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CONTRACTS I OUTLINE
PROFESSOR STONE
FALL 2011
Allen Blow

“I’ve got the everybody gets a trophy generation sitting in front of me, I’m sorry to tell you,
we’re running out of trophies.”- STONE
What is a Contract? (Contracts in General)
1. “All life is a series of contracts.”
2. Bargained for exchange.
3. Restatement Definition: “A promise or 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.”
4. “The Contract Formula”
Offer + Acceptance + Consideration= Contract
5. Types of Contracts:
A. Express- formed by language, oral or written
B. Implied (in Fact)- formed by manifestation of assent other than oral or written
C. Quasi-Contract (in law)- not a contract, constructed by courts to avoid unjust enrichment by
permitting P to bring an action in restitution to recover the amount of the benefit conferred on
the D.
6. The Coase Theorem:
“When transactions costs are low, voluntary transactions will allocate the resource, property, or right
to its highest or best use.”
7. Referee Rules- Contract law is a series of referee rules, for the most part-
A. Mandatory Rules- rules that apply to all contracts, cannot be contracted around.
B. Default Rules- rules that apply if you don’t specify otherwise in your contract, can be
contracted around in Coasean bargain.
Levels of Performance
A. Full and Complete Performance:
K is performed and completed to the satisfaction of both parties.
B. Substantial Performance:

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Main portion of the contract is completed, leaving only incidental portions to be completed.
C. Satisfactory Performance:
Completed, but maybe not quite to specifications. Exp. House built, but builder put in the wrong brand of
pipes, just as good quality, but a different companies.
D. Material Breach:
Total Breach of the main contract terms.
NOTES: Notes: People expect to get what bargained for; Remedy at law=money; Why do we attach money? Money is a way to
keep score; reflects way people put value in things; Could seek remedy in equity instead; a) specific performance (land
transactions) b )injunctions c )mandamus—compel gov’t. official to do something; In Hawkins there was material breach, so D
gets nothing; Full performance would have been entitled to contract price; Substantial performance—e.g. building is to be 60’
and it is only 59’11 ½ “; How much incentive do you have to be accurate? Where do you draw the line?; SOMETHING LESS
THAN SATISFACTORY CAN BE FULL PERFORMANCE.; Why? Buildings aren’t expected to be perfect; scarce resources in
the world; Must apply reasonable expectations standards; If party fails at F.P., is it always guilty of material breach? No; Might
be difficult to distinguish between material breach and substantial performance; Difficult to draw intermediate lines in substantial
performance; Strict view=material breach; loose view=substantial performance—is an imperfect world, always will be flaws in
performance + alternative to living with it ;could be even more costly; marginal costs exceed marginal benefits.

REMEDIES
A. Contract Remedies in General
Monetary Damages and Equitable Relief (Monetary Damages are the preferred remedy)
B. Purpose of Remedies
a. Expectation Interest- (Restatement 347) attempts to put the injured party in as good a
position as it would have been in had the K been performed. It gives the injured party the
benefit of its bargain. “Make them whole.”
I. § 347: “Subject to [the 3 limitations], the injured party has the right to damages
based on his expectation interest as measured by (a) the loss in value to him of
the other parties performance caused by its failure or deficiency, plus (b) any
other loss, including incidental or consequential loss, caused by the breach, less
(c) any cost or other loss that he has avoided by not having to perform.”
II. Restatement, Second, Contracts, Chapter 16, Introductory Note:
Awarding damages on this basis to protect the injured party’s “expectation
interest” gives the other party an incentive to break the contract if, but only if, he
gains enough from the breach that he can compensate the injured party for his
losses and still retain some of the benefits from the breach.
b. Reliance Interest- (Restatement 349) Injured party may have, by reliance on the K, have
incurred expenses in preparation for the K. Courts attempt to put the party in the position
they would have been in had K not been made.
i. Essential Reliance- Prep for performance under K.
ii. Incidental Reliance- Prep for collateral transactions that a party plans to carry out
when K is performed.
§ 349: “As an alternative to [expectation interest]…the injured party has a right to damages
based on his reliance interest, including expenditures made in preparation for performance or
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in performance, less any loss that the party in breach can prove with reasonable certainty the
injured party would have suffered had the contract been performed.”
c. Restitution Interest- (Restatement 370-377) to prevent unjust enrichment. Puts party in
breach in position they would have been in had K never been made. The party in breach
is required to disgorge what that party has received in money or services by returning the
benefit to the injured party that conferred it.
§ 371: “If a sum or money is awarded to protect a party’s restitution interest, it may as
justice requires be measured by either (a) the reasonable value to the other party of what
he received in terms of what it would have cost him to obtain it from a person in the
claimant’s position, or (b) the extent to which the other party’s property has been
increased in value or his other interests advanced.
C. Types of Remedies
a. Specific- intended to give the injured party the very performance that was promised.
b. Substitutional- intended to give the injured party something in substitution for the
promised performance ($).
DAMAGES
I. Expectation Interest
a. Restatement §347: Measure of Damages in General—Injured party has right a damages
based on his expectations measured by:
1. loss in value to him of other party’s performance caused by its failure or
deficiency, plus
2. any other loss, including incidental or consequential loss caused by
breach, less
3. any cost or other loss that he had avoided by not having to perform
b. How to measure expectation: The value of what was promised-the value of what is
delivered.
c. Formula: Loss (K price) + incidentals or consequentials – gains from K breach (costs
avoided by P as a result of breach)
d. Hawkins v. McGee— The Hairy Hand Case
Facts- Surgeon is consulted about a skin graft surgery on D’s hand. He says that there will
be 4 days in the hospital and a few days down. He also is quoted as guaranteeing a 100%
perfect or good hand. The D is suing for breach of warranty of operation’s success.
D Contends- This cannot be a reasonable assumption of a contractual relation.
P Contends- The doctor solicited this operation to test his otherwise little skill in skin
grafting, evidence that they took the doctor’s words at face value. He is seeking damages.
Procedure- Jury finds for P, D appeals on excessive damages.
Holding- The damages were excessive. All above $500 are removed. New Trial.
Reasoning- The instruction to the jury to award damages for pain and suffering and for ill
effects of the operation was in error. Recovery should be based on what the P would have
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received had the contract been fulfilled (i.e. the value of the promised good hand and the
value of the hand he has right now).
e. The idea is to restore the party to the position they would have been in had the contract
been performed. The courts would hardly ever grant specific performance, because its not
in the best interests of the parties, they would have to work together and there could be
animosity. For instance in Hawkins v. McGee it would not be ideal to have them working
together in a specific performance realm.
f. Limits on Expectation Damages
i. Foreseeability- what is reasonably contemplated by parties at K
1. General Damages- obvious, without special knowledge of
cicumstances.
2. Special Damages- probable loss, when D has reason to know special
circumstances.
ii. Mitigation- “duty” not to pile up damages or worsen loss
iii. Causation- can only recover damages caused by the breach
iv. Reasonable Certainty- show that the breach resulted from the loss and have
evidence to prove it
v. Unfair Forfeiture- damages must not unfairly harm D and provide a windfall for
P
II. Cost of Performance (Expectation Interest)
i. Restatement § 348(2)(b)—if the breach results in defective or unfinished
construction and loss cannot be proved with substantial certainty, he may recover
on the reasonable cost of completing performance or of remedying defects if cost
isn’t clearly disproportionate to probable loss in value. The general rule for
figuring damages.
ii. Damages are determined objectively—what a reasonable person in her position
would have expected to come from the deal given all circumstances.
III. Diminution in Value (Expectation Interest)
a. Restatement § 348(2)(a)-- If a breach results in defective or unfinished construction and
the loss in value to the injured party is not proved with sufficient certainty, he may
recover damages based on the diminution in the market price of the property caused by
the breach. See Also 347(a)
b. Used to figure damages when using the Cost of Performance rule would result in plaintiff
being in a better position than he would have been if K was completed. MC>MB.
c. Diminution is common, i.e. car wreck cost to restore would be $20,000 but value the day
before wreck would be $15,000 so $5,000 would be economic waste.
d. Peevyhouse v. Garland Coal & Mining Co. Landmark case. D’s promise to restore
land after strip mining was uncompleted. P was entitled to cost of performance, but this
would result in economic waste as land would increase in value only by $300 and cost of
performance was $29k. In this case, there was substantial performance, the restoration
was incidental to the K.
e. Diminution is typically not allowed for willful breaches.
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f. Jacob & Young, Inc. v. Kent (p.16) Builder constructed a large house for owner. The
plumbing specifications required that only Reading pipe be used. Nine months after the
home was completed and occupied, it was discovered that pipe from a different
manufacturer had been used. To replace and repair would have required the substantial
destruction of part of the house (substantial cost). Would have been economic waste.
IV. Efficient Breach- An intentional breach of contract and payment of damages by a party who
would incur greater economic loss by performing under the contract. If the D’s cost to
perform the K would exceed the benefit that performance would give both parties, the D may
save enough money by breaching to pay expectancy damages to the P and still come out
ahead. It compensates the P and increases the D’s wealth

V. Reliance Interest- Reliance damages are the amount of money necessary to compensate the
plaintiff for efforts expended or expenses incurred in reasonable reliance upon the contract.
Reliance interest is the courts attempt to put the injured party back into the position it would
have been in had the K never been made.
a. Limit on Damages- Reliance damages may not exceed benefit of the bargain damages.
Thus, if benefit of the bargain damages are proven, that amount becomes a ceiling on
recovery. Therefore, reliance damages are only relevant when benefit of the bargain or
expectation damages are not proven.
b. Types of Reliance:
i. Essential- Directly based on the K and essential to fulfilling the party’s
contractual commitment.
ii. Incidental- Incurred as a consequence of and incidentally to K. (for the purpose
of taking advantage of or enjoying the K).
c. Restatement § 349-- The injured party may choose to ignore the element of profit and
recover as damages his expenditures in reliance (including expenditures made in
preparation for performance or in performance, less any loss that the party in breach can
prove with reasonable certainty the injured party would have suffered had the K been
performed). He can do this if he cannot prove his profit with reasonable certainty.
d. Security Stove case- D had knowledge of special circumstances, damages even though
did not foresee the specifics.
FACTS- P manufactured a special furnace with an oil and gas burner that it wanted to
ship to an exhibit (no sale) in Atlantic City. The furnace had to be shipped express and
the D contracted to do this on time. The special time constraints were made known in
writing and acknowledged. There were 21 packages in all. The P reached exhibit and the
most imp part was missing. The part never made it on time. P seeks damages for expenses
of the trip and shipping from D.
CONTENTIONS- D contends that P can only recover for lost profits, of which there is no
evidence. The other costs are not caused by the breach they were incurred before K.
PROCEDURE- Case tried before judge and awarded P $1000. D appealed
ISSUE- Whether the P can recover reliance damages in the form of the trip expenditures.
HOLDING- Reliance damages can be recovered, judgment affirmed
REASONING- Ordinarily P could only recover lost profits, however, the D was made
aware of the special circumstances before the K was made. Because of this K, the P made
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expenditures that he otherwise would not have made. The P relied on the K with D. There
were no profits contemplated at the exhibit and no way to recover that.
i. In this case, D knew the obligation to get equipment to show on time, so damages
are directly related to breach.
ii. These kind of expenses are foreseeable, the degree or the extent of the damages
need not be foreseeable.
iii. “Should Have Known Test”- If D should have known from the facts and
circumstances that P will incur the expenses, then he is liable for them.
e. Anglia TV v. Reed- Expenses are granted prior to the breach. That is contemplated ex
ante (§351). Anglia entered into a contract with Reed to play the lead in a film. Reed did
not perform because of conflicting commitments. Anglia was unable to find another
actor suitable and abandoned the project. Anglia spent money to hire a director and Reed
had reason to know that other personnel would be hired. Reed is responsible for all of
Anglia’s expenditures. Under the Restatment 349—an injured party may recover as
damages his expenditures in reliance. Lord Denning stated, that “if the plaintiff claims
the wasted expenditure, he is not limited to the expenditure incurred after the contract
was concluded. He can claim also the expenditure incurred before the contract, provided
that it was such as would reasonably be in the contemplation of the parties as likely to be
wasted if the contract was broken.
f. Dempsey Case- Expenses are not granted prior to the breach. There is no contemplation.
It’s too speculative. Should D have contemplated expenses? Prior expenses are
incorporated into the contract by reference. Want to be able to argue that breach is or is
not the proximate cause of the loss and use the ex ante. See Lost Profits Seller
How can you prove expected profits? Often speculative.
g. Sullivan v. O’Conner- Bad Face Lift Case. Restitution damages § 370. Patient suffered
physical pain and suffering beyond what is expected in surgery. Reliance interest will
adequately compensate. Pain and suffering is generally only awarded in personal service
K. Here, the extra surgeries beyond the original were going to cause extra pain and
suffering.
h. Freund v. Wash. Sq. Press- The 6 cent man case.
FACTS- P entered into K with D to have his manuscript published. K provided for $2,000
advance upon receiving manuscript, which was paid. The terms also included royalties
and return of copyright (in the event of termination). D merged with another company
and refused to publish work. There was no termination notice as provided for by K.
CONTENTIONS- P sues for delay in promotion, loss of royalties and cost of publication
somewhere else. Seeks specific performance
PROCEDURE- Trial court denies promotion recovery, royalties recovery, but grants
$10,000 for cost of publication. Appellate Court upholds, appealed again.
ISSUE- Whether the P is entitled to cost of publication damages for breach
HOLDING- Inaccurate measure of relief, decision reversed and modified.
RULE- UCC § 1-106
REASONING- Damages are made to put P in as good as a position as he would have
been if the K had been performed. To award P cost of publication would enrich him at the
D’s expense. These damages were not foreseeable by D. There is no recovery for

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royalties because that number is purely speculative. This K does not allow any special
damages to be recovered. There is an incentive for Ps to mitigate their damages.
i. Ferrell Case- P agreed to lease building for (new business) cosmetology school, lessor
reneges and P sues for lost profits for 9 months spent looking for another location. P did
establish a track record of profits because it had been in business 9 months at the time of
the trial. However, would different location translate to same profits?
VI. Restitution Interest (Common Law)- To prevent unjust enrichment. Restores to the P the
value of a benefit unjustly conferred on D by disaffirming the K and suing for the recovery of
benefits received. Measure by market value or net gain.
a. Bollenback v. Continental Cas. Co.-P wants rescission instead of correction to recover
Restitution ($2166) not Expectancy ($107). Not a mistake of fact, but an intentional
repudiation. § 373 (return of all premiums) and 374 (return of all benefits conferred less
benefit received).
FACTS- P is a policyholder under D. He paid premiums from 1954- 1963, when he
suffered a back injury. He sought to recover for bills and received no answer. After the
3rd letter, he received a letter saying that his policy expired in 59. P wrote again asking
for verification and received no answer. P filed claim electing to rescind the K because of
repudiation and requesting all premiums paid to D.
CONTENTIONS- D contends P not entitled to rescission (mistake), and measure of
damages is incorrect
PROCEDURE- Trial without jury found for P, D assigns error in judgment.
ISSUE- Whether the P is entitled to rescind and recover all premiums
HOLDING- The P is entitled to rescind and can only recover payments after 59
(remanded).
REASONING- This action goes under equity. The breach is substantial enough to justify
P’s rescission. Although mistake of fact might have been a defense to this, the D was
given a chance to investigate and correct itself before action was brought. D was willfully
neglected to ascertain its mistake. The return of all premiums is not proper measure.
Theoretically he would have been covered for an accident that occurred between 54
(beginning) and 59 (D’s proposed termination). Those premiums (the coverage they
afforded) are benefits the P received from K. He can receive the rest for wrongful
termination.
b. § 370 Rescission available when: Conferred benefit on D, breach by D is total, P returns
anything recovered from D. In other words, -entitlement to restitution only if he has
conferred a benefit on the other party by part performance or reliance.
c. §371 – Measure of restitution interest—“As justice requires” measured by either:
(i) Benefit Rendered: The reasonable value to the other party of what he received (if he
had gotten services from a person in claimant’s position) In other words: The reasonable
value of the benefit received (if he had gotten services elsewhere)

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(ii) Benefit Received: The extent to which the other party’s property has been increased
in value or his other interests advanced. In other words: Increase in value of party’s
property
d. Boone v. Coe--- Defendant made a verbal contract with plaintiffs, whereby he rented his
farm to them in Texas for a period of 12 months, to commence from the date the
plaintiff’s arrived at the farm. He agreed he would have a dwelling completed on the
farm and ready for occupancy upon their arrival if they would work and manage his farm
for the next 12 months. Landowner received no benefit so he owes no restitution even
though he reneged on his agreement to lease farmland. His property was not increased
either.
e. Michigan Cen. R.R. v. State- 371(b) benefits received, implied K, under Indiana Public
Policy/Law the highest price paid is the bid price for the coal not the market price. Case
involved mistaken delivery of coal that was 2x the price of the coal ordered under the K.
Mutual mistake wipes out the K and we get an implied K.
i. What are the damages?
ii. 371…restitution interest…the state public policy was that the prison bid coal
contract, it went to the lowest bidder, and prison paid no more than that.
iii. the express contract is gone with mistake—mistake negates the express contract.
Now, there is just an implied contract. 371(a) benefit received as market value
but here we have an exception to that—public policy says, in this case, we have a
regulated industry environment—regulation will not allow a state prison to pay
more than the contract price in the competitive bid. We may gag at the statute
that, in effect, the statute gives the government the difference between 3.40 and
6.85 as a gift to the prison system. How do you want to govern this? By way of
markets (cotnam v. wisdom) or govern by politics (Boone case and mail statute
approach)? Positive v. Normative. Positive is descriptive—The Normative
approach—“should”—we should be hesitant to pass regulatory statutes. Who do
you want making your contracts? Legislature, gov’t, courts, or private parties.
Why does the gov’t get the break? Why don’t we get a break in prices? In Boone
v. Coe the plaintiff wants restitution interests. What other remedies at law do we
have here? We have “as justice requires” realm—we want to create a
disincentive to breach even if no benefit conferred.
f. § 373 paid when other party is in breach---
i. Entitled to restitution for any benefit conferred on other party by part
performance or reliance.
ii. No right to restitution if he has performed all of his duties under the contract and
no performance remains due, other than payment for that performance.
g. §374 – Restitution in favor of party in breach---
i. Breaching party entitled to restitution for any benefit conferred by part
performance in excess of the loss that he has caused by his own breach.

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ii. If parties agree to terms limiting the damages, a party agrees to have their
performance retained in case of breach, that party is not entitled to restitution if
the value of the performance as liquid damages is reasonable in light of the
anticipated or actual loss and difficulties of proof of loss.
h. §376 – a party is entitled to restitution of any benefit conferred if K is breached on fraud
or duress.

3 Common Law Limitations on Damages

(350,351,352)

VII. § 350 Mitigation (Avoidability as a Limitation on Damages)—Restatment/Services.

a. Restatement 350- Damages are not recoverable for loss that the injured party could have
avoided without undue risk, burden or humiliation. However, the injured party is not
precluded from recovery to the extent that he has made reasonable but unsuccessful
efforts to avoid loss.
b. In brief form, the rule is: P has to use reasonable effort/ due diligence to find comparable
performance
c. Rockingham Co. v. Luten Bridge--County breached contract and backed out of bridge
building K and Luten still completed performance. Plaintiff is entitled to the damages
incurred until the point of breach plus any profits he would have realized had the contract
been followed through. Entitled to recover (lost profits + work completed + reliance cost
i.e. architecture plans). Here: You can’t continue to pile up damages.
d. Hussey v. Holloway---Breach of K for employment K. Employee not obligated to accept
offer of lesser employment as mitigation and is entitled to expectancy interest from
original K.
e. Parker v. Twentieth Century Fox Film Corp.---Film company signed a contract with
Shirley MacLaine to star her in a musical to be made in California, but the company then
decided not to produce the picture. It offered MacLaine the starring role in a drama to be
made in Australia without the script and director approval that she had for the musical.
Otherwise the terms were the same. MacLaine did not accept the offer of substitute
employment and sued for breach of contract. A directed verdict in her favor of $750,000
was affirmed on the ground that as a matter of law her refusal did not constitute a failure
to use reasonable efforts to mitigate damages. Restatement 350(2).
VIII. Mitigation and the Lost Profit/Volume Seller

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a. Olds v. Mapes-Reeves Construction Co.-D wrongfully terminated a contract for marble

work with P (a subcontractor). P mitigated by signing a K2 with the building owner to do
the same work, for more money than K1. Trial Court held: Old K($3000)- New
K($1050)= $1943. P argues for: Old K($3000)- Cost of completion of Old K($717)=
$2283. Held for P, overruling trial court. Calculating as trial court did, provided a
windfall for the D. The D is not entitled to profit off the P’s new independent K. P is
entitled to profit from both k1 and k2 if he can prove that in fact, he could have done
both…Notice 2nd K created a new business risk (P could have lost on 2nd K)

IX. § 351 Foreseeability as a Limitation on Damages

a. Foreseeability acts as a limit on expectancy damages. A party in breach is not liable for
damages that the party did not at the time of contracting have reason to foresee as a
probable result of the breach.
b. § 351(1)- Damages are not recoverable for loss that the party in breach did not have
reason to foresee as a probable result of the breach when the contract was made.
c. § 351(2)- Loss may be foreseeable as a probable result of a breach because it follows
from the breach
i. (a) in the ordinary course of events, or
ii. (b) as a result of special circumstances beyond the ordinary course of events, that
the party in breach had reason to know.
d. § 351(3)- A court may limit damages for foreseeable loss by excluding recovery for loss
of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it
concludes that in the circumstances justice so requires in order to avoid disproportionate
compensation.
e. Hadley v. Baxendale- P had a broken shaft and K’d w/ D to carry it to be repaired w/o
letting D know that P’s business was shut down until shaft came back. Shaft was delayed
and P sues D for lost profits from D’s delay. Held: For D. The loss was not a consequence
which “in the usual course of things” flows from a delay in the shipment of a shaft.
i. D could not have foreseen the damages from this event.
ii. Changed standard from proximate cause to contemplation, and gave 2 rules.
iii. General Damages § 351 (2)(a)- Damages that arise naturally out of the breach.
Do Damages have to be actually known? No, a reasonable man would have
known.
iv. Special Damages § 351 (2)(b)- Damages that are not normally known or
contemplated. When are they foreseeable? When both parties are aware.
f. Contracting Around Hadley- this is a default rule, it can be contracted around. The
parties may allocate risk through express terms in their agreement.
g. Time of Foreseeability- Foreseeability is determined ex-ante, when the K is made.
h. Tacit Agreement-Morrow v. Hot Springs Bank- Arkansas court ruled that a bank
did not have to pay a coin collector for coins that were stolen b/c bank did not let
collector know that safety deposit boxes were available as agreed.

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i. To recover, the P must not only prove that the D had knowledge of the special
damages, but also that they tacitly agreed to assume the responsibility for the
special damages.
ii. Held: P can recover general damages 351(2)(a), but not the 351(2)(b) special
damages…because the D did not tacitly agree to them.
i. Foreseeability Hypo- Concert at Legion Field. $3 million in lost revenue potential
because of electrical problems. K’s with electrician for $200. He doesn’t fix it. What
damages is the electrician liable for? $200 or $3 million? $200. The electrician,
although he has notice and knowledge doesn’t contemplate and accept to cover that
kind of a loss. Could argue that breach of K caused the loss, but § 351 (3) addresses
disproportionate compensation.
j. K. Kerr S.S. Co. Steamship Co. gave RCA a radiogram in Scott’s code to send to
steamship company’s agent in Manila. The radiogram contained instructions for the
loading of cargo. RCA mislaid the radiogram and it was not sent. As a result, the
cargo was not loaded and steamship co. lost the freight charge of over $6,500.
Steamship Co. paid $26.28 to send the message. If special damages were known to
RCA and contemplated that it’s within terms of contract, then it would be in line
with Morrow decision; could also get negligence damages leads to tort but K is not a
tort!! Duty was defined by K so no need for tort; was a breach of duty, but the duty
was spelled out by K terms.
i. Notes: Yes, there was a breach of duty—but that duty was not an all risk
policy. Prices carry messages—the $27 dollar charge represents a risk for
$27 dollars. One is not assuming a risk for more than what they charge—
plaintiff should not assume they are taking on that risk and that defendant
owes them. Plaintiff is not a victim—but stupid—for not contracting around
it. Michael Jackson—yum,yum give me some—everybody wants more
money in damages, everyone is a victim, etc.
X. § 352-Certainty as a Limitation
a. § 352- Damages are not recoverable for loss beyond an amount that the evidence permits
to be established with reasonable certainty.
b. Example: A K’s to publish a novel that B wrote. A repudiates the K and B is unable to get
his novel published elsewhere. If the evidence does not permit B’s loss of royalties and of
reputation to be estimated with reasonable certainty, he cannot recover damages for that
loss, although he can recover nominal damages.
c. Example: A K’s to sell B land, on which B plans to build a drive-in movie theater. A
breaks the K by selling the land to C. B is unable to build the theater. If, because of the
speculative nature of the new enterprise the evidence does not permit B’s loss of profit to
be estimated with reasonable certainty, his recovery will be limited to expenses incurred
in reliance or, if none can be proved with reasonable certainty, to nominal damages.
d. Example: A and B make a K for A to construct a building with radical new design for B
for $5,000,000. A has spent $3,000,000 in reliance, B repudiates. If the evidence does not
permit A’s lost profits to be calculated with a reasonable certainty, then then he can
recover the $3,000,000 in reliance damages, assuming that he can prove that will
reasonable certainty.
e. Example: A, a manufacturer, makes a K with B, a wholesaler, to sell B a quantity of
plastic. B resells the plastic to dealers. The plastic turns out to be defective and B receives
many complaints from dealers, some of which refuse to do further business with B. B can
recover the loss of good will if his loss can be estimated with reasonable certainty by

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such evidence as his business records before and after the transaction and the testimony
of his salesperson and that of dealers.
f. Lost Profits for a new business- If the business is a new one or if it is a speculative one
that is subject to great fluctuations in volume, costs or prices, proof will be more difficult.
Nevertheless, damages may be established with reasonable certainty with the aid of
expert testimony, economic and financial data, market surveys and analyses, business
records of similar enterprises, and the like.
i. Lost Profits on a new business- Lost profits are generally not awarded for a new
business. But, in some cases where P cannot prove expectancy because he has
lost no economic benefit, he may try to gain some potential lost profits.
1. Owner must show some facts
2. Projection of profits, based on both similar businesses in the area and his
profits since opening.
ii. Argue no lost profits for new business- Merely a projection, different locations
and neighborhoods could mean different results. What is to say that P would have
done any better in the original location, in fact might have done worse there.
Also, his subsequent profits could be based on seasonal sales, which will
misrepresent his figures.
iii. How do you calculate profits if it’s a new business? Expert testimony. Look to
comparable businesses. Question of fact for the jury to decide.
a. You can K around the problem. If you fear that lost profits would be too
speculative, stipulate what the profits would be. (Liquidated Damages Clause).

COMMON LAW “PUNIES” & Emotional Damage

§ 353 & § 355

§ 353 (Emotional Disturbance)- Recovery for emotional disturbance will be excluded unless the
breach also caused serious bodily harm or the contract or the breach is of such a kind that
serious emotional disturbance was a particular likely result.

Peace of Mind Contract- Emotional Disturbance Damages Can be Awarded for Peace of Mind K
Lamm v. Shingelton-The Hubby All Wet Case. Undertaker breached K duty to do burial in a good
and workmanlike manner. Caused hubby to get all wet. Held: peace of mind K. Recovery under §
353.

§ 355 (Punitive Damages)- Punitive damages are not recoverable for a breach of contract unless
the conduct constituting the breach is also a tort for which punitive damages are recoverable.
Ainsworth ($6 million dollar man)- Insurance company refuses to pay claim. Restatement 205
requires good faith. Insurance offers a settlement, because the MC of litigation would be more
expensive. Punitive damages are typically reserved for torts, but court allows recovery for
oppression (relies on statute, court defines oppression, no terms are clearly defined). § 353
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does not cover obstinacy. This makes the law ambigious. Does it violate § 351(3)
disproportionate compensation?
Rule of the case: Jury may award punitive damages where the D has been guilty of fraud, malice
or oppression(a conscious disregard for the rights of others which constitutes an act of
subjecting P to cruel and unjust hardships.)
Five Factors Punitive Damages-consider (1) the financial position of D, (2) the culpability and
blameworthiness (mitigating circumstances), (3) vulnerability and injury suffered by the
offended party, (4) offensiveness of the punished conduct, (5) and the means judged necessary
to deter future misconduct.

Seaman’s-trial court awarded punies for “tortuous breach of implied covenant.”

Club Med.- “Fraud” case. The Court finds Fraud, but the facts in this case don’t really meet the
test.
Five Elements of Fraud
(1)-A representation is made.
(2)- The representation is false.
(3)- The D knew that it was false.
(4)- The D intended to defraud/mislead.
(5)- P relied on and suffered damages because of the false representation.

Patton v. Mid-Continent Systems-- Franchisor allegedly breached the contract by not giving the
franchisee sufficient time to provide additional coverage in the franchisee’s territory, and then by
authorizing someone else to compete with the franchisee in that territory. A franchisee sued its
franchisor for breach of the franchise agreement. The franchisee recovered compensatory damages.
Indiana allows punitive damages to be awarded in suits for breach of contract if, mingled with the
breach, are elements of fraud, malice, or gross negligence or oppression. There is no evidence that the
action of Mid-Continent in franchising Truck-O-Mat in the plaintiffs’ exclusive territory was opportunistic
or even deliberate. However, Mid-Continent’s failure to correct the violation year after year after the
plaintiffs had called its attention to it—even after it acknowledge that the violation—converted an
innocent breach into a deliberate one; but no clear evidence enables the breach to be characterized as
malicious, fraudulent, oppressive, or even grossly negligent. Even if the breach is deliberate, it is not
necessarily blameworthy. The promisor may simply have discovered that his performance is worth more
to someone else. Efficient breach; Posner’s test: need clear and convincing evidence of malice; high
proof.

U.C.C. Damages
Application of the UCC to “Mixed” Contracts

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A. Does the UCC apply if the contract in issue involves not only a sale of goods, but also the
performance of services, or the sale of items that are not goods? Three common situations in
which this question arises are:
(1) a contract for the sale of goods involving substantial installation services by the
seller;
(2) a sale of a business in which the buyer pays not only for the goods in inventory, but
also for realty and goodwill;
(3) a transaction in which the buyer supplies the seller with all or part of the materials
from which the goods are manufactured.
B. Most courts that have faced the issue of whether the UCC applies to mixed contracts, apply
the “Bonebrake predominant purpose test.” The test for inclusion or exclusion (of such
contracts under the UCC) is not whether they are mixed, but granting that they are mixed,
whether their predominant factor, their thrust, their purpose, reasonably stated, is:
(1) the rendition of service, with goods incidentally involved (e.g., contract with artist for
painting), or
(2) is a transaction of sale with labor incidentally involved (e.g., installation of a water
heater in a bathroom.)

XI. Contract for the sale of Goods

a. Remedies available to the seller- where the buyer wrongfully rejects or revokes
acceptance of goods, fails to make a payment due on or before delivery, or
repudiates, the seller may: § 2-703:
i. (a)-withhold delivery of the goods;
ii. (b)- stop delivery by the carrier;
iii. (c)- resell the goods and recover the difference;
iv. (d)- cancel the contract;
v. (e)- recover the price (if the goods have been accepted or the conforming
goods were lost or damaged within a reasonable time after the risk of loss
passed to the buyer OR the goods have been identified to the contract and
the seller is unable to resell)
vi. (f)- recover ordinary contract damages
b. Remedies available to the buyer- if the seller fails to deliver or repudiates or the
buyer rightfully rejects or revokes acceptance with respect to the goods: § 2-711:
i. (a)- cancel
ii. (b)- “cover”
iii. (c)- recover goods identified to the K, if the buyer has paid all or part of
the price.
iv. (d)- recover the goods contracted for if the buyer is unable to recover and
the goods were either in existence when the K was made or were later
identified to the K.
v. (e)- in a proper case obtain specific performance.
vi. (f)- recover damages for non-delivery.
c. Remedy for buyer who keeps non-conforming good- the buyer may recover the
difference between the value of the goods if they had been as warranted and the
actual value of the goods (UCC § 2-714(2)).

§ 2-703. Seller’s Remedies in General:

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Where the buyer wrongfully rejects or revokes acceptance of goods or fails to

make a payment due on or before delivery or repudiates with respect to a part or
the whole, then with respect to any goods directly affected and, if the breach is of
the whole contract, then also with respect to the whole undelivered balance, the
aggrieved seller may
(a)- withhold delivery of such goods
(b)- stop delivery by any bailee as hereafter provided.
(c)- proceed under the next section respecting goods still unidentified to the K.
(d)- resell and recover damages.
(e)- recover damages for non-acceptance or in a proper case the price.
(f)- cancel.

§ 2-708. Seller’s Damages for Non-Acceptance or Repudiation

(1)-Subject to Subsection 2 and to the provisions of this article with respect to
proof of market price, the measure of damages for non-acceptance or repudiation
by the buyer is the difference between the market price at the time and place for
tender and the unpaid contract price together with any incidental damages
provided in this article, but less any expenses saved in consequence of the buyer’s
breach.
(2)- If the measure of damages provided in subsection 1 is inadequate to put the
seller in as good a position as performance would have done then the measure of
damages is the profit (including reasonable overhead) which the seller would have
made from full performance by the buyer, together with any incidental damages
provided in this article, due allowance for costs reasonably incurred and due
credit for payments or proceeds of resale.

§ 2-709. Action for the Price

(1)- When the buyer fails to pay the price as it becomes due the seller may
recover, together with any incidental damages under the next section, the price
(a)- of goods accepted or of conforming goods lost or damaged within a
commercially reasonable time after the risk of their loss has passed to the buyer;
and
(b)- of goods identified to the contract if the seller is unable after reasonable effort
to resell them at a reasonable price or the circumstances reasonably indicate that
such effort will be unavailing.
(2)- Where the seller sues for the price he must hold for the buyer any goods
which have been identified to the contract and are still in his control except that if
resale becomes possible he may resell them at any time prior to the collection of
the judgment. The net proceeds of any such sale must be credited to the buyer and
payment of the judgment entitles him to any goods not resold.
(3)- After the buyer has wrongfully rejected or revoked acceptance of the goods or
has failed to make a payment due or has repudiated, a seller who is held not
entitled to the price under this section shall nevertheless be awarded damages for
non-acceptance under the preceding section.

§ 2-710. Seller’s Incidental Damages

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Incidental damages to an aggrieved seller include any commercially reasonable

charges, expenses or commissions incurred in stopping delivery, in the
transportation, care and custody of goods after the buyer’s breach, in connection
with return or resale of the goods or otherwise resulting from the breach.

§ 2-711. Buyer’s Remedies in General; Buyer’s Security Interest in Rejected

Goods
(1)- where the seller fails to make delivery or repudiates or the buyer rightfully
rejects or justifiably revokes acceptance then with respect to any goods involved,
and with respect to the whole if the breach goes to the whole contract, the buyer
may cancel and whether or not he has done so may in addition to recovering so
much of the price as had been paid
(a)- “cover” and have damages…to all the goods affected whether or not they
have been identified to the K; or
(b)- recover damages for non-delivery
(2)- Where the seller fails to deliver or repudiates the buyer may also
(a)- if the goods have been identified recover them…
(b)- in a proper case obtain specific performance or replevy the goods…
(3)- On rightful rejection or justifiable revocation of acceptance a buyer has a
security interest in goods in his possession or control for any payments made on
their price and any expenses reasonably incurred in their inspection, receipt,
transportation, care and custody and may hold such goods and resell them in like
manner as an aggrieved seller.

§ 2- 712. “Cover”; Buyer’s Procurement of Substitute Goods

(1)- After a breach…the buyer may “cover” by making in good faith and without
unreasonable delay any reasonable purchase of or contract to purchase goods in
substitution for those due from the seller.
(2)- The buyer may recover from the seller as damages the difference between the
cost of cover and the contract price together with any incidental or consequential
damages as hereinafter defined, but less expenses saved in consequence of the
seller’s breach.
(3)- Failure of the buyer to effect cover within this section does not bar him from
any other remedy.

§ 2-713. Buyer’s Damages for Non-Delivery or Repudiation

(1)- Subject to provisions of this article with respect to proof of market price, the
measure of damages for non-delivery or repudiation by the seller is the difference
between the market price at the time when the buyer learned of the breach and the
contract price together with any incidental and consequential damages provided in
this article, but less expenses saved in consequence of the seller’s breach.
(2)- Market price is to be determined as of the place for tender or, in cases or
rejection after arrival or revocation of acceptance, as of the place of arrival.

§ 2-714. Buyer’s Damages for Breach in Regard to Accepted Goods

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(1)- Where the buyer has accepted goods and given notification he may recover as
damages for any non-conformity of the tender the loss resulting in the ordinary
course of events from the seller’s breach as determined in any manner which is
reasonable.
(2)- The measure of damages for breach of warranty is the difference at the time
and place of acceptance between the value of the goods accepted, and the value
they would have had if they had been as warranted, unless special circumstances
show proximate damages of a different amount.
(3)- In a proper case any incidental and consequential damages…

§ 2-715. Buyer’s Incidental and Consequential Damages

(1)- Incidental Damages resulting from the seller’s breach include expenses
reasonably incurred in inspection, receipt, transportation and care and custody of
goods rightfully rejected, any commercially reasonable charges, expenses or
commissions in connection with effecting cover and any other reasonable
expenses incident to the delay or other breach.
(2)- Consequential damages resulting from the seller’s breach include
(a)- any loss resulting from general or particular requirements and needs of which
the seller at the time of contracting had reason to know and which could not
reasonably be prevented by cover or otherwise; and
(b)- injury to person or property proximately resulting from any breach of
warranty.

§ 2-716. Buyer’s Right to Specific Performance or Replevin

(1)- Specific performance may be decreed where the goods are unique or in other
proper circumstances.
(2)- The decree of specific performance may include such terms and conditions as
to payment of price, damages, or other relief as the court may deem just.
(3)- The buyer has a right of replevin for goods identified to the contract if after
reasonable effort he is unable to effect cover for such goods or the circumstances
reasonably indicate that such effort will be unavailing or if the goods have been
shipped under reservation and satisfaction of the security interest in them has been
made or tendered. In the case of goods bought for personal, family, or household
purposes, the buyer’s right of replevin vests upon acquisition of a special
property, even if the seller had not then repudiated or failed to deliver.

XII. The Perfect Tender Rule/Acceptance and Revocation of Acceptance (UCC)-

a. The Perfect Tender Rule-- calls for perfect performance, allows the buyer to reject the
goods that do not conform to the K in any manner (§ 2-601). Perfect tender rule stated
that sellers must deliver goods as the K calls for.
i. Seller’s Remedies- 2-703 to 2-710
ii. Buyer’s Remedies- 2-711 to 2-717
iii. Exceptions to the Rule-
a) the parties otherwise agree (2-719).

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b) the failure of the seller to make a reasonable K with a carrier of the failure of
the seller to notify the buyer, promptly, of shipment gives the buyer the right to
reject only if material delay or loss ensues
c) If the buyer has accepted the goods, he no longer has the right to reject
d) A bad faith rejection by the buyer in relation to an immaterial defect may
preclude his right of rejection
e) Though the buyer has the right to reject for any defect in general, if K time
remains, the seller has the right to cure
f) installment K’s can only be rejected if the value is substantially impaired.
iv. Continued in UCC under rule 2-711 allowing buyer to reject for any non-
conformity pursuant to 2-601 (if the goods or the tender of delivery fail in any
respect to conform to the contract, the buyer may reject the whole, accept the
whole, or accept part and reject the rest).
1. The rights of the parties vary depending on whether the rejection
occurred prior to or after acceptance.
v. § 2-508: Sellers Right to Cure- The seller has a right to cure any non-
conforming delivery so long as- (a) the time for performance has not yet expired
or (b) where the seller had reasonable grounds to believe that the tender would be
acceptable. The Seller must seasonably (timely) notify the buyer of his intention
to cure.
vi. Difference in treatment between single lot and installment contracts- The
U.C.C. provides for different treatment between single lot and installment
contracts. Code recognizes that in an installment K the parties anticipate some
sort of ongoing cooperative relationship and there is likely an interest in
preserving the relationship despite some minor bumps in the road.
1. Termination of installment K § 2-612(3)-One must establish that the
“non-conformity or default with respect to one or more installments
substantially impairs the value of the whole contract.”…This is a tough
standard to meet, indicating a policy of keeping installment K’s on track
despite a seller’s failure.
a. Buyer can reject a particular installment if the non-
conformity substantially impair the value of the installment
and it cannot be cured.
2. Rejection- Regardless of whether the K is an installment or single lot K,
any rejection must occur within a reasonable time after delivery or tender
of the goods. The rejection will not be effective unless the buyer
seasonably notifies the seller of the rejection (§ 2-602(1)).
a. Rejection is possible only so long as the goods have not been
accepted.
b. Point-of-Acceptance-

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i. U.C.C. 2-606 –What constitutes acceptance of goods? Possession intent to keep

(a) After a reasonable opportunity to inspect the goods signifies to the seller that
the goods are conforming or that buyer will take or retain them in spite of
their nonconformity; or
(b) Fails to make an effective rejection 2-602(1), but such acceptance does not
occur until buyer has had a reasonable opportunity to inspect them
(c) does any act inconsistent with the seller’s ownership if the act is ratified by
the seller.
(d) Acceptance of a part of any commercial unit is acceptance of the entire unit.
ii. U.C.C. 2-601(Buyer’s Rights on Improper Delivery/ Before Acceptance) –
Perfect tender is watered down under 2-508 (Cure by Seller) which allows seller
to correct non conformity in goods during K time of performance.
iii. U.C.C. 2-608(1) (Buyer’s Rights on Improper Delivery/ After Acceptance)—
After acceptance of goods buyer can reject only if non-conforming performance
substantially impairs the value of the goods.
iv. Ramirez v. Autosport – P accepted the goods, D had a reason Daable amount of
time to cure the goods. Buyer can only reject goods if non-conforming
performance substantially impairs the value of the goods.
c. When Can the Buyer sue for breach?
i. If the Buyer Accepts. (2-606)
1. Can revoke acceptance only if the goods are substantially impaired. (2-
608)
ii. Buyer’s Remedies for Seller’s Breach of Goods
1. B can cancel and recover down payment. (restitution)
2. B can cover and have damages [2-711(1)(a)-using 2-712 coverprovision]
iii. Total Breach by Seller
1. 2-713: Mrkt. Price – K Price + Incidental/Consequential Damages
2. Specific Performance (however, monetary damages are preferred)
a. Exchange of unique property (ex. Hand tooled machine parts or
other specialty goods.)
b. Use 2-716 (Specific Performance) prefaced by 2-711(2)(b) (B’s
remedies).
iv. How to get around the Perfect Tender Rule
1. (2-719)- Parties may agree to have remedies in addition to or in
substitution for those provided in the UCC. However, when
circumstances cause an exclusive or limited remedy to fail of its essential
purpose, then a remedies can be had as provided in the UCC.

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d. Substantial Impairment-(2-608) Durfee v. Rod Baxter Imports, Inc.-- can’t repair the
Saab, it substantially interferes with purpose or operation. Substantial impairment-Does
the effect interfere with the use of the product? Why no substantial impairment? a series
of minor defects is not serious enough to interfere with the use. Taken individually it’s
minor, but if you add them up it becomes major. D had a replacement-repair clause in
warranty. Buyer seeks revocation of acceptance of goods, return of money and other
contracts. Dealer couldn’t repair car after several attempts; car could not be used as
much (deprived owner of benefit of bargain) so 2-719(2) would apply. Wants incidental/
consequential 2-715, but has to prove them.
e. Wrongful Rejection- If the tender is in complete compliance with the K requirements,
the buyer has no legal right to reject, but they have the power to reject. If one has not
accepted and gives notice of rejection in a timely manner, though wrongful the rejection
is legally effective. But the rejecting buyer has breached the K and may be liable for any
damages.

U.C.C. and Good Faith

§ 1-304. Obligation of Good Faith (2001)
Every contract or duty within [the UCC] imposes an obligation of good faith in its performance
and enforcement.

§ 1-203. Obligation of Good Faith (2000)

Every contract or duty within this Act imposes an obligation of good faith in its performance or
enforcement.

SELLER HAS RIGHT TO CURE

§ 2-508. Cure by Seller of Improper Tender or Delivery; Replacement.
(1)- Where any tender or delivery by the seller is rejected because non-conforming and the time
for performance has not yet expired, the seller may seasonably notify the buyer of his intention
to cure and may then within the contract time make a conforming delivery.
(2)- Where the buyer rejects a non-conforming tender which the seller has reasonable grounds to
believe would be acceptable with or without money allowance the seller may if he seasonably
notifies the buyer have a further reasonable time to substitute a conforming tender.

2 instances when seller has the right to cure

a)= rejected and the time for performance has not yet expired.
b)= seller had reasonable grounds to believe it would be acceptable.

Requirements:
Seller must seasonably notify the buyer of his intention to cure.

Point to consider: Given the Obligation of Good Faith, wouldn’t the seller always have the right
to cure? Either it will be within the contract time or he would have had reasonable grounds to
believe that the tender would have been acceptable to the buyer.

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COVER (Mitigation under the UCC)

§ 2-712. “Cover”; Buyer’s Procurement of Substitute Goods
(1)- After a breach within the preceding section the buyer may “cover” by making in good faith
and without unreasonable delay any reasonable purchase of or contract to purchase goods in
substitution for those due from the seller.
(2)- The buyer may recover from the seller as damages the difference between the cost of cover
and the contract price together with any incidental or consequential damages as hereinafter
defined (Section 2-715), but less expenses saved in consequence of the seller’s breach.
(3)- Failure of the buyer to effect cover within this section does not bar him from any other
remedy.

Buyer remedy formula for cover under § 2-713: Cost of Cover – K price (plus consequential and
incidental damages) less expenses saved as a consequence of the seller’s breach = damages.

Cover by the buyer-

Consists of buying/procuring substitute goods to replace those repudiated or not delivered or
delivered damaged by the seller.
A. UCC 2-712: permits buyer to cover and gives damages due for covering to buyer if cost of
cover are reasonable.
B. UCC 2-715: Incidental and Consequential Damages-
a. 2-715 (1)- Incidental Damages: expenses reasonably incurred (in inspection,
receipt, transportation and care and custody of goods rightfully rejected), any
commercially reasonable charges, expenses or commissions in connection with
effecting cover and any other reasonable expense incident to the delay or other
breach.
b. 2-715 (2)- Consequential Damages:
i. (a)- any loss resulting from general or particular requirements and needs of
which the seller at the time of contracting had reason to and wis hich
could not reasonably be prevented by cover or otherwise; and
ii. (b)- injury to person or property proximately resulting from any breach of
warranty.

What is appropriate cover?

Whether at the time and place the buyer acted in good faith and in a reasonable manner, and it is
immaterial that hindsight may later prove that the method of cover used was not the cheapest or
most effective; goods must be a commercially reasonable substitute; the buyer is protected from
market price slump and can recover actual loss; done in reasonable time.

Durawood Treating Co. v. Century Forest Industries- Durawood contracted to supply 3rd party
with cross ties. Durawood contracted with Century Forest to supply the ties for the contract.
Century Forest breached. Durawood reviewed other price quotes and determined that self-
production would be the least expensive means of cover.
P: valid means of cover & they should be allowed to recover lost profits from their lines being
used to effectuate the cover.
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D: Covering internally is not a valid cover.

Held: (1)internal cover is a valid cover. (2) But, potential lost profits should not be recovered.
Reasoning: (1) K buyer may cover by making in good faith and without unreasonable delay any
reasonable purchase of goods to substitute for those due from the seller. (2) The Potential profits
could have been made if they had not used their facilities for making the cover. This was
preventable, they could have used a different form of cover.

Interior Elevator Co. v. Limmeroth- You can cover partially and recover normal damages for the
rest of the K. For instance, in this case, they bought 125,801 bushels. They were going to resell
125,000 bushels to a 3rd party. They covered on the 125,000 and where allowed to recover 2-713
damages on the 801 bushels.

Cover by the Seller:

Cover on the part of the seller is a de facto duty to mitigate when goods are wrongfully rejected
or repudiated before performance.
1. Perishable goods particularly. If it will ruin quickly, you need to sell it and get what you can.
2. 2-704 (2)- Where the goods are unfinished an aggrieved seller may in the exercise of
reasonable commercial judgment for the purposes of avoiding loss and of effective realization
either complete the manufacture and wholly identify the goods to the contract or cease
manufacture and resell the scrap or salvage value or proceed in any other reasonable manner.
3. 2-709: requires attempt at resale before claiming price of goods from buyer. (must make a
reasonable effort to resell the goods at a reasonable price, unless the circumstances reasonably
indicate that such effort will be unavailing.)

U.C.C. and the Lost Volume Seller of Goods

If a seller of goods or services has the capacity to supply the full demand for those goods or
services, a breach by one buyer is not substituted by a subsequent sale of the goods or services to
another customer who would have bought those goods in any event. The breach has caused a loss
in the volume of P’s sales and can only be compensated for by an award of lost profits.

Lost Volume Seller: A seller of goods who, after a buyer has breached a contract, resells the
goods to a different buyer who would have bought identical goods from sellers’ inventory even if
original buyer had not breached.

§ 2-708 Seller’s Damages for Non-Acceptance or Repudiation

(2)- If the measure of damages provided in subsection 1 is inadequate to put the seller in as good
a position as performance would have done then the measure of damages is the profit (including
reasonable overhead) which the seller would have made from full performance by the buyer,
together with any incidental damages provided in this Article (Section 2-710), due allowances for
costs reasonably incurred and due credit for payments or proceeds of resale.

ISSUE: under 2-706(1) the seller would be entitled to (K price- resale + incidental damages –
expenses saved/costs avoided)
Under 2-708(1) the seller would be entitled to (K price – market price of goods + incidental
damages – costs avoided)
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Under 2-708(2) the profit

2-708(2) is generally applicable to lost volume sellers.

3 Part Test For Lost Volume Seller’s:
(1)- Did the seller have the capacity to make sale to both buyers?
(2)- Would it be profitable for the seller to make both sales?
(3)- Would the seller have made the second sale absent the breach?...In order to prove this look at
past records of sales, market, i.e prove the history of the business, people are always
coming looking to buy the equipment. In the end, a fact question for the jury.

R.E. Davis Chemical Corp. v. Diasonics- P contracted to sell D medical equipment. D paid a
$300,000 down payment. D breached by refusing to accept the equipment, refused to pay. D sued
to recover their down payment (less $500 that P was entitled to keep). P counterclaimed for
offset as “lost volume seller” under UCC. The P sold the equipment to another company.
Held: For P, if P can prove that they would have made the 2 nd sale & that it would have been
profitable for them to do so, they can recover the profit as a lost volume seller.

Lost Volume Seller test from above, point 2 is critical-

Would it be profitable for seller to make both sales?
The law of marginal returns or increasing marginal costs—as a seller’s volume increases, then a
point will be reached where the cost of selling each additional item diminishes the incremental
return to the seller and eventually makes it unprofitable to conclude the next sale.

“Including Reasonable Overhead”- variable costs are costs avoided, if you are able to avoid
those costs, they are subtracted from your recovery. However, fixed costs cannot be avoided. So,
a reasonable amount of the fixed costs can be apportioned to the K and recovered.

INCIDENTAL AND CONSEQUENTIAL

DAMAGES UNDER THE U.C.C.
What are incidental damges?

-For the seller, § 2-710: “Incidental damages [are]…any commercially reasonable charges,
expenses or commissions incurred in stopping delivery, in the transportation, care and custody of
goods after the buyer’s breach, in connection with return or resale of the goods or otherwise
resulting from the breach.

-For the buyer, § 2-715(1): “Incidental damages…include expenses reasonably incurred in

inspection, receipt, transportation and care and custody of goods rightfully rejected, any
commercially reasonable charges, expenses or commissions in connection with effecting cover
and any other reasonable expense incident to the delay or other breach.

What are consequential damages?

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-For the buyer, § 2-715(2): (a) any loss resulting from general or particular requirements and
needs of which the seller at the time of contracting had reason to know and which could not
reasonably be prevented by cover or otherwise; and (b) injury to person or property proximately
resulting from any breach of warranty.
-Note: Property is fair market value of the property, no sentimental value is to be awarded.

Quantity Discounts as Damages under the U.C.C.

Nobbs Chemical v. Koppers- P cannot recover for quantity discount lost as a result of D’s breach.

They tried to recover under 2-708(2), which lists incidental damages. However, seller’s incidental
damages are better defined under 2-710. 2-710 lists charges, expenses, and commissions. A quantity
discount is none of the above, in fact, a quantity discount is a benefit. The U.C.C. doesn’t allow recovery
for benefit’s foregone. The others listed in 2-710 are expenses, only expenses are recoverable as
incidental damages, not benefits.

On the opposite side of the argument, it could be argued it is an economic cost—a reduction in cost has
the same effect on the seller’s profit as an increase in sale price. This reduction of the quantity discount
affects the bottom-line.

Warranties under the U.C.C.

What is a warranty?
A warranty is a promise or guarantee by the seller that the goods will have certain qualities.

Two Type of Warranties: Express and Implied

Express Warranty- An express promise from the seller to the buyer as to the goods. In order to
recover under an express warranty, you must show reliance. Can be made by a description, a
sample, or a model. However, “puffing” does not amount to an express warranty.

Express warranty is covered by § 2-313:

(1)- Express warranties by the seller are created as follows:
(a)- any affirmation of fact or promise made by the seller to the buyer which relates to the goods
and becomes part of the basis of the bargain creates an express warranty that the goods shall
conform to the affirmation or promise.
(b)- Any description of the goods which is made part of the basis of the bargain creates an
express warranty that the goods shall conform to the affirmation or promise.
(c)- Any sample or model which is made part of the basis of the bargain creates an express
warranty that the whole of the goods shall conform to the sample or model.
(2)- It is not necessary to the creation of an express warranty that the seller use formal words
such as “warrant” or “guarantee” or that he have a specific intention to make a warranty, but an
affirmation merely of the value of the goods or a statement purporting to be merely the seller’s
opinion or commendation of the goods does not create a warranty.

Implied Warranty- 2 kinds: Merchantability (Usage of Trade) and Fitness for a Particular Purpose

Merchantability (Usage of Trade), this requires no reliance, it exists unless it is disclaimed, and
even then, rules for disclaiming are stringent.
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§ 2-314. Implied Warranty: Merchantability; Usage of Trade:

(1)- Unless excluded or modified [under Section 2-316], a warranty that the goods shall be
merchantable is implied in a contract for their sale if the seller is a merchant with respect to
goods of that kind. Under this section the serving for value of food or drink to be consumed
wither on the premises or elsewhere is a sale.
(2)- Goods to be merchantable must be at least such as
(a)- pass without objection in the trade under the contract description; and
(b)- in the case of fungible goods, are of fair average quality within the description; and
(c)- are fit for the ordinary purposes for which such goods are used; and
(d)- run, within the variations permitted by the agreement, of even kind, quality and quantity
within each unit and among all units involved; and
(e)- are adequately contained, packaged, and labeled as the agreement may require; and
(f)- conform to the promises or affirmations of fact made on the container or label if any.
(3)- Unless excluded or modified [under 2-316] other implied warranties may arise from course
of dealing or usage of trade.

Fitness for Particular Purpose, requires reliance, can be disclaimed under 2-316. Seller must have
known the purpose and the buyer must rely.
§ 2-315. Implied Warranty: Fitness for Particular Purpose
Where the seller at the time of contracting has reason to know any particular purpose for which
the goods are required and that the buyer is relying on the seller’s skill or judgment to select or
furnish suitable goods, there is unless excluded or modified…an implied warranty that he goods
shall be fit for such purpose.

Chatlos Systems, Inc. v. National Cash Register Corp.- “The correct measure of damages, under
UCC § 2-714(2), is the difference between the fair market value of the goods as accepted and the
value they would have had if they had been as warranted.”

Overstreet v. Norden Laboratories, Inc.- A vet (P) buys new medicine from Norden (D) that is
warranted to prevent disease on account of D’s literature. Drug does not work, mares abort foals
and P sues for breach of warranty.
-The express warranty was relied on by the plaintiff.
-Alternative Product Rule: Consequential Damages are only awarded under 2-715 if:
a. An Alternative Product was available.
b. The Alternative Product would have been used.
-An expert in a field, such as horses here can only rely on an express warranty if the product is
new or unique.

LIQUIDATED/STIPULATED DAMAGES
Parties may agree to stipulate damages in the K, to limit damages between the parties and to
avoid the costs of litigation.

This is a coasean tool to plan for damages and to plan to avoid them, also helps avoid
foreseeability issues in damages.
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Restatement § 356 and UCC § 2-718

Courts will not enforce a penalty clause.

Shotgun Clause/Provision- One gets mammoth damages for a minor breach.

What is a penalty clause?

A clause that will reward the non-breaching party more than they would have earned by full
performance in the event of a breach. They deter efficient breach.

Damages are supposed to be compensatory, not punitive.

Test:
(1)= Is the stipulated damage sum or formula reasonable based upon what the parties might have
anticipated to be the likely result of a given breach?
(2)= At the time the contract is made, it is evident that in the event of breach, damages will be
very difficult or impossible to ascertain.
OR as Stone put it:
Ball Park Rule- 1) are damages difficult to predict or assess, incapable of estimation at the
moment you enter the K 2) is the liquidated damages amount a reasonable estimate of likely
actual damages (ex ante)?
RESTATEMENT ON LIQUIDATED DAMAGES
§ 356. Liquidated Damages and Penalties
(1)= Damages for breach by either party may be liquidated in the agreement but only at an
amount that is reasonable in light of the anticipated or actual loss cause by the breach and
the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is
unenforceable on grounds of public policy.
(2)= A term in a bond providing for an amount of money as a penalty for non-occurrence of the
condition of the bond is unenforceable on grounds of public policy to the extent that the amount
exceeds the loss cause by such non-occurrence.

Notes: The amount fixed is reasonable to the extent that it approximates the actual loss that has
resulted from the particular breach, even though it may not approximate the loss that might have
been anticipated under other possible breaches.
……

Furthermore, the amount fixed is reasonable to the extent that it approximates the loss
anticipated at the time of the making of the contract, even though it may not approximate the
actual loss.

UCC ON LIQUIDATED DAMAGES

§ 2-718. Liquidation or Limitation on Damages; Deposists
(1)- Damages for breach by either party may be liquidated in the agreement but only at an
amount which is reasonable in the light of the anticipated or actual harm caused by the breach,
the difficulties of proof of loss, and the inconvenience or non-feasibility of otherwise obtaining
an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.
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………..

ENFORCED CLAUSE:
C&H Sugar v. Sun Ship- K1 on barge to be delivered 6-30-81 but wasn’t delivered until 3-16-82.
K2 on tug to be delivered 6-30-81 but wasn’t delivered until 7-15-82. Liquidated damages
provided for $17,000 per day late. Court holds that two sophisticated parties with equal
bargaining parity cannot be said to not know what they are getting into so the damages are
upheld. (Stone loves b/c “whose K is it anyway.”)…Further notes: Both parts were needed for
the ship to function. Damages by late performance were difficult to estimate at the time of
contracting. Although P’s actual damages were much less than the liquidated damages, they only
have to be in proportion to anticipated damages.

ENFORCED CLAUSE:
Southwest Engineering Co. v. U.S.- U.S. entered into K with D to install navigation aids at
airfields. K stipulated liquidated damages of (100/day). The project was completed late, but the
U.S. “suffered no actual damage.”
Held: Valid Liquidated Damages Clause. “It is not unfair to hold D to the agreement…if by later
development damages prove to be less or non-existent. Each party by entering into such a
contractual provision took a calculated risk and is bound by reasonable contractual provisions
pertaining to liquidated damages.”

ENFORCED CLAUSE:
Mahoney v. Tingley- Seller of house required buyer to put earnest money down on house. Buyer
backed out and seller had to sell for less than original price. Seller sues for lost profits on the sale
of the house.
Held: If seller incorporates an earnest money provision in a K as a liquidated damages clause
then they cannot avoid that agreement. They agreed to $200 as liquidated damages, and $200 is
what they will get. It doesn’t make a difference if the clause is bad for the seller and not the
buyer.

UNENFORCED CLAUSE:
Lake River v. Carborundum- Clause provided a minimum amount of Ferro Carbo to be bagged
over 3 yrs. They also included a liquidated damage clause.
Held: Penalty Clause, it would provide a windfall for the plaintiff. But, P can still recover actual
damages (unpaid K- costs saved because of breach). “The fact that the damage formula is invalid
does not deprive Lake River of a remedy.

UNENFORCED CLAUSE:
Lefemine v. Baron- K allowed one party to choose either the liquidated damages or to sue for
actual damages. This indicated an intent to penalize the buyer, and negates the intent to liquidate
damages.
-The buyer in a liquidated damages provision such as this (with the option) at risk for damages
far greater than the liquidates sum.

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-Showed that neither party intended the stipulated sum to be the agreed-upon-measure of
damages, so it cannot be a valid liquidated damages clause.

ENFORCED CLAUSE:
Kearney v. Master Engraving- P K’d with D to sell P equipment to make parts. P claims that
equipment is bad and caused P to lose profits and sales. P sues to recover all losses (including
consequential damages). K had a limitation on liquidated damages (repair, replace, return clause)
which excluded consequential damages. P contends that the clause rendered the K to fail to its
essential purpose (2-719).
Held: For D. The Clause was a risk-shifting device, so it was not failing as to its essential
purpose. The parties decided who would have what risk in the K price.

ESSENTIAL PURPOSE-
§ 2-719. Contractual Modification or Limitation on Remedy
(1)Subject to…subsection 2 & 3 of this section and the section on liquidated damages and
limitation of damages,
(a) the agreement may provide remedies in addition to or in substitution for those provided in
this Article and may limit or alter the measure of damages recoverable under this Article, as by
limiting the buyer’s remedies to return of the goods and repayment of the price or to repair and
replacement of non-conforming goods or parts; and
(b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be
exclusive, in which case it is the sole remedy.
(2)Where circumstances cause an exclusive or limited remedy to fail of its essential purpose,
remedy may be had as provided in this Article.
(3)Consequential damages may be limited or excluded unless the limitation or exclusion is
unconscionable. Limitation of consequential damages for injury to the person in the case of
consumer goods is prima facie unconscionable but limitation of damages where the loss is
commercial is not.

Britton v. Turner- P breached the K by quitting. Express K required the whole K to be completed
before any compensation could be had. P quit, did not finish, so he could not recover under the
express K. P argues he should be paid for the services that he rendered.
Held: P should be awarded the value of services rendered if the value was received and accepted
by the other party. P will recover for work done minus costs to D.
Rule: D must pay if-
a)- He receives an actual benefit from the service.
b)- Benefit received by D are greater than the damages caused by the breach.
c)- the value of services are reasonable (as to the D).
Look at § 374. Restitution in Favor of Party in Breach (ALSO P. 155)

Freedman v. Rector- Buyer paid $2,000 into escrow as a deposit for the purchase of real estate.
After buyer repudiated the contract, seller sold the land to another for $2,000 more than buyer
had agreed to pay. Seller was paid the money in the escrow account. Should the seller be
entitled to the $2,000 deposit from the first transaction/breach? The buyer is entitled to return of
the $2,000 less escrow expenses. The court said that allowing the seller to retain the entire
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deposit would “permit what are in effect punitive damages merely because a party has partially
performed his contract before his breach.”

----------------------------------------------------------------------------------------------------------------
EQUITABLE REMEDIES/SPECIFIC
PERFORMANCE
Specific Performance- a remedy in equity, in which a party will be compelled to completely
perform their part of the K.

§ 357. Availability of Specific Performance and Injunction

(1)-Subject to the rules in §§359-369, specific performance…will be granted in the discretion of
the court…
(2)- Subject to the rules stated in §§359-369, an injunction against breach of a contract duty will
be granted in the discretion of the court…if
(a)- the duty is one of forbearance, or
(b)- the duty is one to act and specific performance would be denied only for reasons that are
inapplicable to an injunction.

§359. Effect of Adequacy of Damage

(1)- Specific performance…will not be ordered if damages would be adequate to protect the
expectation interest of the injured party.

359- monetary damages are the preferred remedy, we only go to equitable remedies if money
damages do not adequately compensate.

Specific Performance- Requires parties to perform their ends of the K.

Injunction- Stops a party from doing a certain act.
Mandamus- an order from a court to a govt. official ordering a certain act.
When may you see a remedy in equity:
(a)- Unique (land)
(b)- One-Shot Personal Contract. I.E. Portrait
(c)- When money value is difficult to ascertain and there are no good substitutes.

Laclede Gas Co. v. Amoco Oil Co.- K for oil over a number of years, hard to find replacement oil
K, remedy at law is inadequate and its hard to know the real value of the K.
Amoco 3 Part Test:
(1)- Part/Service is not readily available/obtainable elsewhere
(2)- Part/Service is available only at considerable expense, trouble or loss.
(3)- Cannot be estimated in advance.

-No specific performance….unless the K is in definite terms, a substantial part of the

performance has been rendered, the burden to perform is not disproportionate, not in personal
service contracts, not if unfair or against public policy.

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-If a decree of specific performance would entail high monitoring costs, or be difficult to
perform, then no specific performance will be allowed.
-Personal Service K’s- unlikely to grant specific performance because it forces the parties to
work together, and there is a probability that there may be animosity.
-Personal Service K’s---Employment K’s-not usually.
A)- Cooperation is not likely
B)- 13th amendment forced slavery issue
C)- Monitoring costs are likely to be high
BUT, D)ABC v. Wolf- injunction to stop employee from working for a competitor when the K
had a no compete clause may be upheld.

When can you have a K in restraint of trade?...§§186, 187, 188 realm.

1)- Is the restraint supplementary to the interest of a legal, valid K?
2)- Is the restraint reasonable as to time?
3)- Is the restraint reasonable as to space/geography?

Billboard Case- a billboard was not unique enough….not like land, there are plenty of other
billboards, sure they may not be at exactly the same spot, but still. Plus, it is not hard to set the
value of a billboard, the company had 400 other contracts, so we know what a billboard is worth.

IMPLIED IN LAW K
. Cotnam v. Wisdom [371(a)—Reasonable Value of Benefit Rendered]—Implied Contract. Dr.
gives service to unconscious man who eventually dies, and Dr. sues for cost of surgery. No
contract was made; what he rendered was a gift.
Notes: Where was the offer? Not the witness as an agent of the unconscious b/c he was not an agent &
didn’t have authority. The doctor’s conduct could be an offer, but there’s no acceptance. Legal vehicle
thru the implied contract (passive K, quasi K, constructive K, quantum meruit)Three types of contracts:
Express contract—no, Implied in fact—no—here you have to have acts and conduct from the parties.
Implied in law—yes, in this case. The three part test of setting forth the essentials of a plea of quantum
meruit as follows: The law as to quantum meruit rests on the principle that a person will be
compelled to pay for services if (1) he stands by and permits another to render such services, (2)
under such circumstances as to convince any reasonable man that they were being done with the
expectation of being paid for them, and (3) no effort is made to prevent the rendition of such
services. You can argue that it is illogical to have a contract implied in law—it takes away the freedom
of the parties to privately contract. Can we choose to be stupid? Of course, it is a competitive game to
succeed or fail. On the other hand, we can argue that the default rule should be an implied contract in
law—to save lives of those who are unable to speak for themselves. Could the doctors be trying to gain
unjust enrichment? What is “unjust enrichment?” Is he a parasite in a contractual sense? “unjust
enrichment” is 40mph maybe—deplorable language. The transaction costs would be high—so high
they are prohibited—he is unconscious. Would the parties come to terms if the transaction costs were
not so high? Hypothetical contract here—if they could have contracted, would they have done so?
Given all the circumstances, what is the probability the two parties would have contracted? If the court
uses this hypothetical contract, it creates an incentive for doctors to come to the aid of individuals in
distress. On the other hand, if no hypothetical contract was tried to be assumed, there would be no
incentive to save individuals in distress. If it is a high statistical probability that the two parties would
have had a meeting of the minds and a contract would have been made, the court tends to view the
situation as if a contract were made. If he was a Christian Scientist and didn’t use doctors, would we
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assume he wouldn’t want care? Prob the fact that that he was a C.S. will not be brought out in anyway
and the doc has no way of knowing—so he would have assumed an implied contract. These are first
and foremost emergencies and one needs to act fast. (1) Transaction cost analysis…if high transaction
costs…then go to (2). (2) If high transaction costs, then we’d want to find a contract. The Court has two
options in this case: to find a contract or not. Finding a contract is more wealth maximizing. We look
for an offer of acceptance—otherwise it is a gift. There is no acceptance from Mr. Harrison. No chance
for a meeting of the minds with the unconscious. Is there an offer? Not only words we use to form
contracts—but acts and conduct—the doctor’s conduct could be construed as an offer. Note: Under 39
U.S.C.A. § 3009, “merchandise mailed without the prior-expressed request or consent of the recipient”
“may be treated as a gift by the recipient.” Public choice theory—could the statute have been passed to
increase the number of voters? Does this make the people happy? Emotional self-interested vote
buying. Would you rather risk your law coming from common law or politicians distributing gifts to
become re-elected. The common law was doing just fine over the years—and now the politicians come
in and legislature changes the long-standing rule that now becomes a “gift” that used to be stealing—
using someone else’s property without paying for it. If we have to sue all these people for these cds—
the transaction costs are too high to sue all the people that these cds were sent out to—so the company
won’t do it. You can probably keep the cds—and they will never sue. We have the same thing in the
next case—Michigan Central Railroad v. State. 371—measure of a restitution interest. 371(a) is the
Cotnam approach. 371(b) is Michigan Railway view—benefits received. Analogy to mail order goods
—the prison uses the coal even though it is not theirs—what should they pay? Assume that the mistake
wipes out the express contract. Now, there is an implied contract. Now state is liable for implied
contract. Damages will be the benefit received and enjoyed by the receiver—the 3.40 a ton.

A logical doctrine?
1. Does not make sense
a. Freedom to make and break K is impaired
b. Parties should set terms, not courts
c. D is forced into a contractual agreement
d. Slippery slope of forced agreements
e. K law should leave business judgment and value judgment to parties
2. Makes sense
a. Not making party pay offers unjust enrichment, free lunch
b. Incentives for Drs. To come to the aid of those in need
c. High statistical probability that parties would enter into K anyway if info.
costs were low.

Restatement § 371—If a sum of money is awarded to protect a party’s restitution interest, it

may as justice requires be measured by either:
a. reasonable value to the other party of what he rec’d in terms of what it would have
cost him to obtain it from a person in the claimant’s position (benefits rendered by P)
[Cotnam v. Wisdom]
b. extent to which the other party’s property has been increased in value or his other
interests advanced (benefits received by D) [Michigan R.R.]

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CONSIDERATION OUTLINE

RULES OF LAW ON CONSIDERATION (RESTATMENT)

§ 17. Requirement of a Bargain
“…the formation of a contract requires a bargain in which there is a manifestation of mutual
assent to the exchange and a consideration.”

§ 71. Requirement of Exchange; Types of Exchange

(1)“To constitute consideration, a performance or a return promise must be bargained for.”
(2)“A performance or return promise is bargained for if it is sought by the promisor in exchange
for his promise and is given by the promisee in exchange for that promise.
(3) The performance may consist of
(a) An act other than a promise.
(b) A forbearance.
(c) The creation, modification, or destruction of a legal relation.
(4)The performance or return promise may be given to the promisor or to some other person. It
may be given by the promisee or by some other person.

§ 72. Exchange of Promise for Performance

Except as stated in § 73 (Performance of a Legal Duty) and § 74 (Settlement of Claims), any
performance which is bargained for is consideration.

§ 73. Performance of Legal Duty

Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of
honest dispute is not consideration; but a similar performance is consideration if it differs
from what was required by the duty in a way which reflects more than a pretense of bargain.
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§ 74. Settlement of Claims

(1) Forbearance to assert or the surrender of a claim or defense which proves to be invalid is not
consideration unless
(a) The claim or defense is in fact doubtful because of uncertainty as to the facts or
the law, or
(b) The forbearing or surrendering party believes that the claim or defense may be
fairly determined to be valid.
(2) The execution of a written instrument surrendering a claim or defense by one who is under no
duty to execute it is consideration if the execution of the written instrument is bargained for
even though he is not asserting the claim or defense and believes that no valid claim or
defense exists.

§ 75. Exchange of Promise for Promise

Except as stated in § 76 (Conditional Promise) and § 77 (Illusory and Alternative Promises), a
promise which is bargained for is consideration if, but only if, the promised performance
would be consideration.

Note C: “A promise to perform a legal duty is not consideration for a return promise unless
performance would be.”

§76. Conditional Promise

(1) A conditional promise is not consideration if the promisor know at the time of making the
promise that the condition cannot occur.
(2) A promise conditional on a performance by the promisor is a promise of alternative
performance within § 77 (Illusory and Alternative Promises) unless occurrence of the condition
is also promised.

§ 77. Illusory and Alternative Promises

A promise or apparent promise is not consideration if by its terms the promisor or purported
promisor reserves a choice of alternative performance unless
(a) Each of the alternative performances would have been consideration if it alone had been
bargained for.
(b) One of the alternative performances would have been consideration and there is or
appears to the parties to be a substantial possibility that before the promisor exercises his choice
events may eliminate the alterantives which would not have been consideration.

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§ 78. Voidable and Unenforceable Promises

The fact that a rule of law renders a promise voidable or unenforceable does not prevent it from
being consideration.

§ 79. Adequacy of Consideration; Mutuality of Obligation

If the requirement of consideration is met, there is not additional requirement of
(a) A gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the
promisee.
(b) Equivilance in the values exchanged.
(c) “mutuality of obligation.”

§ 80. Multiple Exchanges

(1) There is consideration for a set of promises if what is bargained for and given in exchange
would have been consideration for each promise in the set if exchanged for the promise alone.
(2) The fact that part of what is bargained for would not have been consideration if that
alone had been bargained for does not prevent the whole from being consideration.
§ 81. Consideration as Motive or Inducing Cause
(1) The fact that what is bargained for does not itself induce the making of a promise does
not prevent it from being consideration for the promise.
(2) The fact that a promise does not of itself induce a performance or return promise does not
prevent the performance or return promise from being consideration for the promise.

§ 82. Promise to Pay Indebtedness; Effect on the Statute of Limitations

(1) A promise to pay all or part of an antecedent contractual or quasi-contractual indebtedness
owed by the promisor is binding if the indebtedness is still enforceable or would be except for
the effect of a statute of limitations.
(2) The following facts operate as such a promise unless other facts indicate a different intention:
(a) A voluntary acknowledgment to the obligee, admitting the present existence of the
antecedent indebtedness; or
(b) A voluntary transfer of money, a negotiable instrument, or other thing by the obligor to the
obligee, made as interest on or part payment of or collateral security for the antecedent
indebtedness; or
(c) A statement to the obligee that the statute of limitations will not be pleaded as a defense.

§ 83. Promise to Pay Indebtedness Discharged in Bankruptcy

An express promise to pay all or part of an indebtedness of the promisor, discharged or
dischargeable in bankruptcy proceedings begun before the promise is made, is binding.

§ 84. Promise to Perform a Duty in Spite of Non-Occurrence of a Condition

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(1) Except as stated in Subsection (2), a promise to perform all or part of a conditional duty
under an antecedent contract in spite of the non-occurrence of the condition is binding, whether
the promise is made before or after the time for the condition to occur, unless
(a) occurrence of the condition was a material part of the agreed exchange for the performance
of the duty and the promisee was under no duty that it occur; or
(b) Uncertainty of the occurrence of the condition was an element of the risk assumed by the
promisor.
(2) If such a promise is made before the time for the occurrence of the condition has expired and
the condition is within the control of the promisee or a beneficiary, the promisor can make his
duty again subject to the condition by notifying the promisee or beneficiary of his intention to do
so if
(a) the notification is received while there is still a reasonable time to cause the condition to
occur under the antecedent terms or an extension given by the promisor; and
(b) reinstatement of the requirement of the condition is not unjust because of a material change
of position by the promisee or beneficiary; and
(c) the promise is not binding apart from the rule stated in Subsection (1).

§ 85. Promise to Perform a Voidable Duty

Except as stated in §93 (Promises Made In Ignorance of Facts), a promise to perform all or part
of an antecedent contract of the promisor, previously voidable by him, but not avoided prior to
the making of the promise, is binding.

§ 86. Promise for Benefit Received

(1) A promise made in recognition of a benefit previously received by the promisor from the
promisee is binding to the extent necessary to prevent injustice.
(2) A promise is not binding under Section (1)
(a) if the promisee conferred the benefit as a gift or for other reasons the promisor has not been
unjustly enriched; or
(b) to the extent that its value is disproportionate to the benfit.

Comment A: Past Consideration/Moral Obligation “the mere fact of promise has been though to
create a moral obligation, but it is clear that not all promises are enforced. Nor are moral
obligations solely based on gratitude or sentiment sufficient of themselves to support a
subsequent promise.

§ 87. Option Contract

(1) An offer is binding as an option contract if it
(a) is in writing an signed by the offeror, recites a purported consideration for the making of
the offer, and proposes an exchange on fair terms within a reasonable time; or
(b) is made irrevocable by statute.
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(2) An offer which the offeror should reasonably expect to induce action or forbearance of a
substantial character on the part of the offeree before acceptance and which does induce such
action or forbearance is binding as an option contract to the extent necessary to avoid injustice.

§ 88. Guaranty
A promise to be surety for the performance of a contractual obligation, made to the obligee, is
binding if
(a) The promise is in writing and signed by the promisor and recites a purported
consideration; or
(b) The promise is made binding by statute; or
(c) The promisor should reasonably expect the promise to induce action or forbearance of a
substantial character on the part of the promisee or a third person, and the promise does
induce such action or forbearance.

§ 89. Modification of Executory Contract

A promise modifying a duty under a contract not fully performed on either side is binding
(a) if the modification is fair and equitable in view of circumstances not anticpated by the
parties when the contract was made; or
(b) to the extent provided by statute;or (THINK 2-209)
(c) to the extent that justice requires enforcement in view of material change of position in
reliance on the promise.

§ 90. Promise Reasonably Inducing Action or Forbearance

(1) A promise which the promisor should reasonably expect to induce action or forbearance
on the part of the promise or a third person and which does induce such action or forbearance
is binding if injustice can be avoided only by enforcement of the promise. The remedy
granted for breach may be limited as justice requires.
(2) A charitable subscription or a marriage settlement is binding under Subsection (1) without
proof that the promise induced action or forbearance.

Note B: “The promisor is affected only by reliance which he does or should foresee, and
enforcement must be necessary to avoid injustice. Satisfaction of the later requirement may
depend on the reasonableness of the promisee’s reliance, on its definite and substantial character
in relation to the remedy sought, on the formality with which the promise is made, on the extent
to which the evidentiary, cautionary, deterrent and channeling functions of form are met by the
commercial setting or otherwise, and on the extent to which such other policies as the
enforcement of bargains and the prevention of unjust enrichment are relevant.
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Note C: “…Promise made to one party for the benefit of another, it is often foreseeable that the
beneficiary will rely on the promise. Enforcement…in such cases…depends on the same factors
as in cases of reliance by the promisee. Justifiable reliance by 3rd parties who are not
beneficiaries is less likely, but may sometimes reinforce the claim of the promisee or beneficiary.

Note D: “…the same factors which bear on whether any relief should be granted also bear on the
character and extent of the remedy….relief may sometimes be limited to restitution or to
damages or to specific relief measured by the extent of the promisee’s reliance rather than the
terms of the promise.

§ 91. Effect of Promise Enumerated in §§ 82-90 When Conditional

If a promise within…82-90 is in terms conditional or performable at a future time the promisor is
bound thereby, but performance becomes due only upon the occurrence of the condition, or upon
the arrival of the specified time.

§ 92. To Whom Promises Enumerated in §§ 82-85 Must Be Made

The new promise referred to in….82-85 is not binding unless it is made to a person who is then
an obligee of the antecedent duty.

§ 93. Promises Enumerated in §§ 82-85 Made in Ignorance of Facts

A promise within the term of…82-85 is not binding unless the promisor knew or had reason to
know the essential facts of the previous transaction to which the promise relates, but his
knowledge of the legal effect of the facts is immaterial.

§ 94. Stipulations
A promise or agreement with reference to a pending judicial proceeding, made by a party to the
proceedings or his attorney, is binding without consideration. By statute or rule of court such an
agreement is generally binding only
(a) if it is in writing and signed by the party or attorney, or
(b) if it is made or admitted in the presence of the court, or
(c) to the extent that justice requires enforcement in view of material change of position in
reliance on the promise or agreement.

RULES OF LAW ON CONSIDERATION (UCC)

§ 2-205
An offer by a merchant to buy or sell goods in a signed writing which by its terms gives
assurance that it will be held open is not revocable, for lack of consideration, during the time
stated or if no time is stated for a reasonable time, but in no event may such period of
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irrevocability exceed three months; but any such term of assurance on a form supplied by the
offeree must be separately signed by the offeror.
§ 2-209
(1) An agreement modifying a contract…needs no consideration to be binding.
§ 2-306
(1) A term which measures the quantity by the output of the seller or the requirements of the
buyer means such actual output or requirements as may occur in good faith, except that not
quantity unreasonably disproportionate to any stated estimate or in the absence of a stated
estimate to any normal or otherwise comparable prior output or requirements may be tendered or
demanded.
(2) A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods
concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to
supply the goods and by the buyer to use best efforts to promote their sale.

WHAT IS CONSIDERATION?

Consideration----under the bargain theory…..§ 17 & § 71.

“Something is said to be bargained for ‘if it is sought by the promisor in exchange for his
promise and is given by the promisee in exchange for that promise.’”

+++Judges were not interested in the substance of the promise, just the process that brought it
into being, i.e. the bargain.

WHAT CAN CONSTITUTE CONSIDERATION?

-Virtually anything anyone would bargain for in exchange for a promise can be
consideration.-----The same consideration can support a number of promises (§ 80)
-As long as part of what is given in exchange for a promise is consideration, then it is immaterial
that the rest is not.

-Performance by the promisee (seller delivers apples, in return for buyer’s promise to pay at the
end of the month.)
-Forbearance (the refraining from doing something/inaction such as forbearing from collecting a
debt.)
-Change in an intangible legal relation-the “creation, modification, or destruction” of the
relation.
- A return promise. (a seller promises to deliver apples at the end of the month, in return for the
buyer’s promise to pay for the apples.)

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 As long as the performance or return promise is bargained for, the consideration may ‘move’
from the promisee to someone other than the promisor, or it may ‘move’ to the promisor from
someone other than the promisee.
 In general, if a performance would itself be consideration, a promise to render that
performance can also be consideration. (But it must be the promise rather than the
performance that is bargained for.

-“New Legal Detriment”- for instance if I promise to sell you Mr. Weisgarber’s car (I don’t own
it) for your promise to give me 15 cents, there is no consideration, I have no right to sell Mr.
Weisegarber’s car, so I suffer no “legal detriment.”
Another example: Duncan v.Black- the cotton allotment case, govt. set a limit on the cotton
allotment each farmer can have. So, the farmer had no right to forbear on the extra cotton
allotment, because he had not right to the cotton allotment to begin with.

RESTATEMENT § 81(2)- The fact that a promise does not itself induce a performance or return
promise does not prevent the performance or return promise from being consideration for the
promise.
Example- “The law does not ordinarily concern itself with actual motive or inducement in
resolving consideration issues. If a wealthy individual teaches contract law because it is the most
pleasant activity in the world, the rendition of this service is sufficient consideration to support
the school’s promise to pay even if in fact the pay was not the primary motive or inducement to
perform.

RESTATEMENT § 81 (1)- The fact that what is bargained for does not of itself induce the
making of a promise does not prevent it from being consideration for the promise.

The real test is:

RESTATEMENT § 71 (2)- A performance or return promise is bargained for if it is sought by the
promisor in exchange for his promise and is given by the promisee in exchange for that promise.

ADEQUACY OF CONSIDERATION
-concern of judges is the bargaining process, no the substance of the exchange.
-Adequacy of consideration is not an appropriate subject for judicial scrutiny.
-Courts do not look at the value of the consideration, nor do they look to the adequacy of
consideration. They simply look for a bargained for exchange and new legal detriment.

“The value of things contracted for, is measured in the Appetite of the Contractors: and therefore
the just value, is that which they be contented to give.” Quote from Hobbes, Leviathan.
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Von Mises (1966)

1. People buy and sell only b/c they appraise the things given up less than those received. Thus
the notion of a measurement of value is vain.
2. There is no measurement of the value of commodities. Example: If a man exchanges two
pounds of butter for a shirt, all we can assert with regard to this transaction is that he—at the
instant of the transaction and under the conditions which this instant offers to him—prefers
one shirt to two pounds of butter.
Notes: Seek the opposite of equality in K b/c the whole point is that one party values something
more than the other; parties won’t exchange unless they see some benefit; How can both parties
be better off if there’s a difference in value given up? It’s the individual value placed on the
exchange.

Batsakis v. Demotsis (The Greek Lady Case)- D wrote a letter promising P to pay him $2,000 +
interest for loaning her a significantly smaller amount of money ($25)….Held: No inadequacy of
consideration (because the court doesn’t look to the adequacy of consideration). The parties are free to
structure the deal in any way they see fit.
Note case: Bennett v. Bennett: “A man is by law allowed to be a fool.” Why? We respect people & their
decisions in life. Parties look out for their own interests.

§ 79(b) [if the requirement of consideration is met, there is no additional requirement of]:
equivalence in the values exchanged.

HOWEVER, courts of equity may look into adequacy of consideration in determining whether to
grant specific relief. This remains…but only precludes the P from obtaining an equitable remedy.
Damages and other remedies are unaffected.

NOMINAL CONSIDERATION

-what happens when a donor wants to make a gift of land, and so to satisfy the requirement of
consideration has the donee give a dollar to the donor.
______Not consideration…§ 71 requires an actual bargain, more than the pretense of a bargain.

FALSE RECITALS
False recital-K claims that one party gave an amount of money to the other in consideration, but
they actually didn’t.

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-Most all courts will allow the party resisting enforcement to show that the recited consideration
was never paid, (a few courts hold that such a showing may not be made…on one of 2 theories
(1) they are “estopped from contradicting the writing” or (2) the recital of consideration gives
rise to an implied promise by the promisee to pay.)

-However, just because the recital was false, doesn’t necessarily mean that there is no
consideration. The underlying issue is was there a bargain?

Schnell v. Nell- (No false recitals) – Nell sued Schnell for not following through on agreement to give
Nell $600. Reason for money was that Schnell’s late wife wished it in her will. Since decedent
did not have any funds (she belonged to her husband) hubby said that he would give the money to the
parties (Nell and 2 others). Knowing that courts wouldn’t honor a gift Nell provided that “for
consideration of 1cent, Schnell would give up the $”. Court holds that 1 cent was obviously a nominal
consideration and there was never an intent of the parties to bargain and K. If penny had been
rare or something of value other than intrinsic then court may have allowed.

. Newman and Snell’s Bank - (Non-existent consideration)– Another dead spouse case. Hubby
dies and wife attempts to renew loans at bank by signing over old note on business (which is
insolvent). Court holds that no C b/c no C on bank’s side. She gave her promise to pay note,
legal detriment. Bank gives up claim on old note and right to sue on old note. Bank didn’t give
up anything b/c stock in company and note which neither hubby nor wife could pay were
worthless and amounted to a false recital of non-existent C. Bank bargained away nothing b/c it
had nothing to begin with.

OPTION CONTRACTS (& NOMINAL CONSIDERATION IN)

Option contracts are contracts that leave open an option that one party can accept.
In an option contract, one has purchased time to decide.

§ 87. (1) An offer is binding as an option contract if it (a) is in writing and signed by the offeror,
recites a purported consideration for the making of the offer, and proposes an exchange on fair
terms within a reasonable time or (b) is made irrevocable by statute (think UCC 2-205 FIRM
OFFER)……(2) an offer which the offeror should reasonably expect to induce action or
forbearance of a substantial character on the part of the offeree before acceptance and which does
induce such action or forbearance is binding as an option contract to the extent necessary to
avoid injustice.

Seyferth v. Groves- Farmer k’s w/ landowner to sell passage through his property for RR. RR is to give
farmer $1 and pay later for land $40/acre. Farmer refuses acceptance of $1 and cites that K is invalid b/c
of inadequacy by way of no C. Court holds that C was recited in K so that is enough to hold the K valid.
Option K. The Court held it was consideration because essentially he “waived” payment. Citing is
enough—we don’t have to actually pay.

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Lewis v. Fletcher- P’s Kd to buy a 40-acre tract of land in an option K. D backed out b-4
performance and P’s sued. Clause called for $20 consideration to be paid. Since $20 not paid
then no K. This is majority view that nominal C must be paid to make a valid K. “An option K
not supported by consideration is merely a revocable offer to sell.”

Marsh v. Lott- 25cent consideration given to acquire an option to buy real estate at $100,000;
option to expire in 4 months. Held: “In our judgment any money consideration, however small,
paid and received for an option to purchase property at its adequate value is binding upon the
seller thereof for the time specified therein, and is irrevocable for want of its adequacy.”

Lindner v. Mid-Continent Petroleum Corp.- P owned a service station and had a K to lease said
station to D w/D having a right to terminate w/ ten days notice. D terminated its sublease to P’s
husband (a separate K) after P2 started buying gas from a competing company. P terminated her lease
w/ D b/c D terminated sublease w/ p2. D sued to recover possession of the station. P claimed that D
gave no consideration by the option to terminate. Held: The ten days notice required by K was enough
consideration to satisfy mutuality of K, not necessarily the time but the payments that would have to be
paid on the lease during said time.

Gurfein v. Werbelovsky-S wrote B that it had “accepted and entered your order for 5 cases of plate
glass.” B had an option to cancel before shipment. S refused to ship. B sued. S claimed that because B
had the option to cancel, there was no consideration. Held: The seller had a right to enforce the buyers
promise, ship quickly and they couldn’t cancel. Consideration.

Restatement (2nd) § 87 comment b. Nominal Consideration:

“Offers made in consideration of $1 paid or promised are often irrevocable under Section 1(a).
The irrevocability of an offer may be worth much or little to the offeree, and the courts do not
ordinarily inquire into the adequacy of the consideration bargained for. Hence a comparatively
small payment may furnish consideration for the irrevocability of an offer proposing a
transaction involving much large sums. But gross disproportion between the payment and the
value of the option commonly indicates that the payment was not in fact bargained for but was a
mere formality or pretense. In such cases there is no consideration.

UCC APPROACH - §2-205 Firm Offers:

“An offer by a merchant to buy or sell goods in a signed writing which by its terms gives
assurance that it will be held open is not revocable, for lack of consideration, during the time
stated or if no time is stated for a reasonable time, but in no event may such period of
irrevocability exceed 3 months; but any such term of assurance on a form supplied by the offeree
must be separately signed by the offeror.

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FORBEARANCE AS CONSIDERATION
Hamner v. Sidway- Uncle promises money in return for nephews promise to refrain from
activities until he was 21, for which he had a legal right to do. The uncle’s estate claimed that
there was no consideration & that it was simply a family gift. The court found that the nephew
gave up (forebearance) something he had a legal right to do. Thus, consideration was found.

However, today a promise to a 18 yr. old to pay $1,000 if they refrained from drinking until they
were 21 would be unenforceable. They have no legal right to drink, so there would be no “new
legal detriment,” because there would be no legal detriment period. Similarly, the promise of one
to pay another $100 to one for refraining from smoking marijuana for a period of 2 years would
be unenforceable, because smoking marijuana is not something that the individual had a legal
right to do, thus he could not forebear form doing that as consideration (no legal detriment).
Kirksey v. Kirksey- D convinces his sister-in-law to leave her home and move to Talladega
County to live with his family and farm land. After 2 years, he kicked her out. Held: the court
found no consideration, it was just a gift.
-the issue here was that there was no bargain. P did give something up, she left her land and
moved to Talladega, which benefited D, because the land was worked. However, D’s requested
that P move, it was not bargained for.

CAN THE SETTLMENT OF INVALID CLAIMS BE CONSIDERATION?

-claimant(A) asserts a claim against B in tort. B promises to pay $1,000 if A releases the claim or
forbears from pursuing it.
-If the claim is valid, then the bargain is clearly consideration for the promise.
-But, what if the claim turns out to be invalid?
……Generally, settlement of invalid claims will be upheld as long as the claim was disputed.
….Claim must have been asserted in good faith, “with an honest belief that it may fairly be
determined to be valid.”
---Also, in most cases, the claim must have enough substance so that it is “doubtful” as opposed
to unfounded.

EXCHANGES THAT LACK CONSIDERATION

The most significant class of promises unenforceable for lack of consideration is made up of
purely gratuitous (or gift) promises---promises for which there has been no exchange at all.
-What is significant, is not that a promise is gratuitous, but that it lacks consideration.

 What is required is that the promise and the consideration be in “the relation of reciprocal
conventional inducement, each for the other.” In otherwords, “the promise and the
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consideration must purport to be the motive each for the other.”…It is not enough that the
promise induces the consideration or that the consideration induces the promise, “if the other
half is wanting.”
 Restatement defines bargain to require that the consideration both be “sought by the
promisor in exchange for his promise” and “given by the promisee in exchange for his
promise.”
 Where a party makes a number of promises, the consideration given by the other party
suffices as consideration for all of those promises.

PAST CONSIDERATION/PRE-EXISTING OBLIGATION/MODIFICATION AND

DISCHARGE

If the action has already taken place, the promisor cannot be seeking to induce it. Such “past
consideration”—action already having been taken before a promise is made—cannot be
consideration for the promise.

 ISSUE OF EMPLOYEE PENSIONS IN PAST CONSIDERATION

Issues arise when employers promise pensions to employees for their past services. However, it
is often possible for the parties to restructure the transaction to make the promise enforceable.
Consideration will be found if the employer bargains for some future performance by the
employee—such as: remaining on the job for a stated time, retiring within a stated time,
refraining from competing with the employer after retirement—or for a return promise by the
employee to do any of these things.

Stilk v. Myrick-2 sailors deserted. The captain told the rest of the crew that they would share the share
of the deserters. Breach. Held: No consideration. Before the sailors sailed from London, they had
undertaken an agreement to do all they could under all the emergencies. They had sold all their service
until the end of the voyage. So, the service they already owed pas a pre-existing obligation (no new legal
detriment.)

Alaska Packers Ass’n v. Domenico- D promised to pay P $50 + 2 cents per red salmon to do any work on a
fishing vessel designated by D’s captain during the fishing season of 1900. Later they signed shipping articles with a
vessel chartered by D in which they bound themselves to do the same work for $60 and 2 cents per red salmon.
While out to sea, P demanded $100 or they would stop work. After failing to get P to do their work, the super
gave into their demands. When they got back to shore, D refused to honor the new agreement. Held:
No consideration, court used §§ 175-176 duress argument. Court said that it was not a voluntary modification.
Levine v. Blumenthal-P & D agreed that D would lease premises from P, in a shopping center, for a
store. Terms…$175/month for the first year, $200/month for the second year. After yr one, D informed P
that they had business troubles and would have trouble meeting their obligations. Agreed to keep rent
at $175 for yr two. D failed to pay the final months rent yr. 2. Breach. P sues for the rent at the original
$200. Held: “The rule was laid down in very early times that even though a part of a matured liquidated
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debt or demand has been given and received in full satisfaction thereof, the creditor may yet recover the
remainder……General Economic adversity, however disastrous it may be in its individual consequences, is
never a warrant for judicial abrogation of this primary principle of the law of K’s.”

Nash v. Atlantic White Tower-“A contract is not to be regarded as a Kamikaze plane in which the
parties seal themselves for mutual destruction.”

Williams v. Roffey Bros.- D a contractor entered a sub-contract with P for carpentry work on 27
apartment units. After sixth months, P had been paid 80% but had only completed work on 9 units. P
was in financial difficulty, K price was too low for him to operate at a profit. D was concerned that P
might not complete the work. The completion of the work was critical to D. D agreed to pay P, 575
pounds for each apartment that he finished. P completed 8 more units, but D refused to pay the extra. D
argued that it was a pre-existing duty that formed the basis for K2, thus no consideration, thus no K2.
Court said there was no indication of duress. Held: “Where a party undertakes to make a payment
because so doing it will gain an advantage arising out of the continuing relationship with the promisee
the new bargain will not fail for want of consideration.”

RESTATMENT § 89: A promise modifying a duty under a contract not fully performed on either
side is binding (a) if the modification is fair and equitable in view of circumstances not
anticipated by the parties when the contract was made, or (b) to the extent provided by statute, or
(c) to the extent that justice requires enforcement in view of material change of position in
reliance on the promise.

RESTATMENT § 275: If a party, before he has fully performed his duty under a contract,
manifests to the other party his assent to discharge the other party’s duty to render part or all of
the agreed exchange, the duty is to that extent discharged without consideration.
Illustartion: A and B make a K under which A promises to build a fence and B promises to pay A
$1,000. As A begins to build the fence, he says to B, “The price we agreed on was too high, and
you need pay only $900 for the fence.” A then builds the fence. B’s duty to pay A to the extent of
the $100 is discharged and B owes A only $900.

Notes: Restatement § 73 Illustration: A owes B a matured liquidated debt bearing interest.Mutual promises to
extend the debt for a year even at a lower rate of interest are binding. By such an agreement, A gives up the right
to terminate the running of interest by paying the debt.

Example Glamorgan City Council- Strike at mine. Mining Co. agreed to pay police to secure the situation. Mining Co.
claimed lack of consideration/pre-existing duty. Held: New legal detriment was found in the duty undertaken
beyond their normal duty (see § 73).

PARTIAL PAYMENT IN EXCHANGE FOR DISCHARGE

If $100 is owed, D’s payment or promise to pay $75 is not supported by consideration. Promising
to pay or paying the lesser amount is not a legal detriment because the party is simply doing that
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which he is already legally obligated to do. Fulfilling a portion of a duty of immediate

performance cannot provide consideration for the creditor’s promise

Foakes v. Beer-Dr. Foakes owed Beer 2090 pounds. Agreed that he would pay $500 immediately and spread the rest
of the payments out over 5 yrs. Beer later claimed that she was owed the interest. Held: Although the plaintiff
agreed to give time, she might at any time have changed her mind, and was not bound by the agreement for there
was no consideration for it.
Stone: Here they tried to use the promise to pay the 2090 as consideration for the promise to give time, he already
was obligated to pay her 2090, so this could not be consideration for the second promise.

Sugar House Finance v. Anderson- SHF got judgment on Anderson of 2400+interest. Anderson
told SHF he was considering bankruptcy, so he settled for 2200. SHF later demanded the full
amount. Held: Consideration. Notes: Restatement § 73 Illustration: A owes B a matured liquidated debt
bearing interest. Mutual promises to extend the debt for a year even at a lower rate of interest are binding. By such
an agreement, A gives up the right to terminate the running of interest by paying the debt.

However, Foakes doesn’t really reflect commercial reality. Most creditors would be delighted to
accept a proposal that the debtor will produce necessary cash to pay the full amount of the
principal owed in exchange for the creditor forgiving interest on the debt.

Modification of K’s Under UCC

Under the UCC 2-209 a modification can be made with no new consideration. “An agreement
modifying a contract within this Article needs no consideration to be binding.”

Commercial Impracticability Case-

The Dam Construction Case (Blakeslee)- Original K to build dam for $200. Unforseen
difficulties arise, modify the K to $300. Held: Ok, because the parties did not know of the
unforeseen difficulty at the time of contracting.
Notes: Where the contractor can justify his refusal to proceed with the contract by showing that he is confronted
with circumstances not contemplated when the contract was made which render its performance impossible and
the promisor, being informed of the situation, induces him by a promise of additional compensation to proceed,
the contractor’s right to that compensation ought justly to be recognized
3 Part Test for Commercial Impracticability-
(1) Legitimate Reason/Pressing Need to seek Adjustment of the K.
(2) Promisor voluntarily agrees.
(3) Promisee not attempting to take advantage of promisor being locked into a long term K.

ACCORD & SATISFACTION:

Liquidated Debt- Debt that is mature, due, and where there is no dispute as to the amount.
Unliquidated Debt- Debt that is unsure, i.e. the amount due is in dispute.
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Only unliquidated debts can be modified.

A check sent for a lesser amount marked “payment in full” will not be enforceable as a
settlement of the debt on a liquidated debt.

St. Department of Fisheries- “Payment in Full Case”- k1 to furnish fish and fish eggs. Price per
lb an estimated amounts are in the k1. Fish were shipped, in far greater amounts than the
estimates in k1. JZ sends check for less than amount due marked “payment in full”. St. Dept. of
Fisheries disputes, but sings & deposits with the court. JZ argues accord, agreement and
satisfaction.
Notes: Restatement §73 and §74(1)(a)—where is consideration element Can debtor always mark
payment in full and have satisfaction, no only if an unliquidated claim (Rule on 305);
2-306(1)—estimates were disproportionate.

For a liquidated debt, you must show that the old k1 was mutually discharged (§ 275) and that
the k2 was substituted. Here, clear and convencing evidence of the discharge and the new k2 are
required (hard burden to carry).

D. Change of tenor in agreement

1. If A owes B $500 by Dec. 15. B agrees to accept $300 as full payment if A agrees to pay
before Nov. 15.
2. That is a promise supported by consideration b/c of time value of money detriment.
3. Same as change in duties as above.
E. Analyzing a liquidation problem
1. Ask first if K1 is liquidated debt—one presently due for which there is no legitimate dispute
(All terms are agreed upon); How do you find new consideration? (Illustration on 289);
key in this area is if a creditor is merely releasing a clear claim, there is no consideration,
debtor looks for consideration

III. Accord and Satisfaction

A. A agrees to pay B $300 for the $500 debt that A owes to B, A gives B the money, that is
accord. B accepts the money that is satisfaction and we have a new K w/ new consideration.
B. Based on mutual discharge of existing duties for each party
1. Promise of substitute performance.
2. Usually accompanied by a time agreement also.
C. Executory Accord—performance yet to be performed
1. Parties agree to a settlement that requires one to act.
2. Promisor gets cold feet and doesn’t perform
3. Result: No accord and satisfaction, so mere accord is not enough, must have satisfaction to be
enforceable.
4. K when this happens is still in executory stage
5. Court decisions—Intent Test (mutual promise vs. promise for an act)

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a. Bilateral K approach (promise for a promise)= If accord (Agreement) but no Satisfaction

(performance) = consideration; Say that a bilateral K exists and all that is necessary is an
agreement. (§279)
b. Unilateral K approach (promise for an act) = Accord but no Satisfaction (performance) = no
consideration; Say that there is a need for payment as well, courts treat these as unilateral K.
Both parties need to promise and perform.
c. Distinguish: unilateral K doesn’t come into existence until performance; bilateral K
exists when mutual promises are made
D. Accord suspends the creditor’s right to enforce his orginal claim in order to give the debtor
the chance to perform
E. Breach by Parties
1. Creditor—debtor can have claim for damages or even obtain specific performance of the
accord
2. Debtor—the accord does not restrict creditor’s rights, may enforce original claim or the accord

Novation
A. Term used to describe a substituted K that discharges a duty by adding a party who was
neither the obligor nor the Obligee of that duty.
B. Obligee must consent to the novation since its effect is to take away his right to hold the
obligor liable if the new party fails to perform.
C. New promise by stranger is consideration for the new promise so does away w/ any problem
of pre-existing duty.

MORAL OBLIGATIONS

 ISSUE OF OBLIGATION TO PAY DEBT BARRED BY STATUTE OF

LIMITATIONS
A subsequent promise to pay a debt that has been barred by the statute of frauds is enforceable
against the promisor. Since “past consideration” and “moral obligation” are not consideration,
this is simply an exception where a promise is enforced even though there is no consideration.
-This exception now extends to a promise to pay any antecedent contracts or quasi-contractual
debts owed to the promisee….Since the action is based on the new promise, rather than on the
barred debt, recovery is limited to the terms of the new promise.
___Such promises can be made either before or after the statute of limitations has run.
___It may be inferred from an admission or acknowledgment of the debt (if not coupled with
an indication of intention not to pay)
__It may be inferred from a statement that the statute of limitations will not be pleaded (if not
coupled with a denial of the debt and a reservation of defenses)

 ISSUE OF DEBT DISHARGED IN BANKRUPTCY PROCEEDINGS

Exception when a debtor promises to pay a debt that has been discharged in bankruptcy
proceedings or a debt that is not yet discharged but is dischargeable in bankruptcy proceedings
begun before the promise is made.
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However, unlike in the statute of limitations exemption, here the promise must be expressed, it
will not be implied (not even from a part payment).

======================================
 ISSUE OF VOIDABLE PROMISES
The promisor is allowed to avoid the promise under some rule designed for the promisor’s
protection, then a new promise to perform the voidable obligation is enforceable. (Assuming that
the new promise is not voidable itself, for the same reason.)
-Example- the promise of a minor is voidable. But if the minor upon turning 18, promises to
make good on the first promise, it is enforceable. (Farnsworth says no consideration here, just an
exception to the bargained for exchange principle).

§ 86- Promise for Benefit Received : “(1) A promise made in recognition of a benefit previously
received by the promisor from the promisee is binding to the extent necessary to prevent
injustice. (2) A promise is not binding under subsection 1 (a) if the promisee conferred the
benefit as a gift or for other reasons the promisor has not been unjustly enriched or (b) to the
extent that its value is disproportionate to the benefit.”

Split in authority-2 pulls here:

Majority Pull: Mills v. Wyman- Promise for past care. P took care of D’s son who had fallen ill. D
was thankful and promised to her. D reneged. Held: Past care cannot be consideration. P did
nothing new for the promise (no new legal detriment).

Minority (Alabama) Pull: Webb v. McGowin- Webb was seriously injured when he fell and had a
log fall on top of him while preventing the log from falling on McGowin. Out of gratitude,
McGowin promised to pay him a sum for the rest of his life. When McGowin died, his estate
stopped payment. Webb sued. Held: Enforceable Contact.

Argue Yes: B obviously intended to pay A, he paid out for 8 yrs before he died, B received a
material benefit from A’s act. Maybe a Hypothetical K situation – A did not have time
to work out a K w/ B as did the parties in Mills if they had wanted to establish
some form of payment. Here time did not allow bargain. See Cotnam v. Wisdom.

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Argue No: D may only have intended to make a gift. Benefit was “past” consideration. B’s
obligation to pay was merely moral obligation. 86(2)(a)

Difference b/w Mills and McGowin is the transaction costs involved, in Mills they were low
(could have K’d for the care of the son) and in McGowin high (didn’t have time to K,
but high probability that parties would have agreed).

CONDITIONAL AND ILLUSORY PROMISES

This problem arises most often in bilateral contracts.

Both parties must make promises that somehow bind them.
Example:
2 parties exchange promises, but one of the promises appears on its fact to impose no obligation
at all on the promisor—ie. “I will if I want to.”

--There is a difference between promises that are conditional on an event entirely within the
promisor’s control and one conditional on an event that is beyond the control of the promisor.

Traditionally illusory promises were held to be unenforceable due to lack of consideration.

-See Paul v. Rosen---Buyer promised to buy a business, conditioned on “the Buyer obtaining a
new lease”…the promise left the buyer “free to get the lease or not as he willed” and so thus
there was no consideration.

However, more recently…courts have tended to read apparently illusory promises so that they
will not be illusory. (Generally, a duty of good faith)
-Grean & Co. v. Grean- Officer of a corporation promised (in an agreement to settle a dispute)
that he would devote such time to the corporation “as he in his sole judgment shall deem
necessary,” in return for the employers promise to employ him....In spite of “in his sole
judgment” the court read the promise as requiring him “to act in good faith.”----So, it was not
illusory…and could be enforced.
-Wood v. Lucy, Lady Duff-Gordon- Lady Duff-Gordon (a fashion designer and Titanic survivor)
gave Wood an exclusive right to market her designs for a period of at least a year (who was
organized to do so.) In return, she was to receive half of anything that he made from the
marketing of the product. The agreement was silent on any duty of Wood to actually market the
goods. She claimed no consideration, because he had made no promise to actually do anything in
return. …..The court found that a promise to use reasonable efforts to market the designs was
implied.
-Line of reasoning has been applied to real estate contracts. “Contingent upon buyer being able
to obtain mortgage” has been reads so as to require the buyer to “make reasonable efforts to
secure a suitable mortage.”
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Scott v. Moragues Lumber- P entered a K with D, whereby if D bought a ship, D would K with P to ship
their lumber to South America. D bought the ship, but K’d with another lumber company other than P. D
claims no mutuality because his promise was based on the condition of buying a ship. Held: A valid K
may be conditioned upon the happening of an event, even though the event may depend upon the will
of the party who afterwards seeks to avoid its obligation. D was not bound to purchase the boat, but
when he did…the K remains as if the condition had never been stipulated. The offer was converted into a
binding K to be performed. The buying of the boat was a condition precedent(or trigger) for the actual K.

Sean Alexander Hypo: 7 million dollar contract if Sean makes team. Sean can choose to try to not make
the team. But, his incentive is to make the team. There is mutuality here, because of his incentive not to
fail.

Sorenson v. Connelly- B agreed to buy S house for $49,500, contingent upon B obtaining a loan. Later B
told S, we have made other arrangements. Held: For the seller, “Buyer cannot rely on the contract
condition to avoid liability on the K; such a provision implies a promise that the purchaser will make
reasonable efforts to secure the loan.

Bloor v. Falstaff Brewing Corp.- P K’d to sell their brewery (B) to D w/ the agreement that D would
continue to market P’s brand of beer for a continued amount of time and pay P .50 cents per barrel or
liquidated damages if they discontinued the brand. The royalty was based on the “best efforts” of D to
market the beer. P felt that D did not do their best to market the beer and sued for breach. Issue is
whether D’s best efforts amounted to mutuality for P’s promise to sell. Court has to define best efforts
by looking at different factors used in marketing the beer as opposed to D’s other brands. Court holds
that D did not make their best efforts to promote the beer and therefore breached that part of the K but
that didn’t necessarily entail D having to pay liquidated damages. So P won on the law but lost on the
damages.

Corenswet v. Amana Refrigeration- Either party could terminate on ten days’ notice for any reason.
Argued, no best efforts, no mutuality, no consideration. Held: There was consideration, at least for the
ten days’ notice period, during which the parties would be bound.

UCC 2-309(3)- terminator must give reasonable notice, then there is no bad faith.

UCC 2-326: Common business practice that a buyer may return goods if they fail to meet with
his general approval, even though they may be wholly as warranted by the seller.
UCC 2-326(1)- Sale of Approval-if goods are primarily for use.
UCC 2-326(2)- Sale or Return-if goods are primarily for retail.

CONDITIONS THAT ARE OUTSIDE THE CONTROL OF THE PROMISOR:

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If the condition is outside the promisor’s control, the condition will almost never prevent his
promise from being consideration, even though it turns out that he does not have to perform.
_Example---A & B are bro-in-laws, they agree regardless of what amount is left to each in f-in-
laws will, the two will share it equally. A is left $10,000 B is left $0. A argues that since B didn’t
get anything, he didn’t promise anything. However, since the condition was outside the control
of B, his promise constitutes consideration….As long as the bro-in-laws thought there was a
possibility that either would have to perform his promise, their promises were consideration for
each other.

CONDITIONS THAT CANNOT OCCUR: § 76(1): “A conditional promise is not consideration

if the promisor knows at the time of making the promise that the condition cannot occur.
-

CONDITION IS WITHIN PARTIAL CONTROL OF THE PROMISOR:

A, owner of Blackacre, agrees to sell Blackacre to B. Contingent upon obtaining financing. A
renigs claiming that B had no consideration, because he didn’t have to seek financing. But, B
was under an implied promise of “best efforts” to obtain the financing, so it was consideration.

CONDITION TO GIFT VS. BARGAINED EXCHANGE

If a professor wished to give a hornbook to a student, the professor might state: “Come to my office after class, and I
will give you a copy of Farnsworth on Contracts.” This communication contains a promise and a request that the
promisee perform an act. The act of the promisee certainly involves legal detriment in the technical sense of the term
because the student is being required to walk to the professor’s office, an act that the student book is simply a
reasonable means to make it possible to complete the gift, and might thus be found to be merely a condition to the
gift.

ALTERNATIVE PERFORMANCES

-----===What about if alternatives exist and only one of the alternatives is consideration===-----
Example: P says to D, “In return for your promise not to sue me right now for the $100 I owe
you, I promise to either buy your car or to pay you the $100 immediately.”….here buying the car
would be consideration (new legal detriment) but paying the $100 would not be consideration
(already obligated to pay the $100).

A promise which reserves to the promisor several alternative performances is generally

consideration only if each of the alternative performances would have been consideration had it
been bargained for alone….Alternatively, there is consideration if one of the alternative
performances would be consideration and there is a “substantial possibility” that before the
promisor makes his choice, events will eliminate the other alternatives.

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Example: A offers to sell B a book if B will either give A a different book, or to pay A $5 (which
B previously owed to A). B accepts, A changes his mind. B sues. Because one of the alternative
performances open to B under the offer would not have been consideration (paying $5 would not
have been new legal detriment), B’s promise is not consideration, even though B is willing to
give the book.

Example: X has 2 cars. Will sell 1. Y I will buy whichever car you don’t keep. Consideration,
because either alternative would be consideration.

Example: M agrees to buy between 300 and 500 lbs. of fertilizer. Consideration because M has
bound himself to buy at least 300 lbs.

TERMINATION OF DEALERSHIP (business unconscionability)

Attempts by dealers to invoke the notion of unconscionability in order to prevent termination of

their dealerships have generally been rebuffed.
-Smith v. Price’s Creameries…clause allowed termination “for any reason” P claimed that it was
“unconscionable and void as a matter of law.” Court said he was educated and that no evidence
was given that he did not have an opportunity to reviewe the fine print of the K.
Elements of Business Unconscionability:
(1) lack of adequate opportunity to fairly review the contract.
(2) inability to understand the provisions of the document.
(3) lack of opportunity to seek independent professional advice regarding the terms and
provisions of the agreement.

-Some courts have held that dealerships are intended to last long enough to give the dealer the
opportunity to “recoup his investment.”

REQUIRMENT AND OUTPUT CONTRACTS (FORM OF CONDITIONAL OR

ALTERNATIVE PERFORMANCES)
Exp. B agrees with S that B will buy all of his requirements for a particular good form S at an
agreed-upon price. (requirements contract)
Has B given consideration?

Exp. S agrees to sell all of his output of a particular product to B. (output contract)
Has S given consideration?

In early cases, before the UCC, both output and requirements contracts were invalid due to lack
of consideration.
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However, the modern view is that in most cases requirements and output contacts will be upheld,
at least if you can find that the buyer implicitly promised to use his best efforts to sell the goods
(or that the seller in an output contract has implicitly promise to attempt to maintain his
production at a reasonable level).

UCC § 2-306: Requirements & Output Contracts

“a term which measures the quantity by the output of the seller or the requirements of the buyer
means such actual output or requirements as may occur in good faith, except that no quantity
unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any
normal or otherwise comparable prior output or requirements may be tendered or demanded.”

There is no lack of mutuality of obligation because “the party who determines the quantity is
required to operate his plant or conduct his business in good faith and according to
commercial standards of fair dealing in the trade.”

---But these must be exclusive contracts….for instance, A must promise to buy all of his
requirements from B.
The promise of exclusivity coupled with the promise of good faith and fair dealings constitute
consideration.

HOWEVER, “I will sell you all the widgets you order at $2 per widget.” This does not bind the
buyer, no consideration. Rather it is an offer looking to a series of contracts; it is revocable at
will, each order given by the buyer constitutes a separate contract.
Unless….a return promise from the buyer (like a promise to deal exclusively) can be implied.
Then the promise is enforceable.

+++
Great Northern v. Witham-D sent a tender to P that read: “I hereby undertake to supply P, for
12mnths. with such quantities of goods P’s store keeper may order from time to time.” P accepted.
Several orders were given which were filled by the D. But, at some point D refused to continue supplying
P with the requested goods. D claims no consideration on the part of P. Held: “the company had given
the order, and had consequently done something which amounted to a consideration for the D’s
promise.”
Stone: Here, the company having given D an order at his request, his acceptance of the order would bind him.
U.C.C. 2-205; would be one-sided no mutuality case, but court finds exception in needs and requirements K;
business people need assurance of supply of goods, sellers willing to risk uncertainty of amount to get certainty of
business, Each side has at least some obligation, doesn’t matter if it’s a good or bad deal;

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De Los Santos v. Great Western Sugar Co.- P contracted to haul such quantities of D’s beets to the beet
receiving station and unload them. However, D had contracted with other’s to do the same thing. So, it is
not a pure wants and needs contract. Held: no consideration …it was not an exclusive k.

Loudenback Fertilizer v. Tennessee Phosphate- B agreed to buy, and S agreed to sell B’s entire
consumption of phosphate rock for 5 yrs. Estimated 1,500 tons a year. Market conditions made it
cheaper for B to buy a different kind of product. Held: Mutuality of Obligation, consideration. Because…
The promise to take all that one can consume would be broken by buying from another, and it is this
obligation to take the entire supply of an established business which saves the mutual character of the
promise.
Stone: We could argue we have two products—rock phosphate and crushed phosphate. We could argue
that when the company buys the second, it is different. The court rules that phosphate is phosphate. The
buyer breaches when he buys the crushed from the third party. A good faith approach is to take some of
your needs—what you have stipulated that you may need—otherwise, what is the point of contracting?
If you argue that it was bad faith that the buyer did not buy any of their needs from the dealer—is that
bad faith failure to perform? Perhaps so. K AROUND—DEFINE WHAT YOU MEAN BY ROCK.

Peter Cooper’s Glue Factory- P K’s w/ D to buy glue from D for a set price over an extended period of
time. The mkt for glue skyrockets and P wants to buy from D a huge amount of glue at the reduced price
to sell on the mkt for the increased price. D says no and P sues for performance. Court holds that there
is no consideration in this case because there was no obligation by the plaintiff to buy any glue.

The only contractual term stated that if plaintiff bought glue, it would be sold at 9 cents.
The plaintiff did not agree to do or refrain from doing anything. Finds no mutuality. It is
illusory as to being bound here. This is a prelude to the Empire Gas case. You have an
indeterminate quantity and price is so uncertain (fluctuating prices)—leads to the
illusion of being bound.—this would be like UCC 2-306 where they talk about gross
disproportionality. Sees good faith economic reasons for the buyer not buying—there is
in essence no mutuality. He didn’t contract to be bound.
1. Court did not find mutuality in this case b/c they scrutinized adequacy of C instead of
looking at mutuality like they should have.
2. Directly contradicts rock case above.

Empire Gas v. American Bakeries- Empire (P) K’s w/ Bakery(D) to sell to D propane conversion units for all
D’s vehicles. D decides that they don’t need to convert so they don’t buy anything from P. P sues for
breach of K and D claims that they had no needs so therefore no requirements from P. Court holds that
D must make a “good faith effort” to meet their K absent any showing of good business judgment for
their decision not to buy the units. . Bakery presented no evidence that they made a “good faith” effort
to meet the terms of their K and presented no evidence that they should not have to in the spirit
of good business judgment.
Stone:This case is about good faith v. bad faith. Empire gas sells converters to convert from gas to propane—cheaper. They
agree to fulfill their propane needs exclusively with Empire gas—to possibly convert their fleet. They never ordered any
equipment or gas. Could we argue that is a risk the Gas co. took—that if they didn’t have the needs, they wouldn’t buy. The
legal issue is, is all this illusory? In a needs and requirements contract, may a buyer say he has no needs without saying the
contract is illusory? How do we test this? Answer: “good faith”—did we act in good faith. UCC 2-306(1) “taking these
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requirements in good faith and Restatement 205. Wouldn’t Posner see the good faith v. bad faith argument as 40 mph maybe?
2-103(b) defines good faith. “Good faith” means honesty in fact and the observance of reasonable commercial standards of
dealing. If the Bakery had bought from a competitor then there would have been a breach of the needs and requirements
clause. 2-306(1) says that no quantity should be reasonably disproportionate—that is a problem—illusory consideration related
to zero. Good faith means to buy from a business in some amount above zero—it is okay if it is reasonably disproportionate.
We presume, that since a contract was made, the buyer has some needs from the seller—regardless of how much. We are
skeptical that a jury could not find good faith—why does Posner say it is cleary bad faith? (1) the bakery did not convert any
trucks at all to propane, (2) the Bakery had financial ability to convert, and (3) the cost of using propane was at least ½ as
expensive as using gasoline. This is the “any idiot” rule—only an idiot would go to the trouble to make a contract and then not
follow through. Just like trying to buy a house and need to get a mortgage loan—this is the same—in good faith the buyer must
try reasonably to obtain the loan. Bakery did not offer any evidence to support good faith performance after the propane co
offered some evidence of bad faith. You have to plead your case—provide evidence of good faith. K AROUND IT—CITE
CIRCUMSTANCES IN WHICH YOU WOULD BUY ZERO AND WHEN YOU WOULD BUY CERTAIN AMOUNTS; CONDITION PRECEDENT;
REASONS WHY WOULD BE EXCUSED FROM BUYING PROPANE

Torncello v. U.S.-P was awarded Gvt. K to do pest control work at Navy base. $500 per call. Turned out
only work needed was gopher control (which is usually cheaper than $500). Gvt. Allowed a cheaper
person to do the work. P sued for breach. The K contained a “termination for convenience clause” by
which the gvt could could cancel by written notice. Held: Court read “termination for convenience
clause” to require the gvt to show “some kind of change from the circumstances of the bargain or in the
expectations of the parties” so that the clause served only as an “allocation of the risk of changed
conditions.”
Stone: divisible contract, the term that would make it illusory was divised from the K and the P was given
the gopher work.

MUTUALITY IN EMPLOYMENT AT WILL

Mabley & Carew Co. v. Borden- Company promised to pay Borden’s sister one year wages upon her
death, if at the time she “is still an employee of this Company”. Company claims lack of mutuality of
obligation. At will employment, she could quit anytime, we could fire her at any time. They claim it was a
gift. Held: This was not a pure gratuity. The provision was that no payment was to be made unless
Borden was an employee at the time of her death. This was an inducement for her to continue to work…
creating a binding obligation upon the company to pay.

Belline v. K-Mart Corp.- P worked at K-Mart, he blew the whistle on his manager and was fired.
Employment at will. Court held that it was improper to fire him…against public policy that protects
whistle blowers.
Retaliatory Discharge:
(1) there was a discharge
(2) the discharge was in retaliation for certain activities
(3) the discharge violates a clear mandate of public policy (Restatement 178)

-Erosion of Employment at Will

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…Public Policy Reasons- examples…refusal to violate the law, insisting on a right granted by
statute, and whistleblowing.
…Contract Analysis (Really an Estoppel View)- written statements in the employee handbook, or
(faithful service, commendations, and promotions…followed by sudden termination), surviving a
probationary hiring period (held to imply a promise of job security).

Voidable and Unenforceable Promises as Consideration

For instance, one party a minor, senile, victim of fraud…so that the promise is voidable or
unenforceable. Or if the promise is an oral contract that is within the Statute of Frauds, and thus
unenforceable.

§ 78: “The fact that a rule of law renders a promise voidable or unenforceable does not prevent
it from being consideration.”

-Car Dealer (A) makes agrees to sell minor (B) a car for $100. B is a minor so the contract is
voidable on his option. A decides not to sell, claiming that since minor had the power to avoid
the K that there was no consideration. WRONG…

RELIANCE AS A BASIS FOR ENFORCEMENT (PROMISSORY ESTOPPEL)

§ 90. Promise Reasonably Inducing Action or Forbearance
(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part
of the promisee or a 3rd person and which does induce such action or forbearance is binding if injustice
can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as
justice requires.
(2) A charitable subscription or a marriage settlement is binding under Subsection (1) without proof that
the promise induced action or forbearance.

Devecom v. Shaw- Uncle says he will pay nephew’s trip to Europe. He dies, estate refuses to pay due to
lack of consideration, it was just a gift (uncle received no benefit). Nephew has already incurred the
expense, based on his reliance.

-INDUCED AND DETRIMENTAL JUST RELIANCE

Can’t just be a fool’s reliance. (reasonable reliance) (substantial reliance under 1st restatement)
1. Justified? (Reasonable)
2. Induced?
3. Detrimental?
4. Reliance.

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Ricketts v. Scothorn- P’s grandfather gave her a $2,000 note, saying “I have fixed out something that
you have not got to work any more.” P quit her job. Afterwards Grandfather died. Court says that
Grandfather gave the note as a gift, but that D was “estopped” from claiming lack of consideration
because of P’s change of position in reliance on the promise. The grandfather contemplated the action
that the P took as a “reasonable and probable consequence of his gift.”

Colonial Savings v. Taylor-P bought a lot. D told him that they had purchased fire insurance on the
property. Later, a fire burned the smaller house. Only then did P find out that the fire insurance was only
on the big house. Held: “P forbore form obtaining his own insurance in reliance upon Colonial’s
undertaking to obtain it for him.”

Walters v. Marathon Oil- Couple relied on promise to supply gasoline. They purchased a lot and built a
gas station. Trial court gave them reliance interest lost profits, not expectancy interest. Held: It would be
unreasonable to assume that P did not anticipate a return of profits from their investment of time and
funds, since in reliance upon D’s promise, they had foregone the opportunity to make the investment
elsewhere.

Feinberg v. Pfeiffer Co.- Reliance doctrine in the modern era. Woman worked for company for years.
Company passed resolution to pay her $200 for life when she retired. Company did not say she had to
retire any certain time before they would pay only that they would. She worked on about two
more years and then retired. Kicked back drawing her check and the company decides to stop
payments. She’s upset and sues to enforce K. Court holds that she relied on the promise of the
$200 and makes the company pay her.

Katz v. Danny Dare- P was injured in a robbery attempt at his job. He became unstable and continued
employment was not an option. The company decided they would either find a way to make him agree
to retire or that he would be fired. An agreement was worked out whereby he would get a pension for
the rest of his life. D argued that since they would have fired him otherwise, he didn’t give up anything
by retiring. Trial court agreed. Held: Had D desired to terminate P without promise of a pension he could
have done so. But D made efforts to induce P to voluntarily retire. So § 90 applies.

BUT:

Hayes v. Plantation Steel- Hayes had been a long time employee of the company and risen to general
manager. He stated his intention to retire. The company told him that they would “take care of him.” The
paid him $5000/yr after retirement. Company changed hands, the new owner stopped payments. Held:
Hayes decision to retire was arrived at without regard to the promise. He was going to retire anyway.

Baggs v. Anderson- P and D divorced. P got custody of the kinds and $200/mnth in support from P.
Agreed that if D made payments that were due, he would be discharged from any future payments .
Held: D had not shown that he had substantially changed his position in reliance on the P’s promise.
Court noted that “this requirement is not satisfied by the mere fact that he indulge in the pleasant and

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euphoric assumption that he would not have to meet his obligations and that he bought a more
expensive car and moved to a more expensive apartment.”

CONSIDERATION IN LIGHT OF DURESS, UNCONSCIONABILITY, & OTHER

FACTORS/ LACK OF A BARGAIN DUE TO UNEQUAL BARGAINING POWER
Post v. Jones-Whaling voyage case; ran aground near Bering Strait. Nearest port was 5000 miles away.
Ships came to the rescue. Auction was held. Held: Auction sale was invalid. “where there was no market,
no money, no competition—where one party had absolute power, and the other no choice but
submission—where the vendor must take what is offered or get nothing—is a transaction which has no
characteristic of a valid contract.”

Mitchell v. C.C. Sanitation Co.- Injured while driving truck. Told if he didn’t sign settlement
agreement he would be fired. Mitchell alleges that he signed because of duress and fraud imposed upon
him by his employer. Employer said he was an at-will employee, so he had no right to a job. Held: It is a
general rule that contracts obtained through duress or coercion are voidable. It is the opinion of the
court, that even where the right of an employer to fire is unquestioned, duress and coercion may found
to void the contract.

Restatement § 79:
If the requirement of consideration is met, there is no additional requirement of (a) a gain, advantage, or
benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or (b) equivalence in the
values exchanged.
COMMENT: EFFECTS OF GROSS INADEQUACY- Inadequacy “such as shocks the conscience” is often said
to be a “badge of fraud,” justifying denial of specific performance. Inadequacy may also help to justify
recission or cancellation on the ground of lack of capacity, mistake, misrepresentation, duress or undue
influence.

RESTATMENT § 175: (1) If a party’s manifestation of assent is induced by an improper threat

by the other party that leaves the victim no reasonable alternative, the contract is voidable by the
victim.

RESTATMENT § 176: (1) A threat is improper if: (a) what is threatened is a crime or a tort, or
the threat itself would be a crime or a tort if it resulted in obtaining property, (b) what is
threatened is a criminal prosecution, (c) what is threatened is the use of civil process and the
threat is made in bad faith, (d) the threat is a breach of the duty of good faith and fair dealing
under a contract with the recipient; (2) A threat is improper if the resulting exchange is not on
fair terms, and (a) the threatened act would harm the recipient and would not significantly benefit

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the party making the threat, (b) the effectiveness of the threat in inducing the manifestation of
assent is significantly increase by prior unfair dealing by the party making the threat, or (c) what
is threatened is otherwise a use of power for illegitimate ends.

RESTATMENT § 208: If a contract or term thereof is unconscionable at the time the contract is
made a court may refuse to enforce the contract, or may enforce the remainder of the contract
without the unconscionable term, or may so limit the application of any unconscionable term as
to avoid any unconscionable result.
Comments: b. “such as no man in his senses and not under delusion would make on the one
hand, and as no honest and fair man would accept on the other.”
d. A bargain is not unconscionable merely because the parties to it are unequal in bargaining
position, nor even because the inequality results in an allocation of risks to the weaker party. But
gross inequalilty of bargaining power , together with terms unreasonably favorable to the
stronger party, may confirm indications that the transaction involved elements of deception or
compulsion, or may show that the weaker party had no meaningful choice, no real alternative,
nor did not in fact assent or appear to assent to the unfair terms.

Selmer v. Blakslee-Midwest- Can financial difficulty by itself justify setting aside a settlement on
grounds of duress?
NO>. The D was not responsible for the financial troubles of the P. It would come out differently if the
party’s financial distress was due to the other party’s conduct.

FDIC v. Linn- Threatened bankruptcy is insufficient to create economic duress. D’s ability to declare
bankruptcy was a double edged sword: It posed an obvious threat to the Banks’ interest of recovering
debt, just as D asy they preferred to avoid that consequence.”

Berger v. Berger- § 175 improper threat. Threat of a criminal prosecution is duress.

RULE: Where a person has the right to do a certain act—for example, not to sell goods at a particular
price—he has the right to threaten to do the act.

STATUTE OF FRAUDS OUTLINE

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Requires that certain particular kinds of contracts be in writing and signed by the person sought
to be held liable on the contract.

“within the statute” or “without or no within the statute”

Exceptions will make it “having been taken out of the statute.”

What is within the statute?

MYLEGS

(1) M = On consideration of marriage, (2) Y = contracts not to be performed within one year,
(3) L = Sale of land or interest in land, (4) E = contracts to charge any executor or
administrator to pay a debt of the estate out of his own money, (5) G = sale of goods of
$500 or more, (6) S = surety contacts (in which one party agrees to become a surety on
the obligations of another).

Why have the statute?

(1) as a protection against fraud and mistake”, (2) “to assure deliberation before making a
promise concerning important matters (cautionary function.)”, (3) “to specify a method
by which intention may be given legal effect (channeling function.)”.

What Kind of Writing is Required?

Original Rule: “the agreement…or some memorandum or note thereof, shall be in writing.”
Some statutes are more strict than others. For instance, the UCC does not require that the price of
goods be stated. Contra, a contract for the sale of land would be held to be ineffectual under the
statute if the price is omitted.

Contents: with reasonable certainty, the writing should:

(1) identify the parties to the contract and show that a contract has been made by them or offered
by the signatory to the other.
(2) indicate the nature of the K and its subject matter.
(3) state the essential terms of the promises to be performed under the contract.

WHAT IS AN ESSENTIAL TERM?

-Omission of a term is never fatal if the court will supply it by implication.
-memorandum need not recite the consideration, IF the consideration has already been given.
-

RULE OF SEVERAL WRITINGS: several writings can be put together to produce a sufficient
memorandum.

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But what if some of the writings are signed and some are not? “A common requirement is that
the unsigned writings must be referred to in the signed writings or otherwise clearly connected to
those writings by, for example, being clipped to them or contained in the same envelope.

Under the UCC 1-201 writing is defined as: “any intentional reduction to tangible form.” A tape
recording has been held to qualify. Computer files may also meet the requirement.

 If A writes an otherwise sufficient memorandum to B, except that it does not identify B,

the deficiency may be supplied by the name and address on the envelope in which the
letter arrives.

 A and B make an oral contract within the Statute. A memorandum of the contract is made
on 2 sheets of paper, the sheets are not connected physically, and they only sign one
sheet. The two sheets may be read together IF: (1) an incomplete sentence on one is
completed on the other, (2) the contract partially disclosed by one is clearly the same
contract partially disclosed by the other, or (3) the fact that one is the continuation of the
other is otherwise show by clear and convincing evidence.

 A sufficient memorandum need not be intended by its author as a memorandum of the

agreement. ….For instance, if the Buyer signs a letter to the seller saying “you cannot
enforce our oral agreement because of the statute of frauds.” That is sufficient. However,
a repudiating memorandum is probably not sufficient if the agreement is “made upon
consideration of marriage.”

o The memorandum need not be delivered to the plaintiff or anyone else. A

memorandum discovered in defendant’s files may be sufficient.
o If A and B make an oral agreement for the sale of land, and A writes a letter to C
with an accurate statement of the contract, that is enough to charge A.

BROAD SCOPE
Letters, emails, telegrams, telex’s, receipts, invoice’s, checks, penciled price lists, minutes of a
meeting, other contracts, and wills have all been held to be sufficient memorandums. In some
instances, tape recordings have been held sufficient, but a split in authority exists as to that point.

What Constitutes a “Signing”?

The writing must be signed.
Initials, a stamp, or even the letterhead may suffice. \
UCC 2-201: “The question always is whether the symbol was executed or adopted by the party
with present intention to authenticate the writing.” So, whether a computer file is signed depends

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on whether it contains a symbol executed or adopted by a party with present intention to

authenticate a writing.

The signature may be by someone the D has authorized to sign for him. i.e. an auctioneer has
authority to sign for a reasonable time on the day of the sale.

What if the writing is lost or destroyed?

If a signed writing that satisfies the statute has been lost or destroyed, its prior existence can be
proven by oral evidence.

What if the writing doesn’t accurately reflect the terms of the K?

Most courts permit it to be corrected by reformation when that remedy would otherwise be
appropriate in cases not involving the statute.

Will Oral Recession or Modification do?

Oral recession is usually held not to violate the statute if the recession does not result in the
retransfer of property that is the subject of the statute. (e.g., goods or an interest in land). Exp.
Oral contract for goods, an oral recession will likely be ineffective if the buyer has already
received the goods.

 A and B enter into a written contract of employment for a term greater than a year. They
orally agree to rescind. Oral agreement is effective and the written K is rescinded.
 A contracts to sell B a fridge.($500). Fridge is delivered and paid for. Later, A and B
orally agree to rescind the transaction. The recession is unenforceable.
 A and B have a written K that A will employ B for 2 years at 500/month. When B starts
they orally agree to substitute the K for 6 months at 600/month. Second K is outside the
statute and enforceable, discharging the prior K.
 A and B make oral contract that A will work for B for 30 days at 20/day. The next day A
and B orally agree to substitute 2 yrs at 6,000/yr. The first K is still enforceable and K2 is
not.

SALE OF GOODS
 Governed by UCC § 2-201
 Applies only to contracts with a price of goods $500 or more.
 Applies to contracts for the present sale of goods and the sale of goods at a future time.

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Section 2-201(1) “Completeness and Accuracy of the Writing”:

The writing must-
-indicate that a contract has been made
-name the parties.
-be signed by the party to be charged.
-state a quantity.
+the quantity need not be accurate, but the K will not be enforced beyond the quantity
stated in the writing.
=Price need not be included, and if it is included need not be accurate. If price is excluded, price
can be compared to the market at the time of the agreement.
=Although the parties must be identified, it doesn’t have to indicate who the buyer is and who
the seller is.

Section 2-201(1) “Mixed Contracts”:

Example- contract for labor and materials= court would look to whether the labor or the goods
formed the predominate portion of what was bargained for.

Section 2-201(2) “Written Confirmation”:

If both buyers are merchants, one need not sign a writing if he or she receives a signed
confirmation of the contract sent by the other and does not within 10 days after receiving the
confirmation give written notice of objection to its contents.
Only effect of 2-201(2) is to take away the defense of the statute from the party who fails to
answer. So, it is not evidence of a K, the sender of the writing must prove the K was made and
the contracts contents. Failure of the recipient to respond may help the sender in carrying the
burden.

2-201(3) “K’s enforceable without a signed writing”:

(a) Specially Manufactured Goods-goods that are specially manufactured for the buyer and
not suitable for sale to others in the ordinary course of the seller’s business. Such is
enforceable if the seller has begun manufacture or made commitments to procure the
goods under circumstances that indicate that the goods are for the buyer and before
receiving notice of the buyer’s repudiation.
(b) Defendant’s Admission- K is enforceable against a party who “admits in his pleading,
testimony or otherwise in court that a K for sale was made.” This also applies to
admission during pre-trial discovery.

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(c) Goods Delivered and Payment Made- K is enforceable if the goods have been received
and accepted or payment for the goods has been made and accepted. BUT the K is
enforceable only to the portion of the goods received or paid for. …….If you pay part
of the price, K is only enforceable to the “apportionable part of the goods” that you have
paid for. But, if the goods can’t be apportionted, I.e. $100 down payment for auto, then
the whole K is likely enforceable.

SALE OF LAND OR AN INTEREST IN LAND

A contract for the sale of land or of an interest in land is within the statute.
-Easement to enter upon the land is an interest in property, but a license to enter the land is not.

Some examples:
-A owes B $1,000. In consideration for B’s promise to extend the time of payment 3 months, A
promises orally to sell his land and apply the proceeds to pay the debt. A’s Promise is within the
statute.
-A and B orally promise C a share in a partnership. C orally promises to contribute his services to
the firm business. A and B own land as part of the partnership assets. The promise is whithin the
statute.
-A promises B(daughter) that he will die intestate so that she will inherit a share in a parcel of
land. Not within the statute, bcz the transfer is by operation of law and not by virtue of the K.
-A orally agrees to share profits from sale of Blackacre with B. Not within the statute.
-A promises to support B during B’s life in consideration of B’s promise to convey Blackacre to
A. A’s promise is within the statute.
-A orally promises B to allow B to put advertisements on A’s wall, in consideration for B’s
promise to pay A $100. Neither promise is within the Statute.

Contract for land or sale of goods?

-Contract for the sale of anything attached to realty that is capable of being severed from it
without material harm to the realty is a contract for the sale of goods. i.e. crops and
timber…..but, minerals and structure are only sales of goods if the seller is to sever the object
from the realty.

Overlapping Provisions
For the most part: if the agreement is taken out of the land section by a statutory or judge-made
exception it is also removed from other statutory writing requirements.

Part Performance
Two qualities of the acts in reliance on the oral promise to convey land are important in deciding
whether those acts are sufficient to take the K out of the statute: (1) the extent to which the acts

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are evidence of the oral agreement, and (2) the degree to which injustice may result if the party
who has relied on the oral promise is not able to compel conveyance of the land.

--When part performance of a contract to convey an interest in realty takes the K out of the
statute, the K is specifically enforceable and the claimant’s full expectancy interest is protected.
----but, part performance does not always have this effect. Claimant may be limited to
compensation for benefits conferred on the land owner, or to reimbursement for reliance that
conferred not benefit.

-------when the land has been conveyed, after conveyance the promise to pay for the land is
enforceable.
--Oral settlement of a boundary dispute is enforceable when the adjoining land owner have
marked the agreed boundary or relied on the agreement.

CONTRACTS NOT TO BE PERFORMED WIITHIN ONE YEAR

Statute applies when “there cannot be any possibility that the agreement will be performed, as
distinguished from prematurely discharged, within a year.”
2 points of reference- time of the making of the contract and the time when the performance is to
be completed. So, a contract for a 10-month period of employment, not to begin for 3 months is
within the statute.
----Example:
Agreement to hire 21-year-old athlete in perfect health for the rest of her life is not within the
statute because she may die within the year. But, an agreement to hire a 90-year-old man on his
death bed for 2 years is within the statute because it cannot possibly be performed within one
year. He will likely die, but that will simply prematurely discharge for impossibility.
Full performance Vs. Premature Discharge
-turns on whether the major purpose of the agreement can be satisfied within one year.

Examples:
-A(insurance company), orally promises to insure B’s house against fire for 5yrs., B promises to
pay the premium within the week. Not within the statute, bcz. If the house burns and A pays
within a year, the contract is fully performed.
-A and B(railway), agree that A will provide grading and ties and B will construct a switch and
maintain it as long as A needs it for shipping purposes. A plans to use it for shipping lumber from
land that has enough lumber to run the mill for 30 yrs. And use the switch for 15yrs. Not within
the statute.

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-A orally agrees to sell B five crops of potatoes to be grown on a farm in Minnesota, B promises
to pay price upon delivery. Within the statute, because it is impossible for five crops of potatoes
to mature within one year in Minnesota.

 THE ONE YEAR DOES NOT Begin to run until an agreement is made, ordinarily when
the offer is accepted.
Illustration:
A makes an oral promise to give a reward to anyone who finds his lost ring. B gives the ring
to A five years later. Not within the statute, because the year doesn’t start until acceptance.

The one year expires on midnight on the anniversary of the day on which the K is made.
Thusly, an oral contract to work for one year beginning the next day is not within the 1yr. statute
because the yr. will not start until midnight of the day of contracting and will expire on midnight
of the anniversary of the contracting.

Part Performance
When one party has completed their part of the K, the other parties promise can be enforced,
even if the completed performance took longer than one yr. However, if there has been only part
performance by the promisee, an oral promise cannot be performed within one year remains
unenforceable. This is true even though the promisee’s performance can or must be completed
within a year.

Answer For The Debt Of Another

Answer for the debt of another if he doesn’t pay…(suretyship).

Someone else must be the principal obligor: Exp. If a donor buys merchandise for a gift, the
donor’s promise to pay the seller is not within the statute.
Novation exception: the oral promise of someone other than the original debtor to pay the
debt, is enforceable if the creditor, as consideration for the promise, releases the original debtor
from further liability.
Relationship must be “explicit”. The creditor need not be a mind reader. Even though the
relationship between the 2 parties is that of debtor and surety, the surety cannot invoke protection
under the statute unless the creditor had reason to know of the relationship when the debt was
incurred.
__> The creditor will have reason to know that one party is acting as surety if the
creditor should know that the creditor’s performance will benefit only the debtor and not the
surety.

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Illustrations:
-S promises C orally to guarantee the performance of any duty that D may incur to C within the
ensuing year. D makes a contract with S, and without excuse doesn’t pay. S’s promise is within
the statute.
-S obtains goods from C on oral promise: “Charge them to D, and, if he does not pay for them, I
will.” S has no authority to charge the goods to D, and D makes no promise to pay. S’s promise is
not within the statute, because D is under no duty, and hence is not the principal obligor.
-S, for consideration , orally promises E to pay a debt of E’s son D to C, if D fails to pay. S’s
promise is not within the statue because it is made to E, not the creditor C.
-A promises to indemnify B if he will garuntee A’s obligation to C. A promise is not with the
statute, B’s is.

…A cautionary Purpose is especially important in requiring a written promise to act as surety. A

written repudiation or reliance on an oral promise to execute a writing is not likely to take the
surety’s promise out of the statute.
In consideration of a loan by C to D, S orally promises C to execute a written
instrument guaranteeing the debt. S’s promise is within the statute.

Main Purpose Exception

If the surety’s promise is made primarily for his or her own economic advantage, the promise is
not within the statute. Some examples:
-Promise of payment if a credit will forbear from seizing the debtor’s property in which the
surety has an interest inferior to the creditor’s interest.
-A guaranty by one who sells her accounts receivable that the buyer will be able to collect the
accounts.
-a salesman who guarantees his/her customer’s accounts.

More Specific Illustrations:

+D owes C $1,000. C is going to levy an attachment on D’s factory. S, who is a friend of D’s
desiring to prevent his friend’s financial ruin, orally promises C that if C will forbear to take
legal proceedings against D for 3 months, S will pay D’s debt if D fails to. S has no purpose to
benefit himself and C has no reason to suppose so. S’s promise is not enforceable.
+D owes C $1,000. C is about to levy an attachment on D’s factory. S, who is also a creditor of
D’s, fearing that the attachment will ruin D’s business and thereby destroy his own chance to
recover his claim, orally promises C that if C will forbear, S will pay D’s debts if D fails. S’s
promise is enforceable.

Furthermore, if the promise is made by a professional surety company, the premium paid for
surety insurance is not sufficient to bring the promise within the main purpose exception.

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NOVATION EXCEPTION
If the creditor accepts a promise in satisfaction and discharge of the previously existing
obligation of a third party, this does not involve a suretyship arrangement. So, if the new owner
of a business promises to pay the rent in exchange for the landlord agreeing to release the former
tenant form his remaining obligations, this is not within the statute as a promise to pay the debt
of another.

PROMISE OF EXECUTOR OR ADMINISTRATOR

The promise of an executor or administer of an estate to answer personally for the duty of the
decedent is within the statute.
Novation and main purpose exceptions are present in this class too.
----Novation exception applies when the executor promises to pay the decedent’s debt if the
creditor does not file his claim in the estate administration.
----Main purpose rule shows up in the executors promise to pay an estate debt if the creditor
does not object to the promisor’s appointment as executor.

ON CONSIDERATION OF MARRIAGE
An oral promise is unenforceable if all or part of the consideration is marriage or a promise to marry. Not
included however, are mutual promises of 2 persons to marry. (this doesn’t often apply, because many
states have abolished the cause of action for breach of a promise to marry.)

-If the promise made on consideration of marriage is a promise other than one to marry the promisee, the
statute applies.

Illustrations:
-In consideration of A’s promise to marry B, B orally promises to marry A and to settle Blackacre upon A.
B’s promise is within the statute.
-B offers to marry A. to induce A to accept the offer, B orally promises to settle property upon A. A
accepts the offer. Both promises to marry and B’s promise to make a settlement are within the statute.
-In consideration of A’s marrying B, C orally promises A a settlement. C’s promise is within the statute.

Distinguish between cases where marriage is a condition on which the promise is to be performed but not
he consideration for the promise.
For instance, if A and B exchange promises that each will give A’s daughter $1000 when she marries B’s
son, the consideration is the mutual promises of A and B, not the marriage. Thus the promises are not
within the statute.

PAROL EVIDENCE RULE OUTLINE

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The parol evidence rule defines the limit of the contract to be construed. It is a substantative rule,
it is not a rule of evidence, and oral testimony, even if admitted will not control the written
contract unless it is admitted without objection.

IT IS A MATTER OF SUBSTANCE, NOT FORM.

General Rule: A writing generally prevails over any previous oral or written agreements.
The rule is designed to carry out the apparent intention of the parties and to facilitate judicial
interpretation by having a single clean source of proof (the writing) on the terms of the bargain.

=Where the parties to K express their agreement in a writing with the intent that it embody the
full and final expression of their bargain (integration), any other expressions—written or oral—
made prior to the writing, as well as any oral expressions contemporaneous with the writing, are
inadmissible to vary the terms of the writing.

3 Part Test For Extrinsic Writings:

(1)- the agreement must be a collateral one (supplementary or complementary) (grows out of k)
(2)- it must not contradict express or implied terms of the writing.
(3)-it must not be one that the parties would not ordinarily be expected to embody in a writing.
(individual responsibility, Hypo K Analysis; putting it in the writing is the low cost avoidance of
the case; lower cost provider approach).

INTEGRATION
The writing must be an integration of all agreements between the parties.
(a)- Intended as a Final Expression- the more complete the agreement appears to be in its face, e
more likely it is that it was intended as an integration.
(b)-Complete Integration vs. Partial Integration- A contract/contract term can never be
contradicted by parol evidence. And a complete integration can neither be contradicted nor
supplemented by parol evidence. However, a partial integration can be supplemented by parol
evidence (consistent additional terms).
The question becomes how do you determine whether it is a complete or partial integration?
-If the agreement contains a merger clause reciting the agreement is complete on its face, it
strengthens the presumption that all negotiations were merged in the written document.
-If the writing is unintegrated (no terms are fully and clearly expressed) then parol evidence may
be admitted to supplement or explain the writing, but it may not contradict the express terms of
the writing.

WILLISTON’S TEST-

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Would parties situated as were these parties to this K naturally and normally include the extrinsic
matter in the writing? If such reasonable parties would have included the matter in writing,
evidence of the extrinsic matter will not be admitted. However, if the judge determines that
reasonable parties would not have normally included that in their agreement, then the evidence
may be introduced.

4 CORNERS TEST-
If the writing interpreted as a whole in accordance with the plain meaning of the language used,
appeared to be a full, final, clear and unambiguous expression of the agreement, it is deemed
integrated.

§ 209. Integrated Agreements

(1)_ An integrated agreement is a writing or writings constituting a final expression of one or more terms of an
agreement.
(2)_ Whether there is an integrated agreement is to be determined by the court as a question preliminary to
determination of a question of interpretation or to application of the parol evidence rule.
(3)_ Where the parties reduce an agreement to a writing which in view of its completeness and specificity
reasonably appears to be a complete agreement, it is taken to be an integrated agreement unless it is established
by other evidence that the writing did not constitute a final expression.

§ 215. Contradiction of Integrated Terms

Except as stated in the preceding Section, where there is a binding agreement, either completely or partially
integrated, evidence of prior or contemporaneous agreements or negotiations is not admissible in evidence to
contradict a term of the writing.

§ 210. Completely and Partially Integrated Agreements

(1)_ A completely integrated agreement is an integrated agreement adopted by the parties as a complete and
exclusive statement of the terms of the agreement.
(2)_ A partially integrated agreement is an integrated agreement other than a completely integrated agreement.
(3)_Whether an agreement is completely or partially integrated is to be determined by the court as a question
preliminary to determination of a question of interpretation or to application of the parol evidence rule.
Complete Integration- Document is intended by the parties to include all details of the
agreement. The writing is complete as to (1) intent and is (2) complete.
-Prior evidence may not be used to add to the terms and especially not contradict the terms.
-Factors in determining a complete integration:
(a)- length of agreement
(b)- detail of provisions
(c)- formality of setting
(d)- elaborate agreements signed by both parties
(e)- confirmations sent at the close of the deal

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General rule: The more complete, detailed and complex a formal writing is, the more likely that
it will be final and complete – unless, it is evident from the K that it was not the intent to be final.

THE FOCUS IS ON THE INTENTION OF THE PARTIES, not the integration practices of
reasonable persons acting reasonably and naturally.

Partial Integration- Writing is not intended to include all details of the agreement. Writing is final
as to (1) intent, but not (2) complete. See § 214, § 216. Evidence may be admitted so long as it
doesn’t contradict the writing.
Factors in determining Partial Integration-
(a)- Informal memorandum
(b)- Exploratory Letters and Telegrams
(c)- Documents that embody one-sided obligation (deeds/promissory notes).

§ 214. Evidence of Prior of Contemporaneous Agreements and Negotiations

Agreements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in
evidence to establish
(a)- that the writing is or is not an integrated agreement;
(b)- that the integrated agreement, if any, is completely or partially integrated;
(c)- the meaning of the writing, whether or not integrated;
(d)- illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause;
(e)- ground for granting or denying rescission, reformation, reformation, specific performance, or other remedy.

§ 216. Consistent Additional Terms

(1)- Evidence of a consistent additional term is admissible to supplement an integrated agreement unless the court
finds that the agreement was completely integrated.
(2)- An agreement is not completely integrated if the writing omits a consistent additional agreed term which is
(a)-agreed to for separate consideration, or
(b)- such a term as in the circumstances might naturally be omitted from the writing.

EXCEPTIONS TO THE PAROL EVIDENCE RULE

i. To Explain or Clarify Ambiguities & Vagueness, conflicts, or inconsistencies. § 216.

ii. To attack the K in its entirety: illegality, duress, misrepresentation, no true consideration
(lack of consideration), mistake, undue influence, incapacity, & impossibility of
performance. § 214(d).
iii. To show a condition precedent. § 217.
iv. To show a subsequent modification of the original K. § 214(a). – clear 2 nd oral contract
supported by consideration. A §275 realm: Mutual discharge and substitution. BUT hard to

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prove that it’s not a “mere (scaling up or scaling down) modification” that would violate the
pre-existing duty rule.

A. Attacking the K in Its entirety-An attack on the validity of the contract. The party
acknowledges that the writing reflects an agreement, but asserts that the agreement never came
into being because of a formation defect (fraud, duress, mistake, illegality), conditions precedent
(where the K would not become effective until a condition occurred).
B. Interpretation (§ 216)- If there is uncertainty or ambiguity in the agreement’s terms or a
dispute as to the meaning of the terms. It can explain the terms, but not alter the terms.
….. “Evidence of a consistent additional term is admissible to supplement an integrated
agreement unless the court finds that agreement was completely integrated.”

C. Evidence of true consideration

D. Reformation- where the party alleges facts entitling him to reformation of the agreement, the
rule is inapplicable because the P is asserting that the terms do not in fact constitute an
agreement. He must show that there was an antecedent valid agreement that is incorrectly
reflected in the writing (mistake). The evidence must be clear and convincing. There was a
subsequent modification. There is a clear oral contract supported by consideration or a
substitution of the first.

A. Attacking the K in Its Entirety (Rest 2d 214 (d))

1. PER does not bar evidence if it goes to show illegality, fraud, duress, mistake, lack of C or
other voidability. (Show no valid K exists)
2. Specific Disclaimers and Merger Clauses are okay as long as they are specific and outside
evidence won’t be allowed in to refute them.
a. Merger clause is a recital that the writing contains the entire agreement of the parties
1) courts typically accept clauses as showing intention that agreement be completely integrated.
(209/210)
2) is a tendency to deny such clauses conclusive effect
b. Jordan v. Doonan Truck– P buys truck after dealer says it’ll run okay for a few months. P
signs a contract for purchase of the truck that states “As is,” Truck is junk and P sues for breach
of K, relying on sellers oral guarantees. Held for D, If P would have wanted a 3 or 4 month
warranty on the vehicle he could have bargained for it. 2-202(b) and §209—Williston view P: 2-
316(1) intent of both oral/writing as consistent; how do you argue partial integration—anytime
you have language like in 2-316 (unreasonable) then you can argue that it would be unreasonable
not to allow oral evidence
3. This exception attacks the K in its entirety (i.e. attempts to make it void, or at least voidable)
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B. Explain or Clarify Ambiguities (Rest 216)

1. Courts will allow PER to explain or clarify ambiguities, vagueness or conflicts in the writing.
Rest. 2d 216 CANNOT ALTER TERMS
2. Argue Y and N to negation of “best evidence” by this exception.
a. Y: Allows agreements not included in the terms.
b. N: Doesn’t add to, alter, or vary; merely explains rules of K not changes any terms.
3. Reformation
a. Mistake – Goode v. Riley – Allow parol evidence in to clarify a clerical error on the face of
an executed deed that awarded too much land to D after sale. Doesn’t contradict essential terms
of K. (214(d)(e)) D says final writing (209/210)
Notes: Does S get windfall. Maybe b/c he gets to convey less land. But if actual meeting of minds was to convey
less land, then it’s a mutual mistake; purpose is to seek the true intent of the parties; was the court wrong in Mitchell
then? can argue yes and no; if fraud or duress then can rescind instead of reform
b. In case of mistake, at the request of a party, a court may reform the writing to express the
agreement actually reached
c. For P to obtain reformation, he must show
1) there was an antecedent valid agreement that is
2) incorrectly reflected in the writing, or
3) if that mistake was induced by the other party’s fraudulent misrepresentation
4. Old test was to show “plain meaning”
5. Collateral Agreement Rule
a. Even the finding of a completely integrated agreement doesn’t preclude a
showing of a collateral agreement
b. Can show an entirely separate and distinct agreement b/t the same parties
c. Is enough if the collateral agreement is one that in the circumstances might
naturally be omitted from the writing
1) Mitchill v. Lath—P buys a house from D w/ the terms stipulated orally that D is to remove an
ice house from his neighboring property if P is to buy the house. D agrees but never puts the
terms in writing and never removes the house and P sues for specific performance. Held: for D.
Court finds that the writing was the complete agreement and any term such as the one requested
by P would alter the terms of the K therefore inadmissible. P says oral agreement should be
integrated into written agreement (§209); D says violates PER b/c will add to, alter, or vary terms
of written K (213(1)); How do you argue as equity point to argue for oral argument? (P relied on
the promise/estoppel)
d. §216(2) is the collateral agreement rule even though it doesn’t state the term
6. Three requirements that must be present before an oral agreement will be
allowed.
a. Agreement must be a collateral one.
b. 2nd agreement must not contradict express or implied provision of the written K.
c. Must be one where parties would not ordinarily be expected to embody the wanted
terms in the K writing (Hypothetical K analysis).
1) If P wanted icehouse removed should have included in writing; low
transactions costs
C. To Prove/Show a Condition Precedent (Rest 217)

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1. If parties agree that a K will not come into existence until a particular event occurs, evidence
of that condition precedent will be admissible to establish said condition.
a. Ex. Football contracts for employment on condition of health precedent
b. Ex. Obtaining financing before sale is final on a home
2. Courts will sometimes imply condition precedent
3. Luther Williams, Jr., Inc. v. Johnson—P sought to recover $670 in liquidated damages from
D for breach. D claims that K was void b/c of unfulfilled condition precedent. Issue was
whether the admission of testimony concerning the oral condition precedent violated the PER.
Two questions: 1) Can evidence be admitted to show that the parties did not intend the
writing to be a complete statement of their transaction? Ans. To determine intent
of parties, look at the written instrument and the circumstances surrounding its execution.
2) Can it be said that the testimony regarding the condition precedent doesn’t contradict the
writing when the K states there are no agreements other than those contained in the writing? Ans.
The oral agreement is operative if there’s nothing in the writing inconsistent therewith. It’s clear
from the illustration that an exclusion only if the parol condition contradicts some other specific
term of the written agreement. In the instant case, no provision was made regarding
financing; therefore, the parol condition would not contradict the terms of the writing.
COLLATERAL AGREEMENTS- Event the finding of a completely integrated agreement
doesn’t preclude a showing of a collateral agreement (an entirely separate and distinct agreement
between the same parties). In certain cases, courts have suggested that extrinsic evidence is
admissible to show agreements between the parties that are collateral to the transaction otherwise
evidence by an apparent integrated writing. If an agreement is collateral it obviously must be an
agreement that parties situated as the parties to this K would naturally and normally not include
in the apparent integrated writing.

3 Requirements before oral evidence will be allowed:

(1)= agreement must be collateral

(2)= agreement must not contradict express or implied provisions of the written K.
(3)= must be one where the parties would not normally be expected to embody the wanted term
in the writing.

D. Subsequent Modifications (§275/§89/§214(e)/§216)

1. Courts will invariably allow into evidence of a new K when old one was mutually discharged.
2. Generally talking about a 2nd oral agreement achieved via mutual discharge and re-K.
3. PER only affects agreements made before or contemporaneous w/ the execution of the K.
4. Could argue that it alters, adds to, or varies K, but is clear 2d K supported by consideration
5. Ex. Pro football K1 600mill and management tears up writing at player’s request; new K2 for
800mill; have a substitution (got to get over pre-existing duty problem and SOF
hurdles)
6. Dennison v. Harden—P’s entered into K with D to purchase for $12,000 a parcel of land that
included fruit trees, tools, tractors, trucks, fertilizers, etc. P claimed that an oral
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agreement was given that there were 276 peach trees and that there was breach of warranty
b/c the trees were worthless. Trial: PER applicable b/c it varied and added to terms of the
written K. P said evidence clarified the subject matter. Supreme Court: No ambiguity in
fruit trees; only ambiguous word is etc. (214(c)); P only trying to question the adequacy
of the fruit trees
Notes: Written term called for fruit trees, so could argue breach (failure for performance); breach of warranty;
PER is not the only way to get relief the party wants

Parol Evidence and the UCC § 2-202:

“Terms with respect to which the confirmatory memoranda of the parties agree or which are
otherwise set forth in a writing intended by the parties as a final expression of their agreement
with respect to such terms as are included therein may not be contradicted by evidence of any
prior agreement or ofa contemporaneous oral agreement but may be explained or supplemented
(a)= by course of dealing or usage of trade or by course of performance
(b)= by evidence of consistent additional terms unless the court finds the writing to have been
intended also as a complete and exclusive statement of the terms of the agreement.

Course of dealing- past conduct in previous K’s.

Usage of trade- any 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 w/ respect to the transaction
in general.
Course of performance- the way in which the parties have conducted themselves in effectuating
the contract at hand.

All the above may be used to interpret even if K is a complete integration.

Exception: For these to be excluded, they must be “carefully negated” in the writing.

*WILLISTON V. CORBIN*
A. Williston view (Rest. 209-210/ 2-202 also 2-316(1))
1. Williston holds that a written K is supreme to outside writings or other evidence
K is final and complete—ORIGINAL WRITING SUPREME UNLESS
Writing is supreme unless the written K left the intention unclear as to whether the parties
intended for the K to be the final agreement.
a. clear mutual discharge of 1st agreement
b. parol might have been agreed upon but was left out
c. new consideration for the parol evidence (2nd promise)

B. Corbin View (Rest. 214, 216)

1. More liberal: Loose and admissible theory—ALLOW PAROL UNLESS clear evidence to the
contrary, or unless the parties claim that original writing is supreme.

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2. Account should always be taken of all circumstances, including evidence of prior negotiations,
since the completeness and exclusivity of the writing can’t be determined except in light of those
circumstances; the K is “final but not complete”.
3. Admit oral unless a writing showed clear intent to the contrary.
4. Trend favors Corbin’s view
C. Stone asks “Has Corbin ever met a 2d agreement that he didn’t like?”

Corbin “original agreement cannot possibly cover all points, seldom see a total integration.”
Williston: status quo, common law view.

STONE 2011 Lecture on Williston v. Corbin:

Williston= original writing supreme unless….Intent?
Vs.
Corbin= Allow Parol Unless……Intent.

Williston= Total Integration= (1) Final and (2) Complete= 209 & 210.
Corbin= Partial Integration= (1) Final but not complete= 214-216.

Status Quo: Parol Evidence is not available to add to, alter, or vary a writing.
Exceptions: Clarify ambiguities or explain the writing.
Attack the K in its entirety
Show a condition precedent
Show a modification of the K

Williston- Writing is supreme, unless a contrary intention appears that the parol is to be part of
the K. Intent is most likely to be found in the 1st writing.
Corbin- Couldn’t have included everything in the writing. Allow parol unless the parties clearly
say that the 1st writing is supreme. Intent is most likely to be found in the 1st writing and the
parol.

The more detailed, lengthy, and formal a writing is, the more likely it will be found to be
integrated.

UCC 2-202: Seems to adopt the Corbin View. More formal and detailed, the more likely it is to
be integrated: (1) final and (2) complete…

Jordan Case p. 691- 2 alleged warranties- 1 oral 1 written. The written warranty has a disclaimer
that excludes all oral warranties. (a 2-316 realm for disclaiming warranties)

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Held: Parol Evidence of the oral warranty is not admissible (PLUS 1 FOR WILLISTON)…it
would be inconsistent with the prior written agreement (it would contradict the written express
terms of the K). 2-202(b).

Merger Clauses: Says that this merges all previous agreements and negotiations of the parties,
the writing is final and complete.
If it is detailed it is likely to be held valid, however, if it is general and vague, it possibly will
not be.
If nothing else, merger clauses strengthen the presumption that the writing is final & complete.

Finally, the Fruit Tree Case p. 705-----

Ambiguity as to meaning of fruit trees.
Good Fruit Trees vs. Scrub Fruit Trees….
Split in the courts- some may admit parol as an explanation of what the parties meant by fruit
trees, some would exclude, because fruit tree means fruit tree…should have defined fruit tree in
the black and white K terms.
-If you don’t put it in the K, What risks do you take? =You may get subpar fruit trees, they are
fruit trees, just not good fruit trees.

ECONOMIC ANALYSIS/COASEAN K’ing OUTLINE

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SIMPLE RULES FOR A COMPLEX WORLD-

“It is said, the simple rules of property, contract and tort from a horse-and-buggy age must yield
to a new more complex legal order….This approach gets it exactly backward. The more complex
the world, the simpler the rules should be.”

-Complex rules confer a large measure of discretion upon those who enforce and interpret the
law/s,
This increases the level of uncertainty and error when the rule is honesty applied
and the level of abuse when it is dishonestly or incompetently applied.

 Error, uncertainty and abuse reduce the welfare of the people who must learn to
adapt to the uncertainty of the complex rules
 It also increases the likelihood that they will struggle to beat the system by finding
gaps and glitches in the law.
► Any legal rule of exchange must serve in a broad range of contexts in which very little is
known about the private habits, tastes, and motivations of our trading partners.
► Like good manners, the classical rules of the common law have proved so durable precisely
because they are well adapted for a world of strangers.

Legal simplicity lies at the foundation of organized markets. EXAMPLE: contracts are enforced
in accordance with their terms…this facilitates most sophisticated patterns of trade.

 Some law, i.e., products liability is so complex, that on identical evidence, one jury could
award a P nothing, while another jury might award punitive damages. Litigation that
indeterminate can offer no guidance for sound product design.

 Complex rules breed uncertainty, which breeds litigation, which in turn diverts scarce
resources from productive use. IT’S THAT SIMPLE.

DO WE REALLY WANT 40 MPH MAYBE?

If we don’t know the rules, then how do we conform, how do we plan?
40 MPH Maybe is inefficient.
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VAGUE LAWS LEAD TO AN EXPANSION OF ARBITRARY POWER

Vague laws introduce arbitrary power, which is the basis of a corrupt government deciding who
the winners and losers will be.

Law 1 “You must wear a tie to visit a friend”- simple, everyone knows what that means.
Law 2 “You must wear a beautiful tie to visit a friend.”- subjective, a new government
commission will decide when ties are beautiful enough. Opens the door for corruption.

----- Vague laws make it impossible for the private sector to operate rationally.
….The U.S. is losing what used to be a huge advantage (clear laws that made people want to
do business here).

COASE THEROEM

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“If the parties to any actual or potential social arrangement could enter into marketplace
transactions with no transactional impediments (costs) of any kind, they would always agree to
rearrange their respective obligations in a manner that would lead to a net increase in the
productive value of their arrangement if such an increase were possible…This would hold true
irrespective of any rule of liability in effect at the time.”

DEBOW’S COASE SIMPLIFICATION FROM A HEDGEHOG’S LEGAL DICTIONARY:

If transactions costs are low, the law’s assignment of a property (or other type of legal) “right” to
one claimant instead of the other will not ultimately determine whether the activity in question is
continued or not.

PRINCIPLES OF ECONOMICS by MANKIW

How People Make Decesions
(1) People Face Tradeoffs. TO get one thing, you have to give up something else. Making
decisions requires trading off one goal against another.
(2) The Cost of Something is What You Give Up to Get It. Decision makers have to consider
both the obvious and implicit costs of their actions.
(3) Rational People Think at the Margin. A rational decision-maker takes action if and only if
the marginal benefit of the action exceeds the marginal cost.
(4) People Respond to Incentives. Behavior changes when costs or benefits change.

How People Interact

(5) Trade Can Make Everyone Better Off. Trade allows each person to specialize in the
activities he or she does best. By trading with others, people can buy a greater variety of
goods or services.
(6) Markets Are Usually a Good Way to Organize Economic Activity. Households and firms
that interact in market economies act as if they are guided by an “invisible hand” that leads
the market to allocate resources efficiently. The opposite of this is economic activity that is
organized by a central planner with the government.
(7) Government Can Sometimes Improve Market Outcomes. When a market fails to allocate
resources efficiently, the government can change the outcome through public policy.
Examples are regulations against monopolies and pollution.

How The Economy Works as a Whole

(8) A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services.
Countries whose workers produce a large quantity of goods and services per unit of time
enjoy a high standard of living. Similarly, as a nation’s productivity grows, so does its
average income.

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(9) Prices Rise When the Government Prints Too Much Money. When a government creates
large quantities of the nation’s money, the value of the money falls. As a result, prices
increase, requiring more of the same money to buy goods and services.
(10) Society Faces a Short-Run Tradeoff Between Inflation and Unemployment.
Reducing inflation often causes a temporary rise in unemployment. This tradeoff is crucial
for understanding the short-run effects of changes in taxes, government spending and
monetary policy.

THE VIRTUE OF GREED

“Enlightened Self-Interest”

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