CONTRACTS II OUTLINE

Spring 2006 – Professor Stone

Amber M. Whillock
INTENT TO CONTRACT
I What Intent is Necessary
A) Intent to Contract: A meeting of the minds that evolves into offer and acceptance measured by
express intentions of the parties, not hidden subjective intentions.

Rest. § 17
The formation of a contract requires a bargain in which there is a manifestation of mutual assent
to the exchange and a consideration. (Exceptions §§ 82-94)

B) Subjective v. Objective Intent

1) Subjective: What a party means in his own mind regardless of conduct (secret or inward
intent)
2) Objective: What a reasonable person or dispassionate third party would regard as intent
(outward intent)

Courts generally look at the objective intent of the parties. A party’s actual mental assent is not
necessary for the formation of a contract. If one party’s actions, judged by a reasonable prudent
dispassionate third party, manifested to the other party an intent to contract, then the real but
unexpressed state of the first party’s mind is irrelevant.

Look to the external or objective appearance of the parties’ intentions as manifested by their
actions.
1) Parties’ mental assent not necessary to make a contract.
2) If one party’s actions, judged by a standard of reasonableness, manifested to the other party
an intent to agree, the real but unexpressed state of the first party’s mind is irrelevant.
3) One may show lack of intent to engage in the actions by which assent was apparently
manifested, but if one intended to engage in the actions there is no requirement that the
actions were done with the intention of assenting to an agreement.
4) Circumstances, rather than words, may manifest intent.

Rest. § 19
(2) The conduct of a party is not effective as a manifestation of his assent unless he intends to
engage in the conduct and knows or has reason to know that the other party may infer from his
conduct that he assents.
(3) The conduct of a party may manifest assent even though he does not in fact assent.

No requirement that the parties intend or understand the legal consequences of their actions, but
If one party intends not to be bound and the other party actually knows of this intention, then the
parties are not legally bound.

Rest. § 21
Neither real nor apparent intention that a promise be legally binding is essential to the formation
of a contract, but a manifestation of intention that the promise shall not affect legal relations may
prevent the formation of a contract.

Illustration:
A writes a check to B for $300 in return for an old silver watch worth about $15. Both A and B
understand that the transaction is just frolic and banter, but each believes that he would be legally
 bound if the other dishonestly so asserted. NO CONTRACT because there is a manifestation
that the promise is not binding under § 21. Whether they believe it to be binding is irrelevant.

C) When one party is joking: Most often the law will enforce the contract based on the theory of
objective assent. Even though one party was joking, if the other party reasonably though that the
other party was serious then a contract is formed.

D) Hypo:
A walks into a restaurant that he frequents and always orders a ham and swiss. A raises his hand
to the waitress. Waitress brings A a ham and swiss. Did A contract to buy a ham and swiss? Did
A have the intent to make a contract? Argue yes and argue no. Argue subjective intent and
objective intent theories.

E) CASES
1) Homan v. Earle: Man is in a relationship with a woman and exhibits all behavior that seems to
say that he intends to marry her. She relies on this then sues when he doesn’t marry her.
Court says that there was a contract. She could have seen his acts as intent to contract him.
 Shows that actions can be used to determine intent.
 Look at conduct or acts, not only explicit words.
 TOTALITY of conduct, not just spoken words
 You cannot say one thing and do another and expect the words to negate the conduct.

2) Embry Case: Employee relied on the ambiguous words of his employer that his contract was
renewed. The court found that a reasonable prudent person would also have found that the
contract was renewed.
 Court used the objective intent approach. It doesn’t mater that the subjective intent of the
employer was not to rehire the employee because a reasonable prudent person would
think that the contract was renewed.
 Lesson is to be clear in what you are saying. Don’t give someone the opportunity to
make what you said into a contract.

3) UPS Case (Tolmie): UPS employee has a position where he can only be fired for good
cause. He accepts an advancement to a higher position after his boss assures him that the
right would follow him. The employee is then fired. The court said that a reasonable prudent
person would NOT have believed that a new contract was formed because the bosses words
were ambiguous.

F) HYPO
X and Y are drinking together and X says he will sell his farm for $50,000. Y says sure. X gets his
wife to get some paper an Y gives $5000 deposit. X says “Wait a minute, I was only kidding. I
can’t sell you my farm for that.” Y sues for performance of the contract. What result? Argue yes
and argue no.
 Yes: (Objective Theory) A reasonable prudent person would see intent in X’s conduct and his
wife’s conduct. The conduct would trump any subjective intent on the part of X.
 No: (Subjective Theory) X was only kidding. His drinking got the best of him and there was
no “meeting of the minds” to bargain. The lower the amount that X offers to sell for the more
likely the court will find NO contract because no reasonable prudent person would expect
someone to sell farm for really small amount.
 General Test for Incapacity: If the party is incapable of comprehending the nature of the
business at hand, then the contract is voidable at the option of the incapacitated party.
o Drinking, drugs, insanity (however, courts reluctant to allow avoidance if self-induced)
o Minors

II Mutual Ambiguity (Rest. §20)

A) Mutual mistake as to material terms of the contract can prevent the formation of a contract.
  Only applies when parties have different understandings of their expression of the
agreement.
 The parties misunderstanding must be reasonable.

Rest. § 20
(1) There is no manifestation of mutual assent to an exchange if the parties attach materially
different meanings to their manifestations and
(a) neither party knows or has reason to know the meaning attached by the other OR
(b) each party knows or each party has reason to know the meaning attached by
the other.
(2) The manifestations of the parties are operative in according with the meaning attached to
them by one of the parties if
(a) that party does not know of any different meaning attached by the other, and the other
knows the meaning attached by the first party OR
(b) that party has no reason to know of any different meaning attached by the other, and
the other has reason to know the meaning attached by the first party.

B) CASES
1) Peerless Case: There was a latent ambiguity. Each party was talking about a different ship
called Peerless. No contract created because there was no meeting of the minds.
2) Konic v. Spokane: Employee thinks the surge protector costs $56.20 and the company he’s
ordering from means $5620. Court follows the Peerless case and says no meeting of the
minds so no contract.

C) Economic View:
Peerless and Konic are the opposite of the economic view. Each party should look out for his
own self-interest and make sure that he is precise. The party with the most to lose should bear
the burden of being precise. The buyer should internalize the cost because he has the most to
lose. He’ll have to pay $5620 for something he thought was $56.20. It’s his own fault because
he should have been clear.

III Interpretation (Rest. §§201-203)

A) The court may interpret terms if they are not clear. Court generally tries to save the contract
instead of just saying no meeting of the minds therefore no contract.

B) CASES
1) Frigalmente Chicken Case: The two parties each understand the word “chicken” to mean two
different things. Plaintiff thought chicken meant “young chicken” and defendant though it
meant “any old chicken”. The court doesn’t go with mutual ambiguity so no contract like in
Konic and Peerless. Court follows the economic approach – Plaintiff has the burden of proof
to prove that the parties mean “young chicken” because he has the most incentive to be
clear. Instead of saying no contract, court uses four part test to clear up ambiguity and the
burden is on the party with the most to lose (the buyer). Buyer claims that trade usage is that
chicken means “young chicken”. The seller is new to the industry so he was not held to the
trade usage. Buyer doesn’t prove that the parties meant “young chicken” so the seller wins.
Chicken means any chicken.

2) U.S. Naval Case: U.S. Naval Institute published book. Granted defendant a license to
publish and the contract stipulated that publication date was no sooner than October 1985.
Defendant relied on common industry practice and began filling orders and shipping books
before October 1985. U.S. Naval says they didn’t know about the trade usage. Court says
trade usage prevails. If you are in the industry then you should know the customs of the
trade. In business the common industry custom will usually prevail. If you don’t know the
industry then get out or learn it. (opposite trade usage view than Frigalmente chicken case)
C) FOUR PART TEST
When a dispute as to the meaning of terms look to:
(1) Terms of the contract
 Expressed clear language of the parties in the contract govern if they are in the
contract.
(2) General Meaning
 If not expressed in the contract, the generally accepted meaning using an objective
approach will be used.
 What would an ordinary reasonable prudent person believe that the term meant?
(3) Special Meaning
 If not expressed in the contract and one party would like to use a meaning other than
the general meaning the party must prove with evidence that the parties intended for
the special meaning to be used. If the party does not prove that they intended for the
special meaning to be used then the general meaning will govern.
(4) Industry Custom or Trade Usage

Two Lines of Cases Dealing with Interpreting Terms:

(1) If mutual ambiguity then no contract because no meeting of the minds. (Throw up your
hands and go home = Peerless and Konic)
(2) Lower cost provider clears up the ambiguity or suffers the consequences. This creates
incentives to be precise in the future.

D) Restatement § 201 – Whose Meaning Prevails

Rest. § 201
(1) Where the parties have attached the same meaning to a promise or agreement or a term
thereof, it is interpreted
in accordance with that meaning.
(2) Where the parties have attached different meanings to a promise or agreement or a term
thereof, it is interpreted in
accordance with the meaning attached by one of the them IF at the time the agreement was
made
(a) that party did not know of any different meaning attached by the other AND the other
knew of the meaning attached by the first party OR
(b) that party had no reason to know of any different meaning attached by the other, and
the other had reason to know the meaning attached by the first party
(3) Except as stated in this section, neither is party is bound by the meaning attached by the
other, even though the result may be a failure of mutual assent.

E) Restatement § 202 – Rules in Aid of Interpretation

(On exam do not assume. Cite the law and argue which should be the proper interpretation.)

§202 RULES:
1) Words and conduct should be interpreted in light of the circumstances.
2) Writing should be interpreted as a whole
3) Unless a different meaning is attached:
 General meaning prevails
 Technical terms are given their technical meaning when used in a transaction in their
technical field
4) Any course of performance accepted with objection
5) Any course of performance, course of dealing, or usage of trade

Rest. § 202
(1) Words and other conduct are interpreted in the light of all the circumstances, and if
the principal purpose of the parties is ascertainable it is given great weight.
 (2) A writing is interpreted as a whole, and all writings that are part of the same transaction are
interpreted together.
(3) Unless a different intention is manifested,
(a) where language has a generally prevailing meaning, it is interpreted in accordance
with that meaning;
(b) technical terms and words of art are given their technical meaning when used in a
transaction within their technical field.
(4) Where an agreement involves repeated occasions for performance by either party with
knowledge of the nature of the performance and opportunity for objection to it by the other, any
course of performance accepted or acquiesced in without objection is given great weight in the
interpretation of the agreement.
(5) Wherever reasonable, the manifestations of intention of the parties to a promise or agreement
are interpreted as consistent with each other and with any relevant course of performance,
course of dealing, or usage of trade.

F) Restatement § 203 – Standards of Preference in Interpretation

Rest. § 203
In the interpretation of a promise or agreement or a term thereof, the following standards of
preference are generally applicable:
(a) an interpretation which gives a reasonable, lawful, and effective meaning to all the
terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of
no effect.
(b) express terms are given greater weight than course of performance, course of
dealing, and usage of trade, and course of dealing is given greater weight than usage of
trade.
(c) specific terms and exact terms are given greater weight than general language;
(d) separately negotiated or added terms are given greater weight than standardized
terms or other terms not separately negotiated.

IV Gap Fillers (Restatement § 204)

A) When all elements of a contract are met (especially intent) except a provision here and there, the
court can fill in the missing parts. As long as the bargain is sufficiently defined, a term which is
reasonable may be supplied by the court. When too many terms are omitted, the probability is
low that a contract was intended.

B) Courts will generally fill in the gaps with respect to:

1) When
2) Warranties, possibility of recission
3) Payment method, Delivery

C) More precision needed under the Restatement than under the UCC. General rule: Terms must
be definite/certain enough to ascertain the rights and duties of the parties or there is no contract.

D) Some courts may fill in so many gaps that they effectively rewrite the contract. Whose contract is
it anyway?

Rest. § 204 Gap Fillers

When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to
a term which is essential to a determination of their rights and duties, a term which is reasonable
in the circumstances is supplied by the court.

Rest. § 33 Certainty
(1) Even though a manifestation of intention is intended to be understood as an offer, it cannot be
accepted so as to form a contract unless the terms of the contract are reasonably certain.
(2) The terms of a contract are reasonably certain if they provide a basis for determining the
existence of a breach AND for giving an appropriate remedy.
 (3) The fact that one or more terms of a proposed bargain are left open or uncertain may show
that a manifestation of intention is not intended to be understood as an offer or as an acceptance.

UCC § 2-305 Open Price Term

(1) The parties if they so intend can conclude a contract for sale even though the price is not
settled. In such a case the price is a reasonable price at the time for delivery if
(a) nothing is said as to price; or
(b) the price is left to be agreed by the parties and they fail to agree; or
(c) the price is to be fixed in terms of some agreed market or other standard as set or
recorded by a third person or agency and it is not set or recorded.
(2) A price to be fixed by the seller or by the buyer means a price for him to fix in good faith.
(3) When a price left to be fixed otherwise than by agreement of the parties fails to be fixed
through fault of one party, the other may at his option treat the contract as cancelled, or himself fix
a reasonable price.
(4) Where, however, the parties intend not to be bound unless the price be fixed or agreed and it
is not fixed or agreed there is no contract. In such a case the buyer must return any goods
already received or if unable to do so must pay their reasonable value at the time of delivery and
the seller must return any portion of the price paid on account.

UCC 2-204(3) Contract Formation

Even though one or more terms are left open, a contract for sale of goods does not fail for
indefiniteness if the parties have intended to make a contract, and there is a reasonably certain
basis for giving an appropriate remedy.

E) CASES
1) Action Ads: (No Gap Filling) Employee had a contract with his employer that said that after
60 days the employee would be covered by an insurance policy. After the 60 days had
passed employee was injured on the job, but there was no insurance coverage.
 The court refuses to supply the terms because there are just too many to supply. The
contract was too indefinite and ambiguous to ascertain the rights and duties of the
parties.
 Action Ads RULE: For the court to fill in gaps, the terms of the contract must be
definite/certain enough to ascertain the rights and duties of the parties.
 UCC §2-204(3): When dealing with goods, indefinite terms are allowed as long there is
intent to contract. The court can fill in minor terms. There must be a key for the court to
hang its hat on.

2) Oglebay v. Norton: (Court Supplies Gap Fillers) Contract called for the price to be set by a
trade journal. The journal stops publication. The court gap-fills be supplying a “reasonable
price”. Price can generally be determined by using market price, experts, etc.

Rest. § 202(5)
Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are
interpreted as consistent with each other and with any relevant course of performance, course of
dealing, or usage of trade.

Rest. § 223
(1) A course of dealing is a sequence of previous conduct between the parties to an agreement
which is fairly to be regarded as establishing a common basis of understanding for interpreting
their expressions and other conduct.
(2) Unless otherwise agreed, a course of dealing between the parties gives meaning to or
supplements or qualifies their agreement.

V Agreements to Agree
A) When do the parties intend to be bound?
 1) Do they intend to be bound by the first writing, and a later more formal writing will just be a
memorial? OR
2) Do they intend for the first writing to only be preliminary negotiations, and don’t intend to be
bound until a later formal written contract?

Rest. § 27 Existence of a Contract Where Written Memorial is Contemplated

Manifestations of assent that are in themselves sufficient to conclude a contract will not be
prevented from so operating by the fact that the parties also manifest an intention to prepare and
adopt a written memorial thereof; but the circumstances may show that the agreements are
preliminary negotiations.

Rest. § 26 Preliminary Negotiations

A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is
addressed knows or has reason to know that the person making it does not intend to conclude a
bargain until he has made a further manifestation of assent.

Rest. § 33 Certainty
(1) Even though a manifestation of intention is intended to be understood as an offer, it cannot be
accepted so as to form a contract unless the terms of the contract are reasonably certain.
(2) The terms of a contract are reasonably certain if they provide a basis for determining the
existence of a breach AND for giving an appropriate remedy.
(3) The fact that one or more terms of a proposed bargain are left open or uncertain may show
that a manifestation of intention is not intended to be understood as an offer or as an acceptance.

B) CASES
1) Deli Case: Lease contract had a term that state that the tenant may renew lease for
additional period of five years at annual rental to be agreed upon. When it came time to
renew, landlord wanted significantly higher rent than what the tenant had the rent appraised
for. This renewal term was not a contract it was just an agreement to agree so its not
enforceable. The terms of the renewal are so ambiguous that they don’t give any relevant
details as to how to determine what the rent should be.
 A clause calling for “reasonable rental” based on market value would have saved the
contract. Then the court could have filled in the gaps with a reasonable term. Give the
court something to hang its hat on if you want this type of agreement to agree to be
enforced as a contract.
 Hypo: You’re the tenants lawyer, plan to make it not vague:
o Put in terms like “negotiate for a good faith rent or a reasonable rent based on other
rents in the area.
o Put some type of specific guidelines.
o Don’t say bring in appraiser because that would increase the transaction costs.
o Use average of other rents through the local real estate board.
o Rent tied to the price index
o Average of last three commercial leases in the shopping center.

2) Pennzoil v. Texaco: Was there ever a contract? Or were there only §26 Preliminary
Negotiations? When did the parties intend to be bound?
 Argue the memo that was signed was a valid contract – it was an agreement on most of
the key terms, the press release used definite words, said it was a “done deal”
 Argue the memo was NOT a contract – the memo was only part of preliminary
negotiations, this was a big contract so the contract should have gone one for 100s of
pages, trade practice that mergers like this would entail lots of negotiation.
 Court found that the memo was a valid contract. This is probably not the majority view.
Most courts would have gone the other way.

OFFER
I Elements of Offer
A) Elements of an Offer
1) Intent (must have “words of offer” not just words of “preliminary negotiation”) §§ 24, 26
2) Certainty of Terms §§ 33, 34
3) Communication §§ 50, 52

Rest. § 24 Offer Defined

An offer is the manifestation of willingness to enter into a bargain, so made as to justify another
person in understanding that his assent to that bargain is invited and will conclude it.
(Manifestation = Words, Acts, Conduct)

B) The offeror is master of his offer.

Rest. § 52
An offer can be accepted only by a person whom it invites to furnish the consideration.

Rest. § 50(1)
(1) Acceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in
a manner invited or required by the offer.

C) CASES
1) Nebraska Seed Co.: The offer wasn’t a clear offer because there were no words of offer, only
words of preliminary negotiation.

2) Moulton v. Kershaw – Offer than is uncertain in its terms (Intent Issue)

 Salt dealer sent letter to another salt dealer saying that he was authorized to offer full car-
load lots at a fixed price. The offeree responded in a telegraph that he wanted 2000
barrels as offered. Offeror refused to ship.
 Argue Yes there was a contract: Offeror offered a certain amount at a certain price. 2000
barrels was not an excessive amount from Offeror’s course of performance.
 Argue No there was no offer so no contract: Offer wasn’t certain, no maximum amount
allowed. Offeror could have sent this letter to 100 people.
 RULE: To constitute intent to make an offer there must be words of offer.
 Intent and certainty often blend together. If a person intends to make an offer it will
usually be clear and certain.

3) Keller v. Ybarru: Offer was for “so many grapes as plaintiff should wish to take. Court held
that this was a proper limit to the amount. Contract formed. Generally offeror is master of his
offer, but in this case the offeree got to set the amount.

4) Fairmount Glass Works (Construing Writings as a Whole)

Fairmount Two Part Rule:
(1) Offer must be reasonably definite/certain
(2) Intent may be found from correspondence as a whole.
 Fairmount Rule: Generally, we only look at words and conduct of offeror, but
Fairmount says look at all correspondence. This is troublesome because generally
the offeror is master of the offer and we don’t look at the offeree’s conduct.
 Aim of the court is to arrive at the intention of the parties.
 Once an offer is accepted you can’t revoke.

II Advertisements as Offers
A) General Rule: Ads are NOT offers. Ads are an invitation for negotiation (§26). Some states
allow for words of offer to construe offers, but it must be very clear in the ad. (“First come, first
served” or “while they last”) Other states find ads to be offers when the ad is definite. Ads may
only be considered offers when the three elements of offer are met.
B) Restatement § 46: Notice to the public, “constructive notice”, of revocation of ads is enough
notice to terminate the offer and prevent the public from accepting the offer.

Rest. §46 Revocation of General Offer

Where an offer is made by advertisement in a newspaper or other general notification to the
public or to a number of persons whose identity is unknown to the offeror, the offeree’s power of
acceptance is terminated when a notice of termination is given publicity by advertisement or other
general notification EQUAL to that given to the offer AND no better means of notification is
reasonably available.

C) EXAM: Argue that ad is offer and isn’t offer based on the three elements of offer. Argue that
whether it is an offer or just preliminary negotiations or an invitation to make an offer. For an ad
to be an offer you need firm, clear intent to make an offer.

D) CASES:
1) Lefkowitz Case: Seller advertised in the newspaper fur coats, mink scares, and a black lapin
stole for $1. The ad stated “first come first served”. Buyer was the first person there, but
seller refused to sell to him because of a house rule that only a woman could complete the
sale.
 TEST to determine if ad is an offer: Whether the facts show that some performance was
promised in positive terms in return for something requested. Court said that this was an
offer because it was clear and definite. Where the offer is clear, definite, and explicit and
leave nothing open for negotiation, it constitutes an offer.

2) Izadi v. Machado: An ad by seller in newspaper claimed that customers would get $3000
minimum trade-in allowance for any car and could get that price deducted from certain
vehicles advertised. Buyer put the cash balance down along with a trade-in for a Ranger
truck, but was denied the sale due to the small fine print of the ad that said the trade-in was
only good for Aerostar or T-bird.
 Generally courts say that you have to read your entire contract so the fine print would be
part of the contract. However, in this case the ad was found to be intentionally
misleading. The court says that a binding offer may be implied from the very fact that a
deliberately misleading advertising intentionally leads the reader to the conclusion that a
binding offer exists.
 General Rule: Always read the ad as a whole.

E) Consumer Protection Acts:

Consumer protections acts are intended to aid in general commercial transactions. The attempt
to protect consumers especially in the case of retail goods. Stone says they should all be
repealed because they don’t work. The more efficient way to regulate ads is by market discipline.
If company doesn’t honor its ads then consumers take business elsewhere. The costs of
enforcing the acts is too high. Transactions costs of suing and you might not win. All the acts do
is lull consumers into a false sense of security. They think they can rely on them, but they really
can’t because the high transactions costs of the litigation with very little return. Most lawyers
won’t even take these cases. The benefit of the acts over market discipline is very small but the
cost is great.

F) Evolution of Cases:
1) Strict Common Law Cases – Ads are NOT offers
 Nebraska Seed Co
 Moulton
2) Look at contract communication as a whole, the offeree is allowed in part to determine the
intent, rather than only looking at the words of the offeror
 Fairmount Glassworks
 Lefkowitz
 3) Courts, Administration/Legislature steps in with the deceptive trade practice acts. Total
reversal of the common law. Offeree and a third party controls whether there is an offer.

III Death of Offers

A) Ways to terminate offers:
1) Revocation: Offeror kils his own offer by withdrawing before acceptance (Rest. §§ 42-43)
2) Rejection: Offeree rejects the offer and kills it. Offeree cannot come back later an accept on
the same terms because the offer is dead. (Rest. § 38)
3) Counter-Offer: Offeree makes a new offer thereby killing the old offer. The offeree becomes
the offeror and the offeror becomes the offeree. (Rest. § 39)
4) Death or Incapacity of the Offeror: This kills the offer. (Rest. § 48)
5) Lapse of Time: An offer may establish the period during which the offer is open. If not the
offer dies after a reasonable time. (Rest. § 41 and UCC § 1-205)

IV Revocation (Rest. §43)

A) TWO PART TEST for Revocation of a Properly Communicated Offer:
1) Offeror takes definite action inconsistent with an intention to enter into the proposed contract
AND
2) Offeree acquires reliable information to that effect.
 Stats are split on whether the offeree has to have actual knowledge of the revocation or
whether the fact that the offeree “should have known” of the revocation is sufficient.
 Argue both theories:
o Actual knowledge approach
o Should have known approach (AKA constructive knowledge approach)

Rest. § 43 Indirect Communication of Revocation

An offeree’s power of acceptance is terminated when the offeror takes definite action inconsistent
with an intention to enter into the proposed contract AND the offeree acquires reliable information
to that effect.

B) Charactistics:
1) The Offeror bears the risk of communication.
2) Revocation is effective when received by the offeree. When revocation is made by
publication, it is effective when published.
3) Revocation by Direct Communication: Direct communication by offeror to offeree is effective
revocation of the offer. Offers made by publication may be terminated through comparable
means, such as publication in the same newspaper, etc.
4) Revocation by Indirect Communication: If information of the revocation is received by a
reliable source that the offeror no longer wants to extend the offer. Argue that source is/is not
reliable.

C) RULE: Offers not supported by consideration or detrimental reliance can be revoked at the will of
the offeror.
1) Exceptions:
 Option Contracts (Rest. §37):
o The offeree gives consideration for a promise by the offeror not to revoke an
outstanding offer.

Rest. § 37 Termination of Power of Acceptance Under Option Contract

The power of acceptance under an option contract is not terminated by rejection or
counteroffer, by revocation, or by death or incapacity of the offeror, unless the
requirements are met for the discharge of a contractual duty.

 Firm Offers (UCC 2-205):

o An offer by a merchant to buy or sell goods that is in a signed writing and by its terms
states that it will be held open is not revocable for lack of consideration.
 UCC 2-205 Firm Offers
An offer by a merchant to buy or sell goods in a signed record 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 three months, but any such term of assurance in a form supplied
by the offeree must be separately signed by the offeror.

 Detrimental Reliance: If the offeror could reasonably expect the offeree would rely to his
detriment on the offer and the offeree does detrimentally rely on the offer, the offer is not
revocable.

 Part Performance: Part performance is more than just preparations to perform.

Traditionally a unilateral offer was revocable until performance was complete. This has
been changed somewhat:
o Implied contracts are given a reasonable time to complete performance and during
this time the offer is irrevocable.
o When the contract can be divided into segments the offeree will be compensated for
the performed segments.
o Offerees will be compensated for partial performance based on their reliance on the
offer. This is done to avoid unjust enrichment.
o If the performance is tendered by the offeree but refused by the offeror, this is
considered part performance.

 Offer Indifferent as to Manner of Acceptance: A bilateral contract is indifferent as to

manner of acceptance, so beginning performance is acceptance and revocation is
impossible.

D) CASE:
Dickinson v. Dodds
Seller makes an offer to sell land to the buyer and says he’ll keep the offer open for a certain
amount of time. Before that time has expired the buyer learns that seller has sold to someone
else. Buyer then tries to accept. Buyer can’t accept because the offer has been revoked. Using
the two part test Seller has indicated his intention not to sell to buyer by selling to someone else
and Buyer has received communication of this action.

V Rejection (Rest. §38)

A) Rule: An offeree’s power of acceptance is terminated by his rejection of the offer unless the
offeree has manifested a contrary intention.

Rest. § 38 Rejection
(1) An offeree’s power of acceptance is terminated by his rejection of the offer, unless the offeror
has manifested a contrary intention.
(2) A manifestation of intention not to accept an offer is a rejection UNLESS the offeree manifests
an intention to take it under further advisement.

VI Counter Offers (Rest. §39)

A) Rule: An offer made by the offeree that contains the same subject matter of the original offer but
differs in its terms is a counter-offer. It is a rejection of the original offer and substitution of a new
offer.

Rest. § 39 Counter-Offers
(1) A counter-offer is an offer made by an offeree to his offeror relating to the same matter as the
original offer and proposing a bargain differing from that proposed by the original offer.
 (2) An offeree’s power of acceptance is terminated by his making of a counter-offer, unless the
offeror has manifested a contrary intention OR unless the counter-offer manifests a contrary
intention of the offeree.

Rest. § 59 Purported Acceptance Which Adds Qualifications

A reply to an offer which purports to accept it but is conditional on the offeror’s assent to terms
additional to or different from those offered is not an acceptance, but a counter-offer.

Rest. § 61 Acceptance Which Requests Change of Terms

An acceptance which requests a change or addition to the terms of the offer is not thereby
invalidated unless the acceptance is made to depend on an assent to the changed or added
terms.

B) Characteristics:
1) A counter-offer is an offer so it must contain all 3 elements of offer (intent, certainty,
communication).
2) To be a counteroffer, it must be more than an inquiry. Must find all three elements of offer.
3) Different time, different place, different amount – any difference in a material term can make it
a counter-offer.
4) Counter-offer is a rejection of the offer and a substitution of a new offer.
5) Counter-offer is effective when received by the original offeror.
6) An acceptance that asks for a change in terms is still an acceptance but the original offeror is
not obligated by anything in the question. (Rest. § 61)
 Example: A offers to sell B 100 tons of steel for X price. B replies that he accepts but
hopes that it can be delivered in weekly installments. There is a contract, but A is not
obligated to deliver in weekly installments.

VII Death of Offeror or Offeree (Rest. § 48)

Rule: Death or incapacity of parties automatically terminates an offer without communication to the
other party.

Rest. § 48 Death of Incapacity of Offeror or Offeree

An offeree’s power of acceptance is terminated when the offeree or offeror dies or is deprived of legal
capacity to enter into the propsed contract.

VIII Lapse of Time (Rest. §41 and UCC §1-205)

A) Rule: Where the offer does not specify a specific time period for its existence, the offer expires at
the end of a reasonable time.

B) “Reasonable Time” depends on the circumstances:

1) Nature of the proposed contract
2) Communications of the parties as to their proposed goals or purposes
3) Parties prior course of dealing, if any
4) Applicable usages of trade
 Direct negotiations: When the contact is face to face, by phone, or by e-mail a
reasonable time doesn’t extend beyond that contact
 Speculative transactions: Very short time period is reasonable when the price of the item
is volatile such as stocks, commodities, options, etc. When the price is stable a longer
time is reasonable such as consumer goods and land sales.

UCC 1-205 Reasonable Time; Seasonableness

(1) Whether a time for taking an action required by the UCC is reasonable depends on the nature,
purpose, and circumstances of the action.
(2) An action is taken seasonably if it is taken at or within the time agree or, if no time is agreed, at or
within a reasonable time.
 C) TEST for “Reasonable Time” is what time period would be thought satisfactory to the offeror by a
reasonable person in the position of the offeree.

SUB-CONTRACTORS, OPTION CONTRACTS, AUCTIONS AS OFFERS

I Option Contracts
A) Definition of Option Contract

Rest. § 87 Option Contract

(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
(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.

B) Revocation of Option Contracts

1) Counter-offers do no invalidate option contracts. The counter-offer is just considered
preliminary negotiations. The counter-offer does not constitute a new offer because the
option to accept is always there.
2) A unilateral option to ripen into a contract would only become a contract upon the offeree’s
acceptance.

Rest. § 37 Termination of Power of Acceptance Under Option Contract

The power of acceptance under an option contract is not terminated by rejection or counteroffer,
by revocation, or by death or incapacity of the offeror, unless the requirements are met for the
discharge of a contractual duty.

C) CASE:
Humble Oil Co.:
Humble entered into an option contract in which Humble would purchase land for $35,000.
Humble had the option to accept by giving notice before 9:00 p.m. on June 4 or within 10 days
following the notice. Earnest money of $1750 was paid plus $50 consideration at time of
execution of option contract. Balance of $33,200 left to be paid. Seller argued that Humble’s
letter sent to seller was conditional acceptance therefore a rejection of the option contract. Court
held that choosing to negotiate before accepting an option does not repudiate the option contract.
The option is an independent completed agreement and gave the optionee the right to purchase
within the time specified.

II Auctions and Offers

A) General Rule: Bid is an offer and the fall of the hammer is acceptance.
1) Auction without reserve:
 Auction is an offer.
 The highest bid (which comes with fall of the hammer) is acceptance. The seller has NO
right to reject the highest bid.
2) Auction with reserve:
 Bid is an offer.
 Auctioneer may accept or reject based on reserve price. He may reject all of the bids if
he wants.
3) A minimum opening bid says nothing about whether the auctioneer will accept or won’t accept
other bids.
4) Silence as to reserve status is generally construed as an auction with reserve. Bids are
generally offers.

UCC 2-328 Sale by Auction

 (1) In a sale by auction if goods are put up in lots each lot is the subject of a separate sale.
(2) A sale by auction is complete when the auctioneer so announces by the fall of the hammer or
in other customary manner. Where a bid is made during the process of completing the sale but
before a prior bid is accepted the auctioneer has discretion to reopen the bidding or to declare the
goods sold under the prior bid.
(3) A sale by auction is subject to the seller’s right to withdraw the goods UNLESS at the time the
goods are put up or during the course of the auction it is announced in express terms that the
right to withdraw the good is not reserved. In an auction in which the right to withdraw the goods
is reserved, the auctioneer may withdraw the goods at any time until completion of the sale is
announced by the auctioneer. In an auction in which the right to withdraw the goods is not
reserved, after the auctioneer calls for bids on an article or lot, the article or lot cannot be
withdrawn unless no bid is made within a reasonable time. In either case a bidder may retract a
bid until the auctioneer’s announcement of completion of the sale, but a bidder’s retraction does
not revive any previous bid.
(4) If the auctioneer knowingly receives a bid on the seller’s behalf or the seller makes or
procures such a bid, and notice has not been given that liberty for such bidding is reserved, the
buyer may at the buyer’s option avoid the sale or take the goods at the price of the last good faith
bid prior to completion of the sale. This subsection shall not apply to any bid at an auction
required by law.

B) CASES
Well v. Schoeneweis
 Rule: At auction, the contract is made at the fall of the hammer. Buyer agrees to buy at
bid price and seller agrees to sell and convey at the bid price. Publicly proclaimed terms
of the sale are binding on both parties.
 Court held that contract was made at the fall of the hammer. No additional written
contract necessary before the contract was made. After hammer falls there is no room
for additional negotiation.

III Sub-Contractors and Keeping the Offer Open

A) Subcontractors submit bids to the general contractor to use in his bid in a construction contract.
The general contract relies on the subcontractors bid when preparing his own bid.

B) Traynor View versus Hand View

1) Traynor applies the §90 reliance doctrine. Reliance on the bid made the offer
(subcontractor’s bid) irrevocable. The subcontractor has reason to expect that the general
contractor will rely on his bid.
 Benefits of Reliance View
o No transactions costs in having to get an option contract
o More flexibility
o Faster than planning
 Costs of Reliance View
o Sloppy
o Uncertainty in the Law (don’t know when it applies)
o Reasonable people differ in what’s “reasonable” reliance
o Judges make it up as they go along

2) Hand does not apply the reliance doctrine. Using of a subcontractor’s bid is not the same as
being awarded the contract. Subcontractor can withdraw his bid because there is no contract
formed.
 Benefits of Not using Reliance
o Certainty in the law
o Clear
o You either have a contract or you don’t, no gray “reliance” area
o Consistent with the rest of the common law
  Costs of Not Using Reliance
o Rigid, not flexible

C) CASES
1) Drennan v. Star Paving (Traynor View – Reliance Doctrine APPLIES)
 Issue is did the subcontractor revoke the offer?
 Traynor says it is a unilateral contract. General contractor makes the offer (promise) and
subcontractor accepts with an act. Subcontractor’s act of submitting a bid is part
performance, so the offer is irrevocable. General relied on the subcontractor’s bid in
making his bid so the subcontractor’s offer is irrevocable. Traynor finds justifiable
reliance.

2) Baird v. Gimbel Brothers (Hand View – Reliance DOES NOT apply)

 Subcontractor submits bid to general contractor. Subcontractor discovers a mistake and
tries to withdraw his submitted bid.
 Hand says it is a bilateral contract. Subcontractor makes a promise (bid) for a promise
(acceptance by general contractor). The subcontractor becomes the offeror and the
general contractor’s power of acceptance is terminated by the subcontractor’s withdrawal
(revocation) of the bid.

D) Planning to Avoid the Problem

1) In the contract, put terms in to handle the situation. Use an option contract.
2) Use condition precedent language in the contract. If X happens, then ….

E) Bid Substitution
1) Subcontractor submits bid then the general contractor later uses it to negotiate with other
subcontractors and substitutes another bid. This shows that there is no intent for the
subcontractor to rely on the general contractor using his bid.
2) Bid substitution is allowed unless it is prohibited by statute.
3) No bid substitution unless:

COMMUNICATION OF ACCEPTANCE
Mailbox Rule (Rest. §63)
A) General Rule
1) Acceptance is effective at dispatch.
2) Applies to any form of communication: mail, fax, courier, carrier pigeon
3) A contract exists at time of dispatch even if the mail is lost, delayed, never reaches offereror.
4) Pregnancy of contract occurs at acceptance.
5) Only applies to acceptance. Counter-offers, rejections, revocations effective only upon
receipt.
6) The Mailbox Rule is a default rule. If there are different terms in the contract regarding when
acceptance is effective they prevail over this default rule.

Rest. § 63 Time When Acceptance Takes Effect

Unless the offer provides otherwise:
(a) an acceptance made in a manner and by a medium invited by an offer is operative and
completes the manifestation of mutual assent as soon as put out of the offeree’s possession,
without regard to whether it ever reaches the offeror BUT
(b) an acceptance under an option contract is not operative until received by the offeror.

B) Argue Mailbox Rule makes perfect sense:

 Agency Argument: The offeror makes the post office his agent to receive acceptance. In
agency law, notice to the agent is the same as notice to the principal.

C) Benefits of Mailbox Rule:

 Speeds up the “wheels of commerce”.
  Efficient: As soon as offeree sends acceptance the offeree can immediately begin
manufacture, etc. to fulfill the contract.
 TIME IS MONEY

D) Risks of Mailbox Rule:

 Mail might be lost (but this seldom happens)
 Offeree might want to change his mind after dispatch (but this seldom happens)

E) Technology and the Mailbox Rule

Model Electronic Data Interchange Trading Partner Agreement
 No document shall give rise to any obligation until accessible to the receiving party at
such party’s receipt computer.
 Upon proper receipt of any document, the receiving party shall promptly and properly
transmit a functional acknowledgment in return.
 A functional acknowledgment shall constitute conclusive evidence

F) Improper Medium
 If the offeror designates a specific means of communication, the offeree must use it or the
acceptance is invalid. If no means of communication is specified, then a “proper
medium” must be used.
 Mailbox rule only applies if a reasonable means of communication is adopted by the
offeree.
 Generally, offeree must adopt at least as rapid and reliable means of communication as
that chosen by the offeror or the communication is invalid.
 Common law: Improper medium means invalid acceptance.

Rest. § 67
Communication sent by an improper medium of transmission is nevertheless effective on
dispatch if it is received no later than the time transmission by a proper medium would have
been received.

Rest. § 60 Acceptance of Offer Which States Place, Time, or Manner of Acceptance

If an offer prescribes the place, time, or manner of acceptance its terms in this respect must
be complied with in order to create a contract. If an offer merely suggests a permitted place,
time, or manner of acceptance, another method of acceptance is not precluded.

G) Crossing Communication
When identical offers cross in the mail, one can argue that neither offer was intended to manifest
assent to the offer of the other. No contract is formed because there is no acceptance.
 Example: A sends B an offer through the mail to sell A’s horse for $500. While this offer
is in the mail, B in ignorance thereof mails to A an offer to pay $500 for the horse. There
is no contract.

H) CASE
Bishop v. Eaton

ACCEPTANCE BY PERFORMANCE
I Unilateral Contract v. Bilateral Contract
A) Unilateral Contract
1) Offer for a unilateral contract can only be accepted by the act requested, not a promise to do
that act.

Rest § 53 Acceptance by Performance; Manifestation of Intention Not to Accept

(1) An offer can be accepted by the rendering of the performance only if the offer invites such
acceptance.
 (2) The rendering of performance does not constitute an acceptance if within reasonable time
the offeree exercises reasonable diligence to notify the offeror of non-acceptance.
(3) Where an offer of a promise invites acceptance by performance and does not invite a
promissory acceptance, the rendering of the invited performance does not constitute
acceptance if before the offeror performs his promise the offeree manifests an intention not to
accept.

Rest § 58 Necessity of Acceptance Complying with Terms of Offer

An acceptance must comply with the requirements of the offer as to the promise to be made
or the performance to be rendered.

2) Acceptance by Performance – Three Views

 Acceptance by Full Performance
o Old Common Law Approach (Petterson Case)
o No acceptance until performance is completed. The offeror was asking for full
performance, not just tender or part performance. Offeror can revoke until
performance is completed in full.
o If the offeror has been unjustly enriched by the offeree’s part performance, the
offeree can be compensated for that under the theory of unjust enrichment/quantum
meruit/implied contract even though no contract was ever formed.
o Petterson v. Pattenberg: P shows up at D’s house and tries to pay off the loan. He
says I’ve come to pay the money and D says I’ve already sold the loan.
o Is showing up and trying to pay the money enough? Or could D still revoke until he
actually gave the money?
o Showing up can be mere preparation to perform, not actual performance. D wants
the money, not the talk about the money. D wanted an act, not a promise. If P
wanted to accept by promise then he should have gotten a bilateral contract.
o Both can back out until the money is actually handed over.
o Court says no contract. The offer was revoked before it was accepted.
o Brooklyn Bridge Hypo: A says to B I’ll give you $100 if you walk across the bridge.
This is a unilateral contract. A makes a promise and he wants an act in return. If B
walks halfway then A stops him and revokes no contract. No acceptance until he
walks all the way across. No unjust enrichment because A doesn’t want him to walk
anymore.

 Acceptance by Part Performance

o Rest. § 45 Approach - When the offeree tenders or begins the invited performance,
an option contract is created. The offer can’t be revoked once performance has
begun.
o Rest § 50(2) Approach – Acceptance by performance requires that at least part of
what the offer requests be performed.
o Brackenbury Case: Mom wanted lifetime care.
o When using this view argue that it’s not part performance its just preparation to
perform, which is NOT enough to be acceptance by part performance.

 Acceptance by Expenditure of Time of Money (Preparation)

o Sunshine v. Manos: The expenditure of time and effort is sufficient to make a
unilateral contract binding an irrevocable.

3) Presumption of Bilateral Contract

 Whether a contract is unilateral or bilateral depends on the intent of the offer and the
facts and circumstances of each case.
 Davis v. Jacoby: There is a presumption of a bilateral contract because bilateral contract
immediately and fully protects both parties.
 4) Notice and Acceptance of Unilateral Contract
 Rest. § 54(1) Where an offer invites an offeree to accept by rendering performance, no
notification is necessary to make such an acceptance effective UNLESS the offer
requests notification.
 Rest § 54(2) If an offeree who accepts by rendering performance has reason to know that
the offeror has no adequate means of learning of the performance within reasonable
promptness and certainty, the offeror’s contractual duty is discharged UNLESS:
o The offeree exercises reasonable diligence to notify the offeror of acceptance OR
o The offeror learns of the performance within a reasonable time OR
o The offer indicates that notification of acceptance is not required.

B) Bilateral Contract is accepted by a return promise (usually a promise to act)

II Acceptance and the Battle of the Forms

A) Battle of the Forms: Each party wants to use their own form because each form is designed to
favor their own needs. It is inevitable that the forms will contain terms on which there has been
no agreement. Most of the transactions are carried out anyway, but sometimes there are
disputes. The court must determine what the terms of the contract actually are.
1) Example: Altered circumstances such as a change in the market price, causes one of the
parties to take advantage of the discrepancies in the forms as an excuse for not performing.
2) Example: After shipment of the goods by seller and receipt by buyer, a dispute arises over
some aspect of performance such as the quality of the goods and the courts must decide
what contract terms govern the dispute.

B) Traditional Contract Doctrine: Performance by both parties makes it clear that there is a contract.
Each subsequent form is a counteroffer, rejecting any prior offer of the other party, therefore the
resulting contract must be on the terms of the party who sent the last counteroffer, which is then
accepted by the other party’s performance. This is usually the seller in a “confirmation of sale”
form that is in answer to the buyer’s “purchase order” form. The seller typically has the
advantage.

C) Original UCC 2-207 and the Battle of the Forms

1) UCC 2-207(1) A definite and seasonable expression of acceptance or a written confirmation
which is sent within a reasonable time operates as an acceptance even though it states terms
additional to or different from those offered or agreed upon, unless acceptance is expressly
made conditional on assent to the additional or different terms.

2) Under this, a discrepancy does NOT prevent a purported acceptance from creating a contract
unless the offeree takes steps to expressly say that it does.
 Result is that there is a contract, and the additional terms are merely new offers by the
original offeree to modify the contract thus formed.
 Under this the party who sends the first form has the advantage. This means the
advantage is typically with the buyer.

3) UCC 2-207(2) The additional terms are to be construed as proposals for addition to the
contract. Between merchants such terms become part of the contract unless:
 The offer expressly limits acceptance to the terms of the offer
 They materially alter it or
 Notification of objection to them has already been given or is given within a reasonable
time after notice of them is served.

4) Under (2) if both parties are merchants, the offeror’s mere silence will sometimes amount to
acceptance if the terms do not “materially” alter the contract. If the offeree adds a term that
does materially alter the contract, (1) holds the offeree to a contract on the offeror’s terms and
(2) does not make the offeror’s silence an acceptance of the added term. If the offer
expressly limits acceptance to the terms of the offer then the offeror’s silence as to new terms
 will not be acceptance of even an immaterial term. Offeror can also prevent incorporation of
a term by giving notice of objection to the term.

5) An issue in dispute is always – does the term “materially” alter the contract. Argue that it
does and argue that it doesn’t.

6) An offeree may try to accept the offer and make his acceptance expressly conditional on
assent to the additional terms. This is not an acceptance. It is a counteroffer.

7) UCC 2-207(3) Conduct by both parties which recognizes the existence of a contract is
sufficient to establish a contract for sale although the writings of the parties do not otherwise
establish a contract. In such case the terms of the particular contract consist of those terms
on which the writings of the parties agree, together with any supplementary terms
incorporated under the UCC.

8) 2-207(3) only applies to situations when the parties go ahead and perform, even though their
writings have not resulted in a contract. This covers situations where the offeree’s
acceptance is expressly conditional on assent to additional terms and is thus a counteroffer.
The offeree is bound by a contract consisting of terms common to both writings together with
any others supplied by the UCC. If an offeree wants to avoid this, he should reject the offer
and make a counteroffer. As long as he doesn’t make any “expression of acceptance” under
2-207(1), then 2-207 doesn’t apply.

D) Revised UCC and the Battle of the Forms

1) Revised UCC asks two questions:
 Is there a contract? UCC 2-204 and 2-206 (UCC rejects the mirror image rule)
 What are the terms of the contract? UCC 2-207

2) Rejection of the Mirror Image Rule

 UCC 2-204 A contract for the sale of goods may be made in any matter sufficient to show
agreement. A contract may result from conduct by both parties recognizing the existence
of the contract, from offer and acceptance, or in any manner confirmed by a record
containing terms additional to or different from those of the contract.
 UCC 2-206(3) A definite and seasonable expression of acceptance in a record operates
as an acceptance even if it contains terms additional to or different from the offer.

3) UCC 2-207 provides that if there is a contract, the terms of the contract are
 (a) those that appear in the records of both parties
 (b) terms to which both parties agree
 (c) terms supplied or incorporated under the UCC

4) If a party insists that its own terms are a condition to contract formation, like in the original
UCC, no contract will be formed unless that party acknowledges the existence of a contract
by subsequently performing or otherwise, or the other party agrees to the first parties terms.

III Rewards and the Law of Offer and Acceptance

A) Rewards are an offer for a return act, a unilateral contract.
1) Rest. § 58 – the offeror is master of his offer. An acceptance must comply with the
requirements of the offer as to the promise to be made or the performance to be rendered.
2) Rest. § 60 If an offer states the place, time, or manner of acceptance, its terms in this
respect must be complied with in order to create a contract. If an offer merely suggests a
permitted time, place, or manner of acceptance, another method of acceptance is not
precluded.

B) Offeror may state a time limit for acceptance. If none stated, then the offer will lapse after a
reasonable time under § 41.
 C) Who can recover? Only those who knew of the outstanding offer. Exceptions for rewards from
the government. A person who has partially performed part of the act before learning of the offer
may accept and receive the reward by completing the act.
1) Police, fire, and rescue personnel are not entitled to a reward if they were under a legal duty
to perform the act before they undertook the desired performance.

Rest. § 73 Performance of a 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 a bargain.

2) Persons who knew of reward, but were not motivated by the reward can generally still
recover.

D) Revocation of Offer of Reward: Offer may be revoked by the method in which it was given if
given to the public at large.

Rest. § 46 Revocation of General Offer

Where an offer is made by advertisement in a newspaper or other general notification to the
public or to a number of persons whose identity is unknown to the offeror, the offeree’s power of
acceptance is terminated when a notice of termination is given publicity by advertisement or other
general notification equal to that given to the offer and no better means of notification is
reasonably available.

ACCEPTANCE BY SILENCE
I Acceptance by Silence or Exercise of Dominion (Rest. §69)
A) General Rule: Silence does NOT constitute acceptance.
1) Exceptions:
 If an offeree exercises dominion over the goods by acting inconsistently with the offeror’s
ownership the offeree is taken to have accepted the offer and is bound to pay unless the
terms are manifestly unreasonable.
 If an offeree takes the benefit of services offered, he is bound by the terms of the offer if
the offeree had a reasonable opportunity to reject them.
 Because of prior course of dealing, it is reasonable that silence is acceptance and the
offeree should notify offeror if he does not want to accept.
 Where the offeror has given offeree reason to understand silence may be acceptance
and by being silent the offeree intends to accept the offer.

Rest. § 69
(1) When an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the
following cases ONLY:
(a) Where an offeree takes the benefit of offered services with reasonable opportunity to reject
them and reason to know that they were offered with the expectation of compensation
(b) Where the offeror has stated or given the offeree reason to understand that assent may be
manifested by silence or inaction and the offeree in remaining silent and inactive intends to
accept the offer
(c) Where because of previous dealings or otherwise, it is reasonable that the offeree should
notify the offeror if he does not intend to accept.
(2) An offeree who does any act inconsistent with the offeror’s ownership of the offered property is
bound in accordance with the offered terms unless they are manifestly unreasonable. But if the
act is wrongful towards the offeror it is an acceptance only if ratified by him.

B) Hobbs v. Whip:
1) General rule is that silence is not acceptance, but it can be acceptance:
 Conduct expressing intent to accept
  Prior course of dealing
 Usage of Trade
2) Silence was found to be acceptance because of prior course of dealings. They looked at
previous contracts between the parties.

C) Rationale behind the “Silence is not acceptance rule

1) To protect people’s freedom from being forced into a contract.
2) Offeree should always have the power of acceptance.
3) Possible scenarios for acceptance by silence:
 Silence outright when a reasonable person would object
 Prior course of dealing
 Retention without rejection for an unreasonable amount of time

D) Ransom v. Penn Mutual – Insurance Contract

1) P offers to pay for insurance coverage. Company has to have a health exam before it will
accept. No contract until the second health exam has been done. P dies before the health
exam.
2) Court says that payment was an offer and keeping the first premium was acceptance by
silence until home office acts to terminate. This exposes the insurance company to risks.
They don’t intend to insure someone until they know their health status. Court says it would
be “unconscionable” not to let P recover. Also court says that P had a “reasonable
expectation” that he was covered because he had paid the money. That expectation isn’t
really reasonable – he should have read the contract.

E) Felton v. Finley – Attorney’s Fees

1) Attorney offers to provide services for X and X’s family. X’s family says that they don’t accept
the benefit. Attorney does the work for X. Some benefit accrues to X’s family. Attorney sues
X’s family for the work performed.
2) Court held that the acceptance of the benefits gave rise to an implied in law contract.

F) Acceptance of Mis-Shipped Goods

1) If the goods are used, then it constitutes acceptance by silence under Rest. §69.
2) Statutes provide that unsolicited goods sent through the mail are to be considered gifts. The
fear is that people will get things they don’t want then become liable for them.
 Benefit to the consumer in the short run, but in the long run the result is that all such
goods may cost more.

39 U.S.C.A. § 3009 (1980) Mailing of Unordered Merchandise

(a) Mailing of unordered merchandise constitutes an unfair method of competition and an unfair
trade practice. Exception for free samples and charity merchandise soliciting contributions.
(b) Any such merchandise may be treated as a gift by the recipient. Must be clearly marked as a
gift.
(c) May not send the recipient a bill for the merchandise.
(d) “Unordered Merchandise” means merchandise mailed with the prior expressed requires or
consent of the recipient.

MIRROR IMAGE RULE

I General Rule (Rest. §§ 58-59)
A) Mirror Image Rule – acceptance that varies at all from offer is not acceptance. Acceptance must
mirror the offer exactly. This is very strict like the “perfect tender rule”.

Rest. § 58
An acceptance must comply with the requirements of the offer as to the promise to be made or
the performance to be rendered.

Rest. § 60
 A reply to an offer which purports to accept it but is conditional on the offerer’s assent to terms
additional to or different from those offered is not acceptance but is a counter-offer.

II UCC and the Mirror Image Rule

A) The UCC relaxes the mirror image rule with 2-204, 2-206, and 2-207. This is because more
flexibility is needed in business.
B) Under 2-204 a contract may be made in any manner sufficient to show agreement, including
conduct by both parties which recognizes the existence of such a contract.
C) Under 2-206, unless otherwise unambiguously indicated by the language or circumstances an
offer shall be construed as inviting acceptance in any manner and by any medium “reasonable in
the circumstances”.
D) UCC 2-207 Original and Revised differ as to what the terms of the contract will be. See Battle of
the forms above for both versions.

III Phases of the Mirror Image Rule

A) Strict Mirror Image Rule - § 58, 59, 39
B) Relaxation of the Mirror Image Rule – 2-207
Rotolith Case:
 Rule is that the acceptance is acceptance as to the extent that it corresponds to the offer
and where it differs, the differing parts will be a counteroffer.
 A response which states a condition materially altering the obligation solely to the
disadvantage of the offeror is an acceptance expressly conditional on assent to the
additional terms. Plaintiff accepted the goods with knowledge of the conditions specified
in the acknowledge so it became bound.

C) Tightening Up of the Mirror Image Rule – Itoh Case

1) Seller inserted an arbitration clause into the form contract. Buyer accepted with a form
contract that did not contain the arbitration clause and got a bad product and wants to sue
instead of arbitrate.
2) Arbitration clause was considered a material term so no contract was formed.
3) Arbitration clause is not a gap filler term that can be supplied by the UCC so it is a material
term.
4) 2-207 prevents an exchange of forms from creating a contract where acceptance is expressly
made conditional on assent to the additional terms.

Mirror Image Relaxation

Rest. § 58, 59, 39 UCC 2-207
“Perfect Tender” “Split the baby Approach”
No acceptance unless exact K as to same terms, counteroffer as to different
Use gap fillers
Things listed in UCC won’t defeat b/c not
material terms
PRECONTRACTUAL LIABILITY
I Traditional View
Traditionally parties were free to negotiate and if negotiations failed then courts were reluctant to
impose precontractual liability. Duty of fair dealing is imposed on parties to an existing contract, but it
should not extend to negotiations before the contract is made. General rule is that a party to
precontractual negotiations can break them off without liability at any time and for any reason or no
reason at all.

II Stone’s Rules for Law and Life

A) Don’t assume anything
B) Never say never
C) Can’t always say always
D) Use thinking, not emotion
III Four Grounds for Precontractual Liability
A) Unjust Enrichment Resulting from the Negotiations – Restitution
1) To prevent unjust enrichment, the law imposes liability measured by the injured party’s
restitution interest. The amount of any benefit conferred on the other party.
2) Party may seek restitution for misappropriated ideas and/or for services rendered.
3) Courts rarely do this.

B) Misrepresentation Made During the Negotiations

1) A negotiating party may not fraudulently misrepresent its intention to come to terms.
2) Fraud is actionable in tort.

C) Specific Promise Made During the Negotiations

1) Courts may base liability on a specific promise that has been made in order to interest the
other party in negotiations and that the other party has relied on.

2) franchise agreements, a prospective franchisee may make substantial expenditures for

advertising and other preparation before receiving a franchise in reliance on the a franchisor’s
promise of a franchise.

3) Hoffman v. Red Owl Stores: Parties were in negotiations for the opening of a franchise.
Franchisor promised to give franchise if Hoffman came up with $18,000. They then refused to
grant the franchise. Court held that injustice would result here if plaintiffs were not granted
some relief because of the failure of defendant’s to keep their promises which induced
plaintiffs to act to their detriment. It was impossible to measure Hoffman’s lost expectation,
so the court awarded recovery based on his reliance interest – he was awarded his expenses
only.
 This case affirms that liability based on a specific promise has a place in the law of
precontractual liability even though the promise falls short of being an offer.
 Must find three elements of § 90 reliance:
o Promise was one which the promisor should reasonably expect to induce action or
forbearance of a definite and substantial character on the part of the promise.
o Promise induced such action or forbearance.
o Injustice can only be avoided by enforcement of the promise.

4) Wheeler v. White: (follows Red Owl) Where the promise has failed to bind the promisor to a
legally sufficient contract, but where the promisee has acted in reliance on a promise to his
detriment, the promisee is allowed to recover no more than reliance damages measured by
the detriment sustained.

D) Agreement to Negotiate in Good Faith

1) General Rule is that there is no obligation of good faith and fair dealing in negotiations.
Question is whether this is merely a default rule that the parties can contract around?
2) Courts are split, but most hold that agreements to negotiate in good faith are enforceable.
3) Consolidated Grain and Barge: P sued D for lost profits due to failure to negotiate profits it
was to receive. A clause had been included to negotiate in good faith.
 The court held that the negotiation clause was unenforceable because it is neither a
basis for determining the existence of a breach nor for giving an appropriate remedy.

MISTAKE, MISREPRESENTATION, IMPOSSIBILITY, AND FRUSTRATION

I “Big 8” Common Law Policemen
A) These will excuse a party from performance:
1) Fraud
2) Misrepresentation
3) Duress
4) Illegality
5) Incapacity
 6) Undue Influence
7) Mistake
8) Impossibility

B) Performance is excused because there is no true meeting of the minds for some reason. You
have to look beyond O + A + C = K. A contract is actually formed, but performance is excused.
The aggrieved party is entitled to rescind the contract.

C) One who is considering whether to make a contract makes a number of assumptions in

assessing the benefits and burdens of the proposed contract. Problems arise when one of the
parties seeks to be excused from performing on the ground that one of that party’s assumptions
turned out to be incorrect.

D) General Rule: Duties imposed by a contract are absolute.

1) Parties may qualify their duties by putting certain terms in the contract.
 Duty only to use “best efforts”
 Obligation only to extent of its output or its requirements.
 Cancellation clause, giving one party power of termination
 Force majeure clause excusing the party if specified types of events occur
 Limitation of remedy clause
 Flexible pricing clause allowing the party to pass on additional costs to the other party

2) If a party does not limit its duty by the terms of the contract, the party must bring itself within a
limited number of judicially created doctrines if it wants to be excused on the ground that one
its basic assumptions turned out to be wrong.

II Mistake
A) Mistake Defined: An erroneous perception.
To be excused, the party must prove that:
1) Mistake, not a mirprediction, was made
2) The mistake justifies relief

Rest. § 151
A mistake is a belief that is not in accord with the facts.

B) When courts grant relief for mistake:

1) Almost NEVER for a § 153 unilateral mistake
2) Pure § 152 bilateral mistake if there is a mistake as to the actual subject matter of the
contract, not the value, therefore there is no real meeting of the minds.

Under § 154(b) if you treat limited knowledge as sufficient, then you bear the risk.

C) An erroneous prediction is not a mistake unless it relates to the facts as they exist at the time the
contract is made. A misprediction (poor prediction of events that are expected to occur or
circumstances that are expected to exist after the contract is made) is NOT a mistake. Mistake
deals only with the risk of error relating to the factual basis of the agreement – the state of affairs
at the time the agreement is made. Mispredictions about what will happen in the future are
handled by impracticability, impossibility, and frustration of performance.

D) Mutual Mistake
1) Mutual mistake occurs when both parties are under substantially the same erroneous
perception as to the facts.

2) Three Requirements for avoidance of on ground of Mutual Mistake – Rest. § 152:

 The mistake goes to a basic assumption on which the contract was made
 o Mistakes as to collateral matters such as market conditions or financial ability are
excluded.

 The mistake has a material effect on the agreed exchange of performances

o Party must show more than a mere loss of advantage from the contract or that the
party would not have entered into the contract had there been no mistake. Party must
show that the resulting imbalance in the agreed exchange is so severe that he cannot
fairly be required to carry it out.
o The mistake generally makes the exchange less advantageous for the party
adversely affected and more advantageous for the other party.
o The availability of other relief, other than avoidance of the contract, is considered
when determining whether the mistake has a material effect on the agreed exchange.

 The mistake is not one of which that party bears the risk
A party bears the risk when:
o Contract itself provides that the party bears the risk (Express terms or implied terms
also? Argue both ways)
o The party makes a contract with only limited knowledge of the facts to which the
mistake relates and the party is aware that the knowledge is limited
o The risk is allocated to the party by the court on the ground that it is reasonable in the
circumstances to do so
-Example: Owner of land contracts to sell it. After making the contract, he discovers
the land has mineral deposits that make it much more valuable that he
contracted for. The court will allocate the risk to him because he was in a better
position to discovery the minerals earlier.
-Example: Builder make a contract to construct a building. After making the contract
builder discovers that the land contains rock that makes the construction much
more expensive than either party had supposed. The court will allocate the risk
to the builder because the builder has much greater expertise in judging subsoil
conditions than the landowner.

Rest. § 152 When Mistake of Both Parties Makes a Contract Voidable

(1) Where a mistake of both parties at the time the contract was made as to a basic assumption
on which the contract was made has a material effect on the agreed exchange of performances,
the contract is voidable by the adversely affected party unless he bears the risk of the mistake
under § 154.
(2) In determining whether the mistake has a material effect on the agreed exchange of
performances, account is taken of any relief by way of reformation, restitution or otherwise.

Rest. § 154 When a Party Bears the Risk of Mistake

A party bears the risk of mistake when
(a) the risk is allocated to him by agreement of the parties or
(b) he is aware at the time the contract is made, that he has only limited knowledge with
respect to the facts to which the mistake relates, but treats his limited knowledge as
sufficient or
(c) the risk is allocated to him by the court on the ground that it is reasonable in the
circumstances to do so.

3) Avoidance on the ground of mutual mistake is allowed only for mistakes that go to the
“identity” or “existence” of the subject matter, not for those that go merely to its “attributes”,
“quality”, or “value”.

4) A mistaken party is not barred from relief merely because that party could have voided the
mistake by the exercise of reasonable care. Relief for mistake is not precluded by the
 mistaken party’s fault UNLESS it amounts to a failure to act in good faith and in accordance
with reasonable standards of fair dealing. Rest. § 157

Rest. § 157 Effect of Fault of Party Seeking Relief

A mistake party’s fault in failing to know or discovery the facts before making the contract
does not bar him from avoidance or reformation for mistake unless his fault amounts to a
failure to act in good faith and in accordance with reasonable standards of fair dealing.

Rest. § 158 Relief Including Restitution

(1) In any case of mistake under this chapter, either party may have a claim for relief including
restitution under § 240 and § 376.
(2) In any case of mistake under this chapter, if the rules in this chapter together with the
rules of chapter 16 (remedies) will not avoid injustice, the court may grant relief on such terms
as justice requires including protection of the parties’ reliance interest.

5) Remedy for Mutual Mistake – Avoidance

On avoidance, both parties are entitled to restitution.

6) Sherwood v. Walker (§ 152) – pregnant cow case; seller gets recission because both parties
were unaware that the cow was able to breed and was pregnant, and price agreed upon was
for a barren cow. Under this case, a mistake as to the “quality” of the subject matter was
grounds for recission.

7) Sherwood Dissent – Rescind for mutual mistake only the thing delivered is different in
substance that the thing contracted for. Example: if a totally different cow was delivered.
This is more like the majority today. Also seller had limited knowledge, knew he had limited
knowledge but considered it sufficient. The seller therefore should bear the risk of his
mistake. [§ 154(b)] If you treat limited knowledge as sufficient then you bear the risk.

8) Wood v. Boynton – Plaintiff sold a rock for $1 to a jeweler. Neither party knew what it was,
but both believed it was a Topaz. It was actually an uncut diamond worth $700. Court denied
recission. This case agrees with the Sherwood dissent. Difference in quality or attributes not
enough to rescind. Also, this can be reconciled with Sherwood in that in this case the seller
had limited knowledge and knew that she had limited knowledge but treated it as sufficient.
The seller therefore carried the risk of mistake.

E) Unilateral Mistake
1) Unilateral Mistake Defined: A unilateral mistake occurs when only one party has an
erroneous perception as to the facts.

2) General Rule: No avoidance for unilateral mistake.

Rest. § 153 When Mistake of One Party Makes a Contract Voidable

Where a mistake of one party at the time the contract was made as to a basic assumption on
which he made the contract has a material effect on the agreed exchange of performances
that is adverse to him, the contract is voidable by him if he does not bear the risk of the
mistake under § 154 and
(a) the effect of the mistake is such that enforcement of the contract would be
unconscionable, or
(b) the other party had reason to know of the mistake or his fault caused the mistake.

3) Exception: Avoidance allowed for clerical errors, but not for errors in judgment. Argue that
even a clerical mistake is actually an error in judgment because the party should have been
more careful.
 This generally occurs in bids for construction contracts. Courts generally grant relief for
unilateral mistakes in the calculation of bids if it is the result of “clerical error”.
  Baptist Church Case – Bidder allowed to rescind for unilateral mistake because it was an
honest clerical mistake.

4) THREE PART TEST for recission due to clerical error:

 Mistaken party has to be able to return the innocent party to the status quo
 One party knows or has reason to know of the other party’s clerical error
 Recission is allowed to prevent an unconscionable taking advantage of the other party.

5) GE Case – Rule from this case is that the bidder “should have discovered” the clerical error
then he is not allowed to rescind for mistake” Sub made bid, everything installed, months
later sub discovers error and tries to rescind. Court does not allow recission. Question of
incentives. If we hold subs to their bids, then they have an incentive to be more careful and
get it right next time. If we allow recission, it creates an incentive for sloppiness. No reason
to be careful if they can just rescind if they get it wrong.

6) Rationale for allowing recission due to clerical error: its more efficient to contract on the basis
of accurate information.

7) Photomart Case – Photomart orderd 4 million labels by mistake, meant to order 4 thousand.
However the labels have already been printed, so innocent party can’t be put back in the
status quo.

8) Remedy for Unilateral Mistake: Mistaken party can avoid the contract. Each party is entitled
to restitution of any benefit conferred on the other party. Party seeking avoidance may be
entitled to restitution for any benefit conferred on the other party.

III Misrepresentation
A) Misrepresentation Defined: A misrepresentation is an assertion that is not in accord with the
facts.

Rest. § 159 Misrepresentation Defined

A misrepresentation is an assertion that is not in accord with the facts.

B) Two Part Test of Misrepresentation:

1) Material innocent misrepresentation occurred
2) Plaintiff reasonably relied on that misrepresentation

C) Requirements for avoidance of a contract for misrepresentation:

1) An assertion that is not in accord with the facts
2) The assertion must be either fraudulent or material
3) The assertion must be relied on by the recipient in manifesting assent
4) The reliance must be justified

Rest. § 164 When a Misrepresentation makes a Contract Voidable

(1) If a party’s manifestation of assent is induced by either a fraudulent or a material
misrepresentation by the other party upon which the recipient is justified is relying, the contract is
voidable by the recipient.
(2) If a party’s manifestation of assent is induced by either a fraudulent or a material
misrepresentation by one who is NOT a party to the transaction upon which the recipient is
justified in relying, the contract is voidable by the recipient UNLESS the other party to the
transaction in good faith and without reason to know of the misrepresentation either gives value
or relies materially on the transaction.

D) Requirements that make a contract void for misrepresentation

Rest. § 163 When a misrepresentation prevents formation of a contract

 If a misrepresentation as to the character or essential terms of a proposed contract induces
conduct that appears to be a manifestation of assent by one who neither knows nor has
reasonable opportunity to know of the character or essential terms of the proposed contract, his
conduct is not effective as a manifestation of assent.

E) Assertion Defined
Assertion is commonly a statement, but may also be any conduct. Assertion may also take the
form of concealment, an affirmative act that is intended or known to be likely to keep another from
learning a fact.

Rest. § 160 When Action is Equivalent to an Assertion (Concealment)

Action intended or known to be likely to prevent another from learning a fact is equivalent to an
assertion that the fact does not exist.

F) Fraudulent or Material Defined

Rest. § 162 When a Misrepresentation is Fraudulent or Material
(1) A misrepresentation is fraudulent if the maker intends his assertion to induce a party to
manifest his assent and the maker
(a) knows or believes that the assertion is not in accord with the facts, or
(b) does not have the confidence that he states or implies in the truth of the assertion, or
(c) knows that he does not have the basis that he states or implies for the assertion
(2) A misrepresentation is material if it would be likely to induce a reasonable person to manifest
his assent, or if the maker knows that it would be likely to induce the recipient to do so.

G) Duty to Disclose
1) Begin the analysis ex ante (before the formation of the contract) and assume that neither
party actually has the information. It doesn’t matter if either party did or did not actually have
the information, the concern is with the transaction/search costs of discovering the
information.

2) Two Part Test for Duty to Disclose:

 Status Quo is that there is NO duty to disclose
 There is a duty not to actively impose misinformation
o Argue silence is not imposing anything.
o Argue silence is imposing because it has the same effect on the party as words.

3) Three Part Test for Duty to Disclose:

 If it would be equally difficult for each party to discover the information, then there is NO
duty to disclose.
o Each party has to look out for his own self interests.
o Even if one party actually has the information and the other doesn’t that is irrelevant.
o This rule covers the majority of situations.
o Rarely will the court find that there isn’t equal access to information.
 If the seller has lower search costs and could more easily discover the information, then
the seller has a duty to disclose the information that he has discovered.
 If the buyer has lower search costs and could more easily discover the information, then
he has a duty to disclose the information that he has discovered.

4) Rest. Second of Torts § 551

(1) One who fails to disclose to another a fact that he knows may justifiably induce the other
to act or refrain from acting in a business transaction is subject to the same liability to the
other as though he had represented the nonexistence of the matter that he has failed to
disclose, if, but only if he is under a duty to the other to exercise reasonable care to disclose
the matter in question.
 (2) One party to a business transaction is under a duty to exercise reasonable care to
disclose to the other before the transaction is consummated
(a) matters known to him that the other is entitled to know because of a fiduciary or other
similar relation of trust and confidence between them; and
(e) facts basic to the transaction, if he knows that the other is about to enter into it under
a mistake as to them, and that the other, because of a relationship between them, the
customs of the trad or other objective circumstances, would reasonably expect a
disclosure of those facts.

Rest. § 160 When Action is Equivalent to an Assertion – Concealment

Action intended or known to be likely to prevent another from learning a fact is equivalent to
an assertion that the fact does not exist.

Rest. § 161 When Non-Disclusure is Equivalent to an Assertion

A person’s non-disclosure of a fact known to him is equivalent to an assertion that the fact
does not exist in the following cases ONLY:
(a) where he knows that disclosure of the fact is necessary to prevent some previous
assertion from being a misrepresentation or from being fraudulent or material.
(b) where he knows that disclosure of the fact would correct a mistake of the other party
as to a basic assumption on which the party is making the contract and if non-disclosure
of the fact amounts to a failure to act in good faith and in accordance with reasonable
standards of fair dealing.
(c) where he knows that disclosure of the fact would correct a mistake of the other party
as to the contents or effect of a writing evidencing or embodying an agreement in whole
or in part.
(d) where the person is entitled to know the fact because of a relation of trust and
confidence between them.

IV Impossibility and impracticability

A) Basic Rule – A contract will be excused for impossibility when the contract (“it”) cannot be
completed, not when the defendant cannot complete the contract. When without fault, it is known
from the beginning that the contract cannot be fulfilled unless a particular specified thing
continued to exist and that thing is destroyed performance is excused.

B) Three Requirements – All three must be satisfied:

1) The unexpected occurrence of an intervening act
2) The occurrence was of such character that its non-occurrence was a basic assumption of the
agreement of the parties
3) Occurrence made performance impracticable.

Rest. § 261 Discharge by Supervening Impracticability

Where, after a contract is made, a party’s performance is made impracticable without his fault by
the occurrence of an event, the nonoccurrence of which was a basic assumption on which the
contract was made, his duty to render that performance is discharged, unless the language or the
circumstances indicate the contrary.

C) The event must be one that was not foreseeable by the parties or was one that couldn’t be
planned for.

D) Impossibility Excuses Performance in These Three Areas:

1) Contracts for Personal Service but death or illness intervenes
 Singers, Actors, etc
2) Contract where intervening legislation makes performance illegal
 Contract to buy liquor for frat party, then the law is changed to make the drinking age 25.
3) Contract where from the beginning the exact subject matter is known to be at the heart of the
contract and that subject matter is destroyed.
  Impossibility is measured by an objective standard. Nobody could perform contract, the
contract itself cannot be performed.
 Difference between contract to repair a house that subsequently destroyed and a contract
to build a house that is destroyed in the middle. In contract to repair the house
performance is impossible and therefore excused because there is nothing left to repair.
If building a new building then there’s no excuse for impossibility because the builder can
just start over.

E) Foreseeability is really another way of saying that the lower cost provider should avoid the loss or
assume the risk of loss. Question is who assumes the risk of nonperformance due to unforeseen
hardship? How do we allocate the risk of loss? Who, ex ante, was in the best position to prepare
for and avoid the loss?

F) NIPSCO Case – Economic Analysis:

1) True impossibility would be if a tornado strikes the plant or a strike shuts the plant down.
2) NIPSCO claims that it is impossible to perform because the PSC makes them use a cheaper
source and won’t allow them to pass the costs of the contract to the customers.
3) NIPSCO is not excused because they are the lower cost provider here. They deal with the
PSC all the time, should have known this was a possibility. NIPSCO can’t get out just
because they made a bad judgment decision.

G) Wolftrap Case – Non-economic Analysis:

1) Defendant agreed to provide electricity for the performance, electricity went out so no
performance. Defendant refused to pay for the performance that didn’t happen.
2) Court allows defendant to be excused because of impossibility of performance.
3) Under the economic analysis the power outage was foreseeable and Defendant was in the
better position to prevent the occurrence or plan for it. Defendant was the lower cost provider
so they should assume the risk.

V Frustration of Purpose
A) Requirements:
1) A supervening event (something that happens after the contract is entered into
2) Event was not reasonably foreseeable at the time the contract was entered into
3) The event completely or almost completely destroys the purpose of entered the contract
4) Purpose was understood by both parties

Rest. § 265 Discharge by Supervening Frustration

Where, after a contract is made, a party’s principal purpose is substantially frustration without his
fault by the occurrence of an event the non-occurrence of which was a basic assumption on
which the contract was made, his remaining duties to render performance are discharged, unless
the language or the circumstances indicate the contrary.

B) The supervening event makes it so that the very reason the party entered into the contract cannot
happen anymore. The difference between this and impossibility is that the contract can be
performed, but the purpose for the contract is no longer there.

C) Cancelled Coronation Case: X rents a room along the coronation route of King Edward, King
gets sick and coronation is cancelled. Purpose for getting the room is frustrated because the
reason for getting the room is gone. If the hotel had burned down instead, then it would be
impossibility.

FRAUD AND THE OTHER COMMON LAW POLICEMEN

I Fraud and Misrepresentation
A) Fraud v. Misrepresentation
1) Misrepresentation is innocent, an error made in good faith where fraud requires an intent to
defraud
 2) Effect of misrepresentation is recission of the contract; Effect of fraud is damages or maybe
even punitive damages.
3) Fraud and misrepresentation can both lead to warranty claims and then to unconscionability.

B) 5 Elements of Fraud:
1) False material representation or untruth
2) Of a past or existing fact
 Parties are not held to prophecy
 Opinions don’t could because they aren’t facts unless they its coming from an expert.
3) Scienter – Intent to Defraud
4) Reasonable/justifiable reliance by the victim
 If the victim knows the truth or could discover the truth after a reasonable inquiry cannot
recover.
5) Injury to the victim
 Must have property injury, not just being upset

C) Two Types of Fraud:

1) Fraud in the Inducement: Enter into the contract by fraud; induce someone to enter a
contract through known misrepresentations
2) Fraud in the Execution: Get someone to sign a contract and they don’t even know that it’s a
contract.

II Warranty Claims
A) Lemon Laws:
1) Magnuson-Moss Warranty –Federal Trade Commission Improvement Act: provides that
when a product is advertised as having a full warranty, if the product contains a defect or
malfunction after a reasonable number of attempts of the warrantor to remedy defects or
malfunctions such warrantor must permit the consumer to elect either a refund for or
replacement without charge or the product or part.
 This has little effect because almost all warranties are advertised as limited rather than
full.
2) Some states have passed similar “lemon laws” that are applicable to all express warranties of
motor vehicles, even those that are NOT “full”. They contain “repair within a reasonable time
or replace” provisions.
 These laws are designed to protect consumers, but really just provide a false sense of
security at an added premium price. Few people take advantage of the law because of
the high transactions costs, but all consumers pay for the law in higher prices.

B) Limitation of warranties is often claimed to be unconscionable. UCC 2-718 and 2-719 governs
liquidation of damages and limitation of remedies for breach of warranties.

UCC 2-313 Express Warranties

Express warranties created by:
(a) affirmation of fact or promise by seller
(b) description of the goods
(c) sample or model
ONLY if it becomes part of the basis for the bargain. No special words needed, but an affirmation of
the value or merely the seller opinion or commendation of the goods does NOT create a warranty.

UCC 2-314 Implied Warranties of Merchantability; Usage of Trade

If a seller is a merchant of the type of goods being sold, a warranty that the goods shall be
merchantable is implied in the contract.

Merchantable:
 Pass without objection in the trade under the contract description
 Are of fair and average quality within the description if fungible goods
  Are fit for the ordinary purposes for which goods are used
 Run, within the variations permitted by the agreement, of even kind, quality, and quantity
within each unit and among all units involved.
 Adequately contained, packaged, labeled
 Conform to the promises or affirmations of fact on the label

UCC 2-315 Implied Warranties of Fitness for a Particular Purpose

Where the seller at the time of contracting has reason to know of 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 under 2-316 an implied warranty that the goods
shall be fit for such purpose.

UCC 2-316 Exclusion or Modification of Warranties

(1) Words or conduct relevant to the creation of an express warranty and words or conduct tending to
negate or limit warranty shall be construed whenever reasonable as consistent with one another; but
negation or limitation is inoperative to the extent that such construction is unreasonable.
(2) Subject to (3) below, to exclude or modity the implied warranty of merchantability or any party of it
the language must mention merchantability and in case of a writing must be conspicuous, and to
exclude or modify any implied warranty of fitness the exclusion must be by a writing and conspicuous.
Language to exclude all implied warranties of fitness is sufficient if it states for example, that the there
are no warranties which extend beyond the description on the face hereof.
(3) Notwithstanding (2)
(a) unless the circumstances indicate otherwise, all implied warranties are excluded by
expressions like “as is”, “with all faults”, or other language which in common understanding calls
the buyer’s attention to the exclusion of warranties and makes plain that there is no implied
warranty; and
(b) when the buyer before entering into the contract has examined the goods of the sample or
model as fully as he desired or has refused to examine the goods there is no implied warranty
with regard to defects which an examination ought in the circumstances to have revealed to him;
and
(c) an implied warranty can also be excluded or modified by course of dealing or course of
performance or usage of trade.
(4) Remedies for breach of warranty can be limited in accordance with the provisions on liquidated
damages or limitation on damages and on contractual modification of remedy. (2-718 and 2-719)

III Unconscionability
A) If terms of a contract are so grossly unfair, sometimes the court will allow one party to be excused
from performance under the contract.

B) California Test for Unconscionability:

1) Two Types of Unconsionability – Procedural unconscionability and substantive
unconscionability.
2) Procedural Unconscionability:
 Oppression
o No real negotiation
o Absence of Meaningful choice
Adhesion contracts, “take it or leave it contracts”, long contracts with terms favorable
to the seller; Stone says no such thing as an adhesion contract because you can
always try to negotiate by going higher up in the organization or you can always
just find another seler.
 Surprise
o Found on last page of 30 page contract, etc.
3) Substantive Unconscionability:
 Commercially unreasonable test – who knows what is commercially unreasonable?
 Rest. § 208 Unconscionable Contract or Term
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.

IV Duty of Good Faith and Fair Dealing

Rest. § 205 Duty of Good Faith and Fair Dealing

Every contract imposes upon each party a duty of good faith and fair dealing in its performance and
its enforcement.

V Products Liability
A) Tests for determining liability on products liability cases:
1) Rest. of Torts § 402(a):
 If a product is in a defective condition unreasonably dangerous to the user or consumer
or to his property is subject to liability for physical harm (not economic) caused to the
user or consumer if the seller is engaged in the business of selling such a product and it
is expected to and does reach the user or consumer without substantial change in the
condition in which it is sold. This is regardless of whether the seller has exercised all
possible care and regardless of whether the user had not bought the product from or
entered into any contractual relation with the seller.

2) Reasonable Alternative Design Test: This rule doesn’t work because of course there will
always be something better that could have been done. Resources are scarce, and having a
perfect product is nirvana. Amounts to a no fault insurance policy for everyone that is a
consumer.

3) Hand Formula Risk/Utility Balancing: What is the risk of accident or injury compared to the
cost of alternative design. If the benefit in safety is even slightly higher than the cost to
provide the safer product, then the product should be redesigned or the seller should be
liable.
 If the marginal cost to prevent the injury/fix the product/etc. is less than the marginal
benefit to consumers then the seller is liable for the injury because he should have made
the product safer.
 If the marginal cost to prevent the injury is MORE than the marginal benefit to consumers
then the seller is NOT liable because it would cost more to fix it than to pay damages.
 Considerations:
o Nature of the product
o Probability of the Occurrence
o Cost of the manufacturer to achieve safety
o Magnitude of injury to the consumer
o Precautions that should be taken by consumer
o Impact of corrective measures taken by manufacturer would have on consumer
 Absolute liability is proper when (mouse in the coke cases – neither seller nor buyer can
make it better)
o Product is simple
o There is a low incidence of the accident’s occurrence
o Cost to manufacturer is high to achieve a small increase in level of safety
o Injury is minor
o Nothing consumer could do to prevent future sales
o Slight increase in cost won’t prevent future sales

4) Consumer Expectations Test: All consumers will never be satisfied so this doesn’t work.
Manufacturers do not agree to uniform expectations so planning ahead is impossible.
VI Service Liability with Exculpatory Clauses
A) Two Part Test for Exculpatory Clauses in Public Service Contracts:
1) Clause must be unambiguous
2) Clause must only free defendant from negligence. It cannot block recovery for willful or
intentional acts.
B) Some states don’t allow exculpatory clauses in service contracts at all.
VII Exorbitant Prices
A) Exorbitant prices are based on some sort of fraud. But courts generally don’t get into the
adequacy of consideration problem.
B) Slum stores need to charge higher prices because they have to assume more risks than other
stores. Customers have no cash and are greater credit risks. Store has to spend more money
trying to get the debtors to pay than other stores. Also higher security costs in higher crime
areas.

VIII Incapacity
A) Infants – Rest. § 14
Unless a statute provides otherwise, a natural person has the capacity to incur only voidable
contractual duties until the beginning of the day before the person’s 18 th birthday.

B) Mental Illness or Defect – Rest. § 15

(1) A person incurs only voidable contractual duties by entering into a transaction if by reason of
mental illness or defect
(a) he is unable to understand in a reasonable manner the nature and consequences of
the transaction, OR
(b) he is unable to act in a reasonable manner in relation to the transaction and the other
party has reason to know of his condiion.
(2) Where the contract is made on fair terms and the other party is without knowledge of the
mental illness or defect, the power of avoidance terminates to the extent that the contract has
been so performed in whole or in part or the circumstances have so changed that avoidance
would be unjust. In such a case the court may grant relief on such equitable terms as justice
requires.

IX Illegality
A) Neither party to an illegal contract may enforce it. This applies even when only one party’s
performance is illegal. Parties may be partial remedy on a partially performed contract and the
contract is divisible from the illegal part. Courts generally make an effort to salvage the contract.

B) Types of illegal contracts:

1) Agreements to restrain trade by interference with a valid contract
 Exception for covenants not to compete
2) Agreements to commit a crime
3) Agreements to commit a tort
4) Gambling Contracts
5) Contract calling for bribes or those procured by a bribe
6) Licensing requirements where one party to the contract should be licensed but isn’t.
7) CONTRACTS AGAINST PUBLIC POLICY – unconscionability (breach of a fiduciary duty, for
example). Administrators of wills and trusts are held to a higher standard than just the regular
contract standard.

Types of Licensing Statutes:

 Regulatory Licensing Statutes – Made to protect the public. EX: license to practice law or to
be a doctor. ILLEGAL CONTRACT
 Revenue Raising Statutes – Just raises money for the government with no direct benefit to
public protection. EX: Business License. NOT ILLEGAL CONTRACT

Rest. § 181 Effect of Failure to Comply with Licensing or Similar Requirement

 If a party is prohibited from doing an act because of his failure to comply with a licensing,
registration, or similar requirement, a promise in consideration of his doing that act or of his
promise to do it is unenforceable on grounds of public policy if
(a) the requirement has a regulatory purpose AND
(b) the interest in the enforcement of the promise is clearly outweighed by the public
policy behind the requirement.

Rest. § 178 When a Term is Unenforceable on Grounds of Public Policy

(1) A promise or other term of an agreement is unenforceable on grounds of public policy if
legislation provides that it is unenforceable or the interest of its enforcement is clearly outweighed
in the circumstances by a public policy against the enforcement of such terms.

C) Covenants not to compete are Valid if:

1) They are ancillary – a protection of legitimate interests of the seller/employer without putting
too much burden on the employee/buyer.
2) They are reasonable as to length of time
3) They are reasonable as to area

Rest. § 187 Non-ancillary Restraints on Competition

A promise to refrain from competition that imposes a restraint that is not ancillary to an otherwise
valid transaction or relationship is unreasonably in restraint of trade.

X Duress
A) Duress by Physical Compulsion: If a victim acts under physical compulsion, for instance by
signing a writing under such force that the victim is a “mere mechanical instrument” then the
victim’s actions are not effective to manifest assent. Such duress by physical compulsion results
in no contract at all or in what is called a void contract. This is the case only when PHYSICAL
compulsion is at issue.

B) Duress by Threat:
1) There must be a threat
2) The threat must be improper
3) The threat must induce the victim’s manifestation of assent
4) The threat must be sufficiently grave to justify the victim’s assent

C) Threat: A manifestation of an intent to inflict some loss or harm on another. It need not be
expressed in words and may be inferred from words or other conduct. A mere prediction of
probable consequences of a course of action may not amount to a threat.

D) Improper:
A threat may be improper even though the one who makes the threat has a legal right to do the
threatened act. Categories of improper threats include:
1) Traditional kinds of improper threats that are regarded as so shocking that the courts will not
inquire into the fairness of the resulting exchange or in themselves necessarily involve some
element of unfairness.
 Threat of criminal prosecution: This is improper because it is use for private benefit of the
criminal process of the court provided for the prosecution of crime and the protection of
the public. The threat is improper even if the person who makes it honestly believes that
the one whose prosecution is guilty and even if that person is in fact guilty.
o Where it is established that the sum promised or actually paid was actually due,
however, it has been suggested that relief for duress will be given only for the
purpose of restoring the excess over what is reasonably and justly due, and to the
extent that such excess is shown to exist.
 Threat of Civil Process: Threat to use civil process is only improper if the person who
made the threat did not believe that there was a reasonable basis for the threatened
 process, or knew that the threat would involve a misuse of the process, or realized the
demand was exhorbitant.
 Threat to Break a Contract: A threat by a party to a contract not to perform a contract
duty is not, of itself, improper, and an agreement of modification or recission induced by
such a threat may be binding on both parties. The parties to a contract are bound by a
duty of good faith and fair dealing, and a threat may be improper if it breaches this duty of
good faith and fair dealing.
o Good Faith UCC §2-103: Observance of reasonable commercial standards of fair
dealing in the trade.
o Subcontract refuses to deliver goods needed by a general contractor to fulfill a
contract unless the general contract both paid more than the contract price for the
goods and awarded the subcontractor a second contract. This amounts to duress.
 Duress may be found if an employer who has the right to terminate the employment at
will threatens to fire an employee as a means of obtaining some unrelated advantage,
such as release of a claim or the sale of shares of stock (even though there is no threat
of breaking the contract).

2) Threats in which the impropriety consists of the threat in combination with resulting
unfairness.
 A party will generally be held to a contract even though that party’s adversity has been
taken advantage of, as long as the contract has been shaped by prevailing market forces.
 If a party has been induced to make a contract by a threat to exercise power for
illegitimate ends, the transaction is suspect.
 Threat not to deal with another person is ordinarily NOT duress, but if the threatened act,
if it were carried out would harm the victim without significantly benefiting the maker and
would therefore be done maliciously and out of pure vindicativeness would be duress.
o A threat to make public embarrassing information concerning the victim unless the
victim makes the proposed contract would be duress. (harm to victim no benefit to
other party)
 If effectiveness of the threat is enhanced because the maker has achieved an advantage
over the victim by unfair dealing.
o Seller refuses to supply goods after manipulative conduct at the bargaining stage has
left the buyer at the seller’s mercy.

E) Induces Assent: This is a problem of causation. The threat must actually induce assent on the
part of the victim. This is usually not in controversy.

F) Threat is Sufficient: Threat must have left the victim with no reasonable alternative. What is a
reasonable alternative depends on all of the circumstances, including the victim’s age and
background, the relationship of the parties, and the availability of disinterested advice.

G) Effect of Duress:
1) Duress by threat makes the contract voidable at the instance of the victim.
2) Victim may assert duress by raising it as a defense to an action brought to enforce the
contract OR by brining an action based on avoidance – recission – of the contract. Victim
cannot rescind the contract if the victim has ratified the contract.
3) After recission, victim is entitled to restitution of any benefit given to the other party. The
other party is also entitled to restitution of any benefit conferred on the victim.

Rest. § 175 When Duress makes a Contract Voidable

(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.
(2) If a party’s manifestation of assent is induced by one who is not a party to the transaction, the
contract is voidable by the victim unless the other party to the transaction in good faith and without
reason to know of the duress either gives value or relies materially on the transaction.
 Rest. § 176 When a Threat is Improper
(1) A threat is improper if
(a) what is threatened is a crime or tort, or the threat itself would be a crime or tort, or the threat
itself would be a crime or 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, or
(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 the party
making the threat
(b) the effectiveness of the threat in inducing the manifestation of assent is significantly increased
by prior unfair dealing by the party making the threat
(c) what is threatened is otherwise a use of power for illegitimate ends.

IX Undue Influence
A) Two Required Elements:
1) A special relation between the parties
2) Improper persuasion of the weaker by the stronger
B) Relationships between the parties:
1) Relationship of trust or confidence in which the weaker party is justified in assuming that the
stronger will not act in a manner inconsistent with the weaker’s welfare
 Parent – child
 Physician – patient
 Husband – wife
2) Relationship of domination in which the weaker party is for some reason under the
domination of the stronger party.

C) “Unfair” persuasion: Once the relationship is shown, then it must be shown that the assent of the
weaker party was induced by unfair persuasion on the part of the stronger party. Whether the
result was produced by means that seriously impaired the free and competent exercise of
judgment? Important factor is imbalance in the resulting bargain.

D) Undue influence is used when the situation falls short of misrepresentation or duress.

Rest. § 177 When Undue Influence Makes a Contract Voidable

(1) Undue influence is unfair persuasion of a party who is under the domination of the person
exercising the persuasion or who by virtue of the relation between them is justified in assuming that
the person will not act in a manner inconsistent with his welfare.
(2) If a party’s manifestation of assent is induced by undue influence by the other party, the contract is
voidable by the victim.
(3) if a party’s manifestation of assent is induced by one who is not a party to the transaction, the
contract is voidable by the victim UNLESS the other party party to the transaction in good faith and
without reason to know of the undue influence either gives value or relies materially on the
transaction.

PERFORMANCE AND CONDITIONS

I Nonperformance and Performance
The goal is to protect the party’s expectation that the other party will perform against a possible failure
of the other party to perform. These rules afford the injured party, in addition to a claim for damages,
a variety of types of self-help, the most important of which is the right to suspend its own performance
and ultimately to refuse to perform if the other party fails to perform.

II Conditions
A) Rest. § 224 Condition: An event, not certain to occur, which must occur, unless its occurrence is
excused, before performance under a contract becomes due.
 1) Condition may be largely in control of either party or a third party. Condition need NOT be
material to the contract. Almost anything can be a condition.
2) Express Conditions: Express language in the contract. A court determines whether the
contract makes the event a condition by the process of interpretation.
3) Implied Conditions: Even if the agreement does not make an event a condition, he court may
supply a term that makes it a condition. If an obligor’s duty cannot be performed without
some act by the obligee, the court will supply a term making that act a condition of the
obligor’s duty.
4) Conditions must be “not certain to occur” so things that are certain to occur such as the
passage of time, cannot be conditions.
5) Condition Precedent: Condition that must occur before the contract must be performed.
6) Condition Subsequent: An event that extinguishes a duty that has already existed.

B) Effects of Nonoccurrence of a Condition

1) Obligor is entitled to suspend performance on the ground that performance is not due as long
as the condition has not occurred.
2) If a time comes when it is too late for the condition to occur, the obligor is entitled to treat his
duty as discharged and the contract terminated.
 This may be stated as a provision of the contract or it may be a “reasonable time” under
an implied term.
3) These effects do NOT follow if the condition has been excused. Condition may excused by
waiver, by breach, or by a court acting to avoid forfeiture. A condition will not usually be
excused unless it is relatively minor part of the bargain.
4) If the occurrence of a condition is expressly required by the agreement of the parties, then a
rule of strict compliance traditionally applies.

C) Questions of interpretation:
1) Was the party’s duty conditional or was it a material term?
2) If conditional, what is the event on which it was conditioned?

D) Preferences:
1) Preference for an interpretation that imposes on a party a duty to see that an event occurs,
rather than one that makes the other party’s duty conditional on occurrence of the event.
2) Preference for an interpretation that will reduce an obligee’s risk of forfeiture if the event does
not occur.

E) Waiver of Condition: After the contract was made, the obligor promised to perform despite the
nonoccurrence of the condition or despite a delay in its occurrence. This promise is known as a
“waiver”. A party can waive a condition only if the condition is for that party’s benefit; only if that
party is the obligor that owes the duty that is subject to the condition. If the condition is a
condition of the duties of both parties, it cannot be waived by one party alone. A party that
without consideration has waived a condition that is within the other party’s control before the
time for occurrence of the condition has expired, can retract the waiver and reinstate the condition
unless the other party has relied to such an extent that retraction would be unjust. Retracting
party must either give notice while there is still reasonable time to permit the other party to cause
the condition to occur or must give an extension of time.

F) Excuse of Condition by Breach: An obligor may excuse a condition of its duty by committing a
breach that causes the nonoccurrence of the condition. When the condition is excused, the
obligor’s duty becomes absolute.
1) Breach by prevention (nonperformance)
2) Breach by failure to cooperate (nonperformance)
3) Breach by repudiation
 G) Excuse of Condition to Avoid Forfeiture: When the nonoccurrence of a condition will cause
forfeiture, but the facts do not lend themselves to relief by interpretation, the courts have found
two situations in which they will avoid the effects of forfeiture.
1) Courts have excused a condition when its occurrence becomes impossible or impracticable
and forfeiture would result if it were not excused.
2) Courts have also excused a condition to the extent that its nonoccurrence would cause
disproportionate forfeiture. To determine what is “disproportionate” a court must weigh the
extent of the forfeiture by the obligee against the importance to the obligor of the risk from
which he sought to be protected and the degree to which that protection will be lost if the non-
occurrence of the condition is excused to the extent required to prevent forfeiture. (balance
the forfeiture that one party would suffer and the interests that the other sought to protect.

III Nonperformance
A) If a duty is fully performed it is discharged. Nothing less than full performance is a discharge.
Nonperformance is NOT always a breach. If the nonperformance is justified, it is not a breach.
When performance is due, any failure to render performance is a breach.

B) Constructive Conditions of Exchange: If the only consequence of a party’s nonperformance were

liability for breach of contract, a party to a bilateral contract would have little assurance of
receiving the promised return performance. If the other party failed to perform, the injured part
would still be bound to perform. The court determines whether one party’s promise is dependant
on the other party’s return promise. If it is, the court supplies a term making the first party’s
promise conditional on performance of the return promise.

C) Concurrent Conditions: Where parties are to perform at the same time rather than one after
another. Tender of the goods by the seller and the payment by the buyer are concurrent
conditions under UCC § 2-507.
1) Tender: an offer coupled with the present ability to fulfill all the conditions resting on the
tendering party.
2) A party that requires concurrent performance must still make an effort to perform before
bringing an action for breach. Mutual abandonment will be considered an agreement of
recission.

D) Order of Performance: Determines the amount of security that the concept of constructive
conditions of exchange can afford.
1) The parties can fix the order of performance by the language of their agreement.
2) Insofar as return performances are to be rendered simultaneously, they are due
simultaneously. The law favors an order of performance that results in concurrent conditions
of exchange.
3) If it is impossible to perform simultaneously, one party’s performance will take time and the
other’s will not, there must be another rule. When the performance of a contract consists of
doing on one side and giving on the other, the doing must take place before the giving.
4) Judicial preference for performance at one time rather than over a period of time.

E) Methods the Court has used to avoid the forfeiture that might otherwise result from the concept of
constructive conditions of exchange:
1) Substantial Performance – if one party’s performance is a constructive condition of the other
party’s duty, only “substantial” performance is required of the first party before that party can
recover under the contract. Strict compliance is NOT necessary to recover under the
contract. Whether performance is substantial is a question of fact that depends on the
particular circumstances of the case. Main focus is the injured party. How much of the benefit
that the injured party reasonably expected from the exchange has been received? Also look
at the party in breach; the extent of forfeiture that the party in breach will suffer is relevant in
determining whether performance has been substantial.
 If breach is “willful” then the performance cannot be substantial.
  Doctrine of substantial performance has generally NOT been applied to a seller’s claim
against a buyer that has rejected either real or personal property under a contract of sale.
Seller can avoid forfeiture by selling the rejected property elsewhere at a reasonable
price.
 Perfect tender rule – Buyer is entitled to reject goods unless the seller made a perfect
tender. Substantial performance is not enough.

2) Divisibility of Contract: Even if a party’s performance falls short of that required by the
doctrine of substantial performance, a court can avoid forfeiture and allow recovery on the
contract by holding that the contract is divisible (or severable) rather than entire in nature. It
will then allow a pro rata recovery based on the contract price for the proportion of the
performance rendered. A contract is said to be divisible if the performance to be exchanged
can be divided into corresponding pairs of part performances in such a way that a court will
treat the parts of each pair as if the parties had agreed that they were equivalents.
 Rest. § 240 two requirements for a contract to be considered divisible:
o It must be possible to apportion the parties’ performances into corresponding pairs of
performances. This is possible if the price for parts of the performance can be
determined.
o It must be proper to regard the parts of each pair as agreed equivalents.
Fundamental question is whether the part performances are of roughly equivalent
value to the injured party when viewed against the background of that party’s
expectations as to the agreement as a whole.

3) Restitution: Courts tend to grant restitution to the party in breach. Thus a party that is
precluded from recovery on the contract because of not having substantially performed can at
least recover for any benefit conferred, less damages for which that party is liable because of
breach. This is more prevalent in employment or building or employment contracts than in
sales for goods.

IV Responses to Breach by Nonperformance

A) Power to Suspend Performance and to Terminate the Contract: The question is whether a breach
justifies the injured party in exercising a right to self-help by terminating the contract and refusing
either to render any remaining performance or to accept any further performance by the party in
breach. Liability is imposed on the first party in time to have committed the material breach.
1) Damages for Total Breach: If the injured party chooses to terminate the contract, it is said to
treat the breach as total. The injured party’s claim for damages takes the place of its
remaining substantive rights under the contract. Damages are calculated on the assumption
that neither party will render any remaining performance. Injured party is compensated for
the loss that it will suffer as a result of being deprived of the balance of the other party’s
performance minus the amount of any saving that resulted from the injured party not having
to render any remaining performance of its own.

2) Damages for Partial Breach: If the injured party does not terminate the contract, either
because he had no right to or does not choose to, the injured part is said to treat the breach
as partial. The injured party has a claim for damages for partial breach, in addition to its
remaining substantive rights under the contract. Damages are calculated on the assumption
that both parties will continue to perform in spite of the breach. They compensate the injured
party ONLY for the loss it suffered as the result of the delay or other defect in performance
that constituted the breach, not for the loss of the balance of the return performance. Injured
party is NOT relieved from performing so there is no saving to be subtracted.
 Risk of splitting the claim by suing immediately for damages for partial breach is that the
party may be precluded from bringing the suit again. No second action is allowed on the
same claim.
 3) Breach when conditions are concurrent: A party must tender its own performance in order to
put the other party in breach. On tender, the injured party is excused from performing and
has a claim for damages for total breach.

B) Material Breach and Suspension:

In order for a breach to justify the injured party’s suspension of performance, the breach must be
“material”; it must be significant enough to amount to the nonoccurrence of a constructive
condition of exchange. The injured party doesn’t have to suspend, it can instead continue to
perform and claim damages for partial breach. An immaterial breach does NOT entitle the injured
party to suspend performance; the party must continue performance and can claim damages for
partial breach. If the injured party disrupts performance by suspending in response to an
immaterial breach, that party itself commits a breach. Time for determining materiality is the time
of the breach and NOT the time that the contract was made.

C) Cure: Even though a breach is serious enough to justify the injured party’s suspending
performance, the party in breach can often “cure” the breach by correcting the deficiency in
performance.
1) If the time for performance has not yet expired at the time the seller rejects, the seller can
cure within the time for performance.
2) After the time for performance has expired and the seller had reasonable grounds to believe
that the goods would be acceptable, then the seller has a reasonable time to cure by
tendering acceptable goods as evidenced by prior dealings and usage of trade.

D) Total Breach and Termination: Although a material breach justifies the injured party in exercising
a right to self-help by suspending performance, it does NOT necessarily justify the injured party in
terminating the contract. Fairness ordinarily dictates that the party in breach be allowed a period
of time to cure the breach if it can. If the party in breach does cure within that period, then injured
party is not justified in further suspension of its performance and both parties are still bound to
complete their performances. After some period of time, the injured party can put an end to the
contract by terminating it. A claim for damages for total breach does NOT rest on the premise
that the contract has been avoided, but rather on the premise that the injured party is entitled to
compensation for the performance that has not been rendered. To recover such damages, the
injured party must show that, had there been no breach, it could have performed or tendered
performance as required under the contract.

V Prospective Nonperformance
A) Anticipatory Repudiation as a Breach: Party repudiates before the time for performance has
arrived. Anticipatory repudiation discharges any remaining duties of performance by the injured
party. They no longer have to be ready to perform. Repudiation of a duty does not operate as a
breach if it occurs AFTER the repudiating party has received all of the agreed exchange for that
duty. The injured party must then await the time for performance to sue for damages. Thus
courts do not apply the doctrine of anticipatory repudiation when a party repudiates a unilateral
contract or a bilateral contract that has been fully performed by the injured party.

B) What Constitutes a Repudiation

1) Repudiation is a manifestation by one party to the other that the first cannot or will not
perform at least some of its obligations under the contract. It may be by words or other
conduct. Repudiation must be serious enough that the injured party could treat it as total if it
occurred and under the UCC is must substantially impair the value of the contract.
2) Repudiation by Words: Repudiation generally consists of a statement by the repudiating
party that it cannot or will not perform. A party’s expressions of doubt as to its willingness or
ability to perform do not constitute a repudiation. Intention must be communicated and must
be made to a party to the contract.
3) Party’s good faith is irrelevant, its still a repudiation.

C) Responses to Repudiation:
 1) Injured party may treat the contract as terminated an claim damages
2) Injured party may attempt to save the deal by insisting that the other part perform or by urging
it to retract its repudiation
3) Injured party may ignore the repudiate and await time for performance.

ASSIGNMENT AND DELEGATION, THIRD PARTY BENEFICIARIES

I Assignments
A) General Rule: Contract rights are freely assignable.

B) Assignment is when the obligee transfers his contract rights to the assignee. The assignee then
becomes the one who receives rights from the obligor. Assignment is the transfer of RIGHTS.
The assignee gets the benefits of the contract.

C) The word assignment refers to the act by which an assignor transfers a contract right to an
assignee. This act will sometimes be called an “effective assignment” as opposed to an
“attempted assignment” or “purported assignment”.

D) To assign a contract right is to take from the assignor and to give to the assignee the right to
performance by the obligor. The transfer of a contract right extinguishes the assignor’s right to
performance by the obligor and gives the assignee a right to that performance. There must be a
present transfer of the rights, not a promise of future transfer.

E) No writing is required for an effective assignment, unless it involves a property right. No

consideration is needed for a transfer of contract rights.

F) Limitations on Assignability
1) Purported assignment will be deemed ineffective if the transfer of the right would adversely
affect the obligor.
 Under the UCC an assignment of rights under a contract for the sale of goods is
ineffective if it would
o Materially change the duty of the other party
o Increase materially the burden or risk imposed on that party by the contract
o Impair materially that party’s chance of obtaining return performance
 This limitation is to protect the obligor, so it doesn’t apply if the obligor either agreed in
the original contract that the obligee’s rights would be assignable or later consented to
the assignment.
2) Assignment will be ineffective if the assignment would result in a material change in the
obligor’s duty.
 If the obligor’s duty depends on the obligee’s personal discretion, assignment may result
in a material change in the obligor’s duty. (duty to perform services under the personal
supervision of the other party)
3) Assignment will be ineffective if assignment causes a material increase in the obligor’s
burden or risk, even though it doesn’t result in a material change in the obligor’s duty.
4) Assignment MAY be ineffective if it impairs the obligor’s chances of obtaining return
performance.
5) Assignment is ineffective if the parties include in the contract a term that prohibits
assignment.

G) Revocability of Assignments
1) Gratuitous assignments are revocable. If the assignment is revoked, or the donor becomes
incapacitated or dies the assignee’s rights are terminated.
2) If an assignee gives value for the assignment, it is not gratuitous and is NOT revocable. An
assignee gives value by taking the assignment either in exchange for something that would
be consideration for a promise.

H) Effect of Notice on Assignment

 1) If the obligor has notice of the assignment, he has to pay the money to the assignee, not the
assignor. Some courts hold that if the obligor pays the assignor, then he is also required to
pay the assignee. The assignee is not required to go against the assignor to get the payment
received from the obligor.
2) If the obligor pays the assignor without knowing of the assignment, the obligor is not required
to also pay the assignee.

I) The assignee stands in the shoes of the assignor. The assignee generally has the sam rights
against the obligor as id the assignor.

J) Competing Claims of Ownership

1) If an assignor assigns his rights to B, then later assigns them to C also who is unaware of the
assignment to B –
2) New York Rule – 1st assignee wins.
3) English Rule – 1st assignee wins UNLESS the 2nd assignee had notified the obligor of its
assignment before the 1st assignor notified the obligor of his. Whoever notifies the obligor
first wins.
4) Massachusetts “Four Horsemen Rule” (Restatement Rule)– 1 st assignee wins unless the
second assignee did one of these things:
 Received payment or other satisfaction of the obligation
 Obtained judgment against the obligor
 Made a new contract with the obligor by novation
 Obtained possession of a symbolic writing.
5) UCC Rule – Assignee that first files a financing statement covering its assignment prevails.
6) NOTE: If assignment was made irrevocable (value was given) that subsequent assignment
will take precedence over previous gratuitous assignments because the gratuitous
assignments are revocable.

II Delegations
A) Delegation is the obligor’s empowering of another to perform the obligor’s duty. By a delegation,
the obligor as delegating party empowers a delegate to perform a duty that the delegating party
owes to an obligee.

B) Delegation refers to the act by which one owing a duty manifests an intention to confer upon
another person the power to perform that duty. If the delegating party accomplishes that intention
the delegation is said to be “effective”.

C) Under an effective delegation, the delegating party is not relieved of its duty. A delegation of
performance does not relieve the delegating party of any duty to perform or liability for breach.
The significance of delegation is not that the delegation itself will discharge the duty (it wont’) but
that the performance of the duty by the delegate will discharge the duty. An effective delegation
means that the obligee must accept performance by the delegate as performance of the duty
owed by the delegating party. If the obligee refuses to accept delegate’s performance, it will
constitute a repudiation.

D) Non-delegable Duties
1) Duty is not delegable if the parties to the contract explicitly provide that a performance is not
delegable.
2) Duties are not delegable if they are “personal” in that they involve character, reputation, taste,
skill, or discretion.
3) Delegations that would change the obligee’s expectancy are not effective.
4) If a special trust is reposed in delegator by the other party the duty is not delegable.

E) Assumption v. Novation
1) The delegate is under no duty to perform. He has no liability if he does not perform. The
obligee only has a claim for breach against the delegating party.
 2) Assumption: The delegate may assume the duties of the delegating party by promises the
delegating party to perform that party’s duties. The delegate is then under a duty to the
delegating party, and is also under a duty to the obligee because the obligee is an intended
beneficiary of the assumption agreement. The assumption does not discharge the duty of the
delegating party to the obligee. Both the delegate and the delegating party are liable to the
obligee to render the same performance. The obligee is entitled only to one performance.
The delegating party acts as a surety for the delegate. The delegate is the principal and the
delegating party is the surety.

3) Implied Assumption: If a party transfers an entire contract (rights and duties) an assumption
of the duties may be implied.

4) Novation: If the delegate promises to perform the duty of the delegating party and the obligee
consents to it, then the delegating party’s duty may be discharged. There may be a novation
even if the duty is nondelegable. For a novation, assent by the obligee to release the
delegating party in exchange for the new liability of delegate, is required.

III Transfers
A party to a contract that both assigns rights and delegates performance to another person will be
referred to as a transferor. The other person will be referred to as a transferee. The transaction will
be known as a transfer of the contract.

IV Third Party Beneficiaries

A) Incidential Beneficiary: One that does NOT acquire rights under a contract.
B) Intended Beneficiary: One that does acquire rights under a contract.
1) Requirements for Intended Beneficiaries:
 One must show that a recognition of a right to performance in the beneficiary is
appropriate to effectuate the intention of the parties.
 One must show that either
o The performance of the promise will satisfy an obligation of the promisee to pay
money to the beneficiary OR
o The circumstances indicate that the promisee intends to give the beneficiary the
benefit of the promised performance.

2) Rights of the Beneficiary

 Beneficiary has a right against the promisor
 Beneficiary retains any right that the he had against the promisee BEFORE the contract
between the promisor and promisee. This occurs in the creditor situation when there is an
existing obligation between them. A gratuitous beneficiary has no rights against the
promisee unless there are grounds for § 90 reliance.

3) Rights of Promisee
 Promisee has a right against the promisor. That right is enforceable by an action for
damages or specific performance to the same extent as are other contract rihts.

4) Vesting of Beneficiary’s Right

 A beneficiary does acquire contract rights until those rights have vested.
 Three views as to when the rights vest:
o As soon as the contract is made
o When, having learned of the contract, the beneficiary assents to it
o Right does not vest until, having learned of the contract, the beneficiary relies on it.
 Restatment View: The promisor and promisee have the power to discharge or modify the
duty until the beneficiary, before he receives notice of the discharge or modification,
 materially changes his position in justifiable reliance on the promise or brings suit on it or
manifests assent to it at the request of the promisor or promisee.
 Prior to vesting, the promisee and promisor are free to modify or rescind the beneficiary’s
rights under the contract.