Contracts Harvard Ferrell Fall2004

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OUTLINE DETAILS:School: Harvard Law SchoolCourse: Contracts

Year: Fall, 2004Professor: Allen FerrellText: Contracts: Cases and Comment, 8th Ed.Text Authors: John P. Dawson, William Burnett Harvey, Stanley D.Henderson

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Contracts Outline Harvard Law School Professor Ferrell Fall 2004

1. Background Elements: The Contract Curve and Expectation Damagesa. basic goal of any contract: both parties believe it to be their benefit. not a zero-

sum gameb. Basic issues to examine:

i. is there a K formed?ii.what is meant by the K (interpretation)?iii. is there a breach of K?iv. how is the breach to be resolved (damages)?v.Common Law (probably) or UCC (good = movable commercial items.

not land, employment, etc)2. Consideration and the Bargained-for Exchange what is the nature of the bargain?

i. 17 enforceable K requires bargain and consideration, except wherespecial rules apply

1. bilateral K exchange of promises or promise for a promise.2. unilateral K exchange of a promise for a performance3. 31 presumption favors bilateral K in case of ambiguity

ii.71 to count as consideration a performance or return promise(inducement required) must be bargained for (quid pro quo requirement).bargain theory of liability.

iii. 19 Promise need not be in writing (in acts ok)1. but see UCC 2-201 (writing required for sales of goods > $500)2. also see SOF (writing required for K not to be performed w/in 1

year)iv. note: return promise need act as onlypartialinducement for the

promise in order to function as consideration.1. If promise is 99% altruistic and only 1% induced by return

promise there is still consideration.2. 81 (1) what is bargained for need not induce a promise to

count as consideration; (2) promise need not induce performanceor return promise to count as consideration

3. legality: consideration / inducement must be legal. illegal =unenforceable K.

b. Promises to Make a Gifti. Bargain and consideration found?

1. if yes then gift promise is enforceable (see Hamer v Sidway giving up legal right = consideration)

2. if no then promise may still be enforceable under 90a. see Ricketts v Scothorn reliance was induced by gift

promise. (reasonable reliance)b. c.f. Kirksey v Kirksey widow moves to step-brothers

house; promise did not seek to induce that reliance(moving) so no 90 no reasonable reliance.

3. if no (and no reliance) and promise merely a gratuity then notenforceable.

ii.Generally: gift promises not enforced with some exceptions (i.e.promisor dies and enforcement is against estate); desire is to effectuateintent of the parties.

1. Nominal consideration (i.e. $1 in hand paid) can be used tomake donative/gift promises enforceable


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2. adequacy of consideration is not evaluated by court; existence(not equality) of bargain is what matters

c. Reliance and Promissory Estoppeli. rationale: expand the bargain-theory of consideration to protect

expenditure of parties when no considerationii.90 Promissory Estoppel promise expected by promisor to induce

action, and does induce action/reliance, is binding and enforceable ifnecessary to avoid injustice. Remedy granted for breach may be limitedas justice requires.

1. Is there actually a promise on which to rely? (See EastProvidence v Geremia promise to renew insurance policy)

2. Did the promisor expect to induce action? (See Ricketts Uncleexpected to induce action quitting job)

3. Was there reliance and was it reasonable?4. What remedy is required to avoid injustice?

a. note: 90 liability does not entail that damages must bereliance damages; just a means of creating anenforceable K. Could still have expectation damages.

d. Illusory Promisesi. 77 -promise which does not bind one party in any way (unfettered

discretion of party to perform) is illusory.1. as much as you want illusory (See Wickham coal)2. as much as you need arguably not illusory can be somehow

measured.3. if the promise as a whole is something that is not entirely

discretionary then it is not illusory.ii.illusory promises is not enforceable as an offer / promise; cannot serve as

consideration for a K.iii. promise to use good faith or best efforts not illusory can be

measured and enforced (See Wood v Lady Duff promise to use best

efforts impliedin fact)e. Moral Obligation and Past Consideration

i. another exception to the consideration requirementii.Generally: unrequested service/performance does not acquire right to

compensation but there are exceptions1. Beneficiary of voluntary servicesubsequently promises.

a. promise enforceable if promisor was beneficiary (seeWebb v McGowin)

b. promise unenforceable if promisor was not beneficiary(See Mills v Wyman)

2. subsequent promise may support an implied promise at law inabsence of traditional consideration (i.e. actual promise) iff the

benefit of the act was received by the promisor himself.a. note: no actual K for implied promise at law so any suit

will be in restitution.b. ex: doctor providing services to unconscious patient who

then dies (In Re Crisan)c. c.f. implied promise in fact: based on the

circumstances/facts of case (See Allegheny College;Wood v Lady-Duff implied promise to use bestefforts) as opposed to pure legal fiction (implied


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promise at law).iii. 86 promise made in recognition of previous benefit binding to

extent necessary to prevent injustice (no requirement of moralobligation) unless 86(2)(a) benefit was conferred as a gift orif promisorwould not be unjustly enriched or86(2)(b) value of promise isdisproportionate to benefit received

3. Contract Formation has a contract been formed?i. basically K requires offer and acceptance of that offer. parties must

somehow indicate their assent to be bound by the K. when this is lackingthere will be no K.

1. 20 (1) no mutual assent if parties attach materially differentmeanings unless (2) one party knows or has reason to know ofthe other meaning then use that meaning

a. meeting of minds is sufficient but not necessary to createK under 20

b. See Raffles v Wichelhaus (Peerless Case) no meetingof the minds = no K to be enforced.

c. consider prior dealings, trade customs, language / terms

of K, etc. in considering what meaning parties shouldhave attached.

2. reasonable person standard: objective test: what reasonableperson can infer from objective actions about what partyintended.

a. EX: if reasonable person would understand there to be aK, and party subjectively does so understand, then thereis meeting of minds and a K.

b. dont need a true meeting of the minds where subjectiveintent of both parties matches (20)

b. Statute of Fraudsi. applies to (1) interests in land, (2) Ks not possible to perform in one year,

(3) UCC goods greater than $500, (4) promise to pay 3P debt.ii.Requirements:

1. need a written confirmation of K or written K itself need not beentire K, just enough to confirm

a. common law requires essential termsb. UCC needs a confirmation note, doesnt need to contain

all essential terms2. party being enforced against must have signed somewhere.

c. Offer and Acceptancei. What constitutes an offer (as opposed to initiation or element of

bargain)?1. consider surrounding circumstances advertisements or circulars

generally not considered offers; consider reasonable personstandard is it reasonable to view it as an offer?

2. generally price quotations are not offers it is the order itselfthat constitutes the offer

ii.Is there actual acceptance (before revocation or is purported acceptancereally a counteroffer)?

1. offeror is master of the offer: valid acceptance depends on termsof the offer

a. 31 rebuttable presumption in favor of bilateral K


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acceptance presumed to require promise to performb. 2-206(1) offer may be accepted by any reasonable

medium given the circumstancec. sometimes (i.e. recurring transactions) commencement

of performance counts as acceptancei. 2-206: offer (i.e. purchaser order) can be

accepted by commencement of perf.ii.32 and 62: commencement of performance or

nature / structure of K may constituteacceptance, act as an implied promise toperform, and thus create a bilateral K.

1. Failure to complete perf. would bebreach.

2. See Allegheny College (commencementof perf. implies existence of legal duty)and Wood v Lady-Duff(structure ofcontract)

d. rationale: promote efficiency start performing rather

than have added step of formal acceptance. one ofpromises in bilateral K may be implied promise.

2. Option Contractsa. 25 basic option K limits promisors power to revoke

an offer; may be made in same K or in a collateral K.must have separate consideration for the option.

b. 87(2) - K which offeror reasonably expects to inducereliance by offeree before acceptance and does inducereliance is binding as option K to extent necessary toavoid injustice.

3. Acceptance of a Unilateral Ka. acceptance requires complete performance

b. but45 Unilateral Option Contract: treatscommencement of perf. as conferring an option K onofferee right to complete perf. Offer becomesirrevocable on the part of offeror

i. offeror not bound to perform until complete perfreceived; only obliged to hold offer open

1. offeree is not bound to completely perf. bilateral K not created by 45

2. if partial performance makes offereeworse off that is too bad - he has noright of action, should have requested abilateral K.

ii.preparation to perform and commencement ofperformance is a judgment call.

4. Mailbox Rule - 63 default rule that acceptance is effectiveonce out of offerees possession, not upon receipt by offeror. but:If offeror explicitly requires receipt of acceptance or a differentform of acceptance then this is controlling.

a. note: K possible if no meeting of minds decide torevoke but acceptance already mailed

b. 63(2) does not apply to option Ks


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5. Silence as Acceptance - 69 only if (1) offeree takes benefit ofoffer w/ reasonable opportunity to reject and reason to knowcompensation would be expected OR (2) offeror has indicatedacceptance may be manifested by silence and offeree intends toaccept OR (3) on basis of previous dealings silence can beconsidered acceptance.

iii. Valid offer and acceptance constitute a binding agreement note: discuss whether a bilateral or unilateral K is created

d. Revocation and Counterofferi. Termination - 36 offerees power of acceptance terminated by (1)

rejection or counter-offer (2) lapse of time (3) revocation by offeror (4)death or incapacity of offeror.

ii.Revocation offeror free to revoke at any time before acceptance byofferee (See Dickinson v Dodds; Petterson v Pattberg)

1. offers presumed to be revocable unless consideration given tomake it irrevocable (option K). consideration distinguishesirrevocable from revocable offers.

2. Reliance exceptions:

a. irrevocable offer without consideration allowed whenthe offerors intention is to induce reliance on offer byofferee.

b. 87(2) used to convert revocable offer into an option K(See Drennan v Star Paving Co. imply promise by subto hold offer open due to reliance).

i. preparation to perform / accept can be sufficientreliance to keep option open.

ii.promissory estoppel basis for establishing optionK.

c. c.f.90 when used as a tort theory of liability (not K) toallow reliance damages when there is neither formal

offer / acceptance or promisei. See Hoffman v Red Owl Stores makes use of

equitable estoppel; allow recovery for pre-Kexpenditures because of the tort-like liability

ii.90 used as independent grounds for reliefwithout regard to theories of bargain, contract,or consideration.

d. note: 87(2) has higher requirements for demonstratingreliance than 90 because it creates a legallyenforceable, bilateral K

iii. Counteroffer 1. Mirror Image Rule:

a. 59: acceptance is effective only if a mirror image ofoffer and assents to its terms / conditions; otherwise it isa counteroffer if it adds new and/or additional terms.

b. UCC 2-207: rejects common law mirror image rule andlast shot rule.

i. Last Shot Rule: if forms differ then last form isdeemed counteroffer; subsequent shipment andacceptance will be governed by last form(deemed acceptance of counteroffer).


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c. generally: offer remains on the table only as long as it isnot revoked or rejected (counteroffer)

2. Counteroffer treated as rejection of the original offer.Subsequent effort to accept is ineffective.

a. inquiry exception: 39: counteroffer not treated asrejection if offeree manifests contrary intent

i. leave original offer on the table; matter ofinterpretation whether inquiry or counteroffer.

3. Battle of the Forms (2-207): dont strictly apply common lawmirror image rule to form Ks

a. note: Battle of Forms only applies to standardizedcommercial agreements; handwritten forms or back andforth, face to face negotiation then use traditional offerand acceptance doctrine.

b. 2-207(1): offerees form treated as acceptance, notcounteroffer even if additional/different terms frompurchase order unless acceptance is expressly madecondition to assent to the additional or different terms.

i. See Idaho Power narrow interpretation ofunless clause - must be very explicit thatacceptance is condition on assent toadditional/different terms mere presence ofadditional terms is insufficient

ii.Disputed terms are either supplied by the offeroror by the UCC (knockout rule)

c. 2-207(2): additional terms are included unless (a) theofferor expressly limits his offer to its own terms (b) theofferor objects to additional terms or (c) the additionalterms materially alter the K (and are not assented to)

i. note: (2) only looks at what terms of K are, not

whether or not there is a K. Only get to (2) ifthere is a K, otherwise we dont reach it.

ii.therefore materially altering terms dont bythemselves mean there is no K under (1);otherwise you would never reach (2)

iii. additional terms: courts are split as towhether additional terms means additional termsonly or also includes differentterms. solutions:

1. majority rule: knockout rule differentterms are knocked out (supported byComment 6 but limited becausecomment 6 only refers to confirming

forms)2. minority rule: different terms treated

like additional terms (supported byComment 3) OR different terms alwaysdrop out (supported by (2) which onlyrefers to additionalterms)

d. 2-207(3): If no K under (1) but actions (i.e. delivery andpayment) indicate parties believed there was anenforceable K then K consists of terms on which parties


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do agreei. note: (3) only applies if no K under (1) if there

is a K under (1) then look to (2) to determineterms of it.

ii.Knockout Rule:1. 2-207(2) version: is there actually a

knockout rule here? Different termsknocked out?

2. Comment 6 version: K consists of (1)terms expressly agreed to (2) terms onwhich confirmations agree and (3) termssupplied by UCC, including 2-207(2).

a. issue: does knockout rule applyto forms that constitute an offerand acceptance or to those thatconfirm existence of agreement.

b. Comment 1 mentions both kindsbut Comment 6 (which contains

knockout rule) only discussesconfirming forms courts aresplit so discuss both.

e. general aim of 2-207: impart controlling status to theform submitted by buyer/offeror.

4. Unfairness and Unconscionability is there actual assent to the bargain?a. Traditional Elements: Duress, Incapacity and Misrepresentation render a K

voidable if presenti. Duress difficult to establish

1. violence or threat of economic harm constitute duress:standardis whether person making threatening action reasonably believedor should have believed duress would result.

2. do not enforce opportunistic use of leverage.ii.modification of an existing K

1. 73:preexisting legal duty rule: performance of an act whichthe promisee is already bound by contract to complete is notvalid consideration for a K modification (See Alaska Packers)

2. butwhere there is valid consideration or changed circumstances /good faith dealing parties are free to modify. (see Goebel v Linn ice crop case. modify K;see Schwartzreich tailor case.rescind K and enter into new K)

a. 89: modification of K allowed if it is fair and equitableunder circumstances not anticipated by parties.

b. 2-209: Modification, Rescission and Waiver: no

consideration required; modification must simply bemade in good faith and for a legitimate commercialreason.; extortion, coercion, or bad faith will rendermodification ineffective and void.

i. market shift may constitute a good faith reasonfor K modification and, if not assented to byother party, to breach

ii.parties must weigh cost of breach vs. cost of Kmodification it may be better for both parties


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to modify even though it would be bestfor oneparty to stick with original K.

3. generally: look to the motives of the party threatening breach ifno modification are they acting in bad faith / trying to extort orsimply responding to circumstances that have rendered Kunprofitable?

iii. Misrepresentation and Non-Disclosure1. assent implies that both parties have a reasonable understanding

of what they are bargaining over if this is lacking then no K.note: must be as to a material fact.

2. Misrepresentation of material fact used to induce K results invoidable K. (See termite case)

a. as an affirmative tort action used to collect reliancedamages if you are injured. (See Goodman v Dickerradio distributorship case) equitable estoppel

i. need to have culpable state of mind (scienter) i.e. gross negligence, fraud, etc.

b. as a defense to breach of K if you are accused of

breach. (doesnt requirescienter)c. note: pressure to find actions that count as

misrepresentation, since nondisclosure is not generally abasis for liability at common law ( termite case)

3. Non-Disclosure:a. 161 non-disclosure constitutes misrepresentation

where the undisclosed fact concerns a basicassumption made by the other party and non-disclosureamounts to a failure to act in good faith.

b. difficult to argue for non-disclosure, so considermisrepresentation as alternative.

c. general policy: require disclosure of casually obtained /

public info; not information that is private and you haveinvested in obtaining (see policy section).

b. Standardized Forms and Unconscionabilityi. Policy Rationale: Balancefreedom of contractagainst preservation of

important individual rights and customerexpectations.1. balance unwanted intervention in consumers lives with the

obvious lack of understanding about Ks.2. are the courts or the sellers in a better position to determine what

consumers actually want in bargain?ii.Misrepresentation

1. were the terms on the standardized form fully explained or couldthey be understood by the average person?

2. misrepresentation of fact: tort action (See Goodman v Dicker)iii. Unconscionability 208 unconscionable K not enforceable

(See Williams v Walker-Thomas Furniture Co.)1. court may refuse to enforce entire K, or the unconscionable term,

or limit application of unconscionable term to avoidunconscionable result.

2. Determination: look to context, gross inequality of bargainingpower, public policy concerns, impossible to understand, lack ofmeaningful choice.


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3. Courts dont rule on inadequacy of consideration but overallimbalance may demonstrate unconscionability.

iv. Contacts of Adhesion1. Reasonable Expectations Test: 2112. policy concerns to consider:

a. assent: if there real assent if K is long, difficult to

understand, no negotiation or bargaining (see Williams vWalker-Thomas). did individual know what he wasgetting into?

b. tort-like concerns: dont want to allow clauses that areunsafe, etc.

c. structural concerns: if quality cannot be observed (or isnot observed) the market may deteriorate (Market forLemons) Ks of adhesion present this danger.

3. Ks of adhesion typically long, standardized Ks which aredifficult to understand and contain an unreasonable or onerousprovision. take it or leave it Ks.

v.UCC 2-302 K between competent adults is binding w/out regard to

fairness. If comprehension of meaning of K is lacking the court can usejudgment to determine fairness of K terms.

1. Determiningfairness: consider what parties would have agreedto at the time if they fully understood the terms. Is there anelement of duress to the term itself?

vi. Generally: including more favorable consumer terms will resultin increased price. Is this desirable?

5. Contract Interpretation what have the parties promised each other?i. 201(1) if parties agree on interpretation of K language then that is

what is used, regardless of what seems reasonable to 3P. If parties do notagree on interpretation (even if 3P thinks they do/should) then neither isbound by the understanding of the other (unless one party had reason to

know of the others interpretation).1. if the disagreement of interpretation is material then there is no

meeting of minds and no K (Peerless)ii.generally: emphasize a subjective, party-oriented approach in rules to K

interpretation. rely on general good sense1. note: subjective understanding of a party must be consistent with

an objective meaning of the term2. if terms are simply left out courts may supply the missing

element (look to trade usage, prior dealings)b. The Parole Evidence Rule

i. When to Use:PER does not apply to subsequent agreements onlyapplies to prior or contemporaneous agreements (written or oral) that

seek to establish legal enforceability of apromise.ii.213 a written agreement that is completely integrated(i.e. final

expression under209) and binding discharges all prior orcontemporaneous agreements (oral or written) w/in its scope orinconsistent w/ it.

1. judge determines whether or not the agreement is integrated andthus whether to allow parol evidence.

2. admission of parol evidence only if (a) agreement is collateralinform (i.e. capable of expression in a separate agreement; not w/in


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the scope) and (b) the written K is not fully integrated.iii. Integration: Complete vs Partial (see Mitchell v Laith ice house

removal case)1. Completely Integrated full and complete embodiment of

contractual relationship. Earlier or contemporaneous agreementsw/in this scope are unenforceable; unrelated agreements are still

enforceable.2. Partially Integrated complete with respect to some aspect of

contractual relationship. Earlier agreements consistent w/ writtenagreement (and w/in scope) are enforceable. only collateralpromises will be enforceable.

iv. Two approaches to Parol Evidence:1. Williston approach: four corners approach: if K appears to be

fully integrated on its face do not include parol evidence (SeeMitchill v Laith). Objective: emphasize preeminence of writtenK.

2. Corbin approach: examine parol evidence to see if K fullyintegrated and, thus, if parol evidence is to be included. Doesnt

matter if K appears integrated on its face. (See ) Objective:satisfy the actual intentof the parties.But: seems circular.

a. this is the approach adopted by 213 and generally usedby courts.

b. more lenient in allowing parol evidence in interpretingKs.

v.Exceptions to PER:1. 214 Exceptions: prior agreements admissible to establish (a)

whether writing is integrated (b) degree of integration (c)meaning of the writing (d) anything that might invalidate the K(i.e. fraud or mistake ) (e) which remedy is appropriate.

2. 216 Consistent Additional Terms: admission of consistent

additional terms unless agreement is completely integrated. notcompletely integrated if consistent additional term was (a)agreed to for separate consideration or (b) would naturally beomitted from the writing

a. parol evidence cannot modify the K or contradictexpress terms of the K.

3. Conditions to a K: PER applies to legal enforceability of apromise, not to a condition to existence of a K.

a. note: this exception does not apply to conditionssubsequent or precedent those alter the K

b. condition precedent inherently varies the K dischargesperformance obligation

c. if parole evidence is to clear up ambiguity about whethercondition is precedent or subsequent, this is more likelyto be OK.

4. UCC 2-202, 2-208; 203 PER does not exclude evidence ofusage of trade or prior course of dealing which might helpexplain or supplement the written K (i.e. figuring out whichPeerless is meant). (this is the Corbin approach)

c. Filling the Gaps: Best Efforts and Other Flexible Commitments indefinite orincomplete Ks.


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i. exs: exclusive dealing contracts (i.e. distributorships and licensing),purchasing or output requirements.

ii.Best Efforts or Reasonable Efforts1. best efforts can act as consideration for a more specific and

binding promise (See Wood v Lady Duff)2. No means to quantify best efforts. One solution is to think of two

parties as partners, and determine what is best for thepartnership.

iii. UCC 2-3061. Distributor: 2-306(2) requires distributor to perform in good

faith by using best efforts to sell goods. (codifies Wood)2. Requirements / Output Ks: 2-306(1) when quantity is not

specified the requirement is for actual output in good faith,except that no quantity unreasonably disproportionate toanynormal or otherwise comparable prior output or requirementsmay be tendered or demanded.

a. requirement/output K only when you have exclusivity3. Generally: performance of merchant must satisfy standards of

good faith and reasonableness.iv. Certainty and Open Terms

1. 33 Certainty (1) terms of K must be reasonably certain. (2)reasonably certain if terms provide a basis for determiningexistence of breach and for giving remedy. (3) Open terms mayindicate that offer or acceptance was not intended.

2. UCC 2-204 K does not fail for indefiniteness if parties haveintended to make a K and there is a reasonable basis for remedy.

3. UCC 2-305 Open Price Term (1) K can omit price (usereasonable price at time for delivery) unless parties intended notto be bound unless there was a fixed price (4).

6. Performance and Breach have parties kept their promises?

i. a valid claim of breach may entitle a party to (a) regard performanceobligations as discharged(or perhapssuspended) and (b) sue forexpectation damages.

ii.objective: social and private interest in preventing collapse of Ks(inefficient). The law thus prefers to have K continue and acts to preventparties from determining breach has occurred and their perf. obligationsare discharged.

iii. Underlying requirement of good faith. (205 and 1-304)b. Conditions

i. Express Conditions Conditions Precedent vs Conditions Subsequent1. Condition Precedent must be met in order for any obligations

to be imposed on parties. (see Gray v Gardener whale oil case;

must be strict performance before obligation to pay arises)a. c.f. Condition to Existence of K no K until the

condition is satisfied; interpretive question. (i.e. identityof ship inPeerless cotton must arrive on Peerless forthere to be K)

2. Condition Subsequent K in effect but if condition met thenremaining obligations are discharged. discharges a preexistingobligation

3. 227 - unclear conditions will be interpreted so as to reduce the


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risk of forfeiture and minimize reliance losses.4. General points:

a. strict performance required: express condition must be100% satisfied before duty arises (c.f. constructiveconditions substantial performance). no doctrine ofsubstantial performance

b. burden of proofi. condition subsequent burden is on breaching

party prove obligation dischargedii.condition precedent burden on party bringing

suit prove condition satisfied and obligationexists

c. Parole Evidence Rule does not apply to conditions toexistence of a K; does apply to condition subsequent(modifies K by discharging obligation) and may applyto condition precedent (if it is not determining theexistence of a K)

i.parol evidence not barred if it addresses

ambiguity of a condition in the written Kii.Condition, Promise, or Promissory Condition:

1. Is it a condition? in analyzing whether a clause is a condition(esp. condition precedent) or a promise look to whether it createsrisk of forfeiture, how parties intended to allocate risk, languageof K, importance of clause to overall K (materiality).

2. Damages Claimsa. important to consideration of whether or not there are

damages claims (breach) or not.b. yes when it is a promise or promissory condition, no

when it is merely an express condition.3. Consequences of failure

a. promise: failure of event to occur discharges obligationsof the injured party ifmaterial breach. Otherwise, otherparty has opportunity to cure. substantial performanceallowed.

b. condition or promissory condition: performanceobligations are discharged. no substantial performanceallowed.

4. forfeiture: construing something as a condition instead of apromise more likely to result in forfeiture. avoid this if possible

5. concern: construing a clause (i.e. a payment schedule) as just apromise may give party a free option (see Rice Packets case)

iii. Oral Modification and Waiver

1. PER does not apply to agreements made subsequent to writtenK.

a. but: consider potential problems ofduress andconsideration

2. Can specify that K cannot be modified by subsequent oralagreement but can also waive this provision.

iv. Implied Conditions1. Implied Warranty: UCC2-314 (Merchantibility) and 2-315

(Fitness for particular purpose).


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a. only an implied warranty if agreement is silent - there isno express warranty (or warranty disclaimer provision)or other risk allocation.

b. note: if express provision deemed unconscionable (i.e. Kof adhesion) then there may be implied warranty.

2. rationale: allocate the risk between the two parties.

c. Problems of Performancei. Constructive Conditions of Exchange

1. constructive conditions address the timing of performance underK determine when promises become due

a. if other party does not meet a constructive condition theystill maysubstantially perform

b. non-breaching party not excusedfrom performing unlessbreach is material

2. bilateral K promises are conditional and mutually dependent(See Kingston v Preston creates this rule); exchange ofpromises (bilateral K) requires exchange of performances aswell.

3. unilateral K no constructive conditions. The condition is 100%performance.

4. Ks can be performed in one instant (i.e. sale) or over a period oftime (i.e. service, building a house)

a. 234(1) for the former, if performance can be renderedsimultaneously it is due simultaneously, unless Kspecifies otherwise

i. 238 if performance due simultaneously, eachparties performance obligation is condition onthe other party either performing or offering toperform his part of simultaneous exchange

ii.either party can trigger the obligation to perform

by offering to performiii. if no party ever offers to perform then

no breach promises given by both parties butthey never become due

b. 234(2) for the latter the return performance isconditionalupon completion (or substantialperformance) of prior performance; unless K specifiesotherwise.

c. these are just defaults - parties are allowed to explicitlyset whatever timing scale they want. but must beextremely clearyou want to opt out of constructivecondition. high opt-out hurdle

5. substantial performance constructive conditions are satisfiedby substantial performance (c.f. Express Conditions require strictperformance)

6. 2-307 timing: all goods must be tendered in single delivery andpayment due upon such tender unless otherwise specified.

ii.Material Breach excuses performance obligation of non-breachingparty

1. 235 any non-performance of duty constitutes breach; but ifbreach is not materialin character the injured party is required


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to continue with performance but may claim damages for losssustained.

2. 225 237 material breach results in either suspension (if it isreasonable to suspect the breach will be cured) or discharge ofperformance obligations. Damages for the former are for partialbreach (loss incurred by delay in cure) and total breach for the

latter.iii. Substantial Performance breach but performance obligation of

non-breaching party not excused1. Breach must be material in order to serve as basis for forfeiture

of the K. If there is substantial performance the injured partiesremedy is in damages calculated by diminished value (asopposed to cost of specific performance) (See Jacob & Youngs vKent)

a. rationale: want to avoid unfair forfeitures.b. note: breaching party can also sue if breach is not

material2. Whether or not there is specific performance (and thus whether

breach is material) depends on what the K specifically requires,whether there is idiosyncratic valuation, what is a reasonablepreference, etc.

3. Consumer preference can be disregarded when (a) cost ofsatisfying that preference is high and (b) the change in marketvalue of specific performance is insignificant (See Jacobs &Young;Plante v Jacobs)

iv. Sales of Goods and Perfect Tender1. 2-601 adopts old common law perfect tender rule with

corresponding right of rescission for non-conforming goods.a. Rationale: possibility of rescission encourages sellers to

conform with Ks.

2. But2-602(1) requires buyer to seasonably notify seller of intentto rescind and, then, 2-508(1) allows seller to respond with intentto cure defect in tender (if time for perf. has not yet expired).

3. And2-608(1) buyer may revoke acceptance of previouslyaccepted non-conforming goods only if (a) non-conformitysubstantially impairs the value of goods and (b) he had reason toassume that non-conformity would be cured by seller (but ithasnt been) or defect could not have been discovered on initialinspection. 2-608(2) revocation of acceptance must be w/in areasonable time and before any additional alteration occurs incondition of goods.

4. 2-714 if non-conforming goods are accepted buyer still has

right to sue for conventional K damages.5. Common Law: allows substantial performance, perfect tender

not required.v.Anticipatory Breach

1. repudiation of K obligation in advance of time performance isdue discharges injured party from his own obligations and allowshim to immediately bring a suit for total breach (253)

2. UCC requires cover at the time repudiation is made known;good faith.


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d. Demand for Assurance - 251 and 2-609 provide a promisee who has reasonablegrounds for believing K will be breached to demand adequate assurance of dueperformance and suspend their own performance until such assurance isreceived. What constitutes reasonable grounds is determined by facts and goodfaith.

7. Mistake and Impossibility implied excuse doctrines; excuse performance by voiding

the K.a. Mistake separate real mistake (voids K) from misjudgment (no legal remedy)

i. 152 mutual error in basic assumption material to transaction renders Kunenforceable when there is no assumption of risk (Sherwood v Walker;Peerless)

1. close line between mistake and misjudgment (or even calculatedrisk);

2. if that risk is assumed (i.e. that the cow mightnot be barren isconsidered in K price) then mistake cannot be used as a defense.

ii.unilateral mistake: also renders K voidable provided the mistaken partywas not allocated risk of mistake; exception if the other party did notknow or have reason to know of the mistake and has relied on it.

1. exs: include clerical or mathematical error (See Elsniore Union);does not apply to mistake in judgment

2. If non-mistaken party realizes the mistake and relies on itanyway, courts generally allow reformation of K by mistakenparty. rationale: similar to last clear chance rule party w/ lastchance to avoid harm has obligation to do so. create incentive toavoid harm.

iii. lack of complete information does not necessarily invoke themistake doctrine; if better-informed party has made expenditures toacquire information then they are entitled not to disclose it. rationale:want to encourage / reward information gathering.

iv. Similarity toHadley:

1. only hold parties responsible for what they contemplate2. i.e. foreseeable expectation damages (Hadley); conditions / states

of the world for which risk has been explicitly allocated(mistake)

v.generally: want loss resulting from mistake to lie w/ mistaken party ifpossible.

b. Impossibility and Frustrationi. General Elements Required:

1. unexpected occurrence not covered by the K2. failure to have allocated risk of that occurrence by agreement or

custom3. commercial impracticability with respect to performance or

decrease in value of obligationsii.Impossibility:

1. Implied Condition Precedent: courts willing to imply conditionprecedent if a certain thing or state of the world is necessary inorder to carry out K and there has been no allocation of risk (SeeTaylor v Caldwell,Krell v Henry) voids the K.

2. generally: look to intent of parties what would they haveintended ex ante if they had contemplated the event. partiesusually do not intend to provide insurance for the other party in


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case of unforeseen event butlook to which party is in betterposition to insure against the event.

iii. Impracticability1. needs to be a substantial increase over initial cost of performance

(i.e. 15% inAmerican Trading Suez Canal not enough) mereadded expense is not sufficient to satisfy commercial

impracticabilityiv. Frustration of Purpose

1. similar to impossibility, if supervening events frustrate the K orsubstantially decrease its value then K is unenforceable (Krell vHenry)

2. consider: is the K really frustrated or was the event unlikely butnot unimagined and, thus, the risk of its occurring allocated (SeeAmerican Trading Suez Canal); if risk allocation is not specificconsider which party is in the better position to insure.

v.Intended Performance?1. to determine if it is impracticability or frustration, determine

what the promised performance is.

2. just because particular means of performance intended isfrustrated / impossible does not mean that it was the onlypossible performance (i.e. if there were other music halls inTaylor, alternative route inAmerican Trading)

vi. Policy Considerations1. Fault could the problem have been prevented (i.e. had warning

of canal closing)2. Insurance was one party in a better position to ensure against

this event (i.e. do lots of shipping; insure against wars / canalclosings / etc.)

3. generally: courts seem to take Ks and cease to enforce them atthe time the unforeseen event occurs; let losses lie where they

are (Kull excerpt)c. Mistake vs. Impossibility vs Frustration

i. Assumption pre or post K formation1. Mistake concerns basic assumptions that are made and are

false at time of K formation2. Impossibility basic assumptions that turn out to be false ex

postii.Performance cost or value

1. Impossibility concerns cost of performance2. Frustration concerns value of performance (may be completely

or substantially destroyed)8. Remedies

a. Expectation Damagesi. rationale: forward looking as well as remedial; need to providesecurity

for potential / future contracting parties as well as give the currentlyinjured party the benefit of his bargain.

ii.default rule of damages: put the non-breaching party in as good aposition (not better that is unjust enrichment) as if K performed.

1. calculation of damages:a. Basic Calculation: 347 (a) value lost due to other

partys breach (lost profit) + (b) value ofreliance


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expenditures (c) cost avoided through non-performance

b. UCC: 2-712 (buyer breach) or2-706 (seller breach) damages are equal to the cost of cover (incidental +consequential damages)

i. 2-715: incidental damages = costs incurred in

rejecting goods, effecting cover; consequentialdamages = injury / lost profits the result ofbreach.

c. 348 Other Possibilities if 347 cannot be calculated:i. Cost of Performance when that cost is calculated

into initial K price. (See Groves v John Wunder leveling/grading case; Great Depression -$60K v $12K)

ii.Difference in market valuation when breach isnot material or if cost of performance cannot bejustified. (See Jacobs & Young) [this is thedefault calculation]

iii. if no idiosyncratic valuation and cost ofcompletion is efficient then these two measuresshould be very similar.

2. Three Rationales for Expectation Damages (see policy sectionfor more):

a. Efficient Breach: ensure widget ends up w/ highest valueuser.

b. Efficient Precautions: ensure efficient investments inproduction of goods.

c. Efficient Insurance: ensure risk-averse buyer is in sameposition whether or not there is breach either getsperformance of K or expectation damages. Encourage K

formation.iii. Damages or Specific Performance

1. specific performance only if the K involves unique property(i.e. real estate) or idiosyncratic valuation or the particular modeof breach is expressly addressed in the K (See Peevyhouse, c.f.Jacobs & Young specific performance more likely whendealing w/ land)

a. damages are the default rather compensate with moneythan performance.

b. uncertainty as justification: if cant calculate expectationdamages (or place a value on performance i.e. unique /priceless) then consider specific perf.

2. 359 and 2-716 desire to liberalize granting of equitable relief;expand classes in which monetary damages are consideredinadequate. Use equitable relief (i.e. injunction) if it best servesjustice.

a. See Walgreen Co. v Sara Creek issue injunction andlet parties decide what the value is to remove it; workswell when damages are (a) difficult to calculate and (b)equitable relief is easy / inexpensive to enforce.supported by Coase Theorem.


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b. rationale: parties themselves are in better position todetermine actual cost of breach. butconsider transactioncosts of bargaining (vs. court investigation / trial) andpossibility of complete breakdown (very inefficient)

3. generally: try to consider what parties would have agreed to asmeasure of damages ex ante did they demand specific

performance in the K? Was it bargained for as part of K cost?iv. Cost Avoided and Overhead subtract costs avoided due to

breach from damages award but do not subtract overheadcosts thatwould have been paid regardless of whether K ever existed.

b. Limitations on Expectation Damagesi. Avoidability and Mitigation

1. avoidability: 350 - injured promisee cannot recover fordamages (i.e. reliance expenditures) avoidable once breach isknown; legal obligation to use reasonable efforts not to run updamages (SeeLuten Bridge cont. building bridge)

2. mitigation: responsibility to minimize lost-profits claim byreasonable efforts to cover (i.e. find another seller or buyer)

a. ButSee Parker v 20th Cent. Fox Shirley MacLainecase duty to mitigate does not include acceptingdifferent or inferior employment.

b. Jacobs & Young use diminished value rule; installedpipe not substantially diff. or inferior.

ii.The Lost-Volume Seller Exception 2-708(2) and 350 if seller is ableto expand inventory / output to sell to as many buyers available thenstandard damage measure (involving mitigation) is inadequate. Use lostprofit + overhead from actual K.

iii. Foreseeability implicit duty to premitigate1. breaching party is liable only for damages which arise naturally

or were reasonably contemplated by parties at time of K

formation (See Hadley v Baxendale take pre-breach efficientprecautions to minimize loss resulting from breach)

a. Disproportionality: codified in 351 dont allowrecovery of lost profits when it is disproportionate to theK price

b. effect: under-compensatory measure of damages dontalways include lost profits if they are not foreseeable.

2. rationale: want to limit breaching parties liability to what theycould reasonably foresee and insure against; dont want to giveinjured party an incentive to withhold info, keep K price down,and receive free insurance policy. encourage promisee to beefficient, cost-saving, beforebreach occurs.

iv. Certainty1. 352 - damages for breach recoverable only to the extent that

they can be determined w/ reasonable certainty2. otherwise will need to consider reliance and restitution measures

of damagesc. Reliance and Restitution

i. Reliance Damages still operates under the K (like expectationdamages)

1. 349 - compensate for expenditures reasonably made under K


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a. if breaching party can prove it was a losing K, theamount of loss under the K can be deducted fromreliance. (349)

b. often used when expectation damages are speculative ordifficult to calculate (See Sullivan v OConnor botchednose job case; c.f. Hawkins v McGee botched hand

surgery expectations damages were deemed calculableand awarded)

c. proxy for expectation: use reliance as a proxy (a goodground floor) for expectation damages

2. return parties tostatus quo ante position before the K (tortnotion of liability (equitable estoppel) See Security Stove,Goodman v Dicker radio distributor case; misrepresentationallows P to receive reliance expenditures, no lost profits)

a. recovery for pre-K reliance will depend on there actuallybeing a K

b. if there is no K and you want to recover you will need towork in equity (i.e. restitution or make use of PE)

3. note on estoppel: 90 PE does not mean damages are limited toreliance but equitable estoppel (tort notion) will limit damagecollection to reliance.

ii.Restitution quasi-contractual remedy / quantum meruit(all threeinterchangeable) - damages not necessarily limited by K. based onpreventing unjust enrichment. measure benefits conferred rather thanlosses sustained.

1. The Breaching Plaintiffa. generally factored into damages calculations anyway

breaching party gets credit for the value of the goods /services actually supplied; must pay the difference incover.

b. quantum meruit injured party still bound to pay forreasonable worth of services received (See Britton vTurner); can counterclaim for damages sustained (if any)

c. generally: breach does not validate unjust enrichment(but it does void K) so breaching party still compensated(but must sue in reliance).

i. but note: quasi-K claim here still governed byoriginal K. value of services to non-breachermay be less then under K (but they may not bemore) when breacher sues in restitution.

ii.but note: in some jurisdictions if there is awillful breach of K courts may not allow

breacher to bring restitution action.d. burden of proof: breaching party bears burden of proof

for showing unjust enrichment.2. Losing contracts good reason to consider restitution; breach is

fortuitous and injured party doesnt want to enforce the Ka. Rule #1: Restitution

i. 373 support recovery of entire value of workup to date of breach, even if it exceeds K priceprovided that non-breaching party has not fully


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performed. Material breach so K no longer actsas limit on damages.

ii.Recovery underquantum meruitrather than Kso potential loss is irrelevant measure ofrecovery is reasonable market value ofperformance (See Algernon Blair / Coastal

Crane)iii. problem: gives breacher incentive to just

let K finish up even if it no longer desires theend result; this keeps liability tied to the K price.

b. Rule #2: Contract Damages 349 allows recovery ofreliance costs minus expected losses if K had beenperformed. Who would ever use this?

c. Rule #3: Loss Sharing: P recovers in damages portion ofK price equal to portion of work completed thus far.

d. Liquidated Damagesi. 356(1) allows for liquidated damages provided they do not exceed

what is reasonable in the light of the anticipated or actual loss caused by

the breach and the difficulties of proof of loss at time of K formation.ii.create a new damages rule butexcessive liquidated damages (not a

reasonable ex anteproxy) are deemed a penalty and are unenforceable then use traditional damage calculation rules

1. See Lake River v Carborundum steel powder bagging liquidated damages did not reflect cost avoided due to breach;thus constituted a penalty. But was this penalty factored into Kprice?

2. penalty liquidated damages more commonly found in individualconsumers (See Walker-Thomas)

9. Third Party Beneficiaries

a. Intended Beneficiaries any person intended to be benefited by the K (even if

not specifically named) can enforce against the promisor.i. 304 distinguishes between intendedand incidentalK beneficiariesii.who is an intended beneficiary is done on a case-by-case basis; what did

contracting parties intend / contemplate.b. Defenses promisor can assert any defenses against 3P beneficiary that could

have been asserted against promisee. Cant raise defenses that have already beensettled or waived as to promisee.

i. Post-contractual modification or discharge contracting parties generallyretain control to discharge rights of 3P beneficiary but there arelimitations (i.e. reliance or if the 3P directly participated in the initialbargaining)

ii.at some point (either at suit or perhaps earlier) the 3Ps rights vest and

cannot be removed.


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POLICY CONSIDERATIONS

1. Basic Contract Policy Goalsa. Efficiency:

i. Posner especially economic efficiency allocate resources to highest

value userii.c.f. redistribution of wealth / value rather than giving widget to highest

value user what about giving it to the one who needs it the most? contractlaw doesnt actually do this isnt economically efficient.

iii. c.f. some areas of law where efficiency is definitely againstpublic policy for other reasons. not all Ks are commercial.

1. i.e. contracts of adhesion,Baby M(baby doesnt go to highestvalue user), familial relations

2. also public policy where it contracts conflicts with other areas oflaw (torts = punitive damages)

b. Autonomy / Freedom of Contracti. Fried argues from Kant; enable individuals to pursue free choice and

their own objectives through contract.ii.compare Unger critical legal studies consider ideology and power

structure, whose interest does law and contract doctrine serve. Interestsof those already w/ wealth, trying to maximize it. law serves powerhierarchy

c. Rules v Standards (see PER and Default Rules below)i. Rules create accountability and predictabilityii.Standards allow for justice and flexibility: law should not be mechanical.

2. Consideration and Bargaina. Consequences of90 PE

i. Fears: Grant Gilmore the Death of Contract (K law going to besubsumed by tort) suggesting PE will displace traditional K doctrines

(consideration, bargain theory, expectation measure of damages).1. tort-like notion enforce agreements between parties whether

they like it or not; hold person who made the promise thatresulted in reliance responsible.

2. see Hoffman; Drennanii.Reality: This is not happening traditional bargained-for consideration is

still basis of K law and damages based on 90 tort-like liability are rareand get reversed often. (Hillman)

b. Inadequacy of Consideration: courts dont get involved in evaluating whether ornot a bargain / consideration is fair or a good one to make. rationale: supportfreedom of K. c.f. want of consideration if no consideration at all then promisenot enforceable.

3. Contract Formation4. Unfairness and Unconscionability

a. Contracts of Adhesioni. Monopoly Power:

1. businesses w/ market power / monopoly should not beconsidered to create unconscionable Ks give consumers theterms they want at the price they want. (Schwartz)

2. rationale: not enforcing adhesion Ks requires consumers to paymore for better terms which they may not want. goes against


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freedom of K. otherwise we take a paternalistic approach consumers dont know what they really want or is in their bestinterests.

ii.Market for Lemons Description1. competitive market may not satisfy consumer desires; gradual

decrease in quality of goods available when consumers cannot

observe quality.a. end up with low-quality goods; consumers not

overpaying but no high-quality goods on the marketb. overall social welfare loss race to the bottom in terms

of quality. no market for consumers who want to paymore for higher quality.

iii. Solutions to Market for Lemons:1. Government Intervention:

a. Rakoff freedom of K should not apply to Ks ofadhesion these actually threaten freedom to enter intoKs because right goods / K terms arent being offered.

b. govt (judiciary or legislature) should step in and provide

quality terms this will help prevent an efficientmarketwith a competitive pathology

c. critique: efficiency and information problems how isgoing to identify the situation and determine maximalconsumer preferences?

2. Market Mechanisms:a. reputation build a reputation for high quality; incentive

to provide high quality to maintain that reputation.b. advertising may be able to overcome or mitigate

information asymmetry in the marketplace byadvertising your high quality of goods.

c. warranties convince buyer of high quality by backing

up sale with a warranty.b. Non-Disclosure

i. Disclosure of Public v Private Information (Kronman):1. public information: casually acquired information/fact obtained

by a party without any cost must be disclosed.a. rationale: didnt invest anything so no need to provide

return on investment2. non-public information: deliberately acquired information (if

time/energy/money is invested in obtaining) has no requirementof disclosure.

5. Contract Interpretationa. Parole Evidence

i. Willistonian approach penalty default approach; want to incentivizeparties to draw up completely integrated agreements.

1. assumption: parties know in advance what court will do; not thereality that parties are aware of rule/penalty default and that theycan predict how it will be applied.

ii.Corbin approach majoritarian approach want to effectuate intent ofthe parties.

iii. Rule v Standard Williston uses a Rule, Corbin uses a Standard.But even Willistons Rule is riddled w/ exceptions; clear-cut rule of PER


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may be impossible standard is better.1. Scalia argues for rules, bind judges to them.2. standards give judges discretion; look to do justice in deciding

a case.b. Default Rules

i. Default Rules serve an instrumental purpose pursue main policy goals

(i.e. efficiency or autonomy)ii.Apply ex postdefault terms for what parties didnt address ex ante

1. areas where parties are silent, where they have failed tocontemplate a particular event

2. ex: mutual mistake default term w/ respect to low-probabilityevents is to void the K

iii. How to choose default terms?1. majoritarian approach ask what most parties would want most

of the time (if they had thought about it). set that as default andallow opt out. intent of parties.

2. efficiency approach what are the default terms that are mosteconomically efficient. expand the pie.

a. ex: expectation measure of damages - save transactioncosts; add predictability and consistency.

b. ex: doctrine of mistake let party off the hook forunanticipated events; reduce transaction costs

3. efficiency + autonomy: if parties know what default rules are andare able to contract around them then we can set default rules topromote efficiency w/out impinging on autonomy. critique: not areasonable assumption.

iv. Focus on risk allocation and incentives in constructing defaultterms

1. risk allocation default allocation between parties2. incentives defaults create incentives to do desirable thing.

penalty defaults.a. EX:Hadley v Baxendale (non-breaching party cant

recover for unusual damages unless they give notice toother party before)

b. EX: Willistonian PER (parol evidence not included force parties to put it in writing to effectuate their intent)

c. Mandatory Rules (cant opt out)i. no K for illegal behaviorii.unconscionable Ks not allowediii. doctrine of consideration is a mandatory rule of K law (but can

get around with PE)iv. liquidated damages not honored if unreasonable proxy for

expectation measure of damages6. Performance and Breach

a. Express Conditionsi. Determining condition precedent or condition subsequent:

1. Langdell look at wording semantic approach2. Holmes critiques Langdell. look at policy justifications - which

party is better placed (in terms of record-keeping or otherinformation/ability) to establish that the conditioned is satisfied.

ii.Forfeiture: Hesitation to construe contracts as containing express


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conditions; this leads to forfeitureb. Constructive Conditions

i. avoids multiplicity of actions solve everything form the same contractin one case.

ii.comport with the evident sense and meaning of the partiesiii. Constructive conditions are quasi-mandatory very difficult to

overcome default timing provisionsc. Implied Warranty Cigarette Litigation is there an implied warranty that

cigarettes are safe?i. main point: fundamental tension between insurance and incentives

(precautions)ii.precautions policy argument

1. consumer information: if consumers have information that cigsare dangerous they can take precaution of not smoking; thisargues against implied warranty consumers need to pay fortheir choices.

2. manufacturer information: if they know cigs are dangerous theycould produce healthier cigs, inform consumers about dangers of

smokinga. only have incentive to do this if they are on the hook for

health costs of smokingb. this would be a precautions argumentforimplied

warrantyiii. Insurance policy argument

1. Implied warranty acts as insurance against dangers of smokinga. cig maker sells cigs + health insurance policyb. increase price acts as an incentive against smoking

force makers to bear true costs of cigs which they willpass along to consumers

2. but insurance against dangers of smoking dulls incentive not to

smoke moral problem.3. can attempt to solve by finding compromise between insurance

and precautions4. problem:

a. insurance: turns cig maker into seller of insurance thisis not what they do best may not be most efficientprovider of insurance; force people to pay for insurancethey might not want

i. depends on who has better information cigmakers or insurers

b. cross-subsidization: all smokers pay for health costs,including those who smoke but dont actually have

health problemsi. reduces incentives high risk smokers being

subsidized by low risk smokersii.butheavy smokers (greater risk) will pay more

because they buy more lowers level of cross-subsidization

7. Mistake and Impossibilitya. Implied Excuses three possibilities for remedy

i. let losses fall where they are at time of implied excuse (Kull)


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1. parties can prepare for this up front; specify in the K or provideinsurance against this.

2. Hard to know how courts will decide issues about fault/insurancemonths or years later and whether implied excuse will beapplicable.

3. implied excuse doctrines are so unpredictable they create no

incentive effect so parties cannot prepare for them. so just letthings lie as they are.

4. critique of Kull:a. avoid uncertainty by addressing it in the Kb. Ferrell Kulls reasoning is bizarre. letting losses lie

only applies once it is decided there is an implied excuseand K is suspended does not address any of theuncertainty problems.

ii.full reliance recovery return all money that has been paid out under Kso far (i.e. 25# deposit inKrell)

iii. full recovery minus reliance of other party (majority position)1. i.e. return deposit inKrell v Henry but subtract reliance expenses

of apt. owner2. reliance must be reasonable; can only be recovered up to the

value of transfer, not more.b. Ferrell What if we had a true penalty default?

i. implied excuses not allowed, period.ii.clear rule if you want to get out of a K if something happens, you must

put that in the K specifically.iii. merits?

1. con: increased transaction costs, hard to overcome lack ofcomplete information without complete information and withlimited time it is impossible to write a complete K.

2. pro: predictable, parties know up front what will happen.

a. but : penalty default rule may not even be that clear andpredictable.

b. Sykes: even if there are no implied excuses we still needto deal with the risk allocation question whether thereis an implied warranty or implied promise

c. but : remedy is different for implied promise / warranty(expectation damages) then it is for implied excuse(restitution b/c no K)

8. Remediesa. Expectation Measure of Damages

i. law does not require keeping of promises; treats monetary compensationas sufficient. generally no recovery fornon-pecuniary harms 353

(efficient precautions is the exception)ii.Three Rationales for why Expectation Damages are economically

efficient:1. Efficient Breach:

a. ensure widget winds up with highest value user willingness to pay expectation damages indicates thatsomebody else values the widget more (Posner)

b. but : Friedmann maybe there should besupra-compensatory damages punish people for moral


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depravity of breach; selling something that they dontactually own.

i. otherwise efficient breach is really efficient theft can break the law as long as you leave theright amount of money in an envelope

ii.critique: making damages supra-compensatory

does not change this; just deters breach more.still punch and pay

iii. consider rights of people instead ofeconomic efficiency punishment/deterrencemodel; protect rights and fairness

iv. critique: this makes more sense inpersonal contracts, less in commercial

c. critique: why not enforce K, let buyer then sell to highervalue user.

i. increases transaction costs (B1 may not know ofB2) but limits court costs / time

d. public policy critique: may not want widget to go to

highest value user (See Baby M)2. Efficient Precautions:

a. ensure efficient investments in production of goods (i.e.how hard do you try to avoid breach?)

b. Learned Hand Formula: B=PL gives optimal amount ofinvestment (in maintenance, production) by seller

i. P reduction in the probability that themachines breakdown; that is, the reduction inprobability that there is breach of K.

ii.L the harm that is caused by breach of K.

1. note: this can take into account non-pecuniary harms

iii. B socially optimal level of investmentc. critique: assumes no externalities no benefits or costs

to anybody but buyer/seller.d. Efficient Precautions (deterrence and precautions in

general) is a tort notion.3. Efficient Insurance:

a. ensure risk-averse buyer is in same position whether ornot there is breach either gets performance of K orexpectation damages (predictable outcome)

i. risk-preferringbuyers prefer supra-compensatory damages (but they should go buya lottery ticket instead) (Craswells argument)

ii.risk-neutralbuyers dont care; expectationdamages is fine for them.

b. Encourage K formation and efficient allocation of riskc. critique: values desires of risk-averse buyers above those

of risk-preferring buyers.d. rationale: insurance only against pecuniary harms

i. people not risk-averse w/ respect to non-pecuniary harms (i.e. hurt feelings due tobreach)


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ii.thus dont force people to buy insurance againstnon-pecuniary harms (breach) by awardingsupra-compensatory damages

b. Critiques of Expectation Damages and Efficient Breachi. Coase Theorem allocation of a legal right will not affect efficiency if

transaction costs are zero; the highest value user will end up with widget

at the end of the day.1. rationale: argues against expectation measure of damages

(particularly efficient breach); measure of damages reallydoesnt matter

2. note: this model depends on transaction costs being zero but sodoes efficient breach.

ii.Litigation Costs: Posner / Efficient Breach assumes this is costless thismight not be true.

iii. Renegotiation: this might make more sense than efficient breach;still get widget to highest value user, allow original buyer to share in theextra profit. Avoid litigation costs.

iv. Expectation Damages are sometimes inaccurate:

1. See Hadley awarded less than expectation measure ofdamages; under-compensatory damages when you want toincentivize non-breaching party to take efficient precautions

a. encourage information exchange by creating threat ofloss of compensation

b. concern: if this is applied to mass markets (i.e. FedExinstead of Hadley)

2. if they cant be accurately determined (too speculative) then allyou get is reliance. burden of proof is on non-breaching party.

3. efficient breach assumes that expectation measure of damagescan actually be determined and awarded

c. specific performance:

i. Coase Theorem supports this; enforce the K and, with zero transactioncosts, let parties determine how much the breach is worth. Increasescertainty.

1. critique: negotiations still required what if they break down?ii.Schwartz The Case for Specific Performance courts often award

under-compensatory damages; award specific perf to protect interestsand because non-breaching party has better information than court abouthow much damage is sustained.

1. but : may create an incentive for parties to seek specificperformance (supra-compensatory damages) even when courtcould provide compensatory damages

2. loss of efficiency: breakdown in bargaining could lead to

inefficient result3. transaction costs: bargaining costs may exceed court transaction

costs in determining compensatory damagesiii. Efficient Precautions: if potentially breaching party is worried

about specific performance (and possible supra-compensatory damages)that might increase K price.

d. Reliance: not inconsistent with freedom of K; designed to effectuate intent ofparties.

e. Liquidated Damages: striking down liquidated damages clauses as penalties


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under 356(1) is paternalistic; goes against freedom of K especially incommercial settings where clause is figured into K price.

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