgagor paid a smaller
lump sum by a stated date
o The mortgagor raised the money and made a contract to sell the land
o He took the money and went to the mortgagee’s door and said “I have come to
pay off the mortgage.”
o Before he could hand over the money the mortgagee told him that he had already
sold his rights to the mortgage.
o The court held that the mortgagee was not bound.
o He had sought a performance that was technically not completed.
What is an Acceptance
If the offeree manifests assent, the offeree is said to accept the offer
Upon acceptance, the offeror is bound by the contract propose by the offer.
Acceptance By Promise:
o The fact that an offer invites acceptance by a promise does not mean that the
promise must be in words
o A promise may be implied from other conduct
o § 62(2): A beginning of the invited performance operates as a promise to render
complete performance
UCC 2-206(1)(a)
o An offer to make a contract shall be construed as inviting acceptance in any
manner and by any medium reasonable in the circumstances
Elements for an Acceptance by a Promise:
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o There must be an expression of commitment
o The commitment must not be conditional on any further act by either party
The commitment can’t be condition on some decision to be made in the
future.
o The commitment must be one on the terms proposed by the offer without
variation
The offeror may impose further requirements for acceptance.
Promise Inferred from Silence or Exercise of Dominion:
General Rule: A promise will not be inferred from the offeree’s mere inaction
o Even an offeror cannot make silence a way of acceptance
Implied In Fact:
o A promise may be inferred from additional circumstances.
o The offeree exercises dominion over the goods by acting inconsistently with the
offeror’s ownership.
o Same concept with real estate.
o An offeree that takes the benefit of services offered is bound by the terms of the
offer if the offeree has a reasonable opportunity t reject them.
Duty to Speak:
o Situations where the offeror has reason to believe form the offeree’s silence that
the offeree assents
o Each case turns on its own facts
o Reliance by the offeror is a significant factor.
o Subsequent performance, prior dealings, other facts
Notice of Acceptance:
Acceptance by Performance
o Under ordinary circumstances notice is not necessary.
o However, if an offer invites acceptance by performance the offeree must
ordinarily notify the offeror that the offer has been accepted if the offeree has
reason to believe that the offeror will not learn of the acceptance without notice.
o If the act is of such a kind that knowledge of it will not quickly come to the
promisor, the promisee is bound to give him notice of his acceptance within a
reasonable time after doing that, which constitutes the acceptance. Bishop v.
Eaton
Acceptance by Promise:
o The offeree must take appropriate steps to let the offeror known of acceptance §
56
o Notice of acceptance must be given if the beginning of a requested performance is
a reasonable mode of acceptance. UCC 2-206(2)
Reasonable Care:
o If notice required, it is enough if the offeree exercises reasonable care to let the
offeror know of the acceptance, even if the offeror never actually learns about it.
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TERMINATION OF THE OFFER/POWER OF ACCEPTANCE
Ways of Termination:
Revocation of the offer
Rejection of the offer
Death or Incapacity of the offeror
Lapse of the offer
Revocation of the Offer:
A revocation must be a clear manifestation of unwillingness to enter into the proposed
bargain §42
An offer can be withdrawn if notice of the withdrawal reaches the offeree no later than
the offer does.
An offer is generally freely revocable and can be countermanded by the offeror at any
time before it has been accepted.
o Consequence of the aversion to allowing one party to speculate at the expense of
the other.
It is enough that the offeror indicate an intention not to make the proposed contract.
A subsequent offer inconsistent with the original offer may suffice to revoke the original
offer.
The revocation is not effective until the offeree receives it.
Indirect Revocation:
o Revocation does not have to be communicated directly by the offeror to the
offeree Dickinson v. Dodds
o § 43: The offeror takes definite action inconsistent with an intention to enter into
the proposed contract.”
General Offers:
o An offer made by a newspaper, advertisement, poster, or other general
notification to the public.
o Giving equal publicity to the revocation has been held to be enough even if the
offeree did not see the revocation.
Rejection: §38
Rejection by the offeree terminates the power of acceptance.
A manifestation of intention by the offeree is a rejection if it gives the offeror reason to
believe that is the offeree’s intention not to accept the offer.
Counter Offer usually serves as a rejection to the original offer. § 39(1)
o A mere request for modification does not ordinarily have the same effect.
o A counteroffer is itself an offer that is capable of being accepted
Offeror’s Death or Incapacity:
The offeree’s power of acceptance is terminated if the offeror dies before the offer has
been accepted, regardless of whether the offeree has notice of the death
Lapse of the Offer:
If the offer fails to specify a period, it lapses after a reasonable time. § 41
Reasonable time depends on the circumstances
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o May be affected by: nature of the proposed contract, direct negotiations, the
communications of the parties as to their goals, course of dealing or by usage.
If the contract is speculative in nature it will not be held that the offeror intended to give
the offeree an extended period to accept.
An offer made orally is understood to lapse when the conversation terminates.
An offer made by mail may be accepted if an acceptance is mailed at any time before
midnight on the day on which the offer is received. §41(3)
The Mirror Image Rule
An attempt to add to or change the terms of the offer turns the oferee’s response from an
acceptance into a counteroffer and a rejection of the offer
Courts have developed techniques to mitigate the harshness of the mirror image rule.
Mere Suggestion: not actually making a counteroffer
The battle of the forms have provided a motivation for courts to reconcile terms that are
not in agreement in order to prevent parties from getting out of contracts.
UCC 2-207:
o (1) A definite expression of acceptance operates as an acceptance even though it
states terms additional to or different form those offered, unless acceptance is
expressly made conditional on assent to the additional or different terms.
The additional terms are merely new offers by the original offeree to
modify the contract that has been formed
Knock out rule?
o (2) The additional terms are to be construed as proposals for addition to the
contract. Between merchants such terms become part of the contract unless: (a)
the offer expressly limits acceptance to the terms of the offer; (b) they materially
alter it; or (c) notification of objection to them has already been given or is given
within a reasonable time after notice of them is received.
The offeror may choose to accept the terms and modify the contract
If both parties are merchants, the offeror’s mere silence will sometimes
amount to an acceptance (if they do not materially alter the contract)
An acceptance that is expressly made conditional to additional or different
terms is a counteroffer
o (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. The terms such a contract consist of those terms
on which the writings of the parties agree, together with any supplementary terms
incorporated under any other provision of this Act.
Mailbox Rule:
General Rule: Absent an express specification by the offeror, an acceptance is effective
when it is put into the mail.
Adams v. Lindsell
o Held that once the buyers had dispatched their letter of acceptance it was too late
for the offeror to revoke.
o If the defendants were not bound by their offer when accepted by the plaintiffs
until the answer was received, the plaintiffs out not to be bound until after they
had receive the nonfiction from defendants and so on and so on.
The rule that throws the risk on the offeror has the merit of closing the deal more quickly
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Acceptance is effected when mailed regardless if it is retrieved Organon
A revocation Crossing an Acceptance: §63
o There is no revocation if the acceptance is received first.
Lost or Delayed Acceptance:
o When the offer is receive on a timely basis, but the acceptance is lost or delayed,
even though properly addressed.
o The offeror, having instituted communication, should expect a reply
o An offeree would normally not known of the delay of his communication and
may rely on the existence of a contract.
The Overtaking Rejection:
o When the offeror learns of the rejection before he learns that an acceptance was
earlier put into the mail
o Case law has generally applied the mailbox rule in this situation so that the
acceptance is effective even though the offeror learns of the rejection before he or
she learns of the acceptance.
Rejection Followed by the Mailing of an Acceptance:
o In this situation the restatement abandons the mailbox rule and provides that a
contract exists only if the offeror receives the acceptance before he receives the
rejection.
Use of an Improper Medium of Transfer:
o It is usually assumed that the mailbox rule is applicable only if a reasonable
means of communication is adopted by the offeree
o However, a communication sent by an improper medium of transmission is
nevertheless effective on dispatch if it is received no later than the time
transmission by a proper medium would have been received
Not Properly Dispatched
o The restatement §66 states that the mailbox rule is not applicable to acceptance
that are not properly addressed, on which proper addressed, on which proper
postage is not affixed, and so forth.
Options, Option Contracts, and Firm Offers
Option: An irrevocable offer
Option Contract:
o An offeree that accepts the offer is said to exercise the option
o An option is itself a contract.
o § 25: A promise which meets the requirements for the formation of a contract and
limits the promisor’s power to revoke an offer.
Firm Contract:
o 2-205: What the code calls irrevocable offers.
o The offer need only be in a signed writing which by its terms gives assurance that
it will be held open
Reliance on Offer that Invites Performance § 45
An exception to the traditional rule that a unilateral contract may be revoked any time
before performance.
An option contract is created when the offeree tenders or beings the invited performance
or tenders a beginning of it.
The rule protects the offeree as soon as the offeree relies by beginning performance.
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To recover the offeree still most complete performance
Mere preparation is not enough
Sunshine v. Manos
o To prove partial performance it must be shown that there was an expenditure of
time and money.
Reliance on Offer that Invites a Promise:
Courts are reluctant to protect an offeree that has relied before making the invited
promise because it is relatively easy to do.
Bids on Construction Contracts:
o Problems arise if the contractor is awarded the contract, but before the contractor
has a chance to notify the subcontractor, the subcontractor attempts to revoke its
bid.
Three Possible Solutions:
o Treat the subcontractor’s offer as one that invites acceptance by the general
contractor’s promise after the award of the main contract and is revocable until
such acceptance.
o Same to the first except it is irrevocable until the general contractor has had a
reasonable time to make that promise following the award.
This binds the subcontractor but not the general contractor
Can lead to bid shopping
Treat the subcontractor’s offer as one that invites acceptance by the general
contractor’s promise at the tie it makes its own bid, rather than after the award of the
project.
o Baird
The court held that the subcontractor, which had discovered a mistake in its bid
before the bid had been accepted by the general contractor, could revoke it in
spite of reliance by the general contractor.
Otherwise the defendant would be bound to a contract that the plaintiff was not
bound to (referencing the second solution above)
o Drennan:
Drennan’s reliance on the subcontractor’s promise made the offer binding and
irrevocable.
A subcontractor can contract around this rule by stating that its bid is revocable.
o § 87(2)
A more flexible approach than §45 and invites performance to the extent
necessary to avoid injustice
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MISTAKE, IMPRACTICABILITY AND FRUSTRATION
Nature of the Problem:
General Rule: Duties imposed by contract are absolute.
A party that does not qualify its duties or liabilities must bring itself within a judicially
created doctrine if it would be excused on the ground that one of its basic assumptions
has proved to be wrong.
Mistake:
Types of Mistake:
o The word mistake, in contract law, is used to refer to an erroneous perception
o An erroneous perception is not a mistake unless it relates to the facts as they exist
at the time the contract is made
o A misprediction, a poor prediction of events that are expected to occur, is not a
mistake.
Leasco v. Taussig: Neither party could safely assume that the projected
earnings would be realized. Fiscal earnings are not an assumption that
could justify mistake
ALCOA: The court held that a mistaken assumption that a price index
used in a contract would reflect changes in cost was an assumption that
justified mistake. Must protect the viability of long term contracts
Mutual Mistake:
o A mutual mistake occurs when both parties are under substantially the same
erroneous perception as to the facts.
o Sherwood v. Walker
Both believed Rose could not breed and set the price at $80
Seller discovered she was with calf.
Court held that seller was entitled to avoid because the breeding
capabilities went to the heart of the contract.
A party may avoid performance if the contract was made upon the mistake
of a material fact
If it is only a difference in some quality or accident, the contract remains
binding.
o Requirements: §152
The mistake goes to a basic assumption on which the contract was made
The mistake has a material effect on the agreed exchange of performances;
and
The mistake is not one of which that party bears the risk.
o Basic Assumption:
A party may have such an assumption even though not conscious of
alternatives.
Ex: a person walking into a room may assume that the room ahs a
floor without thinking about it.
Land Sale Cases
17
Courts have enforced contracts selling land by the acre despite
mistakes as to the total amount of land. The rate can be adjusted to
the action acreage
Differs for sale in gross. If the parties shared a basic assumption as
the acreage the purchaser will be granted relief.
o Material Effect:
The party must show that the resulting imbalance in the agreed exchange
is so severe that he cannot fairly be required to carry it out.
The party must show more than a mere loss of advantage from the contract
or that the party would not have entered into the contract had there been
no mistake.
Hardship for one party is a sufficient basis for avoidance for mistake.
However, it is easier to show that the effect on the agreed exchange is
material if the mistake also has an impact on the other party.
A court will also consider whether relief other than avoidance is available
to the party adversely affected.
Ex: mistake in the contents of a writing can be reformed
Wood v. Boynton
Owner of a small stone sold it to a jeweler for $1 b/c both thought
it was topaz
It was actually a rough diamond worth $700
The court denied the seller relief.
Attempts to reconcile with Sherwood: avoidance for mistakes go
to the identity or existence of the subject matter, not to attributes,
quality, or value. Bore the risk
o Must Not Bear Risk: §154
Recession is not available to relieve a party who has assumed the risk of
loss in connection with the mistake. Messlerly
Three Situations:
The agreement itself provides that a party bears the risk of the
mistake
Awareness of Limited Knowledge: Wood v. Boynton (topaz case)
o One in which a party makes a contract with only limited
knowledge of the facts to which the mistake relates.
o If the party is aware that its knowledge is limited, it bears
the risk of the mistake.
o “Conscious ignorance”
Judicial Allocation:
o The risk is allocated by the court on the ground that it is
reasonable in the circumstances to do so.
o Based heavily on common sense
A mistaken party is not barred from relief merely because that party could
have avoided the mistake by the exercise of reasonable care. § 157
o Remedy:
Avoidance-Restitution
Unilateral Mistake:
18
o A unilateral mistake occurs when only one party has an erroneous perception as to
the facts.
o In general, courts have been reluctant to allow a party to avoid a contract for a
mistake that was not shared by the other party
Many courts have started to recognize a limited right of avoidance for
unilateral mistake
o Courts have granted bidders relief for unilateral mistakes in the calculation of bids
in a growing list of jurisdictions
The requirement that the bidder seek to avoid before any significant
reliance by the other party is imposed so that the avoidance will cost the
other party only its expectation
The degree of hardship must be unconscionable. The extent of hardship
depends on the magnitude of the error and the profit that the bidder will
make or the less that the bidder will sustain if required to perform
The party seeking avoidance must not have bore the risk of the mistake.
If the mistake in the bid is known to the other party, or the other party had
reason to know, the bidder is not bound to perform
Distinction between clerical mistakes and business judgment mistakes.
First Baptist Church of Moultrie
o If the error was a substantial one and notice is given before the other party has
made such a change of position that he cannot be put substantially in status quo,
the bargain is voidable and recession will be decreed. First Baptist Church
o When the mistake results from an error the occurred after extensive attempts to
prevent error by plaintiff, plaintiff should have had knowledge of the error.
General Electric Supply Corp.
Impossibility as an Excuse
Supervening Illegality: If supervening governmental action prevents a party’s
performance by prohibiting it or imposing requirements that make it impossible, that
party is excused
o It is not enough for the action merely to make performance somewhat more
difficult.
o Ex: shortage of supply
Supervening Death or Disability: If a contract requires performance by the promisor, no
action will lie for its breach if the promisor dies before performing.
o Whether the existence of a particular person is necessary for performance may be
determined by the agreement itself or other circumstances.
o If a party can delegate a duty to perform to another, the party’s own death or
incapacity will not be an excuse
Supervening Destruction: If the existence of a particular thing is necessary for a party’s
performance, the party is excused if the destruction or deterioration of that thing prevents
performance.
o Taylor v. Caldwell
o Taylor was to use the music hall for performances
o The hall was accidentally destroyed by a fire a week before the first performance
o The court allowed Caldwell to void because the existence of the Music Hall was
essential to performance.
19
o 2-613;2-709
When a court excuses a party on the ground of impossibility, it is supplying a term to deal
with an omitted case, to fill a gap.
They insert an implied condition
The Doctrine of Impracticability: 2-615, § 261
Recognizes that the judicial function is to determine whether, in the light of exceptional
circumstances, justice requires a departure form the general rule that a promisor bears the
risk of increased difficulty of performance
Four Requirements:
o Performance is Impracticable:
The focus is on the increased burden on the party that is to perform.
If one alternative to perform remains open, this will not excuse a party just
because of additional expense. Ex: Suez canal cases
Increased cost alone does not excuse performance unless the rise in cost
due to some unforeseen contingency which alters the essential nature of
the performance. Ex: Severe shortage due to war, embargo, etc.
The doctrine of commercial impracticability focuses on the reasonableness
of the expenditure at issue, not upon the ability of a party to pay the
commercially unreasonable expense. Asphalt International, Inc. v.
Enterprise
The court in ALCOA found the substantial loss in money as justification
for excusing performance. They stood to lose $75,000,000 for the
duration of the contract.
o Basic Assumption on Which the Contract Was Made:
The assumption must be shared by both parties
Common assumptions: the government will not directly intervene; the
person necessary for performance will be alive; the thing necessary to
performance will remain in existence
The assumed capacity of a price formula in a long term service project
against vast windfall profits to one party and vast windfall losses to other
is basic to an agreement. ALCOA
o Not Fault of the Promisor:
The fault must be clear if it is to prevent excuse
o Greater Obligation Not Assumed:
Must not have assumed the risk
A promisor can protect himself against foreseeable events by means of an
express provision
Trade usage and the circumstances surround a particular agreement may
indicate that the parties intended to accord the seller an exemption broader
than is available under the UCC. Eastern Airlines
Effect of Foreseeability
o The occurrence of the event does not necessarily have to have been unforeseeable.
Wolf Trap
This absolute requirement would destroy the doctrine of impracticability
(or frustration)
20
o Foreseeability of the event will often be a factor that suggests that a promisor
assumed the risk of its occurrence.
o However, it should not be conclusive
o A party may not have wanted to broach the subject during the bargaining process
and risk the deal as a whole
o Was the contingency which developed one which the parties could reasonably be
thought to have foreseen as a real possibility that could affect performance? Wolf
Trap
Alternatives Available
o There must be a substantial variation between expected cost and the cost of
performing by available alternative. Transatlantic Financing (Suez Canal)
o But see, Mineral Park Land, where a higher cost method of removing gravel per a
contract was so prohibitive so as to make performance impracticable.
Frustration of Purpose: §265
Krell v. Henry
o Henry rented a room to view King Edwards coronation
o The House of Commons later announces that the king would miss the coronation
and the event was cancelled.
o Henry was allowed to avoid payment on the ground that his duty to pay was
discharged because the object of the contract was frustrated by the cancellation of
the coronation
Distinguished from Impracticability:
o Henry still could have performed so it was not impracticable
o However, the benefit that he expected was totally gone.
o Frustration is usually applied to the advantage of parties that are to pay money in
return for performances.
Requirements:
o Event Substantially Frustrated the Party’s Principal Purpose:
Courts have insisted that the frustration be nearly total.
The mere fact that what was expected to be a profitable transaction has
turned out to be a losing one is not enough
o Must have been a Basic Assumption:
o Party not at Fault:
o Must not have assumed a greater obligation:
A court may refuse to excuse the party on the ground that the party
assumed the risk of the occurrence of the frustrating event.
Courts have been more reluctant to hold that a party has been excused on
the ground of frustration than on the ground of impracticability
The frustration must be so severe that it is not fairly to be regarded within
the risks assumed under the contract. Wolf Trap
Foreseeability
o Meaningful only where the party seeking relief could have controlled the
language of the contract to the extent of allocating the risk.
o Same sort of decisions as Foreseeability under impracticability
Existing Impracticability and Frustration
21
Excuse on the ground of existing, as opposed to supervening, impracticability is well
recognized
2-613: Applies whether the goods were already destroyed at the time of contracting
without the knowledge of either party, or whether they are destroyed subsequently.
The same four requirements from intervening impracticability apply
Plus, the party must show that it neither knew nor had reason to know of the facts that
made performance impracticable
Taylor v. Caldwell
o Opera house that burned down. P wanted money for advertising and amounts
spent in preparation for the concert.
o Court found that both parties had contemplated the continuing existence of the
music hall as the foundation for the contract.
o The thing necessary for performance ceased to exist
Effects of Impracticability and Frustration
The effect of existing impracticability or frustration on the excused party is usually to
prevent any duty of performance on that party’s side from arising.
If the failure is material, the other party can suspend performance.
Temporary Impracticability:
o The temporarily excused party will be permanently excused if that party can show
that performance at the later time would be materially more burdensome than the
performance to which that party originally agreed.
Partial Impracticability:
o Sometimes, even though the excused party has not yet rendered any performance,
only part of that party’s performance has become impracticable.
o In that event, it may be possible to salvage the remainder of the agreement by
requiring the excused party to perform what it can.
o 2-615(b): If the impracticability affects only part of a seller’s capacity to perform,
the seller must allocate production and deliveries among the seller’s customers in
a manner which is fair and reasonable.
22
POLICING THE AGREEMENT
Competing Policies:
Enforcement: Favors the autonomy of the parties, the protection of justified expectations,
and the stability of the transactions.
Avoidance: Favors the prevention of unfairness and the protection of the parties from
overreaching
Three Perspectives:
o Substance
o Status
o Behavior
Courts are reluctant to view the problem in substantive unfairness.
Courts do not usually examine the adequacy of consideration.
If the courts were required to determine reasonable compensation then the court would
have to serve a price regulatory function
Generally:
Only in extreme instances is one’s power regarded as impaired because of an inability to
participate meaningfully in the bargaining process.
Immaturity
The law usually prescribed a certain age at which a party reaches maturity under the law.
A minor’s apparent age or maturity is irrelevant
The other party’s knowledge of the minor’s age is irrelevant.
A minor may not surrender one’s power of avoidance during minority
o These rules may disadvantage minors by discouraging others from contracting
with them.
The contract is voidable at the instance of the minor
o The minor may avoid the contract even if it has been fully performed.
o The other party is bound unless the minor avoids the contract
The power of avoidance is personal to the minor and can be exercised only be the minor
or by the minor’s legal representatives.
o The exercise of the power is called disaffirmance
o Any manifestation of an unwillingness to be bound by the contract will suffice as
disaffirmance.
The surrender of the power of avoidance is known as ratification.
o Must be made when the party reaches the age of majority
o The minor is rarely precluded from avoidance by delay as long as there has been
no reliance on the transaction by the other party
The minor is usually accountable for the benefit conferred by the other party’s
performance.
o The minor is expected to return what remains of anything that was received.
o The minor is traditionally not responsible for servies received or goods that have
been damaged or resold.
There are exceptions to the rule that hold the minor accountable for the reasonable value:
Necessaries
23
o Whether a thing is a necessary is often a question of fact that depends on the
social position and situation in life of the minor.
o Courts have included essential medical care and legal services.
Misrepresentation of Age
Incompetency:
Test:
o There mere presence of a disability does not itself impair the capacity to contract
o Cognitive Test: Was the party unable to know what he or she was doing and to
appreciate its effects? Otelere
Attacked as unscientific
However, it is almost universally accepted by courts
It is irrelevant whether the other party knew or had reason to know of the
mental disability
o Volitional Test:
When the mentally infirm person understands the nature and consequences
of their actions, but lack effective control of them.
o Restatement Position: §15
Qualified volitional test
If by reason of mental illness or defect 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.
Intoxication: §16
o Under the Restatement the inability to understand by reason of intoxication makes
a contract voidable only if the other party has reason to know of the inability
Effects of Mental Incompetency
o Generally held that such an agreement is voidable at the instance of the mentally
incompetent person
o In order to avoid the contract the incompetent must return whatever has been
received and not just what remains
o The incompetent must make restitution for necessaries received, including those
received by dependents
Misrepresentation:
Inducement:
o When the seller misrepresents the quality of goods
o The contract is voidable at the instances of the recipient
Execution:
o When the misrepresentation is regarded as going to the very character of the
proposed contract
o The contract is considered to never have existed.
o Only rarely is a misrepresentation seen as going to the very nature of the contract
itself
Requirements for Avoidance:
o An Assertion Not in Accord With the Facts:
Must be an assertion of a fact that existed at the time of the assertion
It may be one of a past event but cannot be a future event
The assertion may be words or other conduct
24
May also take the form of concealment
Non-Disclosure
Laidlaw v. Organ: British blockade, purchaser knew that prices
were going to jump because of the lifting of the blockade. The
court held that he was not bound to communicate.
Relation of Trust or Confidence: Does not need involve a true
fiduciary as a matter of law.
Need to Correct: One who has made an assertion who later
acquires knowledge that contradicts his previous assertion must
speak up
Mistake in Basic Assumption: A party’s nondisclosure of a fact is
equivalent to an assertion that the fact does not exist if he knows
that disclosure of the fact would correct a mistake of the other
party as to a basic assumption on which the party is making the
contract. §161. The restatement attempts to distinguish cases in
which nondisclosure amounts to a failure to act in good faith and in
accordance with reasonable standards of fair dealing from regular
business tactics. A court is more likely to expect a party to
disclose if the party is in a position to have special knowledge or a
special means of knowledge not generally available to those in the
position of the other party.
o The Assertion Must be Either Fraudulent or Material
If the recipient seeks to avoid the contract it may show that it was either
fraudulent or material
Fraudulent: must be both consciously false and intended to mislead
The knowledge required of the untrue character of the assertion is
sometimes referred to as scienter
o Knowledge of or belief in the untruth of the assertion is not
necessary
o Courts have held that it suffices that the maker simply lacks
confidence in its knowledge but nevertheless chooses to
assert them.
The intent to mislead is shown if the maker acts either with the
desire to mislead another or in the belief that the other is
substantially certain to be misled
Material: Met by showing that the misrepresentation would have been
likely to have induced a reasonable recipient to make the contract
o The Assertion must be relied on by the Recipient in Manifesting Assent
The misrepresentation need not have been the sole or even predominant
reason that the party was induced as long as the misrepresentation
substantially contributed to the party’s decision
There is not requirement of detriment
o The reliance of the Recipient Must be Justified
The recipient may be barred from avoiding the contract if the
misrepresentation was obviously false or could not be expected to be taken
seriously
25
The recipient’s failure to take steps to discover the facts before making the
contract will not generally preclude avoidance. §172
Assertions of Opinion: §168,169
o A statement of opinion is one of fact- of the fact that a person is of the state of
mind asserted.
o The extent to which an assertion will be regarded merely as one of the maker’s
opinion, and not as one of the maker’s knowledge, is essentially a question of
interpretation, which may depend on the circumstances in which the language was
used.
o A seller’s statement of quality is more likely to be taken as one of opinion than is
a seller’s statement of quantity
o Sometimes a statement of opinion implies that the maker knows facts that justify
holding that opinion.
If the facts are other than as impliedly asserted, the statement may be
grounds for avoidance.
o Statements of opinion only, that carry no implied assertions of fact, are generally
regarded as not to be taken seriously and the recipient is not usually justified in
relying on them.
Exception: The maker stands in such a relation of trust and confidence
that the recipient is justified in relying on the opinion §169(a)
Special knowledge, skill, judgment, or objectivity §169(b)
Assertions of Matters of Law: §170
o One’s assertion of one’s opinion as to a matter of law may carry the implication
that one knows facts justifying holding that opinion.
Or it may be an assertion of opinion only
Assertions of Intention: §171
o One of fact since it asserts a state of mind.
Often are not to be taken seriously.
o One factor is the recipient’s expectation that the intention can and will be carried
out
Effects of Misrepresentation
o Misrepresentation in the inducement makes the resulting contract voidable at the
instance of the recipient.
o The recipient is precluded form avoiding the contract by failing to disaffirm
within a reasonable time after discovering the falsity of the representation.
o On avoidance, the recipient is entitled to restitution.
Duress:
Physical Compulsion: §174:
o If a victim acts under physical compulsion by signing a writing under force that
the victim is a mere mechanical instrument the actions are not effective to
manifest assent.
Duress by Threat: §175
o Must be a Threat
An intent to inflict some loss or harm on another.
It need not be expressed in words but may be inferred from words or other
conduct
26
o The Threat Must be Improper: §176
Threat of Criminal Prosecution: Impropriety lies in the use for private
benefit of the criminal process of the court.
Threat of Civil Process: If the person who made the threat did not believe
that there was a reasonable basis for the threatened process.
Threat to Break Contract: Not generally a basis for improper threat but
both parties are regarded as bound by a duty of good faith and fair dealing.
Unfair Terms: Unfairness of the resulting exchange.
o The Threat Must Induce the Victim’s Manifestation of Assent
o It must be sufficiently grave to justify the Victim’s Assent
A threat under which the threat must have left the particular victim no
reasonable alternative. §175
A threat to withhold performance will not amount to duress if the victim
can procure a suitable substitute on the market as a reasonable alternative
to succumbing to the threat.
Recent decisions have found duress on a showing of particular necessity
involving a threat to not pay money
Withheld payment of debt knowing the creditor faced bankruptcy
Effects of Duress:
o Duress by threat makes the resulting contract voidable at the instance of the
victim
o The victim of duress may assert it by either raising a duress as a defense to an
action brought to enforce the contract or by brining an action based on avoidance
of the contract.
o Ratification and reasonable time have the same effect.
o The victim is entitled to restitution based on the benefit conferred
o Coercive behavior that does not amount to duress may nevertheless by considered
a factor in connection with undue influence or Unconscionability
Undue Influence:
The equitable concept of undue influence was aimed at the protection of those affected
with a weakness, short of incapacity, against improper persuasion.
Elements:
o Relationship of Trust or Confidence:
The mere fact that the victim is weak, infirm, or aged does not suffice in
the absence of such a relationship, but it may be a factor in showing that
such a relationship existed.
Examples: parent-child; clergy-communicant; physician-patient; husband-
wife.
Relationship of domination
Doctrine has extended to those in which the weaker party is for
some reason under domination of the stronger.
o Improper Persuasion
Whether the result was produced by means that seriously impaired the free
and competent exercise of judgment.
Important factor is showing the imbalance in the resulting bargain
Other factors:
27
Unavailability of independent advice
The lack of time for reflection
The susceptibility of the weaker party
Standardized Agreements (Battle of the Forms): §211
Advantages of Standardization:
o Simplify operations and reduce costs
o Facilitates the accumulation of experience.
o Helps make risks calculable
Dangers:
o Affords a means by which one party may impose terms on another unwitting or
unwilling party
o The party that writes the form has the advantage of time and expert advice
o The other party is usually completely or relatively unfamiliar with the form.
o Bargaining over terms of the form may not be between equals or there may be no
possibility of bargaining at all
Traditional Response:
o Not receptive to the argument that party should be relieved of an agreement on the
grounds of such an imposition as a standardized form
o One is not entitled to relief merely because one neither read the standard form nor
considered the legal consequences of adhering to it.
Techniques to Avoid Traditional Rule:
o Interpretation of Terms:
Interpret the language of the term to favor the weaker party.
Aided by rules under which terms are generally interpreted against the
drafter.
o Writing Not an Offer
Where the court refuses to hold party to the entire form on the ground that
it was not a type that would reasonably appear to the recipient to contain
the terms of a proposed contract.
o Term not Part of the Offer:
Although the writing may plainly have been an offer, the term was not one
that an uninitiated reader ought reasonably to have understood to be party
of the offer.
The size of the type and other factors affecting legibility of both the
reference and the term itself play an important part in determining whether
a reference to a term makes it a party of the contract.
UCC: 2-316 sometimes requires thta a term be conspicuous which it
defines as being so written, displayed, or presented that a reasonable
person against which it is to operate ought to have noticed it.
Criticism of Traditional Approaches:
o The techniques to get around the rule were all techniques that could be avoided by
the clever drafter.
Unconscionability:
Courts of equity would traditionally find that a contract was unconscionable if it was so
unfair as to shock the conscience of the court.
Factors include: If the contract itself is unfair, one-sided, unjust, or unconscionable.
28
Generally:
o The standards for fairness of bargains that were fashioned in Equity do not
preclude the enforcement of bargains at law.
Exceptions:
o Fiduciary Relationships:
Ex: trustee-beneficiary; principal-agent; attorney-client
If a contract is made concerning matters within the scope of their
relationship courts of law will demand that it be on fair terms
o Undue Influence:
o Policy Against Forfeitures:
UCC 2-302
o Developed in response to the constrained techniques the court used in the past to
refused enforcement of an unfair contract
o Basic Test: Whether, in the light of the general commercial background and the
commercial needs of the particular trade or case, the clauses involved are so one
sided as to be unconscionable under the circumstance existing at the time of the
making of the contract. Campbell Soup Co. (Cited by Hahn)
o Extended through the Restatement §208
o The court may refuse to enforce the contract or enforce the contract without the
unconscionable term
o Unconscionability has generally been recognized to include an absence of
meaningful choice on the part of one of the parties together with contract terms
which are unreasonably favorable to the other party. Williams v. Walker-Thomas
o Focus on “oppression” and “unfair surprise”
Substantive Unconscionability (Unreasonably favorable terms/Oppressive terms)
o Refers to oppressively one sided and harsh terms of a contract
o Usually arise where courts have determined the price unduly excessive or where
the terms of the contract unduly limit debtor remedies
Procedural Unconscionability (Absence of Meaningful Choice/Unfair Surprise)
o The manner and process by which the terms become part of the contract
o Characterized by consumer ignorance
o Can include sharp bargaining practices, the use of fine print and convoluted
language, lack of understanding, and an inequality of bargaining power.
o Yellow Pages Case
The company provided such a unique opportunity and position in the
public market that the buyer had no alternative or power to bargain
o Where an inexperienced buyer is concerned, the seller’s performance
representations are absolutely necessary to allow the buyer to make an
intelligence choice.
o Courts look at who could have best prevented the defect or assumed the risk
Ex: examined the product, bought insurance.
Cabbage case, supplies could have better detected the disease and
prevented it
o Courts will balance the two types to determine the overall imbalance of the
contract
Reluctance:
29
o On the whole, judges have been cautious in applying the doctrine of
Unconscionability
o They recognize that the parties often must make their contract quickly, that their
bargaining power will rarely be equal, and that the courts are ill equipped to deal
with the problems of unequal distribution of wealth.
o Courts are even more reluctant to pass judgment on the fairness of the price term.
Rarely can party claim surprise as to price.
If the court should find the price term unconscionable, it usually cannot
simply strike the clause and enforce the rest of the contract
But See Kugler where the court found a price two and a half times the
value of the product as basis to invalidate the contract
o Modification of warranties and limitations of remedy are not per se
unconscionable Hahn
o There mere fact that a contract term is not read or understood by the non-drafting
party or that the drafting party occupies a superior bargaining position will not
authorize a court to refuse to enforce a contract A&M Produce
o
Remedies:
o The court may refuse to enforce the entire contract, or it may refuse to enforce or
limit the application of an unconscionable term.
30
o Events that are certain to occur (passage of time)
o Events that extinguish a duty after its performance has become due
Ex: An insurance policy that provides that after the insurer has come
under a duty to pay, its duty is discharged if the insured fails to commence
an action against the insurer within twelve months. The failure to occur
terminates a duty that is already due.
Effects of Nonoccurrence of a Condition §225
Two Effects:
o The obligor is entitled to suspend performance on the ground that the performance
is not due as long as the condition has not occurred
o If a time comes when t is too late for the condition to occur, the obligor is entitled
to treat its duty as discharged and the contract as terminated.
Performance Not Due:
o Ex: If a home purchaser conditions the duty to close the deal on the bank’s
approval of the purchaser’s mortgage application, the purchaser is under no duty
to take the deed and pay for the house if the bank has not approved the application
Duty Discharged
o There is usually some period of time within which the condition must occur if it is
to occur at all.
o Once the period has passed, it is too late for the condition to occur, and the duty is
discharged.
o Ex: If the bank does not approve the purchaser’s mortgage application within the
appropriate period of time, the purchaser may treat the duty to take the deed and
pay for the house as discharged
Possibility of Excuse:
o A condition may be excused by waiver, by breach, or by a court acting to avoid
forfeiture.
o Since the excuse of a condition ordinarily deprives the obligor of an advantage
without compensating the obligor if the event does not occur, a condition will not
usually be excused unless it is a relatively minor party of the bargain
o Strict Compliance: If the occurrence of a condition is required by the agreement
of the parties, rather than as a matter of law, a rule of strict compliance
traditionally applies
o Ignorance: If the nonoccurrence of a condition entitled an obligor to suspend its
performance or treat its duty as discharged, the obligor is entitled to do so even
though unaware that the condition has not occurred.
Condition and Duty Distinguished
An obligor who wants to induce the other party to cause an event to occur can do so in
one of three ways:
o The obligor may make the event a condition of the obligor’s own duty, so that the
other party will have to see that the event occurs in order to have a right to the
obligor’s performance
o The obligor may have the other party undertake a duty to see that the event
occurs, so that the other party will have to see that the event occurs in order to
avoid liability in damages
31
o The obligor may combined the approaches by making the event a condition of the
obligor’s own duty and having the other party undertake a duty to see that the
event occurs. “Promissory condition.”
Constable v. Cloberie
o Ship-owner promised to carry cargo from England to Cadiz in return for the cargo
owner’s promise to pay freight
o The normal freight for such a voyage consists of a base amount plus a premium
o The cargo owner wants the ship-owner to sail with the next wind.
o The cargo owner can seek to induce through a condition, imposing a duty, or by
doing both
o Effect of a Condition:
“premium is to be payable only on condition that ship-owner sails with the
next wind”
If the ship-owner delays the cargo owner will not have to pay the premium
but will have no right to any damages caused by the delay
o Effect of Duty:
“Ship-owner promises to sail with the next wind.”
If the ship-owner delays the cargo owner will have a right to any damages
caused by the delay but will not be relieved of the duty to pay the
premium.
o Effect of Condition and Duty:
“Ship-owner promises to sail with the next wind and the premium is to be
payable only on condition that ship-owner does so.”
If the ship-owner delays the cargo owner will ha e aright to any damages
caused by the delay and will not have to pay the premium.
Interpretation and Conditions:
If a party to an agreement asserts that it was not required to perform a duty because a
condition of that duty did not occur, two questions of interpretation arise.
First, was that party’s duty conditional or not?
Second, if the duty was conditional, what is the event on which is was conditional?
The process of interpretation is essentially the same as the way other questions of
interpretation are resolved.
o Emphasis is put on purpose, maxims, prior negotiations, usage of grade, course of
dealing, and course of performance
Preferences in Interpretation: §227
o Preference for Finding Duty:
Manifests when an agreement refers to an event within the control of one
of the parties but does not make clear if that party is under a duty to see
that the event occurs or if the event is a condition of the other party’s duty.
If the court holds that the obligee is under a duty to see that the event
occurs, the event will still be a condition of the obligor’s duty.
If the court holds that the agreement makes the event a condition of the
obligor’s duty then the rule of strict compliance will apply
o Preference Against Forfeiture:
Reduce an obligee’s risk of forfeiture.
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Manifests when the event in question is not likely to occur until the
obligee has relied on the expected exchange.
Nonoccurrence of the condition results in the obligee’s loss of its
reliance interest
This loss of reliance interest is often described as forfeiture
Was the party’s duty conditional or not?
Ex: Condition or Time Period
o Agreements sometimes ambiguously provide that payment
is due “when” or “not until” a stated event occurs.
o It is unlikely that the creditor assumed the risk of losing the
money if the debtor did not sell any timber. This suggests
that the event of selling the timber was not a condition but
merely a means of measuring the time after which the debt
was to be repaid.
Ex: Sub-Contractor:
o Is the general contractor liable to the subcontractor for
work done that the subcontractor has done if the owner,
because of insolvency or for some other reason, does not
pay the general contractor?
o If it is a condition then the risk of owner’s nonpayment is
on the subcontractor
o If it is a measurement of time the risk of nonpayment is on
the general contractor
o Most courts hold that it is merely a measure of time.
What is the event on which a party’s duty was conditioned?
Ex: Satisfaction: §228
o Some agreements condition one party’s duty to pay or
otherwise to perform on that party’s satisfaction with the
obligee’s performance.
o Should it be honest satisfaction or is reasonable satisfaction
enough?
o Because of the judicial aversion to forfeiture, a court will
make reasonable satisfaction the condition if presented with
choice in which forfeiture may result.
Ex: Contractor:
o A contractor agrees to do work for which the owner is to
pay only on condition that the owner is “satisfied” with the
work.
o Even if the contract is interpreted to require the actual
satisfaction, there may be an out for the contractor.
o The owner’s discretion must be exercised in good faith.
o The promisor’s dissatisfaction must not be with the bargain
itself.
o Significance of Forfeiture and Enrichment
This preference is reinforced because denial of recovery will result in the
enrichment of the owner as well as forfeiture by the contractor.
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Courts presume that the performing party would not have wanted to put
himself at the mercy of the paying party’s whim
Courts have been less reluctant to apply a test of honest satisfaction if no
benefit has been conferred
If it is impractical to apply a test of areaosnable satisfication to such a
contract the courts may apply an honest one in spite of risk to obligee of
forfeiture. Ex: fancy, taste, sensibility, or judgment
Excuse of Condition by Waiver:
Occurs when the obligor promised to perform despite the nonoccurrence of the condition
or despite a delay in its occurrence
o Ex: If an owner whose duty to make progress payments is conditional on the
contractor’s furnishing architect’s certificates excuses that condition by promising
to make payments without certificates.
The promise may be made either before or after expiration of the time during which the
condition must occur.
The obligor’s knowledge of its legal situation and of the legal effect of the promise
immaterial.
A party can waive a condition only if the condition is for that party’s own benefit.
Advantages:
o More flexibility in dealing with the conduct of the parties at the performance
stage compared to course of performance or modification
o A court may avoid the requirement of assent, the requirement of a writing, and the
requirement of consideration or of detrimental reliance.
Retraction: 2-209(5): §84(2)
o May retract before the time for occurrence of the condition has expired
Unless the other party has relied to such an extent that retraction would be
unjust
o The retracting party must either give notice while there is still a reasonable time to
permit the other party to cause the condition to occur or must give an extension of
time.
o When the time for occurrence of a condition has expired, the party whose duty is
conditional has a choice:
Treat the duty as discharged
Disregard the nonoccurrence of the condition and treat the duty as
unconditional.
Excuse of Condition by Breach
An obligor may excuse a condition of its duty by committing a breach that causes the
nonoccurrence of the condition
When the condition is excused, the obligor’s duty becomes absolute.
The breach may take the form of nonperformance or of repudiation
Breach By Prevention:
o The duty of good faith and fail dealing that is usually imposed requires at least
that a party do nothing to prevent the occurrence of a condition of that party’s
duty. Bradford Dyeing
o Ex: The owner that conditions a duty to make progress payments on the
architect’s issuance of a certificate may not refuse to pay on the ground that no
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certificate has been issued if the owner improperly induced the architect not to
issue it.
Breach by Inaction: “Best Efforts”
o A party is sometimes expected to take affirmative steps to see that the condition
occurs
Ex: The purchaser that conditions the duty to close on obtaining a
mortgage is expected to take suitable steps to obtain one.
o Risk Assumed by Obligee:
Courts frequently have refused to burden the obligor with a duty to use
best efforts on the ground that the obligee has assumed the risk that the
obligor would not exert itself to that extent.
Though the good faith requirement is usually still imposed unless
expressly stated
Breach by Repudiation:
o If the condition is at least partly within the control of one party and the other
repudiates by stating that it will not perform even if the condition occurs, the first
party can take the other’s word and do nothing further to see that the condition
occurs.
Ex: An owner’s duty to pay is conditional on the contractor’s furnishing
an architect’s certificate. If the owner repudiates by stating that not
payment will be made at all, the condition is excused.
Casual Connection:
o The breach that excuses a condition must be casually connected to its
nonoccurrence
o The breach must contribute materially to the nonoccurrence of the condition
Excuse of Condition to Avoid Forfeiture:
Impracticability as Excuse: §271
o Courts have excused a condition when its occurrence becomes impossible, or at
least impracticable, and forfeiture would result if it were not excused.
Disproportionate Forfeiture: §229
o A court may excuse a condition to the extent that its nonoccurrence would cause
disproportionate forfeiture.
o The court must weight the extent of the forfeiture by the obligee against the
importance to the obligor of the risk from which he sought to be protected and the
degree to which that protection will be lost if the nonoccurrence of the condition
is excused to the extent required to prevent forfeiture.
o To be used by a court in its sound discretion as a last resort
o The rule on excuse of conditions is directed at the unfairness that would occur at
some later time if the condition were not excused.
Nonperformance
Performance as Discharge and Nonperformance as Breach
If a duty is fully performed, it is discharged
Nothing less than full performance operates as a discharge
Nonperformance does not always amount to a breach
o Full performance may not yet be due
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o The duty may have been discharged on impracticability or frustration
When performance is due, any failure to render it is a breach
Constructive Conditions of Exchange:
The court itself determines whether one party’s promise is dependent upon the other
party’s return promise
If it is, the court supplies a term making the first party’s promise conditional on
performance of the return promise.
Constructive Conditions: A fact that operates as a condition because the court believes
that the parties would have intended it to operate as such if they had thought about it.
Reason for Development:
o The courts developed the concept of constructive conditions of exchange in an
effort to give both parties to a bilateral contract as much security as the order of
their performances will permit
Courts have shown a preference for dependent promises.
o Only the clearest language can make a promise to which the concept of
constructive conditions does not apply.
Leases:
o Major exception to this rule
o Courts have held that the tenant’s promise is independent of any duties that the
landlord may have to make repairs or provide services
Limits of Dependence:
o The timing of the parties’ performances imposes some limits on the use of
constructive conditions
o One party’s duty to perform cannot be conditioned or dependent on the other
party’s rendering a performance that is to come at a later time.
Concurrent Conditions:
When parties are to perform at the same time
The party who sues the other for nonperformance must aver that he has performed, or
was ready to perform, his part of the contract
The restatement holds that tender occurs when there is an offer of performance
accompanied with manifested present ability to make the offer good. §263
Should each party “stay at home” too long, failing to make even a conditional offer to
perform within the appropriate time, their mutual abandonment will be considered an
agreement of recession
Inapplicable to specific performance
Order of Performance: §233, 234
Sometimes the parties themselves fix the order of performance by the language of their
agreement.
If they do not, the situation may dictate that order.
Simultaneous Performances:
o Insofar as the agreement permits return performances to be rendered
simultaneously, they are due simultaneously
o Applies if there is no time fixed for performance or if a time is fixed for only one
of the parties.
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o The law favors and order of performances that results in concurrent conditions of
exchange.
UCC reflects this preference in its general rule that delivery of he goods
and payment of the price are to be simultaneous
o Advantages:
Offers both parties maximum security against disappointment of their
expectations
Avoids placing on either party the burden of financing the other before the
latter has performed
o Exceptions:
Contract for delivery of goods to the buyer on credit
Impossible to perform simultaneously
When the performance of a contract consists of doing one side, and in
giving on the other side, the doing must take place before the giving.
Performance at One Time:
o A preference for performance at one time rather than over a period of time.
o If a party’s whole performance can be given at one time, it is due at one tie.
o Installment contracts:
If the parties have agreed that one party’s performance is due in
installments, and the other party’s return performance can be apportioned
so that a comparable part can be given simultaneously, that part will be
due simultaneously.
Under the UCC where the circumstances give either party the right to
make or demand delivery in lots the price of it if it can be apportioned
may be demanded for each lot.
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o Generally if a party’s breach is willful, that party’s performance cannot be
substantial, regardless of the impact of denying the right to enforce the contract
Courts generally have not applied the doctrine of substantial performance to a seller’s
claim against a buyer that has rejected either real or personal property under a contract of
sale.
Perfect Tender Rule:
o The buyer is entitled to reject gods unless the seller makes a “perfect tender.”
o The Code adopts the perfect tender rule
o Limited in a number of ways:
Buyer can revoke acceptance only if non-conformity substantially impairs
the value of the goods to buyer.
The seller has the right to cure after the buyer has rejected the goods
Divisibility as a Means of Avoiding Forfeiture §270
A contract is said to be divisible if the performances to be exchanged can be divided into
corresponding pairs of part performances in such a way that a court will treat the parts of
each pair as if the parties had agreed that they were equivalents.
Two Requirements:
o It must be possible to apportion the parties’ performances into corresponding
pairs of part performances
o It must be proper to regard the parts of each pair as agreed equivalents
Apportionment:
o Met if the price for parts of the performance can be determined
Agreed Equivalents:
o Depends on considerations of fairness like those that guide the court in
determining whether to supply a term.
o Fundamental Question: Whether the part performances are of roughly equivalent
value to the injured party when viewed against the background of that party’s
expectations as to the agreement as aw hole.
o The fact that prices are stated separately or for units of work will not make a
contract divisible if the injured party cannot make full use of the part received
without the rest
A contract may be divisible even though the price is payable at one time on completion of
the work.
If a contract is divisible, repudiation as to one part affects rights and duties as to al parts.
Restitution as a Means of Avoiding Forfeiture
A party that is precluded from recovering on the contract because of not having
substantially performed can recover for any benefit conferred, less damages for which
that party is liable because of breach.
Granting restitution has become one of the principle means of mitigating the potentially
harsh results of the concept of construction conditions of exchange.
Britton v. Turner:
o Rejected the traditional rule that denied restitution for a party in breach
o The injured party might receive a windfall since that party may receive much
more, by breach of the contract, than the injury which he has sustained by such
breach.
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o If a party actually receives labor, or materials, and thereby derives a benefit and
advantage, over and above the damage which has resulted from the breach of the
contract by the other party, the law thereupon raises a promise to pay to the extent
of the reasonable worth of such excess
The restatement rejects the idea that willfulness is an absolute bar to restitution
Measurement of Recovery:
o Benefit conferred
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The restatement looks to the injured party and asks tow hat extent that arty will be
deprives of the benefit it reasonably expected, account being taken of the possibility of
adequate compensation for that part.
o It also looks to the possibility the other party will suffer forfeiture and the
likelihood that it will cure its failure.
Example of Progress Payment:
o An owner’s failure to make a single progress payment is generally held to justify
the builder in suspending performance.
Cure: §237; 2-508
The party in breach often can cure the breach by correcting the deficiency in performance
Courts have often been willing to allow the party in breach some period of time to cure
its breach.
o Ex: transfer of defective title may allow time to correct defect
When the time for performance has not expired, the seller has the right, on notifying the
seller, to make a conforming tender within that time
When the time for performance has expired, the code gives a seller that has performed in
good faith an opportunity, on notifying the buyer, to cure
If the party in breach does not cure within an appropriate time, the injured party may
terminate the contract.
Total Breach and Termination: §242
After some period of time, the injured party can put an end to the contract by terminating
it
A claim for damages for total breach rests on the premise that the injured party is entitled
to compensation for the performance that has not been rendered
The injured party must show that, had there been no breach, it could have performed or
tendered performance as required under the contract.
Significant Circumstances:
o Length of uncured breach the justifies termination is a question of fact
o Extent to which further delay will deprive the injured party of the benefit that it
justifiably expected from the exchange
o Degree to which the injured party can be compensated adequately in damages for
that loss.
o Take into account the risk of forfeiture
o The likelihood that the party will cure
o Nature of the contract: “Time is of the essence”
Shorter time allowed for the sale of goods
Installment Contracts: 2-612(3)
o Whenever nonconformity or default with respect to one or more installments
substantially impairs the value of the whole contract there is a breach of the whole
Effect of Waiver
A constructive condition can be waived either before or after the time for its occurrence
A constructive condition of exchange can be waived even if it is a material part of the
agreed exchange, since the injured party will still be compensated for the breach.
Example of Delay:
40
o If the other party has indicated that it will tolerate the delay, it cannot later seize
on the delay as a ground for termination, though that party is entitled to damages
for any loss the delay may have caused
Election:
o Once a material breach has continued long enough to be total, the injured party
can choose either to terminate the contract and claim damages for total breach, or
not to terminate the contract and claim damages for only partial breach.
o The party’s choice is designated an election and is binding even if it has not been
relied
o The injured party cannot later reconsider, terminate, and recover damages for total
breach unless the party in breach should commit a further breach.
Choice by Conduct:
o A party’s choice to treat a breach as only partial is often inferred from a party’s
conduct
o A court usually concludes that a party has made such a choice if that party accepts
the other’s performance or retains it for more than a reasonable time.
o If a buyer has accepted several defective installments in succession, the seller may
be justified in believing that the buyer will continue to accept similarly defective
installments
A party can revoke its waiver as to subsequent breaches if the party in
breach has not relied on the waiver to such an extent that revocation would
be unjust
Giving Insufficient Reason: §248
o Ordinarily, a party need not give any reason for rejection
o However, if a party gives an insufficient reason for rejecting, and the party in
breach reasonably understands that to be the exclusive reason, the court will treat
the giving of that reason as a promise not to assert other reasons
Prospective Nonperformance:
Anticipatory Repudiation as a Breach: §253, 2-610, 2-611
A repudiation that occurs before there has been any breach by nonperformance
Anticipatory repudiation discharges any remaining duties of performance of the injured
party
General rule that an anticipatory repudiation gives the injured party an immediate claim
to damages for total breach
The injured party must prove that it could have performed absent the repudiation
Exception:
o Repudiation of a duty does not operate as a breach if it occurs after the
repudiating party has received all of the agreed exchange for that duty
o The injured party must await the time for performance to sue for damages
Even if the injured party was under no duty to render any performance, courts have
applied the doctrine if some performance by that party was a condition of the repudiated
duty and was in this sense part of the exchange
o Ex: option contracts.
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What Constitutes a Repudiation: §250
A repudiation is a manifestation by one party to the other that the first cannot or will not
perform at least some of its obligations under the contract
It may be by words or other conduct.
It must be serious enough that the injured party could treat it as a total breach if it
occurred and it must substantially impair the value of the contract (restatement-Code)
The traditional view is that the party’s good faith will not prevent the statement from
amounting to a repudiation
Responses to Repudiation
Treat Contract as Terminated:
o Treat duties as discharged and bring suit immediately for damages for total breach
o In calculating damages, a court will take into account any cost the injured party
ahs avoided as a result of not having to render any further performance.
o An injured party is expected to take appropriate steps to avoid loss
Retraction: §256
o The repudiating party can prevent the injured party from treating the contract as
terminated by retracting the repudiation before the injured party has acted in
response to it.
o As soon as the injured party has materially changed its position in reliance on the
repudiation, it is too late for the repudiating party to retract
o The code provides that a retraction reinstates the repudiating party’s rights under
the contract with due excuse and allowance to the aggrieved party for any delay
occasioned by the repudiation.
Urge Retraction §257
o Sometimes the injured party will insist that the repudiating party perform or urge
that party to retract its repudiation.
o The injured party’s response in trying to save the deal does not amount to an
election
Ignore Repudiation:
o An injured party that ignores the repudiation and awaits the time for return
performance remains in a state of vulnerability.
Effect of Insecurity as to Return Performance: §251, 2-609
Mere doubts by one party that the other party will perform when performance is due will
not excuse the first party from performing.
It certain circumstances a party may demand assurance
CONTRACT BENEFICIARIES
Historical Development:
Lawrence v. Fox: In the case of a promise made to one for the benefit of another, he for
whose benefit it is made may bring an action for its breach
Modern Rule: §315
Intended Beneficiary: One that does acquire rights under a contract.
Requirements: §302(1)
o One must show that recognition of a right to performance in the beneficiary is
appropriate to effectuate the intention of the parties
o One must show either:
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The performance of the promise will satisfy an obligation of the promisee
to pay money to the beneficiary; or (promise to pay promisee’s debt)
The circumstances indicate that the promisee intends to give the
beneficiary the benefit of the promised performance. (gift promise)
Gift Promises:
o It is enough if the promisee’s purpose was to make a gift to the beneficiary or to
confer upon him a right against the promisor to some performance
o The beneficiary of a gift promise that has not already assented to a contract for its
benefit may render any duty to itself inoperative from the beginning by
disclaiming it within a reasonable time after learning of the contract
Intention to Benefit:
o Courts have not required that the person to be benefited be identified at the time
the promise is made.
o The test may be met even though the promisee’s motives were mixed
Interpretation and Omitted Cases:
o If the parties have included a provision that is not clear, the court’s function is that
of interpretation.
Promise to Pay Promisee’s Debt §302
o Excludes situations in which the duty that the promisee owes the beneficiary is a
duty to do something other than pay money
o Excludes situations in which the duty that the promisee owes the beneficiary is a
supposed or asserted duty rather than an actual one.
Effect of Reliance by Beneficiary:
o If the beneficiary would be reasonable in relying on the promise as manifesting an
intention to confer a right upon him, he is an intended beneficiary.
Government Contracts:
Government contracts to perform public services
Courts have been reluctant to accord public individuals rights as beneficiaries unless the
contract makes it clear that this was intended
H.R. Moch Co. v. Rensselaer Water:
o Moch’s warehouse burned down because the water company failed to maintain
adequate pressure and he sued the company as a beneficiary of the contract.
o More than a benefit to the public must be shown to give a right of action to a
member of the public not formally a party.
Government Under Duty:
o If the contract is one to perform a duty that the government owes to members of
the public, courts have generally allowed recovery by individual members on the
theory that they are creditor beneficiaries.
Provision in Contract:
o Government contracts sometimes by their terms indicate an intention that
beneficiaries have a right of enforcement, and courts give effect to such terms.
o Ex: Contracts for public works that provide that the contractor will pay for harm
that the contractor’s activities cause to members of the public and their property.
Bossier Parish School Board v. Lemon
o Held that African American personnel at an Air Force base were intended
beneficiaries of a funding contract between the US and the local school district
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Private Actions:
o Third party claims under federal contracts to private right of actions claims under
federal statutes.
o Whether the plaintiff is a member of a class for whose especial benefit the statute
was enacted and whether there is any indication of legislative intent to create such
a remedy
Relative Rights of Beneficiary and Promisee
Once it is decided that third party is an intended beneficiary, that party has a right against
the promisor
The beneficiary can enforce that right without joining the promisee in an action against
the promisor for damages or specific performance.
The beneficiary retains any right that the beneficiary had against the promisee before the
contract between the promisor and promisee
o If the promisee already owed a duty to the beneficiary, neither the making of the
contract nor the beneficiary’s acceptance of it operates to discharge the duty.
o The beneficiary is now owed two duties by both the promisor and the promisee
but is only entitled to one complete satisfaction
Example of Mortgage Assumption:
o Mortgagor (B) under a duty to a mortgagee (C)
o B transfers land to a granted (A) that assumes the mortgage
o A is now also under a duty to C
o C is now owed two duties but is entitled to only one performance
Promisee Against Promisor:
o The right is enforceable by an action for damages or specific performance to the
same extent as are other contract rights
Gift Promises:
o The promisee will usually suffer no economic loss if the promisor does not
perform.
o Courts usually consider the damage remedy inadequate and grant specific
performance.
Vulnerability of Beneficiary to Discharge or Modification:
If the beneficiary consents, the promisor and promisee are generally free to make a
subsequent agreement that will discharge or modify the promisor’s duty to the
beneficiary
A time may come after which a beneficiary that does not consent is no longer vulnerable
to such an agreement-Vested
Three Views:
o Vests as soon as the contract is made even though the beneficiary may not learn
of the contract until later
o Vests when, having learned of the contract, the beneficiary assents to it
o Vests only when the beneficiary relies
Restatement View: §311
o The promisor and promisee have the power to discharge or modify the duty until
the beneficiary, before he receives notification of the discharge or modification,
materially changes his position in justifiable reliance on the promise or brings suit
on it or manifests assent to it at the request of the promisor or promisee.
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The rule can be varies expressly or implicitly by the original contract between the
promisor and the promisee
Vulnerability of Beneficiary to defenses and Claims:
A beneficiary’s right is generally subject to any defenses and claims of the promisor
against the promisee arising out of that contract.
Enforceability:
o Lack of consideration
o Unenforceability on grounds of public policy
o Failure to satisfy the statute of frauds
Void ability:
o Incapacity
o Mistake
o Misrepresentation
o Duress
The beneficiary is also vulnerable to defenses of the promisor that arise under those terms
during the performance of the agreement
o Nonoccurrence of a condition
o Failure of performance
Terminology
Assignment: An obligee’s transfer of a contract right
o Assignor transfers to an assignee a right that the assignor has against an obligor
Delegation: An obligor’s empowering of another to perform the obligor’s duty is known
as a delegator of the performance of that duty
o The obligor (delegating party) empowers a delegate to perform a duty that the
delegating party owes to an obligee.
Assignment:
Historical Background and Code Provisions:
First recognized in equity
Effectiveness of an Assignment:
The act by which an assignor actually transfers a contract to an assignee
The owner of that right must manifest an intention to make a present transfer of the right
without further action by the owner or by the obligor
o May manifest directly to the assignee or to a third person
Question of interpretation of all of the circumstances
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Limited Effects:
o May be voidable by the assignor on a ground of misrepresentation or duress
Or it may be conditional
Partial Assignments:
o No legal proceeding can be maintained by the assignor or assignees against the
obligor over his objection, unless all the persons entitled to the promised
performance are joined in the proceeding, or unless joinder is not feasible and it is
equitable to proceed without joinder
o As long as the risk of multiple suits is avoided
Statute of Frauds
o Absent a statute to the contrary, no writing is necessary for an effective
assignment
Limitations on Assignability:
A court may hold that a purported assignment is not effective on grounds of public policy
A court may find a purported assignment ineffective on the ground that transfer of the
right would adversely affect the obligor.
UCC holds that a assignment of rights under a contract for the sale of goods is ineffective
if it would:
o Materially change the duty of the other party
o Increase materially the burden or risk imposed on that party by the contract, or
o Impair materially that party’s chance of obtaining return performance
Courts usually do not view the change in person as sufficient to materially change the
obligor’s duty:
o However some situations may be appropriate. Personal discretion Personal
supervision of the other party
Most courts uphold terms precluding effective assignment, favoring freedom of contract
over free Assignability
o However, they are narrowly construed if possible
o Absent a contrary indicate, a prohibition of an assignment of “the contract” is to
be interpreted as barring only the delegation of duties, not the assignment of rights
Limitations on Assignability of Future or After-Acquired Rights
Mitchell v. Winslow:
o Recognized an equitable lien
o Since the mortgagor should not be taken to have done a useless act, the ineffective
attempted mortgage should be regarded as a promise to make a mortgage on
acquiring the property
o Such a promise would be enforceable in equity when the mortgagor acquired the
property, because the mortgagee’s remedy of damages at law would not be
adequate
o Equity will consider the mortgagor to have mortgaged the property as soon as the
mortgagor acquired it
Practical Concern:
o To allow a person to assign a right under a contract not yet in existence enabled
that person to assign all the contract rights that might be acquired at any time in
the future.
Response:
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o An equitable assignment of a future contract right might be effective as against
the assignor and the obligor, it was not effective as against a good faith purchaser
that acquired legal interest in the same right by means of a subsequent assignment
from the same assignor after the contract was made.
Floating Lien:
o New accounts replace the old ones as the old ones were paid and with security
interest automatically carrying over to each new account as it arose.
o The code abandoned restrictions on the creation of a floating lien
Revocability of a Gratuitious Assignment:
The assignee’s right is terminated if the assignor revokes the assignment, becomes
incapacitated, or dies.
In general, gratuitous assignments are revocable.
Consummation of Gift or Reliance:
o The assignor may lose the power to terminate as the result of the assignee’s
subsequent acts.
o An effective assignment authorizes the assignees to consummate the gift by
obtaining performance from the obligor
o If the assignee relies on the assignment, the assignor is estopped from revoking it,
at least to the extent that it would be unjust for the assignor to do so.
Value:
o If an assignee gives value for the assignment, it is not gratuitous and is therefore
not revocable
o An assignee gives value by taking the assignment either in exchange for
something that would be consideration for a promise; or
o As security for in total or partial satisfaction of a preexisting obligation
Vulnerability of Assignee to Discharge Or Modification
If the obligor pays the assignor before being notified of the assignment, the debt is
discharged
o The assignee may be able to hold the assignor liable for breach of warranty
If the obligor pays have been notified of the assignment, the debt is not discharged
o The obligor’s payment is not a defense against the assignee
Notification:
o The notification must actually be received by the obligor
o It must indicate that the amount due or to become due has been assigned and that
payment is to be made to the assignee
o Must reasonably identify the rights assigned.
Modification After Assignment:
o Some courts found that after notification to the obligor, the assignee was not
vulnerable to modification without the assignee’s assent
o Necessary Advances: Some courts distinguished advances from modification as
necessary to enable the assignor to perform his contract.
o Code Rule: modification of an assigned contract is effective against an assignee
if made in good faith
Vulnerability of Assignee to Obligor’s Defenses and Claims
An assignment does not deprive the obligor of any defenses or claims arising out of the
agreement that the obligor could have asserted against the assignor
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Defenses:
o Unenforceability for lack of consideration, reasons for public policy, or failure to
satisfy the statute of frauds
o Voidability for incapacity, mistake, misrepresentation, or duress
o Nonoccurrence of a condition or failure of performance
Claims:
o The assignee is subject to recoupment of any claims that the obligor would have
had against the assignor for damages for breach of contract
o The claim is good against the assignee to the extent that it diminishes or
extinguishes the assignee’s claim
It cannot be used to impose liability on the assignee
Assignor’s Warranties Against Defenses
o An assignor that assigns for value impliedly warrants that the right as assigned
actually exists and is subject to no defenses or claims good against the assignor,
other than those stated or apparent at the time of the assignment
Vulnerability of Assignee to Competing Claims of Ownership:
The assignee’s interest is regarded as legal in nature and the assignee is protected by a
rule that one acquiring legal ownership takes free of that claim.
An assignee that is a good faith purchaser takes free of latent equities
Priority of Competing Interests:
o New York Rule: the first assignee prevailed even if the second assignee obtained
the performance.
o English Rule: The first assignee prevailed unless the second assignee had notified
the obligor of its assignment before the first assignee notified the obligor of its
o Massachusetts Rule: The first assignee prevailed unless the second assignee had
done one of four acts:
Received payment or other satisfaction of the obligation
Obtained a judgment against the obligor
Made a new contract with the obligor by novation; or
Obtained possession of a symbolic writing
Endorsed by the restatement
o Under the code, the assignee that files first prevails.
Delegation
Delegability of Performance
Delegation refers to the act by which one owing a duty manifests an intention to confer
upon another person the power to perform that duty
No particular language is necessary for an effective delegation
Party Delegating Remains Bound
o Even an effective delegation does not relieve the delegating party of its duty
o That can only happen by consent by the obligee or performance by the delegate
o A delegation of performance does not relieve the delegating party of any duty to
perform or any liability for breach
o If the delegating party denies the duty this denial is a repudiation
Significance of Delegation:
o The subsequent performance of the duty by the delegate will discharge the duty
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o An effective delegation means that the obligee must accept performance by the
delegate
Nondelegability:
o If an obligor attempts to delegate a nondelegable performance, it is not effective
and the obligee is entitled to insist on performance by the delegating party
o Reasons for Nondelegability
Public policy
Explicit terms in the contract
The choice of the person was of sufficient importance to the obligee when
the bargain was made that the performance should be considered
nondelegable
o Test:
Question for the court
A performance is nondelegable to the extent that the obligee has a
substantial interest in having the original promisor perform or at least
control performance § 318(2)
o Extent to which Performance is Personal:
One of the most significant circumstances is the extent to which the
performance is personal.
In the sense that the recipient must rely on qualities such as the character,
reputation, taste, skill, or discretion of the party that is to render the
performance
o Degree of Control Retained:
The degree of control that the delegating party can be expected to exercise
over the delegate
A performance may be considered delegable if the delegating party is to
remain in the business and supervise the performance
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BARBRI
Overview Questions
1. Was there an agreement
a. Did it rise to the level of an agreement?
2. Is it legally enforceable
a. Any reason that a court should not enforce this?
3. What are the terms of the contract?
4. Did each of the two people do exactly what each agreed to do?
5. Is there any excuse?
a. Look at the fact pattern, see what happened after the agreement was made.
6. What are the consequences of not doing what you agreed to do?
7. When do people who did not themselves make a contract have rights or duties under a
contract they did not make?
Article Two
Applies to sales of goods
Something that is tangible
Predominant factor test
Terms:
Not every agreement is a contract
Bilateral versus unilateral
o Unilateral contract results from an offer that requires completion of performance
to constitute acceptance
If performance has begun it cannot be revoked
Language of condition v. language of promise
Delegation v. Novation
Excuse
o Impossibility
o Frustration
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Context
Need to know about advertising (generally not offers-invitation to make
offers)
o After the Offer
Death
Delay in Acceptance
Offeror changes their mind (revocation)
Clear and ambiguous
Communicated to the offeree
Four situations in which the offeror cannot change his mind
Option: Is an offer plus a paid for option not to revoke
Firm Offer Rule: (Code): Where the seller is a merchant. Promise
not to revoke. Signed writing
Where the offer was relied on in a way that was reasonably
foreseeable
o Response
Figure out whether that response is an acceptance or rejection
The offeror can control how the offer can be accepted
Most instances the required response is not indicated
Whatever is reasonable under the circumstances
Mailbox Rule:
Two people are trying to make a deal at a distance
They are using methods of communication that involve delays
The communications are inconsistent
Two Basic Rules: (1) most communications are legally effective
only when they are received; (2) Acceptances are effective when
they are sent
Doesn’t even matter if the letter of acceptance never arrived
Where performance is the method of acceptance
Do you have to give notice?
o Common sense
Rejection:
o Counteroffers:
Operate as rejections
Terminates the offer
o Conditional Acceptance:
Adds something to the offer
Terminates the offer
“On condition that” “if” “provided” “so long as”
o Mirror Image Rule (Common Law)
In order for it to be an acceptance it must be exactly the same
2-207 relaxes this rule:
Has to be a sale of goods
You’ll be given information about the content of the offer
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You’ll be given information about a later communication that adds
a condition
There will be a contract, but the added term is the question
Can’t be “my acceptance is conditioned on…”
Common Law Policemen
Capacity:
o Age-18
Duress:
o Physical duress
o Economic duress
The plaintiff made an improper threat
No reasonable alternative
Undue Influence
Misrepresentation:
o Untrue statement prior to the agreement
o The untrue statement was relied on in entering into the agreement
o Honest material misrepresentations still can make the contract unenforceable
o Nondisclosure
Neither party has an obligation to disclose knowledge
Exceptions: fiduciary duty
Mistake:
o A person on his own getting a wrong idea
o Classic View: If both parties were mistaken and the mistake related to something
material, nature of the contract, there is no contract
Ambiguous:
o In order for an agreement to be unenforceable for ambiguity
A term that has at least two meanings
Each party has a different meaning in mind
Neither party has any reason to know that the term is ambiguous
Public Policy
o Exculpatory Contracts: Where a person is trying to contract away all liability for
their torts
Hard question when its simply negligence (fact specific)
o Covenants not to compete
Is it reasonable?
Reasonable geographic region
Unconscionability:
o Part of the Code and Common law
o Procedural v. Substantive Unconscionability
P: Problems with the agreement process (Ex. Fine print, legalese, etc)
Unfair surprise
S: Based on unease of the terms with the agreement (oppressive terms)
o Arise primarily between businesses on one hand and individuals on the other hand
Terms of the Agreement
Are the additional terms a part of the contract?
o If neither person is a merchant the additional term is not a part of the contract
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o If both are merchants, the additional term is not a part of the contract unless it is
not a material change and it is not objected to
Performance and Excuse
Under common law, material breach excuses the performance of the other party
When is it a material breach?
o Fact question
Perfect Tender Rule:
o For sale of goods
Anticipatory Repudiation:
o Where one of the two parties unambiguously indicates that he is unable or
unwilling to perform before it is time for him to perform
o Reasonable Grounds for Insecurity
Sale of goods only
Something happens to give reasonable grounds for insecurity that the
contract will be performed
There can be a demand for adequate assurance
Conditions
o There must be language in the contract that creates this condition
Duty is conditioned on X
o Language of an express condition must be strictly complied with
o Nonoccurrence of a condition will lead to excuse
Impossibility
o Post contract occurrence that was not anticipated that affects one persons ability
to perform
o Mere expense is not enough
Frustration of Purpose
o Post contract occurrence that does not affect the ability, but the mutual
understanding purpose of the contract
Rights and Duties of Third Parties
Third Party Beneficiary:
o Where two people make an agreement with the common understanding that it is
to benefit a third person
o Was the third party an intended beneficiary?
o Beneficiary can enforce the commitment made to him by the promisor
o Ex: Life Insurance Contract: InsurerInsured; benefit to survivors
o Usually can change beneficiaries
o However, see where beneficiary relies on the contract
Assignment:
o Transfer of contract rights after a contract exists
o Does not require new consideration
Delegation:
o Transfer of duties under a contract
o Contract duties are generally delegable
The delegating party remains liable
Look at personal services-sometimes they can’t be delegated
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