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Table of Contents
Introduction........................................................................................................................................................ 4
Enforcing Promises........................................................................................................................................... 7
Consideration.............................................................................................................................................................. 7
Bargain vs. Gift............................................................................................................................................................................ 7
Adequacy........................................................................................................................................................................................ 8
Promisory Estoppel.................................................................................................................................................... 9
Intrafamiliar Context.................................................................................................................................................................. 9
Employment Context.................................................................................................................................................................. 9
Material Benefit Rule.............................................................................................................................................. 10
Bargain Context.............................................................................................................................................. 11
Offer and Acceptance.............................................................................................................................................. 11
Offer.............................................................................................................................................................................................. 11
Acceptance................................................................................................................................................................................. 12
Revocation................................................................................................................................................................................... 14
Offer and Counteroffer........................................................................................................................................... 15
Common Law View................................................................................................................................................................. 15
UCC §2-207................................................................................................................................................................................ 15
Relational Contracts...................................................................................................................................... 18
Uncertainty................................................................................................................................................................ 18
Preliminary Negotiations........................................................................................................................................................ 19
Binding Preliminary Agreements......................................................................................................................................... 20
Output/Requirements/Exclusive Dealings........................................................................................................... 20
Output/Requirement................................................................................................................................................................. 21
Exclusive Dealings Contracts.............................................................................................................................................. 22
Reducing Conflicts of Interest............................................................................................................................................... 23
Modification of Existing Agreements................................................................................................................... 25
Regulating the Bargaining Process............................................................................................................. 26
Duress......................................................................................................................................................................... 26
Fraud.......................................................................................................................................................................... 27
Willfull + Negligent................................................................................................................................................................. 28
Disclosure + Concealment...................................................................................................................................................... 28
Unconscionability.................................................................................................................................................. 29
Statute of Frauds...................................................................................................................................................... 30
Identifying + Interpreting Terms................................................................................................................ 32
Identifying Terms..................................................................................................................................................... 32
Common Law: Hard Parol Evidence Rule........................................................................................................................ 32
UCC: Soft Parol Evidence Rule........................................................................................................................................... 32
Mistake + Excuse............................................................................................................................................ 33
Mistake....................................................................................................................................................................... 34
Modern Excuse of Impracticability...................................................................................................................... 35
Remedies........................................................................................................................................................... 37
1
Basic Remedies......................................................................................................................................................... 37
Compensation............................................................................................................................................................................. 38
Expectation Damages: Cost to Complete vs. Diminution of Value...........................................................................39
Specific Performance............................................................................................................................................................... 40
Limitations on Compensation................................................................................................................................ 40
Certainty....................................................................................................................................................................................... 41
Duty to Mitigate........................................................................................................................................................................ 41
2
ISSUE SPOTTTING:
UCC or Common Law/Restatements?
Can it be voided?
Duress
Fraud: Willful/Negligent
Fraud: Concealment/Non-Disclosure
Unconscionability
Impractability
Frustration
Mutual Mistake
Unilateral Mistake
Risk allocation
3
Cost to Complete vs. Diminution of Value
Introduction
R2d §1: Contract Defined: A contract is a promise or a set of promises for the breach of which the
law gives a remedy, or the performance of which the law in some way recognizes as a duty
R2d§ 4: How a Promise May Be Made : A promise may be stated in words either oral or written, or
may be inferred wholly or partly from conduct.
3 types of Contracts
1. Express
2. Implied-in-fact (§4)
3. Quasi (Implied-in-law)
Is there a promise? Thumb on the scales against using coercive power of the state
Autonomy: respect for individual rights, must have clear justification
Instrumentalist: too much enforcement, activity level effect + costly precautions
Instant Retraction: Not allowed because we want to enhance the perceived credibility of promises
Objective Theory: Judge intent (existence of promise) by “reasonable person” standard; Gallup pole
Auto: Provides manifestation of assent available to all, preserves individual boundaries
Inst: Easier/cheaper for idiosyncratic to act normal than for normal to worry about idiosyncrasy
4
Bailey v. West RI (1969)
Facts: Δ purchased horse from seller. When delivered, it was lame. Δ instructed trainer to send
horse back to trainer, who refused delivery. Trainer then delivered horse to Π, though not at the
direction of Δ. Π sends bill to Δ, who refuses to pay.
Holding: (1) Π didn’t introduce any evidence for the “quasi-contract” argument upon which the
trial judge ruled (2) Neither a contract, or intent to enter into implied contract, ever existed between
Δ and Π, and (3) Π acted as volunteer, so he can’t recover on Quasi Contractual basis.
R2d §18: Manifestation of mutual assent to an exchange requires that each party either make a
promise or begin or render a performance.
Default Rules: facilitative, majoritarian rules reduce costs of transaction and promotes contracting.
Created by courts, best guess at what majority would want ex-ante
Must be explicitly opted out of, with substitutes provider to not apply
5
Fill gaps (1) allocate risk of performance, (2) provide measure of performance and (3)
specify consequences of non-performance
UCC
GET IN:
§2-102: Scope of transaction covered by UCC, only “goods”
§2-105: Definitions of “Goods”- movable at the time of identification to the contract.
GET OUT:
§1-103: Door out: Where the UCC is silent, common law applies
SUPPLEMENT TERMS:
§2-208: Course of Performance within contract relevant to determine meaning of agreement
§1-205(1): Course of Dealing – previous dealings between the parties can be used to interpret terms
§1-205(2): Usage of Trade – general industry practice can be used
6
Enforcing Promises
Consideration (R2d §71): Four-lane highway
Promissory Estoppel (R2d §90): Gravel road
Material Benefit Rule (R2d §86): Deer trail
Consideration
Williston’s Tramp - actions incidental to the receipt of a gratuity or gratuitous promise do not
constitute consideration (not bargained for).
7
Black Letter Law: Consideration doesn’t depend on conferring of benefit upon the parties to a
promise, but rather the forfeiture of a legal right as prescribed by a promise.
8
Law: If an act is done in return for a promise, that act—no matter how minor—will function as
consideration.
Promisory Estoppel
While no bargain exists (there’s no consideration!), enforcement only typical in general bargain context
All promises will induce a form of reliance, must be the expected reliance (dangling a promise in front
of someone)
Charitable Promises: can be enforced under §90(2), but rarely litigated or adopted. Fear of chilling
effect. Donees rarely sue (bad PR). Often, a bargain context exists (what will named after you etc.)
Intrafamiliar Context
9
Holding: The contract is enforceable under promissory estoppel since the pension promise induced
reliance to retire and not compete.
Why only non-donative benefits? Likely says something about the ‘donativity’ of the subsequent
promise; performed with expected compensation (implicit bargain), not gratuitous (mere volunteer)
Webb v. McGowin: (Worker + falling block); §86 applies, non-donative, worker expected
compensation, not revoked during promisor’s lifetime
Mills v. Wyman: (Son ill at sea; cared for until death; father promises to pay for expenses); “Good
Samaritan”, donative action.
Booth v. Fitzpatrick: (escaped bull); business context; non-donative, expected compensation and kept
records
Desny v. Wilder: (screenwriter) Non-donative, done in bargaining/business context; unequal bargaining
power
10
Bargain Context
Offer and Acceptance
Offer
§ 22: Mode of Assent: Offer and Acceptance: MoMA typically = offer + acceptance
MoMA may be made with offer + acceptance unidentified and moment of formation undetermined.
Offer or Preliminary Negotiations? Offer only exists if it is complete and only acceptance is left
CL does not like indefiniteness and errs towards preliminary negotiations if there are missing
material terms
o Overenforcement affects activity level and offerors will take extra costly precautions
o Cheap talk is valuable (brings parties together) and don’t want to discourage it
UCC §2-204(3): UCC says indefinite terms are okay if parties intended to contract because of
default rules in the UCC
Price quote + advertisements typ. not offers: seller would have no control of quality of buyer or
quantity – unless clear, definite, explicit + leaves nothing open
11
Lefkowitz v. Great American Minneapolis Surplus Store MN (1957)
Facts: Δ advertises on 2 consecutive weeks for special giveaway promotion. Π responds both
weeks, and is told that the sale applies only to women. Π brought suit; Δ alleges ad was invitation
to negotiate.
Holding: Advertisement generally not offer unless clear, definite, explicit and leaves nothing
open for negotiation, acceptance (by performance) completed contract.
Note: should π have notice of “house rule” on the 2nd week?
Acceptance
R2d §35: The Offeree's Power of Acceptance (transferred from offeror to offeree after offer)
1. An offer gives power to offeree to complete MoMA by acceptance of the offer
2. No K by acceptance of an offer power of acceptance terminated via § 36.
12
R2d §54 Unilateral Contract Notification: no notification req’d unless requested; if offeree knows
offeror can’t reasonably find out, offeror duty only when: (1)notification reasonably attempted, (2)
offeror learns of performance, (3)indicates no notification is req’d
R2d §56 Bi-lateral Contract Notification: Notification required for acceptance by promise
R2d§27: Agreement that are sufficiently definite can be enforceable even in written memorialization is
contemplated
Ciaramella v. Reader's Digest Association, Inc 2nd Cir. (1997) POSTPONING ACCEPTANCE
Facts: During settlement negotiations, Π’s lawyer orally indicated that agreement was reached. Π
had insisted that agreement not valid until signed, and did not sign the agreement that his lawyer had
indicated was complete.
Holding: Agreement not reached since Π insisted on signature (opting out of R2d § 30, agreement
thru any medium); Not a Type I prelim agreement
13
Revocation
GC / SUB Arguments:
1) Sub’s sub-bid is an offer (Promise), GC’s use of sub-bid is partial performance: §50(2) Acceptance
Unilateral = Promise + Performance
o Sub’s offer: “we will do the job if you pay us”, they want promise to pay, not use of bid
o Use of bid is not a means of acceptance
2) Sub’s bid is an offer (Promise), Contractor’s use of offer is promissory act (§50(2) Acceptance)
Bilateral = Promise + Promissory Act/Performance
o The use of the bid is not a promissory act b/c GC doesn’t want to be bound until it wins
bid
o Not acceptable means of acceptance
3) Sub’s sub-bid is an offer (Promise), Contractor mails “acceptance” conditional on final award of
project (Promise)
14
Offer (Promise) + Acceptance (Promise) = Қ
o GC’s return promise was conditional;
4) 90 Argument: Sub-Contractor’s sub-bid is an offer (Promise), Contractor’s use of sub-bid is
specific reliance
Promise + Specific Reliance = Қ under §90
a. Sub’s offer is a conditional promise of “I will do the job if you promise to pay”
b. Contractor cannot rely until he makes the return promise to pay
15
o they materially alter the contract (most terms mat. Alter)
o offeror objects to them within a reasonable time
ii. For Consumers: terms are just proposals – fall out.
Route 2: Second Clause of 2-207(1)
a. Acceptance expressly conditional and contains add’l/diff. terms, AND
b. Offeror expressly agrees to the additional and different terms of the counteroffer
c. Seller’s terms dictate – both different and additional terms.
Route 3: §2-207(3) + buyer friendly
a. Acceptance includes different and/or additional terms but the contract is initiated through
performance (writings disagree, w/ no express assent to new/different terms).
All different and additional terms are discarded via the Knock-Out Rule
Contract terms: those agreed upon + defaults of the UCC
Comment 6: when terms directly conflict, assumed that both parties disagree to their use
Additional terms v. Different Terms - §2-207(2): Some courts interpret this to mean that “different
terms” are not covered by this section. Scott believes otherwise drafting error.
Primary means of dealing with this is to apply Knock-Out Rule, (both sets of different terms
knock each other out, leaving §2-207(3)-style contract.)
UCC Default Terms:
- delivery at buyer’s place of business (§2-310)
- delivery in “reasonable time” (§2-308)
- Specific Performance (§2-716)
- Seller pays buyer’s incidental and consequential damages (§2-715)
Step-Saver Data Systems, Inc. v. Wyse Technology, Inc. 3rd Cir. (1991)
Facts: Π purchased copies of Δ’s software via telephone. The software contained a box-top
warranty disclaimer.
Holding: Order = Acceptance. Delivery = performance. The box-top disclaimer was an additional
term brought after the parties had contracted over the phone. The box-top doesn’t meet the test for
conditional acceptance as the parties had an ongoing history of transactions that indicated the seller
was willing to proceed even without some express warranty terms as part of the transaction. 2-207
Route 1 contract, terms materially alter contract, fall out.
16
Facts : Π charges racketeering against Δ for product defects. Δ tried enforcing arbitration clause
contained in List of Terms delivered with computer.
Holding: Transactional efficiency dictates that order = offer, delivery = conditional acceptance. The
contract here was formed upon Π’s receipt and acceptance of the computer, and Π are thus bound
by the arbitration clause.
NOTE: UCC 2-207 applies only where there are multiple writings.
17
Relational Contracts
Uncertainty
Relational Contract: parties are incapable of finalizing contract terms due to uncertainty and
complexity. Few default rules exist.
The Puzzle of Incomplete Contracts – Parties often leave incomplete terms because:
1. Costs of complete contract are onerous:
a. Negotiations + writing costs
b. Cost of identifying all contingencies
2. Maintain asymmetrical information private (not worth telling them a business secret)
Why write incomplete K’s? (1) too remote to be worth dickering (2) failure to foresee (3) might block
negotiation (4) assume courts will fill gap in its favor (5) intention to rely on non-legal mechanisms
Why is P time of delivery, not time of agreement? Maintains pre-contract price risk on part of B + S.
R2d §33: Manifestation of intention to offer = contract only if terms are reasonably certain
(2) Requires basis to determine existence of breach + remedy
(3)Open/uncertain terms may = no intention to make an offer/acceptance
No agreements to agree
Bright line rule
UCC
Broad, flexible standard based on intention to be bound
Examines context: prior dealings + custom (2-208, 1-205)
Provides default rules to fill in open terms
18
§2-310: Absent time of payment – default is payment upon delivery
Varney v. Ditmar
Facts: Employer and employee verbal agree that employee will receive a bonus of a fair and
reasonable share of profits.
Holding: Terms must be definite enough for court to enforce. Parties must be certain and explicit so
that their full intention my be ascertained to a reasonable degree of certainty for K to be enforced.
“Fair and reasonable share” of profits = too uncertain.
Slammit v. Badshot
Facts: Badshot signs purchase order for fixed number of gut-stringed rackets from Slammit at
“price to be determined.” Before delivery, the price of gut triples. Was there a contract?
Holding: Badshot did not intend to be bound unless the price were fixed or agreed (under §2-
305(4)). Prior dealings show that neither party had intention to be bound to pay the price at
delivery if the price of gut string had shifted markedly since the time of order. Prior dealings can
give meaning to open terms and ambiguous contract terms
Can §90 be used to enforce representations made during Prelim Negotiations? Generally NO.
Need a promise + calculated inducement. Most often fails due to lack of a promise (R2d §2)
Scott: Typically need clear definite and unambiguous promise for enforcement
Policy – Over-enforcement = activity level effect on prelim negotiations; encourages cheap talk
o Already usually truthful + in both parties best interests not to lie;
o Usually fails due to a lack of intent to be bound due to uncertainty
19
Note: Discussions were too definite for Type II Leval contract; could instead make a ‘subject-to’
deal.
Leval Test: Modern standard for determining nature of preliminary negotiations (see ~pg. 13)
Typical context: MOUs, LOIs
Damages under Type II contract: Reliance expenditures are the appropriate damages to compensate
a party where counterparty has violated “good faith” bargaining (strategic bargaining delay)
Policy – discourages strategic delays and promotes contractual investments
Output/Requirements/Exclusive Dealings
20
a) Requirements/Output Contract (Reasonable Quantity Demanded aka good faith)
b) Exclusive Dealings (Best Efforts)
UCC § 2-103(1)(b): Good Faith in the case of a merchant means honesty and the observance of
reasonable commercial standards of dealing in the trade.
Can requirements = 0? Posner thinks yes! Only if done in good faith. With fungible goods, always
have market buyers to dispose of excess. Not supported by language of UCC §2-306. Can use prior
dealings, industry practice to support/protect decreased requirements.
Good Faith: Typically requires exogenous variable dramatically altering business plan. (≠ reallocation
of capital). Must be more than re-evaluation of merits of deal.
21
Facts: Requirements contract where Δ would buy “approximately 3,000” propane gas tanks and all
accompanying propane from Π. Δ ordered none, prompting suit. Gave no evidence of reason for
reduction of order.
Holding: A buyer in an options contract can reduce his requirements to zero only if acting in good
faith. Δ, which failed to provide any justification for its zero requirement decision, did not act in
good faith.
o Buyer may not overdemand but may underdemand if in good faith
Probably not supported by text of UCC 2-306. If estimate provided, it’s a “center”
Problem of underdemand: buyer will find substitute goods that work just as well,
violate exclusivity
o Contractual purpose: “Off the shelf indicates requirements contract, non-fungible indicates
specific investment
Purpose: Capture additional marginal utility by taking advantage of one party’s relative advantage in
distribution/marketing etc.
Marginal Revenue
Q
QP1 QP1+P2
Exclusive Dealings: Encourages relationally specific investment by distributor; by preventing
“freeriding” by competing distributors who don’t participate in investment(the “Karl Problem”)
UCC §2-306(2): requires “best efforts in exclusive dealings to maximize joint value (optimal sales
level if same entity owned both production and distribution rights
22
3) % of Gross Revenue (Bloor v. Falstaff):
Avoids distortion from net profits
Problem = royalty shifts optimal level of sales compared to other products with no royalty;
distributor may not be motivated to sell your product (dist. Max profit ≠ seller max profit)
Solutions: Incentives! Publishing - advance stimulates party to recover sunk initial costs
∆PRoyalty
Q
QP2 QP1
4) Benchmarking (McDonald’s):
Operate a few vertically integrated outlets, to which all franchises are compared; franchise
agreements have mechanism to terminate in the event of trailing benchmark
5) Full Vertical Integration (Starbucks):
Own outlets so there is no spread in incentives
6) Extra-Legal Enforcement:
Parties are interested in goodwill and continued business
Agency Costs: costs of hiring someone else to do business and sharing in profits; potential for moral
hazard (agent acts in own best interest, not in mutual interests). 2 options for limiting:
Supervision: ensures agents act in your best interests; works well for routinized work (assembly
line). Costly, not appropriate for many high skill/service jobs
Bonding: Agent provides performance guarantee to reduce need for supervision
o Termination Clause
o Covenants not to Compete
23
Termination Clauses
Common Law: Can terminate at will for any reason or no reason; not a bad reason, violation of public
policy (failure to violate public policy, whistle blowing)
Employee handbook: If termination procedure is listed, must disclaim ability to deviate from
procedures. Be explicit, make it conspicuous, get initials!
‘Blue Line’ Rule: Court may strike objectionable terms while keeping others enforceable.
24
Holding: The non-compete clause is unenforceable since (1) it is not supported by consideration,
(2) was not reasonably limited in time & space, and (3) unnecessary to protect Π. Subsequent
employees not under same obligations
Amtech v. Harkness Hypo: How to avoid “did someone try hard enough” litigation?
1. Montoring
2. Benchmark/deliverables
3. Incentivize:
a. Stock options (combined with fee or not)
b. Termination clause
Pre-existing duty rule (common law): no modification to a contract is binding unless it is supported
by fresh consideration; can’t get more for the same duties. no obligation to renegotiate. 2 ways around:
Fresh consideration (risks sham consideration)
Rescind initial contract prior to entering new contract
Good Faith/Fair + Equitable (UCC§2-209 + R2d §89): all good faith modifications are enforceable
without without requiring separate consideration.
Verifiability issues in proving “bad faith” (Emmitt Smith, wants to retire early or more money?)
Rules v. Standards:
25
Regulating the Bargaining Process
3 Requirements of Expanded Choice + Contract Theory:
1. Voluntary
2. Informed
3. Mentally competence
Line drawing problem: encourage “cheap talk” while protecting against negative behavior
Duress
Proto-Typical cases:
1. Ex-ante Duress (’48 Morgan): “Hard Bargaining” ≠ duress
Simply stating price and sticking to it isn’t duress, even if other party is desperate
Poor choices are better than no choices!
No good faith required
2. Ex-post Economic Duress: (§176(1)(d)) (Wolf +Austin)
Good faith required once a contract exists
Games of chicken
3. Ex-ante Economic Duress (Mojave Dessert Hypo)
Exploiting perilous situation ≠ duress unless ∆ creates peril
Why? Poor choices are better than no choices! We want to incentivize services to those in peril.
Need a rule; uncertainty of standard would deter service providers
Situational monopoly
Elements § 175:
1. Improper threat (§176(1))
Commit a crime or tort
Criminal prosecution
Bad faith civil action
Breach of good faith once under a contract (ex-post economic duress)
2. Induce Assent
3. No reasonable alternative
Subj/ Obj: Would a ‘reasonable’ person with those subjective chars. act that way?
Efficient breach in Ex-Post Econ. Duress context: Must show no hold-up + no a game of chicken
Rationale: Cost of performance > Damages (≠ duress per UCC §2-209(c2); production cost)
Efficient renegotiation: (Value of Performance > Damages)
26
Value of Performance > Damages: often due to lack of recovery for goodwill losses, legal costs etc.
Post v. Jones: Admiralty doctrine of salvage should’ve applied to “auction sale” by salvaging boat. No
common law equiv.
Fraud
27
Would a ‘reasonable’ person with those subjective characteristics have acted that way
“Fraud vitiates Contracts”: Strong general policy preference against fraud due to social costs
Contracting around Fraud: Can get around policy with specific disclaimer combined with
merger/waiver clause, Danann & Borat
Can lose ability to rescind K without prompt action in the event of discovery of fraud (Snyder p. 425)
Willfull + Negligent
Concealment (§160): party taking affirmative action that makes it harder to discover the defect
(papering over walls etc.) = concealment/assertion (Obde).
28
Why compel disclosure? reduce contracting costs; More efficient to have buyer disclose than to have
buyer pay for all possible inspections
Why no disclosure for extrinsic info? Proprietary: encourage private research + gives property
interest in information that is acquired. General info: speeds dissemination of proper pricing info
(Disney orange groves)
Caveat Emptor – common law rule of “Buyer Beware”; opposes concealment + duty to disclose
Policy: disclosure risks info overload and invites false claims of disclosure for all disappointed π’s
Stambovsky v Ackley
Facts: ∆ promoted perception that her house was haunted, sold to π without disclosure of
Holding: Seller creating a material condition that is peculiarly within its knowledge has a duty to
disclose
Laidlaw v. Organ
Facts: ∆ negotiated with π’s agent (Girault) for purchase of tobacco. π unaware of news that prices
were up, asked ∆ if aware of any news affecting prices, ∆ declined to answer and purchased for half
price.
Holding: no obligation to disclose extrinsic circumstances
Unconscionability
Pre-conditions of ability to promise: (1) Voluntary (precludes duress), (2) informed (precludes fraud)
and (3) rational (precludes infancy)
29
- Can be used as evidence of procedural (who would ever sign that?); burden shifting
to ∆ to show procedure was acceptable
UCC §2-302: if a court finds a portion of a contract unconscionable it may not enforce a portion or
entire contract
Statute of Frauds
Formal defense where ∆ can keep trial from jury and avoid judgment on merits
Common Law:
1. Sales of land
2. Suretyship (answering for others debts)
3. Contracts that cannot be performed within a year of signing
4. UCC §2-201 – Sales of goods for an amount >$500
30
a. Doesn’t need to be accurate but recovery is limited to terms stated, sufficient to indicate
a contract has been made
4. ≠ contract has to be in writing; but provide solid evidence of the existence of a contract
Exceptions:
1. Reply doctrine§2-201(2):
a. Two merchants where one party fails to reply to a letter within 10 days
2. Special or custom-made goods §2-201(3)(a)
3. Admissions (in court etc.)§2-201(3)(b)
4. Partial Performance §2-201(3)(c); limited to goods received
Partial Performance: substantial partial performance in common law not limited to amount performed
Lower bar than UCC
Policy for SoF: Encourage deliberation and preserve evidence in “significant” contractual matters
Public subsidy of litigation costs creates undervaluation of reducing litigation cost (facilitating
adjudication by providing more evidence); SoF mandates considering those costs
Predominant purpose test – to classify ‘mixed’ contract (sale of goods + service/distribution rights),
look to “predominant purpose of transaction”
31
Identifying + Interpreting Terms
Goal: Find interpretation that the parties intended a court to reach in the event of dispute (subjective +
prospective)
2 Questions of interpretation:
1. What are the terms of the contract?
2. What is the meaning of those terms?
Parol Evidence Rule: prevents a party to a written contract from presenting oral evidence that
contradicts or adds to the written terms that have been agreed to.
Identifying Terms
Step 1: To what degree were contractual terms committed to language, what is level of integration?
Unintegrated: no evidence of agreement or intent to commit terms to language; any evidence is
admissible to prove if a term is or isn’t part of the contract.
Partially Integrated: Parties agree to some but not all terms. Writing is final to those terms (PER
bars evidence to the contrary); however, evidence allowed for other terms
Totally Integrated: Intention for writing to be final and exclusive. No external evidence
allowed under PER. Intention = explicit (merger clause) or implied (certain/natural omission)
Step 2: What do terms mean? Contextual vs. Textual.
Common Law: Hard Parol Evidence Rule
“Four Corners” presumption: If document looks facially complete, presumption of total integration
Natural Omission Doctrine: Exception to four corners, evidence of additional terms allowed if parties
would have naturally omitted them.
“Plain Meaning” rule: Words interpreted by plain, unambiguous meaning, independent of the context.
Uses “majoritarian language”. Extrinsic evidence only allowed if meaning is ambiguous or vague.
Policy Hard PER: Ease of adjudication; encourages summary judgment; foster business transaction
Policy: Why shift transaction costs Ex-ante by requiring explicit contracts through PER? (NY State)
Parties know their purposes + intrinsic values better than a court ex-post.
Reduce litigation costs by facilitating use of summary judgment at trial.
You can opt-out of hard PER rules to softer standards, but very difficult opt-into hard PER
32
R2d§209+210: Level of integration; rejects four corners.
UCC §2-202: Abandons many common law rules (four corners, natural omission, plain meaning) for
contextual approach to interpretation.
Partial Integration - 2-202(b): Additional terms may not contradict, and allowed if consistent
Hunt: Consistent = doesn’t directly contradict (apply same test: D only barred if D =≠C)
Snyder: Consistent = in reasonable harmony (term allowing unilateral cancellation ≠ harmony)
Contextual meaning: UCC (2-202 comment 1(b)+(c)) and R2d (§212) reject “plain meaning” and
allow contextual evidence (usage of trade, course of dealings, subject matter, preliminary negotiations)
Certain Omission: Evidence supporting terms under UCC allowable unless the parties would have
certainly included the terms in the writing. Increases barrier to proving integration (2-202 comment 3).
33
Mistake + Excuse
Performer’s Risk Rule: Promisee should bear all risks of performance b/c generally best suited to
reduce risks as they have most control; cheaper K-default insurance policy, benefits social welfare
Tries to recreate the ex-ante bargain that would’ve occurred
Exceptions: Excuse for impossibility when a specific performance with no substitute (paint a portrait,
specific crop, specific theatre)
Information Forcing Policy: Foreseeable events (people die, floods, bldgs. burn down) compels
promisee to disclose subjective value and consequences of breach (value of specific oranges)
General Policy: Unallocated risks (not part of the bargain!) should fall on promisee, as they should
stay where they would be borne were it not for the contract
Autonomy: no voluntary assent to shift burden to promisor
Instrumentalist: perhaps that party is cheapest cost avoider because they typically bear it?
Mistake
Mistake: Discharge of party’s performance due to incorrect belief about endogenous fact, not
contemplated by the agreement material affects the contract.
Unilateral Mistake - R2d §153: Mistake by only by one party. Add’l requirements:
1. Enforcement = Unconscionable, OR
2. “Last clear chance”: Other party had reason to know of the mistake or caused the mistake
34
Double precautions at the margin: encourages both sides tot to take care; promisee with last clear
chance will inform or bear risk; promisor doesn’t know whether promisee is in position to bail out.
Last Clear Chance Policy: Autonomy ~ “harm principle”, one ought not to exploit others
Instrumentalist: seller would have to take costly ex-ante precautions to avoid all such mistakes
R2d §263 – Destruction of Necessary Item which was a basic contractual assumption
Excuse if a necessary item is destroyed or doesn’t come into existence
35
1) Performance is substantially frustrated (becomes worthless)
2) Without the party’s fault(exogenous event)
3) Caused by the occurrence of an event
4) Non-occurrence was a basic assumption of both contracting parties
Eastern Airlines (Pt. II): events in Middle East and price regulation by government were foreseeable
Majority Rule
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Remedies
Basic Remedies
Seller Breach
Buyer Breach
Options:
1. Perform + Lose
2. Breach: Triggers seller decision below
Options for Seller upon Buyer Breach:
1. Specific Performance - §2-709: Action for the Price
2. Expectation Damages:
a. Market Damages - §2-708: Damages = (Pmarket - Pcontract) + Incidentals (§2-710)
b. Resell - §2-706: Good faith and commercially reasonable resale; Damages = (Pcover –
Pcontract) + incidentals (§2-710)
i. Consequential damages not available b/c money should be available in liquid
market.
Malign Theory: Breacher seeks to take advantaged of situation that could force the other party to settle
for less than full expectancy damages.
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Benign Breach: “Cry for help. Breacher determines that it would be cheaper to breach and pay π for
the breach than it would be to perform and suffer losses.
Compensation
3 types of Damages:
1. Expectation (R2d §344 (a) + §347): damages = put Π in the position had Δ performed
Factors why damages are worse than actual performance (non-ideal)
o Damages must be calculable to “reasonable certainty” for compensation (Freund)
o Mitigation – breaching party takes steps to cut promisee’s damages (Globe)
o Foreseeability: consequential damages limited to those foreseeable (Hadley)
o Cost of litigation born by promisee
o Time spent finding cover is often hard to calculate and uncompensated.
2. Reliance (R2d §344 (b) and §349): Undo harm of reliance, same position as if party had never
entered into contract.
Position of next best option to contract
Thick market: expectancy = reliance
Often speculative inquiry into what promisee would have done
3. Restitution (R2d §344 (c) + §371): Value of the performance in terms of the benefits the promisee
has already conferred on the promisor in order to secure the broken promise.
Fact-specific
Only option for quasi-contract
Liquidated Damages(R2d §356 / UCC §2-718): opt-out for damages default rules, must be reasonable
Theory of Efficient Breach: promisors will breach if fewer losses or greater profits than performance
Rules don’t compel performance, instead assure performance, or equivalent compensation
Flaws: assumes no transaction costs
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Expectation Damages: Cost to Complete vs. Diminution of Value
Market Damages: Preferred means of measuring expectancy damages in thick market situation
Economic Waste Problem: Courts typically apply diminution in market value when costs to complete
>> ∆ market value.
Scott: Often ignores and undercompensates for prepaid services (often shadow price)
Functionally a “mandatory” rule, as ‘penalty doctrine’ (UCC§2-718; R2d§356) threatens liquidated
damage clauses that insure idiosyncratic valuation
Perfect Tender (UCC § 2-601) vs. Substantial Performance (R2d §237) – stds of performance
PT – buyer can reject goods for any defect no matter how minor
o Goods are typically fungible, avoiding unfairness on seller
SP – if failure of performance is immaterial, difference in value is sufficient
o SP + damages (difference in value) = Performance
o Default for construction contracts b/c cost of ensuring perfect completion to
idiosyncratic standard would drive up prices
R2d §237 (Dependent Promises) – performance only required if there has been Substantial
Performance (no material failure) by other party
R2d §241 – factors of material failure: deprivation of benefit, inadequate compensation, likelihood of
forfeiture, likelihood of curing failure, degree of good faith/fair dealing
UCC § 2-601 – buyer’s rights on improper delivery (perfect tender)
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substantially tearing down the structure (if no “undoing” duty must be incidental to contract). ∆
chose to not perform solely for economic interest, must pay cost of completion.
Note: no idiosyncratic value, solely for resale. Wrongly decided?
Market Thickness:
Thick: availability of substitutes and ease of proving reasonability of “cover”; no SP
Thin: buyer vulnerable in proving “reasonableness” of cover; exposed to undercompensation;
o More likely to be “other proper circumstance”, even if property is not unique
o Limited as court doesn’t like to supervise performance of services
Limitations on Compensation
R2d §350: Duty to mitigate; cannot recover for losses that could be reasonably avoided
R2d §351: Foreseeability limitation of damages.
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Flow in ordinary course, or if ∆ had reason to know of special circumstance
Trends: abandon “tacit agreement”; “ reason to know” not meeting of the minds
Universal opt-out of this rule by sellers. Not effective insurer against loss of buyer profits
Repair + replace clause: 1. disclaim all warranties (2-316); 2. express warranty; 3. explicit remedies
Means to attack: 1. No means of effective repair §2-719(2); 2. Unconscionable
UCC §2-715(2): Incidental damages include any losses from needs that other party had reason to know
at time of K. Uses “reason to know” instead of CL rule of “communication” or “tacit knowledge”
R2d UCC§2-719(2): Courts unclear as to whether lack of effective repair creates liability for (a) full
consequential damages or (b) loss of bargain
Certainty
New Business Profits: Common Law rule against profits for new business due to speculative nature
New view (Drews): Not a per se bar to recovery, evidentiary presumption, overcome with:
o Market study, Compelling expert; ≠ give gross receipts and state expected profits.
Redgrave v. BSO: exception to lack of recoverability for loss of goodwill, court found sufficient
evidence of loss of professional opportunities (appellate court greatly reduced initial award)
Duty to Deal with Breachertac: Typically doesn’t exist in thick markets; thin markets may exist but
not if different or inferior (employment context)
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Facts: Bridge builder(∆) kept building a bridge after county decided not to build road connecting
bridge π attempted to limit damages to costs incurred prior to breach
Holding: ∆ cannot pile up damages, should have desisted further work, failed to mitigate damages
ADD
Factors from Reed v. King
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