MBE Subjects I_Contracts Outline

8/12/2019 MBE Subjects I_Contracts Outline

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I. INTRODUCTION

A. A Roadmap for the three Contracts lectures

1. Day 1:

Offer, acceptance, consideration

2. Day 2:

Statutes of Fraud, interpretation and contract performance

3. Day 3:

defenses, remedies and third party issues



II. SOURCES OF CONTRACT LAW

A. The Common Law of Contracts: O! ". C.#

1. $he common la% of contracts:

default la% that &o'erns contractual relations

B. The Uniform Commercial Code O! ". (.#

1. $he )CC &o'erns *sales of &oods+

a. Sales are:

transactions %here seller transfers title of &oods to a uyer for 'alue.

1# Sales are not:

leases, or ailments or other transactions short of outri&ht sales.

. Goods are roadly defined as:

any mo'ale item

1# -amples of &oods in the Code include:

a# &ro%in& crops

# uncut timer

c# unorn animals

2# /oods do not include:

a# intan&iles

# money

c# assi&nment of a le&al claim

d# ser'icese# real property i.e. (lac0acre

c. "n hybrid cases, %hich in'ol'e oth the sale of &oods and a ser'ices contract, the uestion arises as to %hich

source of contract la% should apply.

EXAMPLE:

(o purchases a car stereo, and the mechanic also installs it.

1# aority rule:

4e determine %hat la% applies y the predominant purpose of the transaction.

EXAMPLE:

A purchase of a water heater where the merchant has it delivered and installed is a sale of !oods and

the service is incidental.

EXAMPLE:

A contract with an artist to paint a portrait is clearly a service.

a# $o determine the predominant purpose of a contract, the follo%in& factors are used:

1# Factor 51:

!an&ua&e of contract

2# Factor 52:



6ature of supplier7s usiness

3# Factor 53:

Relati'e 'alues of the &oods 'ersus ser'ice

2# inority rule:

Apply )CC to &oods portion of the transaction and common la% to ser'ice portion of transaction

d. (esides the case of a hyrid transaction, another hard case in'ol'es:

Computer soft%are

1# aority Rule:$reated as &oods under the )CC.

2# $he )niform Computer "nformation $ransactions Act displaces the )CC in aryland and 8ir&inia in this area.

C. "nterplay between Sources O! ". C.#

1. Common Law #illin! in the Gaps of the UCC

a. -'en in a sale of &oods, the common la% %ill apply unless:

the )CC pro'ides contrary pro'isions

1# -amples of common la% fillin& in )CC &aps:

defenses such as a fraud, duress and incapacity

2# -amples of )CC displacin& the common la%:

firm offers, and the nettle of the forms of rules

$. Basic $efinitions and Concepts of Contract Law O! ". D.#

1. Contractual %bli!ations

a. $here are three &eneral cate&ories of contractual oli&ations.

1# &'press contractual oli&ations are found %here:

the parties ma0e oral and %ritten epressions of their commitments

2# "mplied(in(fact contractual oli&ations are:

a&reements formed y conduct rather than %ords

EXAMPLE:

)omeowner hires a plumber to fi' a lea* but because of the ur!ency of the service the parties do not

discuss the price of the wor* performed. Upon completion of the wor* )omeowner has an implied(in(

fact obli!ation to pay the plumber the reasonable value of the services rendered.

3# An implied(in(law contractual oli&ation arises %here:

4hen one party esto%s a enefit on another and it is unust for recipient to retain the

enefits %ithout payin&. $his is unust enrichment.

EXAMPLE:

&mer!ency Services: A sur!eon who performs emer!ency sur!ery on an unconscious patient creates

an implied(in(law obli!ation to the patient.

EXAMPLE:

Benefits Conferred by +ista*e: A merchant who mista*enly delivers !oods to the wron! party may

create an implied(in(law obli!ation on the wron! party.

. Quantum meruit

1# $he traditional definition:

$he cause of action for implied in fact contract rou&ht in order to reco'er the reasonale 'alue ofenefit con'eyed



EXAMPLE:

The plumber who was hired to fi' )omeowner,s lea* without first discussin! the price.

2# (ut, importantly, the recent usa&e:

Courts ha'e allo%ed this cause of action for implied in la% contract as %ell.

EXAMPLE:

The sur!eon with a recalcitrant patient.

EXAMPLE:

The merchant who mista*enly delivers !oods to the wron! party.

2. Si!ned -ritin! e/uirements

a. A numer of rules in contract la% reuire a *si&ned %ritin&+ in order to create an enforceale le&al oli&ation.

1# -amples include:

Rules pertainin& to merchant7s firm offers, SOF reuirements

. $he contemporary prolem of electronic contractin&:

1# The Si!nin! e/uirement

a# electronic si&natures are le&ally effecti'e in the 'ast maority of ).S. urisdictions

2# The -ritin! e/uirement

a# email is sufficient to satisfy the %ritin& reuirements of contract la%.



III. FORMATION

A. 0roblem That %ffer and Acceptance Law "s $esi!ned to Address O! "". A.#

1. The 12olley3

a. "n many cases, parties to a %ould9e contract ne&otiate in ad'ance of reachin& a&reement, en&a&in& in a

communications *'olley+ %here inuiries, proposals, and counter9proposals are echan&ed.

. $he 0ey uestion to e ans%ered:

at %hat point do the parties ha'e a le&ally enforceale contract

B. The %ffer O! "". (.#

1. "n order to constitute an offer, a party7s communication must meet t%o reuirements.

a. First Reuirement:

Out%ard manifestation

1# $he manifestation can e:

oral or %ritten OR made 'ia conduct

EXAMPLE:

A newspaper seller on the corner with a stac* of newspapers and hands them to people who pay the

posted price.

2# An offer is not aout:

"n%ard thou&hts or suecti'e intentions %hich are irrele'ant unless they are reasonaly

apparent to the other party

EXAMPLE:

A seemin!ly serious offer to sell real property made in secret 4est is nonetheless an offer.

EXAMPLE:

A proposal to sell at a price that a reasonable person would re!ard as 1much too !ood to be true3

5e.!. 1new )$T2s for 67.8839 $%&S %T constitute an offer.

. Second Reuirement:

Si&nal that acceptance %ould close the deal

EXAMPLE:

*" %ill sell you my car if you7ll pay me ;,<<< cash.+ $his is an offer ecause it epresses a %illin&ness to conclude

the deal if the other party pays the reuired ;,<<<.

EXAMPLE:

*=es, "7d e %illin& to sell you my car, ut %hat are you %illin& to pay for it>+ $his is 6O$ A6 OFF-R ecause the

communicatin& party is o'iously reser'in& the ri&ht to decide %hether she li0es the price su&&ested y the other

party

1# Communications that %ithhold the pri'ile&e of further assent fall short of constitutin& an offer.

2# $here are a couple of cate&ories of communications that are not offers, that %ithhold the pri'ile&e of further

assent, and that %ill help you sort throu&h these *'olley+ prolems.

a# 0reliminary e!otiations

1# /eneric term that applies to &i'e9ta0e durin& ar&ainin&



# "nvitation for an %ffer

1# this is an ad'anced sta&e of preliminary ne&otiation %here the communicatin& party is closin& in

on a deal ut %ants the other party to commit first

EXAMPLE:

*So, ho% much are you %illin& to pay me for these &oods>+

2. The 0roblem of +ultiple %ffereesa. 4hen a uestion in'ol'es a party7s communication proposin& a deal to t%o or more persons at the same time, a

multiple offerees issue arises.

. $here are three situations %here this can occur:

1# First situation:

commercial ad'ertisements

a# $he American ad'ertisin& rule:

ads, catalo&s and price lists are not offers ut instead, are in'itations for offers

# $he reason for the rule is:

responses may eceed the a'ailale supply of &oods

EXCEPTION:

!an&ua&e that identifies %ho &ets limited supply of &oods e'en if there is access of

demand

EXAMPLE:

Ad'ertisements that say, *first come, first ser'e+ or *first 1< customers only+ are construed as offers.

2# Second Situation:

Re%ard offers

a# /enerally, re%ard offers are treated as:

offers ecause they are communications that promise a ounty in echan&e for the

performance of a specific tas0

# $here are t%o types of re%ard offers.

1# Self(limitin! rewards:

offers that indicate the tas0 to e re%arded can e performed only once.

EXAMPLE:

*4ill pay 1<< for findin& my lost do&.+

2# %pen(field rewards:

re%ard offers that indicate that tas0 to e performed can potential e

performed y multiple parties.

EXAMPLE:

$he Carolic Smo0e (all case, %here the pur'eyor of a medical preparation promised to pay 1<< to

anyone %ho used the preparation as directed and nonetheless came do%n %ith the flu.

EXCEPTION:

!an&ua&e in the offer that specifies a limitation on ho% many people can accept the offer

EXAMPLE:



*Free ?oe Si9@ac0 Action Fi&ure Send us proof of purchase laels from si cases of your fa'orite

Anheuser9(usch product to&ether %ith a self9addressed stamped en'elope. Offer &ood %hile supplies

last+

3# $hird Situation:

Auctions

a# $he &eneral rule:

Auctioneer is in'itin& offers. $he ids are the offers.

EXCEPTION:

"f the auction is held *%ithout reser'e,+ then:

$he auctioneer is ma0in& an offer to sell to the hi&hest idder

3. The Le!al &ffect of an %ffer

a. An offer creates the po%er of acceptance:

"n the offeree.

. /enerally, there are four %ays to terminate the po%er of acceptance:

!apse, death or incapacity, re'ocation y offeror, or reection y offeree

1# Termination by Lapse of Time

a# An offer lapses after:

$ime stated in offer or after reasonale time, if no time is stated

# $he reasonale time determination is ased on the follo%in& factors:

1# Factor 51:

Suect matter and mar0et conditions

2# Factor 52:

de&ree of ur&ency and means of transmission

c# Face9to9Face Con'ersation Rule:

Offer made durin& face to face con'ersation, lapses at the end of con'ersation unless

the offeror states other%ise.

2# Termination by $eath or "ncapacity of &ither 0arty

a# Death:

Death terminates po%er of acceptance

# "ncapacity:

"f either party ecomes incompetent, terminates po%er of acceptance

3# Termination by %fferor,s evocation

a# $he American rule of the free re'ocaility of offers:

An offeror can re'o0e offer at any time and for any reason so lon& as t%o reuirements

are met

1# Reuirement 51:$imin& B must e re'o0ed efore offer is accepted

2# Reuirement 52:

Re'ocation must e communicated to offeree

a# $irect revocation:

4hen directly communicates %ith offeree an intent to re'o0e the offer

# "ndirect revocation:

i# Reuirement 51:

$he offeror ta0es some action that is inconsistent %ith intention to

&o throu&h %ith the offer



EXAMPLE:

4hile decidin& %hether to accept an offer to sell you a car, you learn from a friend that the

car %as sold to someone else.

ii# Reuirement 52:

Offerree learns aout such action from a reliale source.

HYPOTHETICAL

A offers to sell real property to (. 4hile ( is considerin& the offer, A sells the property to C. Oli'ious to the

third9party sale, ( sees A on the street and yells, *" accept your offer+ "s A no% contractually ound to sell

the property to (>

=es. ( has cause of action for reach of contract as he %as oli'ious that A had sold to C.

# evocation of an %ffer +ade to +ultiple %fferees

1# Functional -ui'alents Rule:

"f offeror re'o0es y communicatin& the re'ocation in a functionally eui'alency %ay

as the offer %as made

EXCEPTION:

"f there is a etter %ay to communicate the re'ocation that is reasonaly a'ailale

then that means can e used.

2# !e&al effect of functionally eui'alent re'ocation:

terminates the po%er of acceptance e'en if offeree is una%are of the re'ocation

c# 0reventin! evocation: %ption Contracts and #irm %ffers

1# American ule of #ree evocability of %ffers

a# $he rule of Dic0inson '. Dodds:

at common la%, the offeror could re'o0e e'en if he epressly said to

the offferee that he %ould 0eep the offer open.

2# )nder contemporary la%, there are t%o %ays to pre'ent re'ocation of an offer: i# common la% option

contract or ii# firm offer under the )CC.

3# 0reventin! evocation by +eans of a Common Law %ption Contract

a# First element:

Offer

# Second element:

Susidiary promise to 0eep the offer open

i# *Sell y+ date:

$his may ust e a lapse date, not a date to 0eep offer open.

c# $hird element:

Some 'alid mechanism for enforcin& the promise

i# Consideration is the most common %ay to enforce the susidiary promise.

EXAMPLE:



*" herey offer to sell you (lac0acre for 1<,<<<, and in consideration for the 1<< recei'ed, "

herey &rant you a 3<9day option on the deal.+

# uances of %ption Contracts

a# Si!ned -ritin! with #alse ecital

i# aority rule is:

reuttale

ii# inority rule is:option contracts %ill e enforced e'en if recital for the consideration

of the option is false

# @romissory estoppel:

courts %ill sometimes 0eep susidiary promise if there has een

;# Special ule for Construction Contracts

a# A prolem occurs %hen a &eneral contractor formulates a id to an o%ner and relies on

sucontractors7 ids efore he %ants to accept them. $he &eneral contractor %ill ha'e prolem if

sucontractors re'o0e efore o%ner a%ards id.

# $he maority rule is %here a &eneral contractor uses a particular sucontractor7s id to formulate

his o%n:

promissory estoppel applies to protect &eneral contractor from re'ocations

y sucontractor

# 0reventin! evocation by +eans of a 1#irm3 %ffer under the UCC

a# )nder the UCC Section ;(;<=, a merchant can ma0e a firm offer an irre'ocale offer# to either

uy or sell &oods without consideration so lon& as three conditions are met:

i# Condition 51:

Offer to uy or sell is made y a merchant i.e. a company in usiness

ii# Condition 52:Offer is made in a %ritin& si&ned y a merchant

iii# Condition 53:

Offer epressly states y its terms that it %ould e held open

# A firm offer that meets all of these reuirements ecomes irre'ocale for:

-ither period of time stated in the offer or for a reasonale time

c# )nder the )CC, the shelf life of a firm offer can e:

6o more than three monthsd# $hree9onth Rule:

"f firm offer is irre'ocale for more than three months, than it is re'ocale

after three months

e# Offers for lon&er than three months:

6eed consideration for lon&er so %e are ac0 to common la%



RECAP QUESTIONS:

Please take a few minutes and answer the following questions Tr! to answer these questions without looking at !our "ar

Notes If !ou must go #a$k to !our notes% tr! rewriting the answer in !our own words This e&er$ise will hel' im'ro(e !our

memor! retention of these $on$e'ts

1. 4hat are the three factors used to determine %hether the predominant purpose of a contract is for the sale of &oods or

not> Contract terms, nature of the usiness, relati'e 'alue of the &oods to ser'ices,

2. 4hat are the t%o reuirements of a 'alid offer> Out%ard manifestation and a si&nal that acceptance %ould close the

deal

3. Descrie the rule re&ardin& commercial ad'ertisements as offers. Ads are not offers ut in'itation for offers. Eo%e'er,

Ad'ertisements that say, *first come, first ser'e+ or *first 1< customers only+ are construed as offers.

. Descrie the four %ays to terminate the po%er of acceptance of an offer. Death or incapacity, lapse, re'ocation y the

offeror, re'ocation y the offeree.



# Termination by %fferee,s e4ection

a# $he po%er of acceptance can also e terminated if the offeree refuses to accept the offer. $here are

three %ays that reection can e effected:

1# First %ay:

Outri&ht reection

2# Second %ay:

Reection 'ia counteroffer

a# A counteroffer constitutes: a reection, %hile also creatin& a ne% offer

EXAMPLE:

*" am not %illin& to pay 1<,<<< for the car, ut " %ould happily uy your car for ,<<<.+

# An eception or nuanceGthe ere "nuiry Rule:

An offeree may test the %aters y ma0in& mere inuiry aout offeror7s

%illin&ness to ne&otiate %ithout creatin& a counter9offer and not

terminatin& po%er of acceptance

EXAMPLE:

*1<,<<< isn7t out of the uestion, ut it7s a little hi&h, &i'en the a&e of the car. 4ould you e

%illin& to consider a lo%er offer>+

3# $hird %ay:

reection 'ia nonconformin& acceptance

a# The +irror "ma!e ule

i# Corollary to the notion that *the ma0er is the master of the offer.+

ii# $he common la% *mirror ima&e+ rule reuires that:

acceptance must mirror the terms of offer and any 'ariation

creates a counter9offer and thus, reection of the initial offer

EXAMPLE:

H offers to uy &oods from =, = says OI, and says he epects payment in 3< days. $his %ill

e a 'iolation of the mirror ima&e rule, and thus a counteroffer.

c. evival of the %ffer after e4ection or Lapse

1# Offeror can re'i'e the offer y lan&ua&e or conduct restatin& the offer or &i'in& more time

to decide

. %ffer and Acceptance under Unilateral Contracts

a. Distin&uish et%een ilateral and unilateral contracts.

"ilateral Contra$ts )nilateral Contra$ts



" ma0e a promise and see0 from you:

a promise in echan&e

Once promises are echan&ed:

4e are oth ound

" ma0e a promise and see0 from you:

only your performance in echan&e

$he offeror is ound only %hen:

Offeree7s performance is completed and

offeree is ne'er ound.

. )nless the terms of the offer state other%ise, the offeree can accept either y promisin& or performin&. So, %hen

loo0in& for a unilateral contract, one ou&ht to carefully consider oth the lan&ua&e and circumstances.

HYPOTHETICAL

A says to his old friend (, *"7ll sell you my car for 1<,<<<, ut due to your credit prolem, you are &oin& to

ha'e to pay me the money or " %ill sell it to someone else.+ 4ill a promissory acceptance from ( form aindin& contract %ith A>

6o. A %ants performance not a promise. $his is unilateral contract.

c. evocation of the %ffer in a Unilateral Contract

1# )nder common la%:

Offeror %as free to re'o0e unilateral offer up until offeree completes performance

2# )nder the modern rule:

Once the offeree e&ins performance, an option contract is created and the offeror

Cannot re'o0e

a# 6ote: $he modern rule is 6O$ the maority ruleJ courts are split.

# 4ith the modern rule, there are t%o thin&s that are unchan&ed from the common la%

1# $he offeree of a unilateral contract is still:

free to aandon the performance at any time and not underta0e performance

at all

2# Acceptance of the offer is still:

effecti'e only upon completion of the performance in accordance %ith the

terms of the offer

3# An important nuance:

a# (e&innin& of performance 's. mere preparations:

mere preparations do not create option contract. ay sue for promissory estoppel ut

definitely not create option contract

EXAMPLE:



H offers = 1<< to *ride my horse (ronco for a minute,+ and %hile = is puttin& on his oots H re'o0es.

C. Acceptance under Common Law O! "". C.#

1. $here are only t%o &eneral reuirements to constitute effecti'e acceptance.

a. First reuirement:

acceptance must mirror terms of offer

. Second reuirement:

acceptance must e communicated to the offeror

1# "f the offer stipulates a particular means of communicatin& acceptance:

then that is the reuired means of acceptance

2# "f the offer is silent as to the means of communication:

the offeree is free to use any reasonale means of transmission

a# )nless the circumstances indicate other%ise, a means of transmission is reasonale if it is:

1# means used y offeror

2# means customarily used in similar transactions

3# means of communication %hich is eui'alent in speed and reliaility to the means

used y the offeror

3# $here are three eceptions to the reuirement that acceptance e communicated.

a# $he first eception to the reuirement that acceptance e communicated:

Acceptance y silence

1# Default rule:

Offeree7s silence in response to an offer does not constitute acceptance

2# $he *acceptance y silence+ eception is in play in the follo%in& situations:

a# Situation 51:

Offeree ta0es enefit of offeror7s ser'ices %ith a reasonale opportunity to reect them

and %ith reason to 0no% that compensation %as epected

EXAMPLE:

A father hires a &olf pro to pro'ide one of his sons a lesson. Father rin&s oth of his sons to the dri'in&

ran&e. $he &olf pro pro'ides the second son a lesson as %ell.

# Situation 52:

%here the offeror has &i'en the offeree reason to understand that

acceptance may e communicated y silence, the offeree7s silence

%ill operate as acceptance if she intends as such

EXAMPLE:

An insurance company notifies A that her policy %ill e automatically rene%ed unless it hears

other%ise from her. A remains silent, intendin& to accept, and accordin&ly her acceptance is

effected y her silence.

EXAMPLE:

Same facts as ao'e, ecept that A does not intend to accept. "n these circumstances, her

silence %ill not operate as acceptance.

c# Situation 53:



%here ecause of pre'ious dealin&s and other circumstances, it is reasonale

that the offeree should notify the offeror if he does not intend to accept

EXAMPLE:

A ne%spaper sends A a %ritten notice that it %ill continue deli'erin& the paper after the

suscription has epired unless it hears other%ise from A. 4hen the suscription has pre'iously

een rene%ed in this manner %ithout incident, A7s silence in the face of notice constitutes

acceptance.

# $he second eception to the reuirement that acceptance e communicated:

unilateral contract

1# "n a unilateral contract settin&:

acceptance is effecti'e only e completin& performance. Communication is

typically not reuired for acceptance unless offer pro'ides other%ise.

HYPOTHETICAL

@rofessor A ma0es the follo%in& offer to her students: *For anyone %ho completes this series of eercises yFriday, "7ll pro'ide you %ith a free e'era&e from Staruc0s.+ Student ( completes the eercises y Friday ut

does not notify the @rofessor until onday. Does (7s completion of the eercises y Friday constitute

acceptance of A7s offer> 4hat if, on the same facts, the professor had stipulated in her offer that the students

had to not only complete the series y Friday ut also had to notify her that they had done so y Friday>

=es, ( completed the offer, and there %as no reuirement for notificationKcommunication.

6o, ( must ha'e notified, ecause offer demands communication.

c# $hird eception to the reuirement that acceptance e communicated:

mailo rule

1# )nder the common law mailbo' rule:

Acceptance y mail is effecti'e upon dispatch so lon& as acceptance is properly

posted

a# $he mailo rule applies only to acceptances and not to any other communication.

# Conseuences of the rule:

i# $he first conseuence of the mailo rule:

offeror may not re'o0e an offer once the acceptance has een dispatched

EXAMPLE:

4hile ( %as considerin& A7s offer, A had a chan&e of heart and sent ( a re'ocation, ut (

dispatched his acceptance efore recei'in& A7s re'ocation.

ii# $he second conseuence of the mailo rule:

the parties ha'e a indin& contract and offeree may not %ithdra% acceptance

iii# $he third conseuence of the mailo rule:

offeror is ound e'en if the acceptance is lost in transit so lon& as it %as properly addressed



c# A couple of nuances:

i# 4hat of means of transmission other than )S@S>

ailo rule applies to any means of transmission that in'ol'es a foreseeale

delay et%een dispatch and receipt

ii# ailo rule as a default rule:

offeror is master of offer. ailo rule applies unless the offer

pro'ides other%ise.

HYPOTHETICAL

A7s offer to ( stipulates that A *must hear from ( y the close of usiness $hursday+ in order for (7s

acceptance to e effecti'e. ( dispatches acceptance of the offer on 4ednesday, ut it doesn7t reach A until

Friday. "s (7s acceptance effecti'e>

ailo rule pro'ides that acceptance y mail is effecti'e upon dispatch unless the offer stipulates

other%ise. Eere, A specifically as0ed ( to let him 0no% y $hursday, so ( rule does not apply, as offer

2# "n a situation %here the parties simultaneously dispatch identical offers:$he dispatch is not le&ally rele'ant. Offers are only effecti'e to create po%er of

acceptance upon receipt.

3# The +ailbo' ule and %ption Contracts

a# aority and Restatement rule B ailo rule does not apply. An acceptance

is only effecti'e upon receipt.

# Eard Case: 4hat happens %hen an offeree dispatches t%o responses to an offer, the first purportin&

to reect the offer and the second purportin& to accept it>

a# $he mail9o rule does not &o'ern:

if the reection is mailed first.# $he parties7 oli&ations %ill depend on %hich of the offeree7s communications reaches the offeror

first.

i# "f the acceptance reaches the offeror first:

then there is a contract y 'irtue of communicated acceptance

ii# "f the reection reaches the offeror first:

there is no contract and po%er of acceptance is terminated

$. Acceptance and the UCC O! "". D.#1. The UCC,s e4ection of Common Law: Case >?@Acceptance by Seller,s Shipment of onconformin! Goods

a. Eo% mi&ht a seller accept a uyer7s offer>

1# )nder the )CC, a seller can accept a uyer7s offer to purchase &oods for prompt or current shipment in one of

three %ays:

a# First %ay:

a promise to ship &oods in conformity %ith terms of the offer

# Second %ay:

prompt or current shipment of the &oods in conformity %ith the terms of offer

c# $hird %ay:



1# Critical factual consideration:

e'erythin& turns on identity of the parties B consumer 'ersus merchants

2# Transaction "nvolvin! a Consumer

a# then different or additional terms are mere proposals for addition and no part

of contract unless offeror eplicitly accepts them.

3# Transaction -here Both 0arties Are +erchants

a# Critical $istinction: 1Additional3 versus 1$ifferent3 Terms1# *Additional+ terms:

Are those that address a ne% term or area not addressed y the offer.

2# *Different+ terms:

$erms that purport to chan&e an eistin& term of the offer i.e. %hich state la%

applies

# -ffect of *additional+ terms:

$hey automatically ecome part of the contract ecept in three circumstances

1# -ception 51:

Offer epressly limits acceptance to its o%n terms

EXAMPLE:

*$his order epressly limits acceptance to the terms stated herein.+

2# -ception 52:

"f the offeror oects to the different terms %ithin a reasonale time

EXAMPLE:

$his could e accomplished throu&h lan&ua&e to the effect of: *4e do not accept the indin&

aritration pro'ision set forth in your Ac0no%led&ment of Order.+

3# -ception 53:

"f the additional terms %ould materially alter the contract.

a# Definition of *material alteration+:

$erms that %ould result in surprise or hardship if incorporated %ithout epress

a%areness of the other party

# -amples of clauses that %ould materially alter the contract include:

i# 4arranty disclaimers

ii# Clauses that materially shorten the deadline for ma0in& complaints

iii# Clauses that chan&e usa&es of trade or past courses of dealin&

EXAMPLE:

(uyer sends Seller a purchase order for 1,<<< %id&ets at the ad'ertised price of 1< each.

Seller sends (uyer an Ac0no%led&ment of Order that promises deli'ery of the %id&ets at the

stated price and includes oilerplate lan&ua&e that ne&ates all %arranties and reuires

payment for the order to e complete %ithin 3< days of deli'ery, %hich is standard in the

%id&et trade.

c# &ffect of 1$ifferent3 Terms

1# aority ruleK*0noc0out rule+:

aority rule is 0noc0out rule, %hich states that different terms of each communication

dealin& %ith the same topic are 0noc0ed out and omitted from the contract



EXAMPLE:

(uyer7s purchase order contains a choice of la% pro'ision statin& that California la% %ill &o'ern

disputes arisin& from the transaction, and Seller7s order ac0no%led&ment states that 6e% =or0 la%

%ill &o'ern. )nder the maority rule, neither pro'ision is part of the parties7 contract, and if the parties

desire a choice of la% pro'ision, they %ill ha'e to ne&otiate one from scratch.

2# inority rule:

Different terms of the acceptance %ould e treated as proposals for chan&es to the contract

EXAMPLE:

On the same facts as immediately ao'e, ut under the minority rule, the uyer7s California la%

pro'ision %ould &o'ern the contract unless she epressly a&reed to the seller7s contrary pro'ision.

# -ritten Confirmations

a# @arties sometimes contract orally and then send follo%9up %ritten confirmations, %hich may contain terms

that are additional or different than the ori&inal oral deal. As is the case for a contract formed y an offer

follo%ed y a nonconformin& acceptance, the treatment of the additional or different terms depends on

the identity of the parties.

1# $ransactions not et%een merchants:

$he terms that are additional or different are mere proposals for addition

2# "n transactions et%een merchants:

a# Additional terms are automatically part of the contract unless:

i# materially alter the contract

ii# the recei'in& party oects to them in a reasonale time

# Different terms are:

mere proposals the other party is free to accept or reect

c# "f oth parties send %ritten confirmations containin& conflictin& terms:

0noc09out rule applies and neither term is in the contract

f. Conditional Acceptance

1# )nder the )CC, a definite and seasonale epression of acceptance %ill operate as an acceptance e'en

thou&h it states additional or different terms unless acceptance is epressly made conditional on assent to the

additional or different terms+ N 292<M1#P.

2# "n other %ords, if the acceptance is made epressly conditional on assent to the additional or different terms:

the non9conformin& acceptance %ill not e effecti'e to form a contract

a# "n this situation, no contract is formed y the %ritin&s until the offeror epressly assents to the additional

or different terms.

3# -hat Constitutes a Conditional Acceptance

a# aority rule:

Clear and conspicuous lan&ua&e that trac0s the lan&ua&e of 292<M %ill e treated as

conditional acceptance.

EXAMPLE:

(uyer sends Seller a purchase order for 1,<<< %id&ets at the ad'ertised price of 1< each. Seller sends

(uyer an Ac0no%led&ment of Order form that promises deli'ery of the %id&ets at the stated price, ut also

contains oilerplate lan&ua&e that ne&ates %arranties and limits remedies in the e'ent of reach. Seller7s

form also contains the follo%in& lan&ua&e in lar&e old font: *Our acceptance of your order is epressly

conditional on your assent to the additional or different terms that appear in this ac0no%led&ment.+ )nder

the maority rule, the echan&e of forms does not create a contract.



# inority rule:

Response must clearly communicate that the offeree is un%ill in& to proceed

unless and until the offeror a&rees to ne% terms

EXAMPLE:

(uyer sends Seller a purchase order for 1,<<< %id&ets at the ad'ertised price of 1< each. Seller responds

to (uyer7s order %ith an email sayin&, *4e are in receipt of your order for 1,<<< %id&ets at the ad'ertised

price of 1< each, and %e %ill e happy to fill it. Eo%e'er, efore %e can do so, %e must reuire you to

a&ree to the follo%in& terms.+ $he messa&e then sets forth terms ne&atin& %arranties and limitin& remediesand concludes, *)pon receipt of your reply to this messa&e statin& your a&reement to these terms, %e %ill

immediately ship your order.+ )nder the minority rule, this echan&e of forms %ould amount not to a contrac

ut to a conditional acceptance. "n contrast, under the minority rule, the echan&e of forms in the pre'ious

eample %ould create a contract.

&. %ther Situations Governed by the Battle of the #orms ules

1# Contracts #ormed by Conduct

a# $he )CC pro'ides that the parties7 conduct in reco&niQin& the eistence of a contract is sufficient to

estalish a contract e'en thou&h their %ritin&s do not other%ise estalish a contract.

EXAMPLE:

(uyer sends order to Seller, Seller responds %ith a conditional acceptance containin& a ne&ation of

%arranties, and the parties ha'e no further communications. Seller ne'ertheless ships the ordered &oods,

and (uyer accepts and pays for them. Althou&h the parties7 %ritin&s do not form a contractGecause

Seller sent a conditional acceptanceGa indin& contract is formed y their conduct.

# "f a contract is estalished in this %ay, the terms of the contract %ill e:

1# the terms in common that the parties a&ree to

2# to&ether %ith:

default terms pro'ided y the )CC

a# 6ote: $he epress terms in the parties7 communications, %hich do not match or a&ree are

omitted.

2# Transactions without 0re(0rinted #orms

a# )CC 292<M still applies e'en if there are pre9printed forms

3# Shrin*(-rap Contracts

a# $he courts are di'ided on %hether the rules of Section 292<M apply to so9called shrin09%rap contracts

i.e., a&reements that consumers find once they open the oes or pac0a&in& containin& the &oods#.

# ost courts apply 292<M:

in consumer transactions, these terms are mere proposals that the consumer can

accept or reect

c# Other courts do not apply 292<M:

"f the consumer retains and uses the &oods, they ha'e accepted the offeron the merchant7s terms



BAR EXAM APPLICATION

*uestion +

On ?anuary 1, $rump left a messa&e on 4riter7s ans%erin& machine offerin& to hire 4riter to create a trainin& %or0shop on

Real -state for $rump. On ?anuary ;, after 4riter had recei'ed $rump7s messa&e ut efore he7d had the opportunity to return

his call, $rump notified 4riter that it %as &i'in& the contract to 4riter7s competitor. $rump terminated the offer to 4riter.

Does 4riter ha'e any le&al recourse a&ainst $rump>

A9 o because no contract was formed.

(# 6o, ecause consideration %as not specified.

C# 6o, ecause an ans%erin& machine messa&e does not meet the form reuirements for an offer.

D# =es, as $rump7s action %as a&ainst the spirit of fair dealin& in the common la%.




*uestion ,

$he faculty of a pri'ately run la% school posted a notice in the student loun&e area %here it could e 'ie%ed y all students in

the la% school. $he notice announced that, in an effort to encoura&e scholarship, the faculty %as offerin& an additional 1,<<<

priQe to any student of the school %ho entered and %on the *"nternational !a% in a Chan&in& 4orld+ contest. $he contest %as

run y an outside or&aniQation %hich had no affiliation %ith the la% school or the faculty.

"n Octoer, Eudson, a student at the school, sa% the notice. She %ent strai&ht to %or0 on her paper for the competition. She also

left a note on the main counter of the Dean7s office %hich said, *", Susan Eudson, accept the offer of the faculty for an additional1,<<< priQe in the "nternational !a% in a Chan&in& 4orld+ contest. Eudson did not 0no% it, ut the note %as accidentally placed

in her file in the academic ad'isor7s office.

"n mid9?anuary, the ori&inal faculty notice %as remo'ed and a ne% notice %as posted announcin& that the faculty %as

re&retfully %ithdra%in& its offer. On Feruary 1, Eudson sumitted her paper to the Dean7s office, %hich in turn passed it on to

the contest eaminers. On April 3, it %as announced that Eudson7s paper had %on first priQe. 4hen she reuested the faculty

to pay the additional re%ard, they refused.

4as the offer effecti'ely re'o0ed as to Eudson>

A9 "t was effectively revo*ed when the faculty,s revocation notice was posted in mid(anuary.

(# "t %as effecti'ely re'o0ed only if Eudson %as a%are of the mid9?anuary remo'al of the announcement and its

replacement y the ne% notice prior to sumittin& her paper.

C# "t %as not effecti'ely re'o0ed ecause she had relied on the offer prior to Feruary 1st.

D# "t %as not effecti'ely re'o0ed since the offer ecame irre'ocale after a reasonale passa&e of time.



RECAP QUESTIONS:




1. Descrie a ilateral contract and a unilateral contract. "n ilateral contract, offeror ma0es a promise and epects a

promise from the offeree %hich inds them oth. "n a unilateral contract, offeror reuires specific performance from the

offeree, %hich does not ind the offeree.

2. 4hat are the t%o reuirements of acceptance> )nder common la%, acceptance must mirror the offer, and must e

communicated to the offeror.

3. -plain the ailo Rule. Acceptance y mail is effecti'e upon dispatch unless offer specifies some other means ofacceptance.

. 4hat is the )CC solution to the *(attle of the Forms+> et%een merchants, non conformin& acceptance from uyer or

seller inds the parties in a contract. $he additional terms are accepted, different terms 0noc0ed out in maority

urisdictions.



IV. CONSIDERATION AND PROMISSORY ESTOPPEL

A. Consideration and Bar!ain O! """. A.#

1. The Bar!ain Theory of Consideration

a. $he &eneral rule in American contract la% is:

promise is unenforceale unless it is supported y consideration

. $he promise has some 'alue and must e echan&ed for somethin& else of 'alue, such as:

counterpromise or performance &i'en to the promisor y the promisee for ma0in& the promise as a

uid pro uo or ar&ained for echan&e.

2. One recurrin& consideration prolem:

a. Occurrin& often thou&h not eclusi'ely# in family settin&s, the !ratuitous promise is:

promise to ma0e a &ift. Such a promise lac0s consideration and is &enerally uneforceale

EXAMPLE:

A in'ites his ne%ly %ido%ed sister9in9la%, %ho li'es < miles from A7s farm, to come and li'e in his &uest house

%ithout char&e so she7ll ha'e a safe place to raise her family, eplainin& that he is ea&er to help her in her time of

dire need. (ecause the sister9in9la% neither promised nor &a'e anythin& in return for A7s promise, A7s promise is

&ratuitous and unenforceale.

3. !e&al synonyms for *%ant of consideration+:

a. lac0 of consideration

. no consideration

c. not supported y consideration

d. insufficient consideration

. $istin!uishin! 1-ant of Consideration3 from 1#ailure of Consideration3a. *4ant of Consideration+:

Concerns the asence of a ar&ained for echan&e

. *Failure of consideration+:

Concerns a party7s failure to perform in in accordance %ith promise i.e. a reach of contract after 'alid

consideration

EXAMPLE:

"f A promises to deli'er a horse to ( in echan&e for (7s promise of payment and A then fails to deli'er the horse,

then there %as a failure of consideration. Eo%e'er, %e %ould not say that the consideration for (7s promise %as

lac0in&, since A7s ori&inal promise of performance constituted consideration for (7s promise of payment.

;. *Bar!ained(for3 Consideration and the 1$etriment3 Test

a. $he maorityKRestatement rule is that:

promise is supported y consideration if it is ased on a ar&ained for echan&e

. Re&ardless of the urisdiction, the uestion of %hether a particular performance y the promisee constitutes a

*detriment+ is ans%ered y the application of the so9called le!al detriment test.

1# )nder this test, the uestion is:

whether the promisee is doin! somethin! that he has a le!al ri!ht not to do or he isfore!oin! some activity that he has a le!al ri!ht to en!a!e in



EXAMPLE:

0romoter promised musician 6=<<< to play a concert at Carne!ie )all. 0romoter then tried to bac* out

of the promise claimin! that 1you would have done it for free.3

EXAMPLE:

Uncle promised nephew 6=<<< if nephew would !ive up smo*in! and drin*in!. The uncle,s estate

hopin! to avoid this obli!ation ar!ued that the nephew didn,t incur a detriment because !ivin! up

smo*in! and drin*in! was !ood for his health.

. "nade/uacy of Consideration

a. $his refers to the situation %here:

Someone claims he has not paid enou&h consideration for the deal

. $he modern rule:

Do not police eui'alence or fairness of echan&e for the purposes of applyin& the consideration

doctrine

EXAMPLE:

"f A promises his irthri&ht for a mess of potta&e from (, ( has nonetheless pro'ided consideration for the promisedirthri&ht no matter ho% mea&er the 'alue of the potta&e. "n other %ords, the supposed inadeuacy of consideration

is no defense to a reach of contract claim.

EXCEPTION:

"n some urisdictions, an element of securin& specific performance is sho%in& that there %as a fair

or adeuate echan&e

EXAMPLE:

"f A promised to sell (lac0acre to ( for a mea&er sum and then refused to deli'er, some courts %ould refuse to

&rant ( specific performance ecause of inadeuate consideration and instead limit (7s remedy for reach to

money dama&es.

c. Do not confuse *insufficient consideration+ %ith *inadeuate consideration.+

1# "nsufficient consideration:

6O consideration for particular promise so no ar&ain

EXAMPLE:

-here A promises his sister(in(law a place to raise her family and see*s nothin! in return.

2# "nadeuate consideration:

Assumes consideration ut that it is not enou&h so the deal is unfair

d. odern courts do not police the fairness of ar&ains 'ia the consideration doctrine.

1# "nstead, a party may e ale to defeat the enforcement of an ecessi'ely one9sided ar&ain throu&h:

the defense of unconscionaility

M. "llusory 0romises

a. -planation and rule:

$his is a promise to perform that lea'es performance to the discretion of the promisin& party is an

illusory promise and %on7t constitute consideration

EXAMPLE:

$hus, if A says to (, *"7ll sell you as many %id&ets as you %ant to order %ithin the net t%o %ee0s for ; a piece,+

and ( a&rees to uy at that price as many %id&ets as he decides to order from A, (7s promise is illusory and %ill not

constitute consideration for A7s promise.



L. Gratuitous 0romises

a. Defined:

@romise to ma0e a &ift. Such a promise is not enforceale.

. -ecuted /ifts distin&uished:

"n contrast, &ratuitous transfers are le&ally indin& and enforceale.

EXAMPLE:

"f " promise you a ne% car for your irthday, that %ould constitute a &ratuitous promise and %ould e unenforceale

if " decline to follo% throu&h. Eo%e'er, if " &i'e you a ne% car for your irthday, then the transfer is le&ally indin&,

and " cannot later chan&e my mind and ta0e ac0 the car.

1# 4hat does it ta0e to *eecute+ a &ift>

a# "ntent

# Actual or symolic deli'ery

c. Bar!ains $istin!uished

1# ecitals of Consideration

a# $he rule:

reuirement of consideration is not satisfied y false recital

EXAMPLE:

A %ants to ma0e a indin& promise to &i'e his youn& &randdau&hter 1<,<<< on her 21st irthday and

accordin&ly &i'es her a note that reads: *For 'alue recei'ed, " promise you 1<,<<< upon your 21st

irthday.+ "f no 'alue %as recei'ed in echan&e for the promise, the recital %ould not satisfy the

consideration reuirement and the promise %ould e unenforceale.

# A minority of courts reco&niQe an eception to this rule %here:

%ritten option contracts contain a false recital of consideration

d. The 0roblem of a Condition on a Gratuitous 0romise

1# 4hat is a *condition on a &ratuitous promise+>

A condition is somethin& that a promise must do to a'ail herself of the promisor7s &ift

ut does not count as consideration ecause it is not ar&ained for echan&e.

EXAMPLE:

A invites his newly widowed sister(in(law who lives < miles away from his farm to come and live in

his !uest house without char!e so she,ll have a safe place to raise her family e'plainin! that he is

ea!er to help her in her time of need. The promisee here won,t be able to ta*e advanta!e of A,s offer

unless she moves her family the < miles to A,s farm. )owever the move is merely a condition of the

!ratuitous promise not consideration.

2# $istin!uishin! a 1Condition on a Gratuitous 0romise3 from 1Consideration3

a# Factor 51:

lan&ua&e of the parties

1# %ords su&&estin& ene'olence rather than self9interest i.e. Iir0sey case

# Factor 52:

contet

1# in the commercial contet, the &ratuitous promise is rare ut much more common

in family and charitale contet



c# Factor 53:

enefit to the promisor

1# %hether the promisee7s detriment creates no enefit for the promisor, it indicates

a &ift, and no ar&ained for consideration.

HYPOTHETICAL

Spra%lmart ad'ertises a &rand openin& celeration for its 1<,<<<th store, promisin& ;<< &ift certificates to

each of the first 1< customers on openin& day. "s this a &ratuitous promise or a ar&ain> "f the latter, %hat is

the consideration>

Contract. 6ot &ratuitous in terms of contet, it is commercial and a store that operates for profit. $hey

%ant people at the store, %hich is the ar&ained for consideration in echan&e for the &ift certificates.

B. Alternatives in the Absence of Consideration

1. 0ast or +oral Consideration

a. A promise in echan&e for somethin& already &i'en or performed is not supported y consideration

EXAMPLE:

"n ills '. 4yman N2< ass 3 @ic0.# 2<M 1L2;#P, the court refused to enforce the father7s after9the9fact promise to

compensate a /ood Samaritan for nursin& his dyin& son, and the case %ould li0ely come out the same %ay today.

. The &'ceptions to the 10ast Consideration3 ule

1# -ception 51:

%ritten promise to pay a det arred y limitations is enforceale.

2# -ception 52:

%ritten promise to pay a det dischar&ed y an0ruptcy is enforceale

c. &nforcin! an Unsupported 0romise Usin! the 1+aterial Benefit3 Test

1# $his test is supported y the Second Restatement ut is used in only a minority of urisdictions. "t pro'ides that

a promise made in reco&nition of a past enefit conferred %ill e enforceale as lon& as:

a# the promise conferred the enefit on a promisor and not on a third party

# the enefit is material

EXAMPLE:

A sees that ( is in &ra'e dan&er and heroically inter'enes to sa'e the latter, inurin& himself in the

process. ( &ratefully promises to compensate A for his efforts. $hese are the facts of 4e '. c/o%in

N2M Ala. App. L2 13;#P, %here the court enforced the promise ecause A7s efforts esto%ed a material

enefit the sa'in& of a life# on (.

EXAMPLE:

(ecause the /ood Samaritan in ills '. 4yman esto%ed the enefit of nursin& ser'ices on the promisor7s

son rather than on the promisor, the promise %ould not e enforceale.

2# An &'ception or Limitation on the 1+aterial Benefit3 Test

a# A promise made ased on past enefits %ill not e enforceale if the enefits %ere

pre'iously contracted for y the promisor.



EXAMPLE:

-mployer promises a retirin& employee a pension %orth half the latter7s salary in reco&nition of the latter7s

many years of hard and loyal %or0. Althou&h the employee7s past %or0 no dout esto%ed material

enefits on the employer, the %or0 %as done under contract i.e., the employee %as paid for it under the

terms of the employment a&reement#, and accordin&ly the employer7s promise is not enforceale.

Rememer, the material9enefit test is a minority rule and most courts %ould in these circumstances

apply the * past consideration+ doctrine and allo% eceptions only for the statute of limitations andan0ruptcy cases.

2. 0romissory &stoppel

a. A promisee that reasonaly relies to his detriment on a &ratuitous promise may e ale to enforce that promise,

e'en thou&h consideration is lac0in&.

. $here are four reuirements that must e met in order for promissory estoppel to e a'ailale.

1# Reuirement 51:

@romise

EXAMPLE:

Statements li*e 1",d li*e to !ive you some money to help you with colle!e3 would be considered too

va!ue to be an actual promise. Alternately 1",ll !ive 6;=<<< toward your tuition this fall3 would be

specific enou!h to /ualify as a promise.

2# Reuirement 52:

Foreseeale reliance

EXAMPLE:

The widow,s move to her brother(in(law,s farm on the faith of his promise would have been reasonably

foreseeable to the brother(in(law at the time he made her the promise. )owever if the widow had

purchased a hi!h(end SU2 to facilitate the move this would li*ely not have been foreseeable.

3# Reuirement 53:

Actual reliance

EXAMPLE:

"f the widow had already decided to ma*e the <(mile move before her brother made her the promise

then this would not be actual reliance.

# Reuirement 5:

inustice %ithout enforcement a# $here are se'eral specific factors that courts use to analyQe the *inustice+ reuirement in an eactin&

%ay:

1# stren&th of proof of the other three elements

2# %illfulness of the reach

3# relati'e position or euities of the parties

# etent to %hich reliance %as detrimental

;# a'ailaility of alternati'es short of enforcin& the promise

6O$-



HYPOTHETICAL

)ncle promises his nephe% L,<<< to enale the latter to purchase a nei&hor7s car for transportation to

school and an after9school o. "n reliance on the promise, the nephe% secures possession of the 'ehicle

and promises the nei&hor the L,<<<. "f the uncle rene&es on his promise to pay, is promissory estoppel

a'ailale if the nei&hor is %illin& to accept the return of the car and release the nephe% from det> 4hat if

the car has a mar0et 'alue far in ecess of L,<<<, enalin& the nephe% to sell the car, co'er the det to his

nei&hor, and recoup any costs associated %ith the sale>

6o inustice %ithout enforcement if nei&hor lets nei&hor off the hoo0. Also, if the car is %orth more than

L<<<, nephe% can sell the car and pay the nei&hor. Courts %ill consider this ecause it is an alternati'e

short of enforcin& the promise, and the reliance on it not as detrimental, %here e'eryone &oes home

happily



RECAP QUESTIONS:




1. -plain the difference et%een a &ratuitous promise and an eecuted &iftGare either or oth considered indin&>

2. 4hat are the three factors used to distin&uish a *Condition on a /ratuitous @romise+ from *Consideration+>

3. 4hat are the four reuirements that must e met for promissory estoppel to e a'ailale>



V. STATUTE OF FRAUDS

A. "ntroduction O! "8. A.#

1. "n contract la%, contracts &enerally need not e in %ritin&J oral and %ritten a&reements are eually enforceale.

2. $he Statute of Frauds is an eception to this &eneral rule.

B. The Statute of #rauds in %peration O! "8. (.#

1. "f a contract is &o'erned y the Statute of Frauds, then:

$he contract must e e'idenced y %ritin& and si&ned y the party a&ainst %hom the enforcement is sou&ht

2. 4ho has a Statute of Frauds defense>

A party %ho does not si&n the contract &o'erned y the statute of frauds

C. &valuatin! Statute of #rauds "ssues O! "8. C.#

$o analyQe Statute of Frauds issues, as0 the follo%in& three uestions in order.

1. $oes the A!reement #all within the Statute of #rauds

a. $he Statute of Frauds only &o'erns certain cate&ories of contracts a&reements for eample, contracts for the sale

of land or &uarantees#.

. "f the a&reement does not fall under the Statute of Frauds:

then assi&ned %ritin& is not reuired to enforce the contract

2. "s the Statute of #rauds Satisfied

a. "f an a&reement is %ithin the Statute of Frauds, then the 0ey uestion is %hether the Statute7s %ritin& reuirement is

met.

1# $o satisfy the Statute of Frauds:

reuires a %ritin& si&ned y the party a&ainst %hom the enforcement is sou&ht

2# "f the Statute of Frauds is not satisfied:

party see0in& enforcement %ill lose unless there is a %or0around

3. "s Alternative &nforcement Available

a. $he party see0in& to enforce the contract may e ale to use another theory of enforcement to protect

its interests such as promissory estoppel or uasi9contract

$. AnalyDin! 0roblems Under the Statute of #rauds O! "8. D.#

Rememer the list of contracts that are %ithin the Statute of Frauds: +E L&GS

1. #irst Fuestion: "s the Contract within the Statute of #rauds

a. "n most states, si cate&ories of a&reements are &o'erned y the Statute of Frauds:

1# arria&e contract

-HA$"@

-HA$"@



2# =ear as in contracts not e performed %ithin one year

3# !and

# -ecutor B Contracts of eecutor or administrator to ans%er for a duty of decedent

;# /uaranty B suretyship or promissory note

# Sale B Contracts for sale of &oods at a price of ;<< or more )CC#

. "n the typical case, there is little difficulty in determinin& %hether a particular contract falls under the Statute of

Frauds. Eo%e'er, some cate&ories ha'e specific limitations %ithin them that narro% the reach of the Statute of

Frauds.

c. Contracts ot to Be 0erformed within a Eear

1# $he year at issue under the one9year pro'ision is measured from:

date of ma0in& the contract rather than date of e&innin& performance

EXAMPLE:

"n une of her first year of law school Law Student enters an oral a!reement with Law #irm to wor* for

the firm durin! une uly and Au!ust of her second summer. Althou!h the duration of the

contemplated performance is only three months the performance will not be complete until ? months

after the ma*in! of the a!reement. Accordin!ly the contract is !overned by the one(year provision

and a si!ned writin! is re/uired in order to secure enforcement.

2# $he uestion of %hether a particular contract is to e performed %ithin one year of the ma0in& thereof is

ans%ered y determinin&:

%hether at the point of formation, it is at all possile to complete the reuired

performance %ithin a year7s time

EXAMPLE:

"t is hi!hly unli*ely that the construction of an oil(producin! facility in a war(rava!ed country would be

completed within a year. But because the performance is possible within that time@even if

e'ceedin!ly unli*ely@the a!reement is not !overned by the one(year provision and no si!ned writin!

is re/uired.

EXAMPLE:

%ne of the parties to an oral construction a!reement attempts to bac* out ? months into the pro4ect

and raises the Statute of #rauds as a defense. Because the prospect of performance is measured from

the point of ma*in! the contract 5when completion within a year was possible9 rather than from the

time of the dispute 5when completion within the first year is clearly no lon!er possible9 the a!reement

is not !overned by the one(year provision and no si!ned writin! is re/uired.

EXAMPLE:

A three(year e'clusive representation a!reement between a professional athlete and his a!ent cannot be

performed within a year@no matter how dili!ently the a!ent wor*s. Accordin!ly the a!reement is

!overned by the one(year provision and a si!ned writin! is re/uired.

3# #re/uently Tested Situations

a# Contracts that can e reached or ecused %ithin a year of its formation:

(reach is true of any contract and is irrele'ant. 4hat matters is not that the contract

can e reached %ithin a year ut %hether the contract can e performed in full

efore the end of a year

# A lifetime or permanent contract of employment:

6ot &o'erned y SOF ecause death is possile %ithin year of formation

d. Land(Sale Contracts

1# $he land pro'ision has een modified under some circumstances.



2# $he contract for future sale:

/o'erned y land pro'ision and reuires a si&ned %ritin&

a# $he present con'eyance of land promised for money:

Outside the land pro'ision for SOF i.e. deeds.

# Real estate ro0era&e a&reements:

Althou&h land is in'ol'ed, these are ser'ice contracts so not &o'erned y land pro'isionof SOF

1# Some urisdictions ha'e resol'ed this y addin& a separate cate&ory to their Statute of Frauds

specifically for ro0era&e a&reements.

3# !ease of real property:

!eases of real property are contracts fallin& %ithin statute of frauds ecause leasehold is

interest in land.

a# Other urisdictions eclude short9term leases of a year or less from the Statute of Frauds.

e. GuarantyHSuretyship A!reements

1# $here are t%o eceptions to the &eneral rule that a promise to ans%er for the det of a third partyGa suretyship, or&uarantor a&reementGis suect to the Statue of Frauds and must e in %ritin&.

a# -ception 51:

4hen the creditor dischar&es the ori&inal detor from oli&ation on the faith of

a &uaranty y third9party to pay the det

# -ception 52:

ain purpose doctrine: main purpose of the &uarantor is to protect his o%n

economic interest

HYPOTHETICAL

?oe @lumin& Co. secures a loan from @i&&y (an0. 6. 8estor, %ho o%ns a controllin& interest in the plumin& firm,

ma0es an oral promise to the (an0 to &uarantee repayment of the loan. "s the &uarantee %ithin the Statute of

Frauds> 4hat if 8estor is a shareholder in ?oe @lumin& Co. ut does not o%n a controllin& interest in the firm>

8estor is &uarantor, ut he o%ns controllin& interest in plumin& firm. $he main purpose doctrine applies

and the promise to ans%er ?oe7s det does not need to e in %ritin& to e enforceale.

2. Second Fuestion: "s the Statute of #rauds Satisfieda. "f a contract falls %ithin the Statute of Frauds, then the &eneral rule is:

$he contract is unenforceale unless it is e'idence y %ritin& and si&ned y party a&ainst %hom the enforcement is

sou&ht

. The -ritin! e/uirement

1# 6o reuirement that parties put the entire a&reement in %ritin&. All that is reuired is that the %ritin& is a

memorandum of the a&reement %hich can e prepared efore, durin& or after contract formation

2# )nder the common la%, the follo%in& memoranda ha'e een held to satisfy the %ritin& reuirement:

a# A letter from one of the parties to a third party descriin& the a&reement

# $he %ritten offer, acceptance of %hich formed the contract



c# A letter from one of the parties repudiatin& ut so admittin& the a&reement

EXAMPLE:

*Dear $ony, " re&ret to inform you that " cannot &o throu&h %ith the sale of my racehorse to you. Althou&h the

1<<,<<< you a&reed to pay is 'ery &enerous, my accountant has ad'ised me of the ta implications, %hich "

had not considered, and so " must re&retfully o% out.+

3# $he memorandum need not document the transaction in detail. Only the follo%in& terms are re1uired:

a# "dentity of the parties to the transaction

# the nature and suect matter of the contract

c# essential terms of the a&reement such as price and date of performance

# e/uired $escription under the Land 0rovision

a# Older case la% su&&ests:

needed a formal le&al description of land

# ore current decisions su&&est:

an address or some other description of the property may suffice

c. The Si!nature e/uirement

1# $he actual full si&nature of the party a&ainst %hom enforcement is sou&ht is not necessary.

a# 4hat is needed>

Any symol or mar0 used %ith the intention to authenticate the %ritin&

# -amples:

initials, typed, stamped or preprinted si&nature, or e'en letterhead

d. 1Tac*in! To!ether3 +ultiple $ocuments

1# $he %ritin& need not e a sin&le document. A party may satisfy the Statute y tac0in& to&ether se'eral

documents %hich, once comined, satisfy all the necessary reuirements for the Statute of Frauds.

a# "f all documents are si&ned, or if a si&ned document incorporates unsi&ned documents y reference:

then the SOF is satisfied

# "f unsi&ned documents are not incorporated y reference in a si&ned document, *tac0in& to&ether+ the

si&ned and unsi&ned documents to satisfy the Statute of Frauds is ne'ertheless permissile if:

1# First reuirement:

$here must e one si&ned %ritin& unami&uously estalishin& a contractual relationship

et%een the parties

2# Second reuirement:

the si&ned and unsi&ned documents must clear refer to the same suect matter

3# $hird reuirement:

must e clear and con'incin& e'idence of acuiescence to the unsi&ned documents

y the party a&ainst %hom enforcement is sou&ht

EXAMPLE:

A ne% employee is sent a hirin& letter, %hich ma0es no mention of a promise of o security.Eo%e'er, the notes from the ne&otiations that preceded the sendin& of the hirin& letter do say that the

company promised t%o years of o security. $hese notes, %hich %ere prepared y the secretary, are

not si&ned, %hereas the hirin& letter is si&ned. "n this case, the notes can e tac0ed on to the si&ned

document.

e. 0erformance

1# $he Statute of Frauds may e satisfied %ith respect to some of the cate&ories of &o'erned contracts 'ia part

performance.

2# Land Contracts

a# @art performance reuires a sho%in& of any comination, or all three, of the follo%in&:

1# payment of all or part of the purchase price



2# ta0in& of possession

3# ma0in& sustantial impro'ements to the property

3# %ne(Eear Contracts

a# "f fully performed:

then an oral contract not to e performed %ithin one year ecomes enforceale e'en

if it ta0es more than a year

# "f only partially performed:

an oral contract not to e performed %ithin one year is not enforceale.c# Quantum Meruit

1# restitution is a'ailale for the performin& party %ho is other%ise out of luc0

# Sale of Goods Contracts

a# $he )CC SOF may also e satisfied y part performance of a sale of &oods contract

3. Third Fuestion: "s there an Alternative Basis for &nforcement

a. "f the contract is %ithin the Statute of Frauds, ut the Statute is not satisfied ecause the reachin& party ne'er

si&ned a %ritten document, the a&&rie'ed party may ne'ertheless e ale to secure some protection for her

interests 'ia an action for restitution or promissory estoppel.

1# ecovery for Benefits Conferred

a# uasi9contract B%here one party esto%s enefits upon another in connection %ith anoral contract, e'en if the party is arred y the SOF, the a&&rie'ed party may reco'er the

'alue of the enefits conferred.

2# 0romissory &stoppel

a# +ay be a'ailale for detrimental reliance for losses suffered on the faith of an oral

contract that is unenforceale

# -asy case:

4here a party to an oral contract %ithin the statute promises the other party that he %ill

create a si&ned %ritin& and the other party specifically relies on it to his detriment.

ost courts %ill apply promissory estoppel if the promisin& party does not create %ritin&

c# Eard Case:6o specific promise to create a %ritten contract, reliance is on the underlyin& oral contract.

EXAMPLE:

An employee %ho lea'es his current o and mo'es across the country ased on an oral t%o9year

employment contract, only to e dismissed efore he starts his ne% o.

1# $he slim maority of courts hold:

@romissory estoppel is a'ailale in these circumstances if there is stron& e'idence of reliance

2# A sustantial minority of courts hold:

Common la% @- doctrine is preempted y SOF as it s%allo%s the rule

&. AnalyDin! 0roblems under the UCC Statute of #rauds O! "8. -.#

1. #irst Fuestion: "s the Contract within the UCC Statute of #rauds

a. $he )CC Statute of Frauds is Section 292<1, %hich y its terms &o'erns:

a&reements for the sale of &oods for ;<< or more

2. Second Fuestion: "s the UCC Statute of #rauds Satisfied

a. $here are fi'e %ays to satisfy the )CC Statute of Frauds:

1# $he first %ay:

Assi&ned %ritin&

a# $he easiest %ay to satisfy the )CC Statute of Frauds, a si&ned %ritin& reuires the follo%in& to e



satisfied:

1# Reuirement 51:

4ritin&

a# 4hat counts as a *%ritin&+ under the )CC>

Any intentional reduction to tan&ile form

# -lectronic communication:

aority of courts say that electronic documentation satisfies reuirements

of the )CC2# Reuirement 52:

Si&ned y the party a&ainst %hom enforcement is sou&ht

a# 4hat counts as a +si&nature+ under the )CC>

Any symol eecuted y a party that %ith present intention to authenticate

a %ritin&

# ost states ha'e adopted the )-$A )niform -lectronic $ransactions Act# under %hich

electronic si&natures satisfy le&al %ritin& reuirements.

3# Reuirement 53:

sufficient to indicate that a contract for sale has een made et%een the parties

a# For this relaed reuirement, all that is needed:that the %ritin& afford a asis for elie'in& that the offered oral e'idence

rest on a real transaction

EXAMPLE:

A enters an oral a&reement %ith ( to sell the latter a speedoat for 1<,<<<. ( %rites a chec0

that contains A7s name as the payeeJ (7s name as payorJ 1<,<<< as the amountJ and the %ord

*speedoat+ in the notation space. Althou&h the %ritin& does not use the %ord *a&reement+ or

*contract,+ it is clearly *sufficient to indicate that a contract of sale has een made+ et%een A

and ( and %ould, therefore, satisfy the %ritin& reuirement of the )CC Statute of Frauds a&ainst

(, the si&nin& party.

# Reuired term:

One reuirement B reuires uantity term to satisfy the SOF, contract is unenforceale

eyond the uantity stated in the %ritin&.

1# "f there is no uantity term, the contract is alto&ether unenforceale, suect to t%o eceptions:

a# -ception 51:

4here other lan&ua&e pro'ides an unami&uous asis for measurin& the

uantity

# -ception 52:

Output or reuirements contracts that satisfy the reuirements under the )CC

c# Apart from the uantity term, no other term is reuired in the %ritin&. Eo%e'er, a %ritin& can ha'eso fe% terms that it %ill no lon&er e *sufficient to indicate that a contract for sale has een made

et%een the parties.+

EXAMPLE:

A and ( enter an oral a&reement under the terms of %hich A is to sell ( fi'e toacco arns for a

total of ;,<<<. After they sha0e hands, A ta0es out a piece of paper, %rites *fi'e arns,+ si&ns it,

and &i'es it to (. "f A suseuently ac0s out of the deal, he %ill ha'e a successful Statute of

Frauds defense a&ainst ( despite the fact he si&ned a %ritin& %ith a uantity term, ecause the

%ritin&, ta0en as a %hole, is insufficient to indicate that a contract for sale has een made

et%een A and (.



c# -ritten %ffers

1# )nder the )CC:

A %ritten offer does not satisfy the %ritin& reuirement ecause it is insufficient to

sho% that a contract has een made

2# (ut if the reuirements of the )CC *Firm Offer+ rule are met:

$hen this %ritin& %ill e fully enforceale a&ainst the one ma0in& the firm offer

2# $he second %ay to satisfy the )CC Statute of Frauds:

erchant7s confirmationa# $he )CC Statute of Frauds may e satisfied %hen t%o merchants enter an oral a&reement and one of

them sends the other a %ritten confirmation of the a&reement.

1# "n such a circumstance, the Statute is satisfied a&ainst the recipient merchant:

"f he fails to oect to the confirmation %ithin the reuired time

# Reuirements for a 'alid merchant7s confirmation:

1# First reuirement:

Confirmation has to sufficient a&ainst the sender

a# $his is satisfied if the confirmation is si&ned and has a uantity term

2# Second reuirement:

$he %ritin& is in confirmation of contract 3# $hird reuirement: $ime9frame for sendin&

Confirmation must e sent %ithin a reasonale time of formation

# Fourth reuirement: RecipientTs Ureason to 0no%U

Confirmation must e ased on a real a&reement or discussion et%een the parties

and must e actually recei'ed

c# -ception: $he recipient7s oectin& response:

Recipient must send a %ritten notice of oection %ithin 1< days of receipt in order to

0eep his SOF defense

EXAMPLE:

A and ( enter an oral a&reement under the terms of %hich A is to sell ( fi'e toacco arns for a total of

;,<<<. $he follo%in& day, ( sends A a %ritten confirmation of the a&reement and t%o days later (

recei'es a si&ned reply that reads in pertinent part: *y understandin& is that %e don7t ha'e a contract

et%een us, for as " mentioned " am still entertainin& other offers for the arns. y apolo&ies for any

confusion that may ha'e een caused.+ (ecause A7s reply oects to the confirmation7s contents, the

confirmation does not satisfy the )CC Statute of Frauds a&ainst A.

d# $he *ni&htmare+ of the admittin& memorandum:

satisfies the SOF a&ainst the sender

EXAMPLE:

A7s si&ned reply to (7s confirmation reads: *" re&ret that " can7t &o throu&h %ith the sale of my arns to you.

Althou&h the ;,<<< you a&reed to pay is 'ery &enerous, my accountant has ad'ised me of ta implications

of the transaction that " hadn7t considered, and " must, therefore, o% out.+ (ecause A7s si&ned reply is itself

sufficient to indicate that a contract for sale had een made et%een the partiesGa contract from %hich A is

no% see0in& to escapeGthe reply satisfies the )CC Statute of Frauds a&ainst A.

3# $he third %ay to satisfy the )CC Statute of Frauds:

in court admission, sometimes called udicial estoppel

a# A third means of satisfyin& the )CC Statute of Frauds occurs %hen:

a party admits in his pleadin&, testimony or other%ise in court that contract for sale



%as made.

1# $he contract is only enforceale:

up to the uantity admitted

# $he fourth %ay to satisfy the )CC Statute of Frauds:

partial performance

a# Despite the asence of a si&ned %ritin&, an other%ise 'alid contract is enforceale %ith respect to:

1# &oods for %hich payment has een oth made y uyer and accepted y seller

OR2# &oods %hich ha'e een recei'ed and accepted

# $hus, the partial performance eception does not apply unless:

there are actions y oth parties indicatin& that the contract eists

c# $ivisible versus "ndivisible Goods

1# "f the contract in uestion in'ol'es di'isile &oods:

contract is only enforceale up to the uantity deli'ered and paid for

2# "f the contract in uestion in'ol'es an indi'isile &ood:

then partial payment renders the contract fully enforceale

;# $he fifth %ay to satisfy the )CC Statute of Frauds:

@rolem of specially manufactured &oods

a# $he prolematic scenario:

Specially manufactured &oods to specifications of a uyer %ho then ac0s out

# Statute is satisfied %here the follo%in& fi'e elements are present:

1# the &oods are to e specially manufactured for the uyerJ

2# the &oods are not suitale for sale to others in the ordinary course of seller7s usinessJ

3# seller has sustantially e&un to manufacture, or made commitments to procure, the &oodsJ

# the actions underta0en to e&in to manufacture or procure occurred under circumstances %hich

reasonaly indicate that the &oods are for the uyerJ and

;# the actions underta0en to e&in to manufacture or procure occurred efore seller recei'ed notice of

uyer7s re'ocation.c# (oilin& those elements do%n to t%o critical concerns:

1# Can the manufacturer resell in ordinary course of usiness

2# 4as the detrimental reliance completely efore notification of uyer7s %ithdra%al

3. Third Fuestion: "s there an Alternative Basis for &nforcement

a. "f a party has relied to its detriment on an oral contract %hose enforcement is arred y the )CC Statute of Frauds,

the a&&rie'ed party may e ale to secure a remedy 'ia promissory estoppel.

1# aority of courts:

@romissory estoppel is a'ailale if a stron& case is made

2# inority of courts:

-press lan&ua&e of SOF precludes promissory estoppel 3# Construction contractors:

8irtually all courts ha'e protected &eneral contractor 'ia promissory estoppel e'en if the oralsucontract in uestion is for &oods for sale for ;<< or more

#. Limitations on the Statute of #rauds O! "8. E.#

1. $he only effect of a successful Statute of Frauds defense is to defeat enforcement of the contract a&ainst the non9

si&nin& party. $he contract may still e 'alid and enforceale for other purposes.

a. $he oral contract may pro'ide e'idence in estalishin& an element of a le&al claim apart

from reach of contract



EXAMPLE:

A rin&s an action a&ainst C for tortious interference %ith A7s oral land contract %ith (. Althou&h ( %ould ha'e a

successful Statute of Frauds defense in a reach of contract action rou&ht y A, the Statute %ill e irrele'ant in A7s

tortious interference claim a&ainst C.

. $he oral contract may pro'ide e'idence estalishin& a defense to a le&al claim esides a reach

EXAMPLE:

)nder an oral contract for the sale of A7s land to (, ( ta0es possession. A rene&es and rin&s a trespass action

a&ainst (. Althou&h A %ould ha'e a successful Statute of Frauds defense in a reach of contract action rou&ht y

(, the Statute %ould e irrele'ant to the 'alidity of (7s defense to A7s trespass claim.

c. $he oral contract may pro'ide e'idence of the 'alue of ser'ices already rendered

EXAMPLE :

A spends three months %or0in& for ( under an oral t%o9year employment contract. "f ( fires A and successfully

raises a Statute of Frauds defense a&ainst enforcement of the oral contract, A may nonetheless e ale to reco'er

from ( the reasonale 'alue of the ser'ices rendered in uantum meruit. oreo'er, he may offer the price a&reed

to in the oral contract as e'idence of the 'alue of the ser'ices rendered.



RECAP QUESTIONS:




1. 4hat are the si cate&ories of a&reements co'ered y the Statute of Frauds> arria&e, land, contract that cannot e

completed %ithin a year, sale of &oods o'er ;<<, &uaranty or suretyship, eecutor

2. 4hat are the fi'e %ays one can satisfy the )CC Statute of Frauds> Assi&ned %ritin&, merchant confirmation, part

performance, udicial estoppel or in9court admission and sales of specially manufactured &oods

3. 4hat is the effect of a 'alid Statute of Frauds defense> $he only effect of a successful Statute of Frauds defense is to

defeat enforcement of the contract a&ainst the non9si&nin& party. $he contract may still e 'alid and enforceale forother purposes.



VI. GAP-FILLERS, INTERPRETATION, AND THE PAROL EVIDENCE RULE

A. "n General

1. @arties to a contract ordinarily reach eplicit and unami&uous a&reements on the essential issues of the contract, such

as uantity and price. Eo%e'er, there are t%o prolems that arise.

a. &aps in a&reement that lea'e certain issues unaddressed i.e. not sayin& %hen &oods or payments are due

. ami&uities in a&reement concernin& issues that parties ha'e tried to address

B. #illin! in the Gaps with $efault 0rovisions

1. $he metaphor of the *default rule+:

ud&es use default rules to fill &aps %hen the contract does not address the matter ut the parties are

free to set the default rules aside throu&h contractin& other%ise

2. UCC $efault ules for the Sales of Goods

a. "mplied -arranties

1# -arranty of Title

a# For the sale of all &oods, there is an implied %arranty of:

1# $itle

2# Ri&htful transfer of &oods

3# 6o liens are attached to these &oods

# $his %arranty can only e ecluded or modified y:

1# Specific lan&ua&e OR

2# Circumstances that &i'e uyer reason to 0no% that seller does not claim

encumered title i.e. uitclaim situation

2# -arranty of +erchantability

a# $he %arranty &uarantees that

&oods are fit for ordinary purposes for %hich &oods %ould e used

# this %arranty only applies if seller is a merchantc# $he %arranty of merchantaility %ill e displaced y:

1# (y specific mention of the %ord merchantaility and conspicuousness if the disclaimer

is in %ritin&

2# any other lan&ua&e or circumstances that %ould e reasonaly understood y the

uyer i.e. as is

3# -arranty of #itness for a 0articular 0urpose

a# $his %arranty &rants that:

/oods are fit for particular purpose for %hich uyer intended to use them

# $he %arranty only applies %here, at the time of contractin&, the seller has &ood reason to 0no%:

1# particular purpose for %hich the &oods are used2# uyer is relyin& on seller7s s0ill or ud&ment to select reasonale &oods

6O 6--D $O (- A -RCEA6$

c# $he %arranty may e ne&ated:

1# 4here disclaimer is in %ritin&, clear and conspicuous

2# the &oods ha'e patent defects %hich %ould ha'e een easily detectale

. &'press -arranties

1# $he )CC also pro'ides that a contract can create epress %arranties. -press %arranties y the seller that the

&oods %ill conform to some standard arise %hene'er the seller epressly or impliedly ma0es them as part of

the asis of the ar&ain in the follo%in& %ays:



a# any affirmation or promise of fact i.e. this car %ould &et 3< miles per &allon

# any description of the &ood

c# any sample or model

2# $he seller need not use the %ords *%arrant+ or *&uarantee+ in order to create an epress %arranty.

a# Eo%e'er:

a mere affirmation of 'alue of &oods does not create a %arranty i.e. puffin&.

c. +issin! Terms1# )nder the )CC, %here there are pertinent terms missin&, the follo%in& default rules %ill fill in those missin&

terms:

a# $he default rule for a missin& price term is:

Reasonale price at the time contract %as made

# $he default rule for missin& time term e.&., timeKdate of deli'ery or timeKdate for action ta0en under the

contract# is:

Reasonale time

c# $he default rule for a missin& place of delivery term is:

Seller7s place of usiness

3. Common Law $efault ules for Service and &mployment Contracts

a. +issin! 0rice Term

1# "f one party performs ser'ices at the reuest of another, ut no price is discussed in ad'ance, then the default

rule under common la% %ill apply. $he default rule for a missin& price term is:

Reasonale 'alue of ser'ices rendered

. +issin! $uration Term

1# "n practically e'ery urisdiction, the default rule for a missin& duration term in an employment contract is:

-mployment at %ill rule B employer can fire and employee can uit at any time for

any reason

2# "n a maority of urisdictions:

EXAMPLE:

Statements made durin! a recruitin! interview that ma*e assurances of 4ob security.

EXAMPLE:

-ritten assurances contained in a personnel handboo*.

. The %bli!ation of Good #aith and #air $ealin!

a. Another source of *&ap9fillin&+ is the oli&ation of &ood faith and fair dealin&. (oth the )CC and the Restatement

impose an oli&ation of &ood faith in the performance and enforcement of contract.

1# "n &eneral, *&ood faith+ is defined as:

Eonesty in fact

2# "n the case of a merchant, *&ood faith+ means:

Eonesty in fact and oser'ance of reasonale commercial standards of fair dealin&

"n the trade

. $he &ood9faith oli&ation %ill also operate to ensure &ood faith %here the terms of the contract lea'e a critical term,

such as the price, satisfaction, or uantity, open to the determination of one party.



1# %pen 0rice Term:

a# "f a contract lea'es the price to e fied y one of the parties, then:

party must fi the price in &ood faith

2# Satisfaction Term

a# "f a contract contains a satisfaction clause or similar term, then:

the determination as to %hether party7s performance is complete must e made in

&ood faith

EXAMPLE:

A commercial de'eloper and the seller of a piece of land enter into a contract. $he de'eloper places a

condition on his purchase of the land that the seller first acuires *satisfactory leases+ for the future

occupancy of the land. $he de'eloper must determine in &ood faith %hether or not the future leases are

*satisfactory.+

3# %pen Fuantity Term

a# $his arises in t%o contets.

1# An output contract:

contract in %hich the uyer a&rees to purchase all of seller7s output of particular

&ood

2# A re/uirements contract:

contract in %hich seller a&rees to supply the uyer %ith all the reuirements of

uyer7s &ood

# )nder the )CC, the party entitled to determine the particular uantity of &oods to e soldGeither the

uyer demandin& deli'ery of his reuirements or the seller demandin& purchase of her outputGmust

ma0e that determination in &ood faith.

c# "n addition to the &ood9faith reuirement, the )CC prohiits any unreasonaly disproportionate demand

or tender, if there %as either:

1# stated estimate

2# past course of dealin&

EXAMPLE:

Seller and (uyer are parties to a three9year contract oli&atin& Seller to supply (uyer %ith the latter7s

upsidasium earin& reuirements for (uyer7s turoet en&ine manufacturin& plant. $he mar0et price

for upsidasium suddenly s0yroc0ets, and (uyer &reatly increases its demand for earin&s %ith the

intention of sellin& them at &reat profit to third parties. Seller is not oli&ated to fill the order ecause

(uyer7s reuirements demand %as made in ad faith.

EXAMPLE:

$he upsidasium mar0et remains stale, ut ecause of a decline in the commercial a'iation industry, the

demand for (uyer7s en&ines declines precipitously and accordin&ly (uyer reduces its monthly demand for

earin&s y <V in comparison %ith the pre'ious 2 months. Althou&h (uyer7s reduced demand %as madein &ood faith, it is unreasonaly disproportionate to its prior reuirements and accordin&ly 'iolates Section 29

3<.

C. "nterpretin! Ambi!uous Lan!ua!e

1. $he prolemKissue:

@arties ha'e addressed the topic in their contract in a %ay that resolution of the matter has een

left unclear

2. %b4ective +eanin! versus Sub4ective +eanin!

a. $he rule:



oecti'e meanin& of lan&ua&e trumps suecti'e

EXAMPLE:

Contractor and Eomeo%ner enter a contract for reno'ations to Eomeo%ner7s home. $he contract incorporates y

reference *the specifications dated 1K11K<M,+ %hich had een prepared y Eomeo%ner and %ere attached to the

contract efore si&nin&. Contractor mista0enly thin0s that the specifications referenced %ere an earlier 'ersion

prepared y Contractor, and he si&ns the contract on that understandin&. $he specifications prepared y

Eomeo%ner and referenced in the contract are indin& on oth parties.

. $he rule is suect to t%o eceptions:

1# -ception 51:

%here one party has reason to 0no% of the other party7s suecti'e understandin&

the first party is ound y that suecti'e understandin&

EXAMPLE:

The facts bein! otherwise as stated in the previous e'ample 4ust before the parties si!n the contract

)omeowner overhears Contractor tell his business partner that he was !lad )omeowner had a!reed to

Contractor,s version of the specifications. Because )omeowner *new of Contractor,s understandin!

of the contractual terms that understandin! controls.

2# -ception 52:

%hen at the time of contractin&, oth parties ha'e the same suecti'e understandin&

then that suecti'e understandin& controls

EXAMPLE:

General contractor is buildin! a brid!e. )e hires a pavin! subcontractor to do wor* at a price to be

calculated in accord with the dimensions of the 1concrete surface of the brid!e dec*.3 At the time of

contractin! both of the parties understand that the concrete wor* included the sides and bottom as

well as the 1surface3 of the brid!e dec* and accordin!ly that interpretation would be the controllin!

interpretation.

3. Contra Proferentem and the $octrine of easonable &'pectations

a. The ule of Contra Proferentem

1# "f an ami&uous term is included in the contract, then:

in case of dout, it is construed a&ainst the drafter

2# $ypes of contracts suect to this rule of construction:

A!! contracts drafted y one of the parties re&ardless of the ar&ainin& po%er

. The $octrine of easonable &'pectations

1# -'en unami&uous terms may e interpreted a&ainst the draftin& party if they conflict %ith the reasonale

epectations of the other party

2# $ypes of contracts suect to this doctrine:"nsurance contracts ut in principle can apply to any adhesion contract, i.e. contracts

4ith no ar&ainin& po%er

3# )nder the doctrine, courts ma0e a distinction et%een the dic0ered terms and the oilerplate terms.

# $he doctrine only applies to defeat the enforceaility of:

oilerplate terms that are inconsistent %ith the reasonale epectations of the

purchaser

EXAMPLE:

#ertiliDer Co. purchased from Allied "nsurance Co. an insurance policy coverin! bur!lary with fine(



print boilerplate lan!ua!e definin! 1bur!lary3 as re/uirin! 1visible mar*s on3 or 1physical dama!e to3

the e'terior of the insured buildin!. $urin! the policy term #ertiliDer Co. was the victim of a theft in

which the perpetrators were able to force open a 0le'i!las door without leavin! mar*s or dama!e and

Allied refused payment on the policy. Because the definition of 1bur!lary3 was a boilerplate term

inconsistent with the reasonable e'pectations of the insured the court interpreted the policy to cover

the theft.

$. Trade Usa!e Course of $ealin! and Course of 0erformance

1. $rade usa&e, course of dealin&, and course of performance are etrinsic e'idence that can e used to oth fill &aps andresol'e ami&uities in contracts.

2. $efinitions under the UCC:

a. A usa!e of trade is any practice or method of dealin& ha'in& such re&ularity of oser'ance in a place or trade as to

ustify an epectation that it %ill e oser'ed %ith respect to the transaction in uestion.

. A course of dealin! is a pattern of conduct concernin& pre'ious transactions et%een the parties that is fairly to e

re&arded as estalishin& a common asis of understandin& for interpretin& their suseuent epressions and other

conduct.

c. A course of performance is present %hen a particular contract in'ol'es repeated occasions for performance y a

party and the other party, %ith 0no%led&e of the nature of the performance and opportunity for oection to it,

accepts the performance or acuiesces in it %ithout oection.

3. Distin&uishin& admissile uses of such e'idence from their inadmissile uses:a. Admissile uses:

1# $o fill in &aps, and

2# Resol'e ami&uities

. "nadmissile uses:

Contradict the epress terms of contract

c. 6ote, ho%e'er, that course of performance e'idence is uniuely a'ailale to:

4ai'er or modification of the epress terms of a particular contract

. "n the e'ent of a conflict, course of performance pre'ails o'er course of dealin& and usa&e of trade, and course of

dealin& pre'ails o'er usa&e of trade.

EXAMPLE:

Trade Usa!e Can #ill in a Gap in the Terms of the Contract: A is one of many suppliers of upsidasium, and ( is one

of A7s lon&9standin& customers. A fills an order y ( and demands immediate paymentJ ( refuses. "t is standard

practice in the upsidasium industry for purchasers to pay in'oices upon deli'ery, and therefore (7s refusal to do so is in

'iolation of the parties7 contract.

EXAMPLE:

Course of $ealin! Trumps Trade Usa!e: Same facts as the pre'ious eample ecept that in the past, A has re&ularly &i'en (

3< days to pay for deli'eries. (ecause this course of dealin& et%een the parties trumps the payment9upon9deli'ery usa&e of

trade, ( has 3< days %ithin %hich to ma0e the reuired payment.

EXAMPLE:

&'press Terms of the Contract Trump Both Course of $ealin! and Trade Usa!e: Same facts as the pre'iouseample ecept that, the parties7 contract contains a pro'ision reuirin& payment %ithin se'en days of deli'ery.

(ecause the epress terms of a contract o'erride oth course of dealin& and usa&e of trade, ( has se'en days %ithin

%hich to ma0e payment despite the past practice of payin& in 3< days and the industry practice of immediate payment.

EXAMPLE:

Course of 0erformance Can &stablish -aiver or +odification of &'press Terms of the Contract: Same facts as

the pre'ious eample ecept that A and ( are parties to an installment contract and ( has paid 3< days after multiple

deli'eries %ithout oection y A. $his e'idence of the parties7 course of performance is admissile to estalish that A

has %ai'ed its contractual ri&ht to payment %ithin se'en days of deli'ery andKor that the parties ha'e mutually modified

that oli&ation.



&. The 0arol &vidence ule

1. "ntroduction

a. Another source of e'idence sheddin& li&ht on the meanin& of an a&reement is the ne&otiations of the parties

leadin& up to the eecution of the %ritten contract. $he parol evidence rule &o'erns efforts to introduce such

e'idence.

. $he rule &o'erns the admissiility of the follo%in& type of e'idence:

oth oral and documentary e'idence of ne&otiations and other communications et%een the parties

that too0 place prior to or contemporaneously %ith the eecution of the contract

2. Approachin! a 0arol &vidence Analysis

a. 4hen a party see0s to introduce parol e'idence, the court %ill determine the admissiility of the e'idence ased on

t%o uestions:

1# %hat is the purpose for %hich the e'idence is ein& introduced>

2# does the e'idence relate to a term or contract %hich is inte&rated>

3. "nte!ration

a. 4hile the first step in the analysis is to determine the purpose for %hich the e'idence is ein& introduced, the effects of these

different purposes %ill depend upon the le'el of inte&ration in the contract.

. 0artial versus Complete "nte!ration

1# 4hen a particular contract is partiallyHfully inte!rated, it means that:

"t means that the terms contained %ithin the contract are intended to e the final

epression of the specific terms of the contract

2# On the other hand, %hen a contract is completely inte!rated:

$he parties intend the contract to e the final and eclusi'e statement of all the terms

c. $eterminin! 0artialH#ull "nte!ration and Complete "nte!ration

1# $he uestion of %hether the terms of a contract are partially inte&rated i.e., final# and %hether an inte&ration is

complete i.e., ehausti'e# is for the ud&e, not the ury, to decide.

2# "n reachin& decisions re&ardin& the complete inte&ration of a contract, the ud&e %ill rely on the follo%in&

e'idence:

a# +er!er Clause

1# $he most important e'idence that the parties intended their %ritten a&reement to represent anehausti'e account of their contractual oli&ations is the presence in the contract of a mer&er clause

recitin&:

$hat the %ritin& contains the complete and entire a&reement of the parties

OR other %ords to that effect

# %ther &vidence

1# Additional factors %hich are important for determinin& %hether a contract as completely inte&rated

include:

$he detail of the contract pro'isions as %ell as the len&th of the a&reement itself

. 0urposes for -hich &vidence "s "ntroduced

a. $he effect of the rule depends on the purpose for %hich the parol e'idence is ein& introduced:

1# $o eplain or interpret the terms of the %ritten contract

2# $o supplement the terms of the %ritten contract

3# $o contradict the terms of the %ritten contract

. 0urpose >?: To &'plain or "nterpret Terms of a -ritten Contract

1# $he maority rule:

parol e'idence A!4A=S admissile for this purpose

EXAMPLE:



A and B have a written contract under the terms of which A a!rees to sell B 1all the uncut timber on

my property.3 &vidence of conversations between the parties durin! a visit to the timber site is

admissible to e'plain that 1property3 means A,s country cotta!e and not A,s home in the suburbs.

c. 0urpose >;: To Supplement Terms of a -ritten Contract

1# $he &eneral rule:

is admissile for this purpose, unless the contract is completely inte&rated i.e. has a mer&er clause

2# A completely inte!rated contract is intended y the parties to represent a final as %ell as an ehausti'e

account of the parties7 oli&ations.

EXAMPLE:

A and B had a written contract under the terms of which A a!rees to sell B 1all the uncut timber on my

property3 and the contract contained detailed terms with respect to the fellin! and transportation of

the timber as well as a mer!er clause statin! that the contract was 1a complete and e'haustive

account of the obli!ations between the parties.3 &vidence of an oral a!reement between the parties at

the time of si!nin! the contract that A would pay to have the trees inspected for termites before

cuttin! would be admissible to supplement the a!reement only if the court concluded that the contract

was partially 5rather than completely9 inte!rated. Some courts would consider the mer!er clause to be

conclusive on the /uestion of complete inte!ration and thus bar the evidence but other courts would

treat it as persuasive only evaluate the proffered evidence of the supplemental oral a!reement and

admit it if they concluded that the parties did not intend the previously drafted mer!er clause to bar itdespite their subse/uent si!natures on the contract.

3# UCC $istinction for Sale of Goods Cases

a# $rade usa&e, course dealin&, course of performance can supplement e'en a completely

inte&rated a&reement i.e. e'en %ith a mer&er clause

EXAMPLE:

Same facts as in the pre'ious eample, ecept A and ( are lo&&in& companies and ( offers e'idence

that sellers doin& usiness in the commercial lumer trade in'arialy pay to ha'e the trees inspected for

termites efore cuttin&. $his e'idence %ould e admissile e'en if the court concluded that the contract%as completely inte&rated ecause under the )CC uncut timer euals *&oods+ and usa&e of trade

e'idence is admissile to supplement a %ritten a&reement.

d. 0urpose >I: To Contradict Terms of a -ritten Contract

1# $he &eneral rule:

@arol e'idence is not admissile for this purpose if the terms in uestion are

"nte&rated

2# "nte!rated terms are terms intended y the parties to represent their final a&reement on the suects in

uestion.

EXAMPLE:

A and B have a written contract under the terms of which A a!rees to sell B 1all the uncut timber on my

property.3 &vidence of an e'chan!e of letters between the parties in which they a!reed that their

a!reement would not include the shady trees in the immediate vicinity of A,s country cotta!e would

contradict the written e'[email protected]. that A had a!reed to sell B 1all the uncut timber on my

property3@and would therefore be admissible only if the court concluded that the /uoted provision not

intended by the parties to be the final word with respect to which timber would be cut 5i.e. that the

writin! was not inte!rated9. "n ma*in! that determination the court is free to consider the e'chan!e of

letters and other e'trinsic evidence.

;. -hen the 0arol &vidence ule -ill ot Apply



a. $he parol e'idence rule %ill not apply to the follo%in& types of e'idence:

1# Subse/uent A!reements

a# $he parol e'idence rule only applies to oral or %ritten communications made prior to or contemporaneously %ith the

eecution of a %ritten a&reement. $his means that it %ill not apply to:

suseuent a&reements entered into after the eecution of %ritten contract

EXAMPLE:

(uyer and Seller enter into a %ritten a&reement for the sale of 1,<<< %id&ets. $%o months efore deli'ery

is to e made, the parties orally a&ree to modify the a&reement and specify the &oods as nonstandard

type9= %id&ets, %ith (uyer a&reein& to pay an additional cost. -'idence of this modification %ould not fall

%ithin the parol e'idence rule, as it %as made suseuent to the eecution of the %ritten a&reement.

2# Collateral A!reements

a# @arol e'idence rule %ill not affect a&reement et%een the parties that are

entirely distinct from the %ritten a&reement or contract at issue

EXAMPLE:

A and ( eecute a detailed %ritten contract, complete %ith a mer&er clause, y %hich A a&rees to sell A7s

car to (. As part of the transaction, the parties orally a&ree that ( may par0 the automoile in A7s &ara&e

for one year, payin& 2; per month. Despite the completely inte&rated %ritin&, either A or ( may adduce

e'idence of the par0in& arran&ement under the collateral a&reement rule.

3# Attac* on the 2alidity of the -ritten A!reement

a# $he parol e'idence rule only applies if there7s a 'alid %ritten a&reement. As a result, the parol e'idence

rule %ill not ar efforts to pro'e:

that the %ritten a&reement is in'alid or unenforceale

# A party can assert such a claim in one of the follo%in& %ays:1# #ailure of an %ral Condition 0recedent to the A!reement

a# -'idence that the parties orally a&reed to CO6D"$"O6 S)(S-)-6$

to the contract ta0in& effect %ill not e arred

EXAMPLE:

$he parties to a %ritten contract for the sale of art%or0 orally a&ree that the sale %ill not ta0e

effect unless and until a certificate of authenticity is issued y a named art epert. (ecause

authentication is a condition precedent to the sale, the parol e'idence rule %ill not ar proof of

the oral a&reement.

2# Absence of Consideration

a# e'idence that a %ritten a&reement lac0s consideration or a false recital

%ill not e arred

3# +ista*e or $uress

a# e'idence of mista0e or duress is not arred y parol e'idence rule

# #raud

a# $he maority rule is:

parol e'idence of fraud is al%ays admissile



# $he minority rule is:

such e'idence is admissile unless the contract pro'ides that the parties made

no representations and relied on no representations durin& the course of

ma0in& this a&reement.

;# eformation

a# $he parol e'idence rule is also inapplicale %here a party to a %ritten a&reement alle&es facts

entitlin& him to reformation of the a&reement.

# For the plaintiff to otain reformation, it must e sho%n:

i# that there %as an antecedent, 'alid a&reement

ii# that %hich is incorrectly reflected in %ritin& y mista0e or fraud

iii# proof of these elements is pro'ided y clear and con'incin& e'idence



RECAP QUESTIONS:




1. )nder the )CC, %here there are pertinent terms missin&, %hat are the default rules used to fill a missin& price term

missin& time term e.&., timeKdate of deli'ery or timeKdate for action ta0en under the contract#, and a missin& place of

delivery term>

2. 4hat is the parol e'idence rule> 4hat t%o uestions %ill courts as0 %hen determinin& %hether to admit parol e'idence>

3. 4hen %ill the parol e'idence rule apply>

. 4hen %ill the parol e'idence rule not apply>



VII. PERFORMANCE, MODIFICATION, AND EXCUSE

A. %bli!ations under the UCC

1. "n General

a. $he seller7s oli&ation:

transfer and deli'er the &oods

. $he uyer7s oli&ation:

accept and pay for the &oods

2. Carrier Cases versus on(Carrier Cases

a. Carrier cases eplained:

4here the parties to a sale of &oods contract a&ree to use a common carrier

. 6on9carrier cases eplained:

4here the parties to a sale of &oods contract do not a&ree to use common carrier

c. "n non9carrier cases, %hen does the ris0 of loss transfer>

1# "f seller is not a merchant:

$hen the ris0 of loss passes to the uyer, upon tender of deli'ery

2# "f seller is a merchant:

$hen the ris0 of loss passes to the uyer only %hen the &oods are physically in

uyer7s possession

d. "n carrier cases, %hen does the ris0 of loss transfer>

1# Critical distinction:

a# Shipment contract:

is a contract %here the seller promises to turn the &oods o'er to the carrier

# Destination contract:

4here the seller promises to tender deli'ery at a particular destination point

2# $he default rule:"f the contract is silent, the contract is a shipment contract, and seller promises

to turn the &oods o'er to carrier, %here ris0 of loss passes.

3# e!ardin! is* of Loss

a# Shipment contract:

Ris0 of loss passes to the uyer %hen the &oods are deli'ered to the carrier

1# "dentified as *FO( Seller.+

# Destination contract:

Ris0 of loss passes to the uyer %hen the &oods are tendered at the destination point

specified in the contract

1# "dentified as *FO( (uyer.+

B. +odification O! 8". (.#

1. At common la%, modification of an eistin& contract %as difficult. Contemporary rules allo%in& for modification under the

)CC and the common la% are more fleile.

2. +odification at Common Law

a. The 0ree'istin! $uty ule

1# A promise to increase compensation for duties already o%ed under an eistin& contract

is an unenforceale modification ecause there is no consideration

EXAMPLE:



The captain of a fishin! vessel promised to pay 6?<< to each of the sailors for their wor* on a fishin!

voya!e. +idway throu!h the voya!e the sailors threatened to cease wor* unless they were promised an

additional 6=< each and the captain reluctantly a!reed. At the end of the voya!e the captain paid each

of them the ori!inally promised 6?<< but refused to pay the 6=< increase so the sailors sued to recover

the additional amount. Because the sailors were already obli!ed to perform the wor* in /uestion under

the terms of their ori!inal contract with the captain his promise of an additional 6=< is unenforceable

under the pre(e'istin! duty rule.

. &'ceptions to the 0ree'istin! $uty ule

1# +utual +odification

a# A promise to increase compensation under an eistin& contract is enforceale as a mutual modification if:

1# (oth parties a&ree to a performance that is different from one reuired y

eistin& contract

2# Difference in performance is not a mere pretense

EXAMPLE:

Durin& the course of the fishin& 'oya&e, the ship7s coo0 ta0es ill, and the captain instructs the youn&est of the

sailors to perform the coo07s duties in addition to his fishin& duties. $he sailor refuses to perform the %or0

unless the captain promises him an additional ;< in compensation, and the captain reluctantly a&rees. $he

promise of additional compensation is enforceale as a *mutual modification+ of the ori&inal contract.

2# Unforeseen Circumstances

a# $he preeistin& duty rule %ill not apply if:

A promise of increased compensation is &i'en in echan&e for a promised performance

that has een rendered sustantially more urdensome than reasonaly anticipated

at formation

EXAMPLE:

$he fishin& nets pro'ided y the captain turn out to e defecti'e and thus increase the %or0load of the

sailors in a manner sustantially in ecess of %hat %as reasonaly contemplated under the ori&inal

contract. $he sailors threaten to cease the fishin& unless they are promised an additional ;< each, and

the captain reluctantly a&rees. $he promise is enforceale despite the pre9eistin& duty rule in 'ie% of

circumstances not reasonaly anticipated y the parties at the time of contractin&.

3. +odification and the Sales of Goods under the UCC

a. "n this contet, the )CC specifically displaces the common la%.

1# $he )CC pro'ides that:

An a&reement modifyin& eistin& contract for sale of &oods does not need

consideration as lon& as there is &ood faith

EXAMPLE:

A manufactures upsidaisium bearin!s and has a three(year contract to supply B with the bearin!s the

latter uses to ma*e turbo(4et en!ines for commercial aircraft. Because of an une'pected world

shorta!e of upsidaisium the price of the metal A uses to manufacture the bearin!s triples over a short

period and A advises B that it can,t continue supplyin! the bearin!s unless B a!rees to increase the

price to the point that A will brea* even on the supply contract. B reluctantly a!rees. "s the

modification enforceable

2# -'en %hen the modification is supported y consideration, the )CC pro'ides that:

A modification is unenforceale if the appearance of the mutual ar&ain is merely

a pretet to hide a ad faith chan&e of terms.



EXAMPLE:

The facts bein! otherwise as stated in the previous e'ample A promises to ship the bearin!s to B in

blue cartons in e'chan!e for B,s a!reement to the hi!her price. Althou!h the blue(bo' promise mi!ht

technically constitute consideration for B,s a!reement to pay the new mar*et price the modification is

unenforceable for want of !ood faith.

C. &'cusin! 0erformance due to #aulty Assumptions O! 8". C.#

1. A party enterin& a contract ma0es many assumptions aout the present and future. 4hen such assumptions turn out to

e faulty, the parties may e ecused under the doctrines of mista0e, impossiility, impracticaility, and frustration of

purpose.

2. #aulty Assumptions re!ardin! 0resent #acts: +ista*e

a. Reuirement of materiality:

ista0e in fact must si&nificantly affect 'alue of the transaction to one or oth parties

. Unilateral versus +utual +ista*e

1# Unilateral +ista*e

a# Defined:

%here only one party is mista0en aout the material fact.

# $he rule:

Sin&le party mista0en aout present material facts is not &enerally ecused

1# -ception 51:

$he other party 0ne% or had reason to 0no% aout the other party7s mista0e

EXAMPLE:

A a&rees to sell ( a co%, %hich A 0no%s to e arren, and, as the parties are %ritin& up and si&nin&

the a&reement, ( as0s A a series of uestions aout the care and feedin& of pre&nant co%s. (ecause

A has reason to 0no% that ( is mista0en %ith respect to the co%7s capacity to ear cal'es, (7s

oli&ation to purchase the co% is ecused on account of unilateral mista0e.

2# -ception 52:

4here there has een a serious clerical or unconscionale error

a# $his eception to the rule for unilateral mista0e %on7t apply if:

i# the error %as caused y etreme ne&li&ence on the part of the party

ma0in& the error OR

ii# the other party relied on the error

# $his eception is a minority rule a'ailale principally to &eneral contractors, %ho face a peculiar

dilemma that %e7'e pre'iously discussed#.

2# +utual +ista*e

a# Defined:

oth parties ha'e made a mista0e in assentin& to facts

# )nder the rules of mutual mista0e, the contract %ill e 'oidale y the disad'anta&ed party %here three

reuirements are met:

1# mista0e or assumption must relate to material facts

2# mista0e must e made y oth parties

3# the disad'anta&ed party did not ear the ris0 of mista0e

EXAMPLE:

A a&rees to sell ( a co% at eef co% prices ecause at the time of contractin&, oth parties %ere

under the assumption that the co% %as arren. A short time later, the co% %as disco'ered to e %ith

calf, %hich &reatly increased her resale 'alue. $he contract is 'oidale at the option of A.



EXAMPLE:

A a&rees to sell ( a co% at eef co% prices. At the time of contractin&, oth parties share the mista0en

impression that the co% is arren. ( tells A that he is still &oin& to try to reed the co% in any case. "n this

case, A ears the ris0 of (7s efforts succeedin&, ecause if ( succeeds, it %ill pro'e the parties7

assumption that the co% %as arren %ron&. So A is accordin&ly ound y the contract e'en if the co%

turns out to e fertile.

3. #aulty Assumptions re!ardin! #uture #acts: "mpossibility "mpracticability and #rustration of 0urpose

a. "mpossibility

1# $he doctrine of impossiility ecuses oth parties from their oli&ations under a contract if the performance has

een rendered impossile y e'ents occurrin& after the contract %as formed.

a# Reuirement 51:

"mpossiility must e oecti'e

1# Oecti'e impossiility occurs:

%hen the performance under the contract ecomes literally impossile for anyone ecause of

circumstances eyond control of the parties

EXAMPLE:

H promises to sell = his horse, ut the horse dies efore H can deli'er the horse.

2# Suecti'e impossiility occurs:

%hen the performance under the contract ecomes impossile ecause of the failure or

fault on the part of the performin& party

EXAMPLE:

A party fails to ha'e enou&h money to either ma0e a promised payment or to otain the components

reuired for the production of a promised product.

3# "n %hat circumstances are %e li0ely to find oecti'e impossiility>

a# Circumstance 51:

%hen the suect matter of the contract is destroyed

EXAMPLE:

(uyer promises to uy Farmer7s 2<< %heat crop, the entirety of %hich is destroyed ust efore

har'est y %heat li&ht. $he Farmer7s performance is ecused on the asis of impossiility.

# Circumstance 52:

%hen there is a personal ser'ices contract and performin& party has died or ecome

incapacitated

c# Circumstance 53:

%hen super'enin& la% has rendered performance le&ally impermissile# Reuirement 52:

contin&ency that creates the impossiility %as not 0no%n to the parties at the time of

ma0in& the contract

1# the contin&ency rose after formation and %as not anticipated y the parties

2# 6ote: "mpossiility, as an ecuse to performance of a contractual oli&ation, is a'ailale under oth the

Common !a% and the )CC.

. "mpracticability

1# Courts are reluctant to ecuse performance for any reason other than impossiility. Eo%e'er, under the

doctrine of impracticability, a promisor may e ecused from performance %here the follo%in& t%o elements



are pro'en:

a# contin&ency causin& the impracticaility not foreseen or unforseen

# the increase in the cost or urden of performance is far eyond %hat either party

anticipated

2# 0arameters of "mpracticability under the UCC

a# "ncreased costs, and the rise or collapse of a mar0et are 'ie%ed as usiness ris0s, the sorts of

contin&encies that fied9price contracts are epected to account for.

# )CC cases %here impracticaility has een found typically in'ol'e:shorta&es causes y %ar or emar&o, local crop failure, unforeseen natural disasters

"mpracticaility, as an ecuse to performance of a contractual oli&ation, is a'ailale under oth the Common

!a% and the )CC.

c. #rustration of 0urpose

1# 4here a contin&ency occurs that dramatically reduces the 'alue of performance to the recei'in& party, the

doctrine of frustration of purpose may e a'ailale to ecuse the recei'in& party from its contractual

oli&ations.

EXAMPLE:

The doctrine of frustration of contractual purpose has as its source the famous case of Jrell v. )enry

which involved the owner of a London flat with a 1rin!side3 view of the forthcomin! coronation parade

who a!reed to lease the flat at premium prices to a lessee ea!er to witness the festivities. The parade

was canceled when the Jin! became ill and the lessee,s contractual obli!ations to the owner were

e'cused on the !round that !oin! throu!h with the rental a!reement in the absence of its raison d’être

1cannot reasonably be said to have been in the contemplation of the parties at the date of the

contract.3

2# The +odern Test

a# $he contemporary 'ersion of this rule %ill dischar&e a party7s contractual oli&ations %hen the follo%in&three reuirements are met:

1# Reuirement 51:

$he party7s principal purpose in enterin& the contract is frustrated.

a# $his means that the frustration of incidental or non9material purposes %ould not tri&&er the

ecuse of frustration of purpose.

2# Reuirement 52:

frustration %as sustantial in nature

EXAMPLE:

"n a 'ariation on Irell '. Eenry, %here the Iin& did not ecome ill and the parade %as not cancelled,

the to%n erected leachers that only partially ostruct the parade 'ie% from the apartment.

3# Reuirement 53:

the non occurrence of the e'ent precipitatin& the frustration must ha'e een a asic

assumption of the contract

3# #rustration of 0urpose and the Contractual Allocation of is*

a# Frustration of purpose li0e mista0e, impossiility and impracticaility# operates as a default rule. "f a

contract allocates the ris0 of the non9occurrence of an e'ent that %ould frustrate a party7s purpose, the

ecuse of frustration of purpose ecomes una'ailale.

EXAMPLE:

6O$-



$he facts other%ise ein& as they %ere in Irell '. Eenry, assume that the parties7 %ritten a&reement contained

the follo%in& lan&ua&e: *$he parties understand and a&ree that the flat o%ner %ill e arran&in& at &reat epense

to mo'e himself and his family to the countryside in order to permit occupancy y lessee and accordin&ly that

lessee %ill e oli&ated under this a&reement irrespecti'e of %hether the coronation parade ta0es place durin&

the lease period.+ Since the contract allocated the ris0 of the contin&ency to the lessee, his oli&ations under the

contract %ere not ecused for frustration of purpose %hen the parade %as postponed.

EXAMPLE:

$he facts other%ise ein& as they %ere in Irell '. Eenry, assume that all of !ondon %as auQQ %ith ne%s of

the ne% Iin&7s possily serious illness durin& the days efore the parties entered into their a&reement.(ecause a postponement of the coronation parade %as therefore foreseeale, the lessee7s failure to secure

lan&ua&e in the parties7 a&reement dischar&in& his duties in the e'ent of postponement constitutes e'idence

that the lessee ore that ris0 and remained fully oli&ated under the contract %hen it came to fruition.

Frustration of purpose, as an ecuse to performance of a contractual oli&ation, is a'ailale under oth the

Common !a% and the )CC.

$. &'cusin! 0erformance by A!reement of the 0arties

1. escission

a. "s permissile %here:

(oth parties to a contract are mid9performance. Consideration is pro'ided y each party7s dischar&e

of the other7s duties.

. 6ote: $he Statute of Frauds %ill not pre'ent an oral a&reement of rescission that dischar&es unperformed duties

from ein& enforced unless rescission of a transfer of property is in'ol'ed.

2. Accord and Satisfaction

a. $he parties may ma0e an accord, %hich is:

a contract under %hich the oli&ee promises to accept sustitution of performance in satisfaction of the oli&or7s

eistin& duty. A&reement to finish somethin& differently is an accord

EXAMPLE:

@urchaser has paid uilder in full for the construction of a house. (ecause of difficulties that neither party to the

contract could foresee, the uilder is only ale to partially complete the construction proect. @urchaser a&rees to a

lesser performance in return for a partial re9payment. $his a&reement is an accord. (uilder then completes the

a&reed9to sustituted performance. $his performance amounts to satisfaction of the accord.

. Le!al &ffects

1# Accord and satisfaction:

"t satisfies the oli&or7s ori&inal oli&ation.

2# the accord alone:

does not dischar&e the oli&or7s duty ut only suspends it. Satisfaction is reuired

c. 2alidity of Accord@Consideration e/uired

1# /eneral contract la% applies to accords, such that consideration is reuired.

2# $here may e sufficient consideration if:

a# %here the accord in'ol'es an a&reement for partial or sustituted performance:

$he sustitute performance differs si&nificantly from ori&inal performance

OR its oli&ation is doutful

# %here the accord in'ol'es an a&reement for partial payment:

there must e a &ood faith or ona fide dispute aout the amount o%ed.

6O$-



&. Anticipatory epudiation

1. Anticipatory repudiation may e estalished y:

a. a party7s definiti'e statement indicatin& it %ill commit a reach of contract

. a party7s 'oluntary act that renders the party unale to perform contractual oli&ations i.e.

sellin& product to someone else

2. Ade/uate Assurance of 0erformance

a. "f anticipatory repudiation cannot e estalished ut there are:

reasonale &rounds for insecurity, the insecure party may ma0e a demand for adeuateassurance of performance

EXAMPLE:

After ma0in& a contract %ith a manufacturer. A %holesaler ecome a%are that the manufacturer7s employees are

out on stri0e. $his &i'es reasonale &rounds to confirm %ith the manufacturer that the contract %ill e performed.

. Suspension of 0erformance by the "nsecure 0arty

1# )pon ma0in& a demand for assurances, a party %ith reasonale &rounds for insecurity may suspend his o%n

performance so lon& as it is commercially reasonale to do so.

2# $he failure to respond %ith reasonale assurances constitutes a repudiation y the non9respondin& party.

$his can occur %here the other party:

a# does not respond to the demand for assurances %ithin a reasonale time

%hich is 3< days under the )CC, or

# if the other party does not respond in a %ay that pro'ide reasonale assurance

3. i!hts of the A!!rieved 0arty upon epudiation

a. $he a&&rie'ed party7s ri&hts upon this anticipatory reach:

1# the a&&rie'ed party can cancel the contract and terminate all ri&hts and oli&ations under it

2# the a&&rie'ed party can rin& an action for dama&es or specific performance

3# the a&&rie'ed party can i&nore the repudiation and continue under the contract

. etraction of an epudiation

a. A party %ho has made an anticipatory repudiation to the other party may retract the repudiation unless and until the

other party:

1# Acts in reliance of the repudiation

2# Accepts the repudiation y si&nalin& this to the reachin& party

3# Commences a suit for dama&es or specific performance

#. Conditions O! 8". C.#

1. "n General

a. "n some contracts, the oli&ation to perform is conditioned upon some e'ent or action y the other party. 4here

there are such conditions in a contract, oli&ations are tri&&ered %hen that conditionin& e'ent or action occurs.

. $he la% re&ardin& conditions deals %ith t%o contractual prolems:

1# Order of parties performances i.e. %ho &oes first

2# the remedies %here conditions in contract ha'e failed. Focus much on this uestion

2. Terminolo!y

a. 0romissory versus 0ure Conditions

1# @romissory conditions:

%here the contract performance is conditioned on the occurrence of the promised performance

y the other party

EXAMPLE:



# Situation 52:

(ad faith conduct

i# %hen a party acts in ad faith so as to pre'ent the condition, that party7s

performance oli&ation %ill not e dischar&ed

EXAMPLE:

A lando%ner7s oli&ations to pay a contractor for the uildin& of a structure are conditioned on theissuance of a certificate of occupancy y the inspector of uildin&s. $he lando%ner ta0es steps to induce

the inspector not to issue the certificate, the lando%ner is in ad faith interferin& %ith the condition and it

%ill e ecused. !ando%ner %ill o%e the contractor e'en thou&h the certificate has not een issued.

EXAMPLE:

"n a contract for the sale of real property, the contract is conditioned on the uyer securin&

financin&. "f the uyer fails to apply for financin&, this %ould e considered conduct in ad faith,

and the uyer %ould e oli&ated to pay.

c# Situation 53:

/ross forfeiture

i# Courts %ill ecuse a performance oli&ation so as to a'oid a &rossly disproportionate

oss to a party for a relati'ely minor infraction

d# "mplied Conditions

1# 4hen the possiility of a reach is not addressed y an epress condition, it is still a reachJ

ho%e'er, under the la% of implied conditions, courts can treat that reach in one of t%o %ays: either

as a material reach or as sustantial performance.

2# +aterial Breach versus Substantial 0erformance

a# "f the reach is serious enou&h, the court %ill treat the reach in the same %ay it %ould treat a

failure of an epress condition. $his is called:

material reach and the a&&rie'ed party is &enerally dischar&ed from his o%n performance

oli&ations

# "f the reach is less serious, the court %ill treat the party7s performance as *close enou&h,+

meanin& that the party has rendered:

Sustantial performance, %hich means the a&&rie'ed party %ill not e dischar&ed from his o%n

performance oli&ations

c# $he Restatement of Contracts lists fi'e factors that can help to distin&uish et%een material

reach and sustantial performance:

i# the etent to %hich the a&&rie'ed party %ill e depri'ed of the enefit that she reasonaly

epected to recei'e under the contractJ

ii# the etent to %hich the a&&rie'ed party can adeuately e compensated 'ia dama&es for the

defecti'e performanceJ

iii# the etent to %hich the reachin& party %ill suffer forfeiture if a material reach is foundJ

i'# the li0elihood that the reachin& party %ill cure his failureJ and

'# the etent to %hich the reach %as %illful or in ad faith rather than merely ne&li&ent or

innocent.

HYPOTHETICAL

Contractor uilds a house for !ando%ner, andGune0no%nst to ContractorGthe plumin& sucontractor

installs a rand of pipe that differs from the rand specified in the contract ut is in e'ery important respect

the same uality. "t %ould e an etremely epensi'e and urdensome tas0 for Contractor to remo'e and

replace the pipe. "s this a case of sustantial performance or material reach> Sustantial performance.



HYPOTHETICAL

Contractor uilds a house for the =uppies, a youn& couple %ho are foodies and lo'e to entertain, and

accordin&ly their plans include a spacious 0itchen. $he =uppies spend the year in @aris %hile the house is

under construction, and in their asence and %ithout prior consultation, Contractor decides to de'iate from

the plans and uild a smaller 0itchen, thus enalin& Contractor to sa'e si&nificant construction costs. "s this

a case of sustantial performance or material reach> aterial reach

e# #ailed Condition That Cannot Be &'cused

1# 4here a condition has failed and cannot e ecused, there are other methods of enforcement

a'ailale to miti&ate the conseuences for the reachin& party.

2# $ivisibility of the Contract

a# $he reachin& party may e ale to ar&ue:

$hat the contract is di'isile and only a part has een materially reached

# $he le&al test for *di'isiility+ of the contract:

is %here it is easily apportioned into a&reed eui'alents

EXAMPLE:

A one9year cleanin& ser'ice contract %ould e di'isile if the ser'ices %ere pro'ided and paid for on amonthly asis, as it %ould e easy to apportion the lar&er echan&e into *pairs of part performance+ that

are *properly re&arded as a&reed eui'alents+Gi.e., a month7s %orth of cleanin& in echan&e for a

month7s pay. $o put it another %ay, the one9year contract is merely the sum of the 12 monthly

echan&es.

EXAMPLE:

A enters into a contract to uild a house for ( for 1<<,<<<, %ith pro&ress payments of ;,<<< due in

monthly installments durin& construction and a alloon payment upon the architect7s certificate of

satisfactory completion. $he contract is not di'isile, for the performances and the pro&ress payments

are not *a&reed eui'alents,+ and the %hole is &reater than the sum of the parts, since no reasonale

person %ould enter a free9standin& contract for a month of construction %or0.

"f the %hole is merely the sum of its parts, it is di'isile. "f the %hole is &reater than the sum of the parts, it is

not di'isile.

3# Quantum Meruit

a# 4here a party failed to fulfill an epress condition or is in material reach, he may still e ale to

reco'er in quantum meruit :

i# the reachin& party may reco'er the reasonale 'alue of the enefits

conferred

ii# such reco'ery %ill e reduced y the dama&es caused y his reach of

contract . #ailure of Condition under the UCC

1# &'press and "mplied Conditions in elationship to the 0erfect Tender ule

a# )nder the perfect tender rule, the terms of a contract for the sale of &oods are enforced eactly. -'ery

contract terms is thus treated as an epress condition, and a reach y seller %ill relie'e the payment

oli&ation of the uyer.

# $he rule is that the seller is in reach:

if the &oods fail in any respect to conform to the contract

c# "f the seller fails to ma0e perfect tender, the uyer has three courses of action a'ailale:

1# e4ect the Goods

-HA$"@



a# For a uyer to reect the &oods, the uyer must:

-ercise the ri&ht of reection %ithin a reasonale time after deli'ery and notify seller

# Once a uyer reects the &oods, the uyer may:

rin& an action for dama&es a&ainst seller on account of lac0 of perfect tender

unless cure applies

c# "f the uyer does not effectuate reection in the manner specified ao'e, then he has made a

failed reection, %hich:

the code %ould e deemed as an acceptance y the uyer2# Accept the Goods

a# $he uyer may accept the &oods, despite the improper tender. Acceptance occurs %hen the

uyer has had a reasonale opportunity to inspect the &oods and si&nifies acceptance either

throu&h:

i# statin& to seller that &oods conform to the contract

ii# ta0in& the &oods despite their non confirmin&

iii# failin& to ma0e an effecti'e reection

i'# ta0in& any action inconsistent %ith the seller7s interest of the &oods.

# 4hat are the le&al conseuences of the uyer7s acceptance>

i# the uyer must:

pay the contract price for the &oods

ii# the uyer may also:

see0 dama&es for any non conformity so lon& as the seller has een

seasonaly notified

iii# $he uyer can re'o0e the acceptance if there is a non9conformity that sustantially impairs

the 'alue of the &oods and if 1# the reason for the acceptance %as that the uyer %as

una%are of the non9conformity or 2# the seller assured the uyer that a 0no%n non9

conformity %ould e cured ut the seller failed to do so.

3# Accept 0art and e4ect 0art

a# $he critical rule:

%hen acceptin& parts and reectin& parts, uyer can do so only %ith commercial units of the &ood

d# -or*(Arounds for Breachin! Sellers

1# $he ri&ht to cure efore the deli'ery deadline:

"f a seller ma0es a non conformin& tender, ut time for performance remains under

contract, then the seller may sustitute conformin& &oods

a# $%o reuirements:

i# Seller must &i'e uyer seasonale notice of his intention to cure

ii# Seller must ma0e conformin& deli'ery %ithin time specified in the contract

2# easonable Grounds to Believe $elivery -as Acceptable

a# $%o reuirements:i# Seller must &i'e uyer seasonale notice of his intention to cure

ii# Seller must ma0e conformin& deli'ery %ithin a reasonale time

3# 0roof of easonable Grounds by Seller

a# A seller may pro'e that he had reasonale &rounds to elie'e that the uyer %ould accept

nonconformity if he has e'idence of:

i# -press assurances to that effect y the uyer

ii# $rade usa&e, course of dealin& or course of performance e'idence to that effect

e# "mperfect Tenders in the Conte't of an "nstallment Contract



1# )nder )CC, installment contracts are contracts that contemplate the deli'ery of &oods in separate

lots to e separately accepted y the uyer.

2# 4hen a particular installment occasions a non9conformin& tender, there are three possiilities that

the )CC deals %ith:

a# "f the non9conformin& tender sustantially impairs the 'alue of the %hole contract:

there is reach of the %hole contract and it can e cancelled

# "f the non9conformin& tender sustantially impairs the 'alue only of this particular installment:

the uyer can reect the installment ut cannot cancel the entire contract

c# "f the non9conformin& tender does not e'en sustantially impair the 'alue of this particular

installment:

the uyer may simply allo% the seller the opportunity to cure the noncomformity

%ithin a reasonale time




*uestion -

A %oman hired her nei&hor to clean up her pool efore her i& ?uly th pool party. $he nei&hor a&reed to do the %or0 for

;<. $he day efore the party, the %oman noticed that her nei&hor still had not started the %or0. She as0ed her nei&hor if

the pool %ould e clean in time for the party. $he nei&hor replied, *" thou&ht aout it and realiQed ;< is too lo% a price for the

%or0 in'ol'ed. " don7t thin0 "7m &oin& to clean the pool.+ $he %oman responded, *"f you can clean the pool y tomorro%

mornin&, "7ll pay you an additional 2;. And " %on7t sue you in small claims court for your failure to perform your promise.+ $he

nei&hor then cleaned the pool that day, ut the %oman refused to pay to him anythin& more than ;<."n a suit y the nei&hor to reco'er the additional 2; promised y the %oman, the nei&hor %ill:

A# %in, ecause he performed his part of the ar&ain.

(# %in, ecause the second contract for M; superseded the ori&inal ;< contract.

C# lose, ecause the M; contract did not supersede the ;< contract.

$9 lose because he had a pree'istin! duty to clean the pool for 6=<.




*uestion .

"n 12, Daniel /ere sa'ed the life of Charlene endenhall7s husand /eor&e, after he %as in'ol'ed in an accident. /eor&e later

re%rote his %ill to lea'e ;,<<< to /ere for his actions. Eo%e'er, %hen /eor&e died in 1, he left ehind no property ecept for

an undi'ided interest in a piece of land held in tenancy y the entirety %ith Charlene. She had purchased the property in 1L3 %ith

money she had inherited from her father7s %ill. After /eor&e died, Charlene si&ned and deli'ered to /ere a %ritten instrument

%hich said, *"n consideration of Daniel /ere7s ha'in& sa'ed my husand /eor&e7s life and his a&reement to ma0e no claims

a&ainst my estate ased on /eor&e7s %ill, " promise here%ith to pay Daniel /ere the sum of ;,<<<.+ !ate last year, Charleneendenhall died, and /ere filed a claim a&ainst her estate for ;,<<<. Eatha%ay, Charlene endenhall7s eecutor, contested

/ere7s claim, indicatin& that /ere7s instrument %as not supported y sufficient consideration.

/ere7s stron&est ar&ument %ould e:

A# that Charlene enefited from /ere7s actions.

(# that Charlene is ound y promissory estoppel.

C9 that Charlene and Gere had reached an enforceable compromise a!reement.

D# that Charlene had eecuted a indin& unilateral a&reement.



RECAP QUESTIONS:




1. 4hen does the ris0 of loss transfer in carrier cases> "n non9carrier cases> "n carrier cases, %here oth parties a&ree to

a common carrier, it depends on %hether the contract is a shipment or destination contract. $he default is a shipment

contract, in that ris0 of loss passes to uyer %hen the &oods are &i'en to the carrier for deli'er. "n a destination contract

thou&h, the seller assumes the ris0 for much lon&er, until the uyer has them in actual physical possession. "n non9carrier cases, ris0 of loss turns on %hether seller is a merchant or not. "f a merchant, then ris0 of loss passes to uyer

only %hen the &oods are in his physically possession. "f seller is not a merchant, then ris0 of loss passes to the uyer

upon the tender of deli'ery.

2. 4hat is the preeistin& duty rule> A promise to increase compensation for duties already o%ed under an eistin&

contract is an unenforceale modification ecause there is no consideration

3. 4hat is the doctrine of impracticaility> Eo% does it differ from impossiility> )nder the doctrine of impracticaility, a

promisor may e ecused from performance %here the follo%in& t%o elements are pro'en a# contin&ency causin& the

impracticaility not foreseen or unforeseen, # the increase in the cost or urden of performance is far eyond %hat

either party anticipated. )nli0e impossiility %here performance is impossile, impracticaility simply reuires an

unforeseen e'ent or a costKurden far more than %hat %as anticipated y either party.

. 4hat is the perfect tender rule> 4hat three options are a'ailale to the uyer if this rule is 'iolated> )nder the perfect

tender rule, the terms of a contract for the sale of &oods are enforced eactly. -'ery contract terms is thus treated as an

epress condition, and a reach y seller %ill relie'e the payment oli&ation of the uyer. $he uyer can accept the

&oods, reect the &oods, accept part and reect part of the &oods.



VIII. DEFENSES

A. "ntroduction:

All defenses are a'ailale in common la% and )CC cases.

B. "ncapacity O! 8"". A.#

1. "nfancyH+inors

a. "nfancy is the time period efore a person reaches the a&e of maority. An infant, commonly referred to as a minor,

is:

Any person under 1L.

. $he modern rule:

inors may enter into a contract ut the contract is 'oidale at the option of a minor

1# $he special case of minors %ho are married or emancipated.

a# $he maority rule:

inors still enoy po%er of a'oidance e'en if they are emancipated or married

# $he minority rule:

arria&e or emancipation eliminates po%er of a'oidance

c. 0ower of Avoidance 5or $isaffirmance9

1# )pon eercisin& the ri&ht to disaffirm a contract, the minor is oli&ated to return to the other party any &oods

recei'ed under the contract.

a# $he maority rule is that the minor must return the &oods if they are in his possession %hen he disaffirms

the contract, ut:

he is not liale for any dama&e, %ear and tear, or any other depreciation in 'alue of the &oods

# A contract et%een a minor and another party may e for somethin& that cannot e returned, such as a

ser'ices contract or a lease. "n such a case:

$he minor is under no oli&ation to payc# "n a minority of urisdictions, a minor can only disaffirm a contract y ma0in& the other party %hole. "n

these urisdictions, the minor %ould e liale for:

Depreciation, dama&es as %ell as compensatin& the other party of ser'ices recei'ed

d. atification

1# Once a minor turns 1L, they may epressly or impliedly ratify the contract entered durin& minority

and thus ind themsel'es to oli&ations they could ha'e disaffirmed. Silence is not enou&h

e. &'ceptions

1# ecessaries

a# A minor7s contract for necessaries:

is 'oidale still ut the merchant al%ays has a uasi contract ri&ht to reco'er the reasonale 'alue of&oods and ser'ices

1# 6ecessaries are:

&enerally, food, clothin&, shelter, and medical care

a# Courts are split:

education and automoiles. Contet specific.

2# +isrepresentation by +inor

a# "n a minority of urisdictions, if a minor has misrepresented his a&e to the contractin& party in order to

otain the &oods or ser'ices of the contract, he may e:



euitaly estopped from pro'in& his real a&e in court and thus pre'ented from

raisin& the incapacity defense

2. +ental "ncompetence

a. )nder modern rules, a person lac0s capacity to contract if he %as mentally incompetent at the time of contractin&.

. e/uirements for +ental "ncompetence

1# "f a party is adudicated incompetent and a &uardian is appointed, then this adudication %ill e sufficient to

estalish mental incompetence for contract cases.

2# Asent prior adudication of incompetence, then the defense %ill e a'ailale under the follo%in&

circumstances:

a# Co!nitive $efects

1# A person %ill e deemed mentally incompetent:

if he is unale to understand, in a reasonale manner, the nature and conseuences

of the transaction

EXAMPLE:

A person %ho is operatin& under the influence of delusions or hallucinations %ill e deemed mentally

incompetent ased on co&niti'e defects.

# 2olitional $efects

1# "n many urisdictions, mental incompetence can e estalished if:

a# a person is unale to act in a reasonale manner in relation to a transaction A6D

# the other party has reason to 0no% of this condition

EXAMPLE:

A person %ho is a manic9depressi'e %ould e ale to a'oid a contract if he %as in a manic phase

at the time of contract formation and if the other party had reason to 0no% of that person7s state

ased, for eample, on his erratic eha'ior.

c. Le!al Conse/uences of the +ental "ncompetence $efense

1# $he le&al conseuences of a successful mental incompetence defense depend on %hether or not the party

eercisin& this defense has een adudicated mentally incompetent or not.

a# "f there7s een an adudication of mental incompetence:

contracts are alto&ether 'oid

# "f there7s een no such adudication:

'oidale at the option of incompetent party

2# 0ossibility of atification

a# if a party %as mentally incompetent at the time of contract, may epressly or impliedly

ratify the contract if he ecomes competent at a later time.

3# $he mentally incompetent party7s duty of restitution:

&eneral rule is that mentally incompetent person eercises his po%er of a'oidance

and has recei'ed some enefit under the contract, then he is reuired to pay the

other party %hole y payin& the reasonale 'alue of &oods and ser'ices.

EXCEPTION:

"f the other party ta0es unfair ad'anta&e of the mentally ill person y ein& a%are

Of his incompetence, then the other party is entitled only to the property or enefit

"n possession of the mentally incompetent party.



# "n the case of a contract for necessaries:

the mentally incompetent can disaffirm the contract ut the pro'ider has a uasi contract

ri&ht to reco'er the reasonale 'alue of &oods and ser'ices

a# An addition to the list of necessaries:

le&al representation in connection %ith incompetency proceedin&s

3. "ncapacity defenses are a'ailale under oth the common la% and the )CC.

C. +isrepresentation O! 8"". (.#

1. Types of misrepresentation

a. #raudulent +isrepresentation

1# Four elements:

a# -lement 51:

isrepresentation

1# defendant must ha'e made an assertion that %as inconsistent %ith eistin&

facts

2# 4hat %ould e sufficient to pro'e this element>

a# oral or %ritten misrepresentation

# fraudulent conduct such as concealment

c# half9truth

EXAMPLE:

A seller of real estate underta0es efforts to hide termite dama&e.

3# isrepresentations are not:

a# ro0en promises, ut misstatements of eistin& facts

# not opinions or &uesses

# (ut there are eceptions:

a# professional opinions are treated as representation of facts of the matter

EXAMPLE:

An automoile dealer %ho tells a uyer that he thin0s the car runs pretty %ell, e'en thou&h he

0no%s that the car does not run %ell, %ould e dis&uisin& a fact as an opinion. $his %ould count

as a misrepresentation to the uyer.

EXAMPLE:

A certified mechanic %ho tells a uyer that he thin0s the car runs pretty %ell is li0ely spea0in& as

an epert. 4e presume that professionals and eperts, %hen spea0in& in their areas of

epertise, ase their 'ie%s on underlyin& facts. $his can also count as a misrepresentation to theuyer.

# -lement 52:

%ron&ful state of mind

1# $he reuirement of scienter is satisfied if the defendant made the assertion either:

a# 0no%in& it to e false

# 0no%in& that he had no idea %hether it %as true or false

EXAMPLE:



Auto dealer says, *this ay can &o from Qero to M< in si seconds flat.+ "f he either 0no%s that

the car can7t accelerate that uic0ly, or has no asis for 0no%in& %hether the car can accelerate

that uic0ly, scienter is present.

2# $he *intent to mislead+ reuirement is satisfied if the defendant made the assertion either:

a# for the purpose of misleadin& the a&&rie'ed party

OR

# 0no%in& that there %as a sustantial li0elihood that a&&rie'ed party %ould e misled

c# -lement 53:

ateriality of the misrepresentation

1# %b4ective +ateriality and Sub4ective +ateriality

a# Oecti'e materiality eplained:

%here such an assertion is li0ely to induce a reasonale person to enter into contract

EXAMPLE:

An assertion that a used car has een carefully inspected y an independent auto mechanic

%ould appeal to a reasonale person, and thus satisfy the oecti'e materiality test.

# Suecti'e materiality eplained:

%here the party ma0in& the assertion had reason to 0no% that it %as li0ely to

induce the particular a&&rie'ed party into enterin& the contract

EXAMPLE:

An assertion that the car %as o%ned y Salman Rushdie %hen he %as li'in& inco&nito in the ).S

%ould e material if made to an indi'idual %hom the seller 0ne% to e a Rushdie enthusiast.

d# -lement 5:

reasonale reliance on the misrepresentation

1# 4hat %ould count as unreasonale reliance>

EXAMPLE:

Reliance %ould e unreasonale if the a&&rie'ed party has independent 0no%led&e or reason to

0no% that the statement in uestion is false.

EXAMPLE:

Reliance %ould e unreasonale if the a&&rie'ed party has reason to elie'e that the statement in

uestion %as made y a person %ho is unreliale.

EXAMPLE:

Reliance %ould e unreasonale if no reasonale person %ould ha'e elie'ed the assertion.

EXAMPLE:

Reliance %ould e unreasonale if the a&&rie'ed party could ha'e easily ascertained the truth y

cursory inspection of the &oods.

. on(#raudulent +isrepresentation

1# $%o types:

6e&li&ent and innocent misrepresentation

2# Four elements:

a# -lement 51:



isrepresentation

# -lement 52:

ateriality of misrepresentation

c# -lement 53:

Reasonale reliance on misrepresentation

d# (ut the fourth element is different:

Do not need scienter or intent to mislead.

1# $he state of mind reuirement for ne&li&ent misrepresentation is:$he D %ould ha'e 0no%n the assertion %as false if he had eercised reasonale care

2# $he state of mind reuirement for innocent misrepresentation is:

$he D made an assertion not in accord %ith eistin& fact

c. #raudulent ondisclosure

1# $he fraud here consists of:

D7s silence %hen there %as a duty to disclose

2# $hree elements:

a# -lement 51:

6on9disclosure %as material to contract

# -lement 52:

Reasonale reliance on the non9disclosure

c# -lement 53:

Duty of disclosure and a failure to fulfill it

3# Althou&h there is &enerally no duty of disclosure to tradin& partners, if a party is a%are of material facts that are

unli0ely to e disco'ered y the other party in the eercise of ordinary care and dili&ence, then there %ill e a

duty to disclose that information in these circumstances:

a# %here the parties enoy a relationship of trust and confidence i.e. fiduciary duty to disclose to clients

# %here the parties ha'e made an assertion that %as true at the time ut that has since een

rendered untrue y inter'enin& e'ents

c# the oli&ation of &ood faith %ould reuire that the party disclose the information

2. emedies for +isrepresentation

a. 4hats a'ailale for all three types of misrepresentation>

1# )se as a *shield+ a'oidance#:

All can e used as defenses to reach of contract claim

2# )se as a *s%ord+ rescission and reliance dama&es#:

All can e used in tort action for rescission of contract and also for dama&es

Resultin& from reliance on representation

. 4hat7s a'ailale to fraudulent and non9fraudulent misrepresentation ut not fraudulent nondisclosure>

Affirmati'e %ords %ere spo0en. $hey may li'e %ith contract and sue for enefit of the ar&ain.c. 4hat7s a'ailale to fraudulent misrepresentation ut not to the other t%o types of misrepresentation>

A party can see0 puniti'e dama&es ecause it is an intentional tort i.e. %illful or malicious %ron&doin&

3. Defenses are eually applicale under common la% and the )CC.

$. $uress O! 8"". C.#

1. )nder modern la%, there are three elements to a defense of duress:

a. -lement 51:

$hreat



1# Defined:

A manifestation of intention to inflict harm on a person y %ords or conduct

EXAMPLE:

An e'ample of conduct considered a threat is the scene in 1The Godfather3 where the man wa*es up

with a horse,s head in bed which was placed there to induce him to si!n the contract.

. -lement 52:

4ron&ful in nature

1# $hree types or circumstances:

a# if %hat is threatened is a crime or a tort

# criminal prosecution or ad faith ci'il process

c# if %hat is threatened is a ad faith reach of contract i.e. economic duress

EXAMPLE:

Sailors on a fishin& 'oya&e cease their %or0 mid%ay throu&h the 'oya&e and refuse to resume their

duties unless the captain a&rees to &i'e them a raise.

1# Distin&uish a ad9faith threat of reach of contract from a &ood9faith demand:

if the demand is due to increased urden caused y unanticipated circumstances

then there is no duress

EXAMPLE:

$he sailors7 demand for additional compensation in response to an unanticipated epansion of their

%or0load due to faulty fishin& nets %ould e a &ood9faith demand.

c. -lement 53:

6o reasonale choice ut to succum to the threat

1# $his is seldom an issue %hen %hat is threatened is a crime or a tort, a criminal prosecution, or a ad faith ci'ilsuit, for ris0in& the e'entuality of any of those is scarcely a *reasonale+ choice.

2# Eard cases often arise in cases in'ol'in& *economic duress+ i.e., threatened reach of contract# and

commonly arise in these three situations:

a# Situation 51:

4hen there are no adeuate or reasonale priced sustitutes for the ser'ices or &oods

that are ein& threatened to e %ithheld

EXAMPLE:

$he ship7s captain is not in a position to find replacement sailors %hen already at sea, so no adeuate

sustitutes %ould e a'ailale.

# Situation 52:

4hen the threatened reach %ould cause the a&&rie'ed party to rea0 his o%n contracts

EXAMPLE:

A purchaser of upsidaisium earin&s used in the manufacture of turo9et en&ines %ould, on account of

the reach, e forced to reach its contract %ith an aircraft manufacturer.

c# Situation 53:

4hen the alternati'e of acuiescin& to the threat and suin& for dama&es is inadeuate



returns any enefits recei'ed.

3. !i0e the other defenses, the claim of common la% undue influence is a'ailale in cases arisin& under the )CC as a

supplementary pro'ision.

#. Unconscionability O! 8"". -.#

1. The &lements of the Unconscionability $efense

a. -lement 51:

@rocedural unconscionaility1# Defined:

%here the ar&ainin& process created an asence of meanin&ful choice for the a&&rie'ed party

2# "n %hat circumstances %ill this e found>

a# Circumstance 51:

6ear9miss cases

EXAMPLE:

A si&natory is competent ut, ecause of ad'anced a&e or lan&ua&e arriers, cannot understand the terms of the

contract and operates as if under mental incompetence or duress.

# Circumstance 52:

Asence of ar&ainin& po%er

1# -amples include:

a# adhesion contracts

standard form contracts %ith ta0e it or lea'e it pro'isions

party %ea0ened y po'erty or lan&ua&e arriers

c# Circumstance 53:

Fine print terms

. -lement 52:

Sustanti'e unsconscionaility1# Defined:

Contract terms are unreasonaly fa'orale to one party of the contract

2# "n %hat circumstances %ill this e found>

a# Circumstance 51:

/rossly ecessi'e price

EXAMPLE:

%here a pay9o'er9time plan reuires the consumer to pay a total sum that is many times the 'alue of the

purchased &oodsJ or %here a an0 char&es an o'erdraft fee that is many times the an07s actual

processin& costs.

# Circumstance 52:

/rossly disproportional conseuences for a minor reach

EXAMPLE:

An add9on clause, pursuant to %hich a merchant is entitled to repossess multiple household items,

includin& furniture, eddin&, and a stereo, %hen a consumer missed a payment, despite the fact that the

consumer had already paid nearly L<V of the monies o%ed for the 'arious purchases.

c# Circumstance 53:



@ro'isions indin& on one party ut not the other

EXAMPLE:

an aritration pro'ision in an employment contract reuires the employee ut not the employer to

aritrate any disputes, or permits the employer ut not the employee to amend the pro'isions of the

a&reement at %ill.

d# Circumstance 5:

@ro'isions that are &rossly unfair

EXAMPLE:

"n (ro%er '. /ate%ay 2<<<, the court found unconscionale a indin& aritration clause that reuired

consumers pursuin& disputes %ith a merchant to pay a non9refundale ad'ance fee that eceeded the

purchase price of the &oods, tra'el to a distant city for the proceedin&J pay the merchant7s le&al fees in

the e'ent of a loss, and file all correspondence in a forei&n country.

2. Le!al Conse/uences of a #indin! of Unconscionability

a. )pon a findin& of unconscionaility, the court may:

1# Refuse to enforce the contract

2# -cise the offendin& clause ut lea'e the rest of the contract in place

i.e. no aritration in @aris

3# !imit the application of offendin& clause so as to limit the unconscionale result

i.e. aritration ut not in France

G. 0ublic 0olicy O! 8"". F.#

1. @ulic policy may e raised as a defense to the enforcement of a contract in the follo%in& four contets:

a. Contet 51:

4here the suect of the contract itself is prohiited y la% i.e. prostitution

EXAMPLE:

"n most urisdictions, a contract for prostitution, &amlin&, or riery is ille&al under the la% and accordin&ly

unenforceale in court.

. Contet 52:

4here the contract is formed for the purpose of committin& a crime

EXAMPLE:

A contract et%een an employer and a hired assassin %ould e a contract for the commission of a crime.

c. Contet 53:

4here the contract performance %ould constitute a tort

EXAMPLE:

A pulicist ein& hired for the epress purpose of spreadin& a defamatory story aout a pri'ate citiQen %ould e a

contract for the commission of a tort.

d. Contet 5:

4here the contract performance %ould 'iolate certain 'alues and freedoms desi&nated y the state

i.e. not sellin& 0idney



EXAMPLE:

A contract that prohiits one party from marryin& for an etended period of time %ould 'iolate the pulic policy of

promotin& free and consent9ased marria&es.

2. Sources of 0ublic 0olicies

a. Le!islation

1# Freuently the source of policy in'o0ed

. udicial $ecisions1# 4here the suect matter of the contract is not specifically prohiited under la%, then ud&e9made pulic

policies may e in'o0ed, %hich may include policies ased on:

a# oral and social 'alues

# -conomic considerations

c# @rotection of &o'ernmental processes and institutions

EXAMPLE:

A contract under %hich a pri'ate citiQen a&rees to 'ote a certain %ay in echan&e for a year7s supply of

eer %ould 'iolate the pulic policy of free and unrestricted eercise of the ri&ht to 'ote.

3. %peration of the $efense of 0ublic 0olicy

a. $he pulic policy defense is almost in'arialy in'o0ed as a defense in an action y one of the parties see0in&

enforcement of a contract a&ainst the other, and %hen it is successful:

the D %ins irrespecti'e of %hether he %as the party %ho promised to perform the pulic policy 'iolation

or the party payin& for it

1# $he reason for this is that:

the courts %ill play no rule in enforcin& such a contract and %ill lea'e them in the

position it found them

EXCEPTION:

5ot9 In pari delicto e'ception:

%here one of the parties is much more e&re&iously in the %ron&, it may e possile for

the more innocent party to secure restitution of enefits conferred on the &uiltier party

. A contract that is suect to the defense of pulic policy is:

clearly 'oidale at the option of the defendin& party.

. Li*ely Conte'ts for 0ublic 0olicy $efenses

a. oncompete A!reements

1# any employment contracts as %ell as contracts for the sale of a usiness contain a pro'ision that pre'ents one

party from competin& for a certain period of time or in a certain area.

a# Althou&h &enerally enforceale, such contracts may e deemed contrary to the pulic policy of promotin&

a citiQen7s freedom to %or0.# Consider the etent to %hich the non9compete pro'ision imposes an unreasonale &eo&raphical arrier

or duration upon the employee

. Sales of Goods via Bribery

1# "f a contract for the sale of &oods %as ased on riery of one party y the other, then the 'ictim of the rie

has a pulic policy defense.

EXAMPLE:

Buyer sues seller for breach of contract when seller refuses to supply the specified /uantity to buyer

at the a!reed(upon price. Seller raises the defense of public policy because after the fact Seller learns

that buyer bribed Seller,s a!ent with a car in order to secure the unreasonably favorable contract



terms.

c. Sales of Goods intended for Unlawful Use

1# "f a contract is for the sale of &oods that the seller 0no%s the uyer intends for an unla%ful use, then the pulic

policy defense is a'ailale to defeat either an action y the seller see0in& payment or an action y the uyer

see0in& deli'ery.

d. Liability Limitation 0rovisions

1# "f the pro'isions of a contract %ould limit a party7s liaility for tortious eha'ior y restrictin& the ri&ht of the

inured party to pursue claims a&ainst the rec*less or intentional harms caused y the party, then suchpro'isions %ill not e upheld y a court ecause to do so %ould 'iolate pulic policy.

2# "n contrast, pro'isions that limit liaility for ne!li!ent tortious conduct are &enerally held to e permissile.

e. Unlicensed Goods or Services

1# "f a contract is for unlicensed &oods or ser'ices, then the contract is 'oidale and may e rendered

unenforceale y a pulic policy defense.




*uestion /

Aott o%ns se'eral acres of commercially Qoned real estate. For se'eral months, Costello has een tryin& to con'ince Aott

to sell him a portion of the property for de'elopment as a shoppin& mall. One day durin& a &olf &ame at the clu, Aott orally

a&rees to sell Costello half of his land. On the ac0 of his score card, Aott scriles in pencil the follo%in& note: *?une 1,

1. " %ill sell to Costello one half of my property located at the corner of First Street and /rand A'enue.+ Aott si&ns the

note as %ell. -cited, Costello &oes to see his an0ers and otains a promise of financin&. Costello tenders the purchase price

to Aott ut Aott reects the money, sayin& that he has chan&ed his mind. Costello rin&s an action for specificperformance. Aott raised the defense of the Statute of Frauds, and Costello introduces the score card %ith Aott7s

memorandum as e'idence to support the contract. Aott ar&ues that the score card is an insufficient memorandum of their

a&reement.

4hich of the follo%in& statements est supports Aott7s ar&ument>

A# $he memorandum %as not si&ned y Costello.

B9 The memorandum does not ade/uately identify the property to be sold.

C# $he memorandum does not contain a co'enant of title.

D# $he memorandum did not set the date for performance.




*uestion 0

Darren %as tall for his a&e. Ee %as the only student in his Mth &rade class o'er si feet tall. One day, %hile %al0in& home from

school, Darren and his friend Chris entered an automoile dealership. "t uic0ly ecame apparent that the salesman thou&ht

Darren %as an adult, and Darren did not correct him. $he dealership %as offerin& a Qero do%n special. Darren found a car he

really li0ed, and a&reed to ma0e the reuired L<< a month payments. Darren and Chris dro'e off the lot %ith the ne% car.

Chris %as afraid that Darren %ould &et in troule, so he called the dealership and spo0e %ith the salesman %ho had sold

Darren the car, informin& him of Darren7s a&e. An hour later, Darren %as dri'in& his ne% car %hen he %as in'ol'ed in anaccident %hich hea'ily dama&ed the front of the car. Darren used the car7s uilt in cell phone to call the dealership. Ee

informed them that he %as actually 12 years old and %ished to &et out of the contract.

)nder contract la%, Darren is

A# responsile for dama&e to the car, ecause he must return the merchandise in the same condition in %hich he recei'ed

it.

(# responsile for dama&e to the car, ecause he %illfully misrepresented his a&e.

C# not responsile for dama&e to the car, ecause Chris7s call notifyin& the dealership of Darren7s true a&e 'oided the

contract.

$9 not responsible for dama!e to the car because as a minor $arren can disaffirm the contract.



RECAP QUESTIONS:




1. 4ith re&ard to the defense of incapacity, %hat is the rule re&ardin& infants and minors>

2. Descrie the three types of misrepresentation. Fraudulent misrepresentation, non9fraudulent misrepresentation,

fraudulent non9disclosure

3. 4hat are the elements of duress> $hreat, %ron&ful in nature, no other option ut to succum to threat



IX. REMEDIES

A. emedies for Breach of Contract Generally O! 8""". A.#

1. +onetary $ama!es at Common Law

a. A party a&&rie'ed y a reach of contract may e ale to reco'er dama&es calculated to protect that party7s

epectation interest, reliance interest, or restitutionary interest. A party may:

elect only one of these remedies

. #irst type:

epectation dama&es

1# $his is the default a%ard courts %ill &rant a&&rie'ed parties.

2# An a%ard of epectation dama&es means that the a&&rie'ed party %ill e entitled to the amount:

that %ill restore him to the position he %ould ha'e een in had the contract een fully performed

EXAMPLE:

A patient with a hand in4ury contracts with his doctor for hand sur!ery. The doctor promises him a

1?<<K perfect3 hand but instead the sur!ery ma*es the hand worse. The e'pectation interest of the

patient is measured by the difference between the value of the promised 1?<<K perfect3 hand and the

value of the hand worsened by sur!ery.

3# Calculatin! the +onetary Award

a# $he formula:

!oss of 'alue of the reachin& party7s performance different

et%een %hat %e &ot and %hat %e are o%ed#

W any incidental and conseuential costs &enerated y the reach

i.e. lost profits#

B any payments recei'ed from the reachin& party

B any costs sa'ed as a result of the reach

X -pectation Dama&es of the A&&rie'ed @arty

EXAMPLE:

/eneral contractor repudiates its contract %ith Sucontractor %hen Sucontractor is half%ay finished %ith

its %or0 under the sucontract. Sucontractor is entitled to see0 from the reachin& /eneral contractor an

amount eual to the contract price or the unrealiQed 'alue of /eneral7s promised performance, plus costs

associated %ith storin&, insurin&, andKor returnin& materials and euipment secured y Sucontractor in

the course of contractual performance i.e., incidental costs &enerated y the reach# or the incidentalcosts &enerated y the reachJ minus any pro&ress payments already made y /eneral contractorJ

minus money Sucontractor may ha'e sa'ed on salaries and euipment rental y not ha'in& to complete

performance.

# Limitations on the i!ht to ecover &'pectation $ama!es

a# $he a&&rie'ed party may not e ale to reco'er the full amount of epectation dama&es in the follo%in&

situations:

1# Situation 51:

%here the cost of performance &reatly eceeds mar0et 'alue of performance



EXAMPLE:

"n the infamous case of @ee'yhouse '. /arland Coal Y inin& Co., lando%ners entered into a contract

%ith a coal9minin& firm permittin& the latter to strip9mine their farmland ut reuirin& the firm to restore

the land to its ori&inal state once the minin& proect %as complete. 4hen the firm reached y refusin&

to do the restoration %or0, there %ere t%o %ays to measure the resultin& epectation dama&es: the cost

of performance or the costs that %ould e incurred in an effort to restore the land as promised in the

contract#, or the net increase in the mar0et 'alue of the property that %ould e realiQed if the restorati'e

%or0 had een completed as promised. (ecause restoration %ould ha'e cost the minin& firm 2,<<<

ut increased the mar0et 'alue of the land y only 3<<, the court limited the lando%ners7 reco'ery to

the latter fi&ure.

a# any courts %ould a%ard cost of performance despite the disparity %ith mar0et 'alue on the

'ie% that epectation dama&es should e calculated on the asis of the 'alue of performance to

the inured party himself and not on its 'alue to some hypothetical reasonale person or on some

mar0et.

2# Situation 52:

-pectation dama&es cannot e calculated %ith reasonale certainty

a# A recurrin& eample of a case %here uncertainty in a%ardin& epectation dama&es eists is:

A ne% usiness %ith no profit history

3# Situation 53:4here dama&es are unforeseeale

HYPOTHETICAL

Supplier a&rees to deli'er a uantity of %indo% &lass to Store for 1,<<< on a certain date. Store needs the &lass to fill its

depleted in'entory. Supplier fails to deli'er as promised ecause the mar0et price of the uantity of &lass has risen to

1,2<< and Supplier prefers to sell to a third party at the hi&her price. )ne0no%nst to Supplier, Store had, in the

meantime, entered a contract to sell the entire uantity of &lass for 1,;<< to a usiness ser'ices firm for use in the many

properties it mana&es, and Store is unale to deli'er ecause of Supplier7s reach. $o %hat &eneral dama&es is Store

entitled> Suppose Store7s uyer eplained at the time of contractin& that it needed timely deli'ery of the &lass in uestion

ecause it had already committed to sellin& the uantity in uestion to a third party. Eo% %ould this chan&e the analysis>Suppose the uyer of the &lass is not a store ut a &laQin& contractor that needs the &lass in uestion to install %indo%s in

a ne% commercial uildin&, and it %ill e reuired to pay liuidated dama&es to the &eneral contractor if it fails to perform in

a timely fashion. Eo% %ould this chan&e the analysis

2<< foreseeale dama&e for the store. $he store %ants epectation dama&es as it %anted to sell to a third party. "t

%ants the 3<< more ut that is not foreseeale dama&es. "f the circumstances ecome foreseeale, than ;<< is

reco'erale. "f the uyer is &laQin& contractor, dama&es are also foreseeale.

# Situation 5:

%here dama&es can e miti&ated

EXAMPLE:

$he liaility of a reachin& uyer of produce %ould e reduced if the seller permitted the produce to

rot after reach rather than sellin& it to third partiesJ ut if the seller is forced y the reach into a *fire

sale+ ecause of the short shelf life of the produce in uestion, then the reachin& uyer %ill e fully

liale for epectation dama&es G that is, for any difference et%een %hat the seller nets from the *fire

sale+ and %hat it stood to earn ut for the ro0en contract.

EXAMPLE:

$he liaility of an employer is reduced if an employee dismissed in reach of contract ta0es an

etended 'acation rather than see0in& other %or0. (ut the a&&rie'ed employee need only ma0e



reasonale efforts to secure a position that is reasonaly eui'alent to the o lost, and accordin&ly she

need not accept sustitute %or0 %hen it: is in a different fieldJ offers si&nificantly lo%er pay or less

desirale terms and conditions of employment than those of the lost oJ %ould entail more urdensome

responsiilities than those of the lost oJ or %ould dama&e the a&&rie'ed party7s career prospects. e.&.

an A9list mo'ie star %ould not e reuired to miti&ate dama&es for a film producer7s reach of contract

y ta0in& a lesser role in a (9&rade film#.

EXAMPLE:

$he liaility of a reachin& lando%ner to a construction contractor hired to erect a structure on the property is

reduced %here the contractor continues the uildin& proect after the lando%ner has repudiated the contract.(ut the liaility of a uyer of &oods ordered for special manufacture %ould not e reduced if the seller

continues the manufacturin& process after reach in order to finish the &oods for possile sale to third parties

c. Second type of onetary Dama&es:

Reliance dama&es

1# $his type of monetary a%ard is desi&ned to:

restore the a&&rie'ed party to the position he %as in prior to the contract

2# $he a&&rie'ed party7s reliance interest is measured y:

a# any ependitures in preparation of performance or in actually performin& i.e. out of

poc0et epenses# !ess:

any loss that the reachin& party can pro'e that the a&&rie'ed party %ould ha'e suffered

e'en if the contract had een fully performed

EXAMPLE:

A a&rees to uy (7s car. On the faith of the promise, A pays ( a 2,<<< do%n payment for the car and

enters a 12 month lease a&reement %ith C for a par0in& space for 2,<<. $he reliance interest of A

%ould e ,<<, the amount it %ould ta0e to compensate A for %hat he7s lost on the faith of (7s promise.

3# Reliance dama&es may e a'ailale %here:

epectation dama&es are not a'ailale such as %hen they are too certain or

speculati'e

EXAMPLE:

"nventor si!ns a contract with ailroad Co. for shipment of a new stove "nventor plans to display at a

manufacturers, convention and she pays fees to the convention hotel for a room and for display space

as well as an e'hibition fee to the convention sponsor. "f ailroad Co. breaches the contract by failin! to

deliver the stove until after the convention "nventor will be unable to recover dama!es for opportunities

she may have lost due to her inability to showcase the stove as calculatin! the probability and value of

those opportunities would be too speculative. )owever "nventor would be entitled to reliance dama!es

5i.e. a return of the ailroad Co.,s fee plus compensation for the amounts she paid to the hotel and

convention sponsor9.

d. Third type of +onetary $ama!es:

restitutionary dama&es

1# $he restitutionary dama&es interest is:

'alue of the enefits conferred upon the other party in the transaction

EXAMPLE:

-here the buyer of a car ma*es a 6;<<< down payment to the seller and a 6;<< payment to the

lessor of a par*in! space the buyer,s restitutionary interest is limited to a recovery of the 6;<<< down

payment because the par*in! space rental payment was made to a third party. Althou!h both of these



1out of poc*et3 e'penses are recoverable as reliance dama!es only the down payment is available as

restitution.

2# $he a&&rie'ed party7s restitutionary interest %ill e measured, in the court7s discretion and as ustice reuires,

y either:

a# reasonale 'alue or cost of the enefit conferred OR

# the etent to %hich the other party7s property has increased in 'alue ecause of

performance rendered

EXAMPLE:

Contractor uilt a $ur0ish athhouse on Eomeo%ner7s property. $he mar0et 'alue of the ser'ices is the

cost to Eomeo%ner of hirin& another contractor to do the %or0, %hich euals 3<,<<<. $he 'alue added

to Eomeo%ner7s property is the net increase in the home7s 'alue from the addition of the athhouse,

%hich euals 2<,<<<. A court calculatin& Contractor7s restitutionary interest could a%ard him either

amount, considerin& %hat rele'ant precedents permit and %hat ustice reuires.

3# An a&&rie'ed party is li0ely to elect to reco'er restitutionary reco'ery %hen it %ould eceed the amount

reco'erale ased on his epectation interest, and:

that is most li0ely in the contet of a losin& contract

EXAMPLE:

General contractor breaches its contract with Subcontractor when Subcontractor is halfway finished

with its wor* under the subcontract. Subcontractor is entitled to see* from the breachin! General

either e'pectation dama!es or the contract price less any amounts already paid and also less any

savin!s due to the shortened performance. Alternately the party could see* restitutionary dama!es or

the mar*et value of the services already rendered at the time of breach. &ven if Subcontractor had a

1losin! contract3 it is nevertheless entitled to recover its restitutionary interest.

# An important limitation:

Restitution is a'ailale %here a&&rie'ed party has partially performed ut not

a'ailale %hen partially performed.

EXAMPLE:

Subcontractor completes contractual performance and General Contractor refuses to pay.

Subcontractor has no ri!ht to see* restitutionary dama!es and is entitled to recovery of the contract

price only.

e. Li/uidated $ama!es 0rovisions

1# @arties are free to include amon& the terms of their contract a li/uidated dama!es clause, desi&ned to:

%hich is desi&ned to pro'ide for dama&es of their o%n choosin& in the e'ent of a reach

2# Such a pro'ision is:

a# enforceale if:

the court finds it to e a 'alid liuidated dama&es clause desi&ned to compensate for reach

# unenforceale if:

the court finds that it constitutes a penalty desi&ned to punish a reach

3# $he test for determinin& %hether a clause in a particular contract is a 'alid liuidated dama&es pro'ision has

three pron&s:

a# @ron& 51:

Did the parties intend for the clause to operate as !D clause or as a penalty>

1# odern decisions do%nplay the importance of this pron&, and emphasiQe the other t%o.



# @ron& 52:

%as the clause reasonale at the time of contractin& in relation to the anticipated harm

1# $he 0ey uestion is:

%hether there %as an anticipated harm %ould e difficult to pro'e

EXAMPLE:

Repudiation of a commercial lease y an *anchor+ tenant in a shoppin& mall is li0ely to cause

reductions in pedestrian traffic to other stores as %ell as harm to the mall7s reputation and

attracti'eness as a shoppin& *destination.+ (ecause the etent and monetary 'alue of those harms%ould e difficult to estalish in court, a liuidated dama&es clause desi&ned to a%ard the mall o%ner

a sum that represents an ineact ut reasonale forecast of those harms %ould e appropriate.

c# @ron& 53:

4as the clause reasonale in relation to the harm and dama&es that actually occurred

as a result of the reach>

EXAMPLE:

"f the shoppin& mall tenant repudiates the contract shortly after enterin& it, and the mall o%ner is ale to

secure a sustitute *anchor+ %ith minimal delay, a clause &uaranteein& the o%ner si&nificant liuidated

dama&es %ould e unreasonale in relation to the actual harms caused y the reach.

# Anticipated versus Actual )arm

a# 4hen a particular clause satisfies the second pron& of the test anticipated harm# ut not the third pron&

of the test actual harm#, there is a split as to %hether courts %ill enforce the clause:

1# $he maority rule:

holds that the clause is still 'alid and enforceale

2# $he minority rule:

clause is an unenforceale penalty

;# 4hen a court concludes that the liuidated dama&es clause is in fact a penalty:

the clause is stric0en from the contract and dama&es %ill e reco'erale in accordance

%ith all the default rules of remedies and dama&es

2. +onetary $ama!es under the UCC

a. ost of the rules &o'ernin& remedies under the )CC reflect the same underlyin& principles that apply in common

casesGin particular, the ri&ht of an a&&rie'ed party to epectation dama&es and the duty of an a&&rie'ed party to

miti&ateGut they differ in their details ecause they are specifically desi&ned for application to the sales of &oods

contet.

. Seller,s remedies

1# $he seller7s ri&ht to reco'er depends on:

4hether the &oods ha'e een deli'ered and accepted y the uyer

a# $o the etent &oods ha'e een deli'ered to and accepted y the uyer:Remedy is for contract price

# $o the etent &oods ha'e not een deli'ered to and accepted y the uyer ecause uyer has

%ron&fully reected them or repudiated#:

Depends on %hether seller has re9sold the &oods

1# "f the seller has re9sold:

$hen the dama&es are difference et%een contract price and resale price

2# "f the seller has not re9sold:

$hen the dama&es are difference et%een contract price and mar0et price

3# Lost 2olume Sellers



a# A lost 'olume seller is one %hose supply of &oods eceeds the demand for the same. "n such

case, the ao'e differential formulas %ill not fully compensate for the seller7s dama&es.

# $he )CC accordin&ly permits lost 'olume sellers to reco'er:

$he profit they %ould ha'e made on the lost sale

c# $o reco'er lost profits, the seller must e ale to sho%:

i# $hey could ha'e made the sale oth to the reachin& uyer and resale uyer

ii# $hey %ould ha'e een profitale on oth sales

iii# $hey %ould ha'e made the additional sale e'en after the uyer reachedc# "ncidental $ama!es

1# 4hether or not the seller resells, he is also entitled to reco'er incidental dama&es, %hich are:

asically the cost associated %ith ein& stuc0 %ith the &oods as %ell as costs of resale

2# Eo%e'er, the seller7s dama&es %ill e reduced y:

any amount reflectin& epenses a'oided on account of the reach

c. Buyer,s emedies

1# $he uyer7s ri&ht to reco'er depends on:

4hether the uyer has co'ered i.e. purchased replacement &oods

a# "f the uyer co'ers:

$he dama&es are the difference contract price and co'er price# "f the uyer does not co'er:

$he dama&es are the difference contract price and mar0et price

c# Additionally, the uyer is free to see0 incidental and conseuential dama&es.

1# "ncidental dama&es:

$he cost associated %ith securin& co'er

2# Conseuential dama&es:

@eculiar costs arisin& to the uyer ecause of a particular use or need for the

&oods in uestion such as lost profit. $his reuires foreseeaility

3# $he uyer7s dama&es %ill e reduced y:

any epenses a'oided ecause of the reach

2# $ifference in 2alue $ama!es for Accepted Goods

a# $his measure is a'ailale if the uyer recei'es and accepts nonconformin& &oods from the seller.

# )nder this measure, the uyer is entitled to reco'er the difference et%een:

the 'alue of the &oods contracted for and the 'alue of &oods recei'ed

3. &/uitable emedies

a. #irst type of &/uitable emedy:

Specific performance

1# $his is an etraordinary remedy y %hich a reachin& party is ordered to perform.

2# $his remedy is only a'ailale to an a&&rie'ed party %hen:

A monetary a%ard is considered inadeuate

3# -here Specific 0erformance "s Generally Available

a# oney dama&es are &enerally presumed to e inadeuate %hen a party is purchasin& either:

1# )niue oects

a# For eample:

4or0s of art and precious heirlooms

2# Real property

# &/uity Considerations

1# 4e are dealin& %ith an euitale remedy and so the uestion is committed to the ud&e7s discretion.



"n so decidin&, courts are li0ely to consider the follo%in& factors:

a# %hether the a&&rie'ed party has *clean handsJ+

# %hether the terms of the contract are fairJ

c# %hether the terms of the contract in uestion are sufficiently definiteJ

d# %hether performance y the a&&rie'ed party can e reasonaly assuredJ and

e# %hether specific performance %ould e in the pulic interest.

# -here Specific 0erformance is not Available

a# Contracts for personal ser'ices # Contracts reuirin& on&oin& cooperation et%een the party

;# Specific 0erformance under the UCC

a# $he )CC lieraliQes the rules &o'ernin& the a'ailaility of specific performance for sales of &oods in t%o

%ays:

1# !ieraliQin& the *uniueness+ reuirement:

)nder the )CC specific performance is allo%ed for a uyer %ho has

adeuately searched ut %as unale to find reasonale sustitute

and so is unale to co'er the reach y the seller

2# !ieraliQin& the *capale of immediate performance+ reuirement:

)nder the )CC specific performance is allo%ed in cases li0e output andreuirement contracts %hich are classic lon& term relationships that reuire

cooperation of parties

. The second type of &/uitable emedy:

e!ative in4unction

1# 6e&ati'e inunctions are:

ordered y the court prohiitin& the reachin& party from ta0in& a particular action

2# $he most common and important area for ne&ati'e inunctions is:

employment settin&

3# $he a'ailaility depends on %hether the former employer is see0in& mid9term or post9employment relief.

a# +id(Term elief

1# 4hen an employee is under contract for a specified period of time and the employee reaches the

contract y departin& efore the end of that period, a ne&ati'e inunction %ill e a'ailale to pre'ent

the employee from competin& if:

the employee7s ser'ices are uniue or etraordinary

EXAMPLE:

"n the famous case of !umley '. 4a&ner, an opera sin&er under contract to sin& at Eer aesty7s

$heatre for a three9month period %as persuaded to depart mid9contract to e&in a concert series at a

competin& 'enue. (ecause her ser'ices %ere uniue and etraordinary, the court &ranted a ne&ati'e

inunction arrin& her from performin& at any competin& 'enue for the duration of the contract term.

2# Althou&h the presence of a specific contractual pro'ision estalishin& eclusi'e employment durin&

the period of time in uestion %ill aid the employer is securin& a ne&ati'e inunction:

most courts %ould imply such a term for the period of contract

# 0ost(&mployment elief

1# -nforcement of employment contract pro'isions that prohiit post9employment competition a&ainst the

employer ha'e ecome a common source of ne&ati'e inunctions.

2# $he 'alidity of such non9compete clauses %ill depend on three factors or considerations:

a# Consideration 51:

"s there si&nificant usiness ustification for enforcin& post9employment restraints>



EXAMPLE:

An employee %ith access to trade secrets and entrepreneurial 0no%led&e.

# Consideration 52:

"s the scope of the non9compete clause reasonale in oth the duration and

&eo&raphical reach>

c# Consideration 53:

"s there an epress pro'ision> Courts %ill not imply non9compete clause

B. %ther 0ossible emedies O! 8""". (.#

1. 0romissory &stoppel

a. $he type of interest a party may reco'er under a claim of promissory estoppel depends on the urisdiction, as some

courts a%ard:

1# epectation dama&es

2# reliance dama&es

3# choose on a case y case asis and tailor the remedy to the inustice at issue

2. estitution and Un4ust &nrichment

a. Restitution is that alternati'e to epectation dama&es that a party can reco'er for a reach of contract.

. (ut there are contets %here restitution mi&ht e a'ailale to a party e'en %hen the other party has not reached a

contract:

1# Benefits Conferred under a #ailed Contract

a# 4hen a party esto%s enefits on his tradin& partner in connection %ith %hat turns our to e a *failed+

contract e.&., incapacity, fraud, duress#:

$he party esto%in& enefit may reco'er their 'alue 'ia restitution

2# Benefits Conferred by a Breachin! 0arty

a# @arty reachin& the contract may reco'er the enefits conferred on non9reachin& party

so lon& as there is an offset for any dama&es caused y the reach

EXAMPLE:

A %or0s for ( under a 129month contract and, %ithout ad'ance notice, reaches the contract after 11

months in order to other accept other employment. A is entitled to restitution of the reasonale 'alue of

the ser'ices rendered, suect to offset for (7s dama&esGthat is, the cost of hirin& a replacement for A at

the last minute.

3# &mer!ency Benefits Conferred by a )ealth Care 0rofessional

a# $he &eneral rule is that a person %ho esto%s enefits %ithout reuest from the enefittin& party:

is considered an officious inter9meddler %ho %ill not e entitled to any reco'ery

ecause there %as no opportunity to decline

# Eo%e'er, an eception applies to:

doctors and other healthcare professionals %ho pro'ide emer&ency healthcare

to a patient %ho is unale to consent

# Benefits Conferred by +ista*e

a# A person %ho mista0enly confers enefits to another party may e entitled to restitution.

# "n this situation, the follo%in& %ill e considered:

1# lame%orthiness of the error



2# %hether the recipient %as a%are of the error in time to pre'ent it

3# %hether the recipient himself of the enefits at issue

EXAMPLE:

After a hurricane, O%ner hires Contractor to perform repairs on his storm9dama&ed home. (ecause

of confusion caused y dama&e to street si&ns and mailoes, Contractor performs the repairs on the

%ron& house. Contractor is entitled to restitution from the enefitin& homeo%ner if the latter %as

a%are of Contractor7s mista0en efforts and remained silent.

3. A!reed(To emedies

a. @arties may also contract out of the le&al and euitale remedies a'ailale under the la%, y specifyin& a&reed9to

remedies in the contract.

. $hese remedies typically ta0e t%o forms:

1# !iuidated dama&es

2# @ro'isions limitin& or ecludin& dama&es

c. 0rovisions Limitin! or &'cludin! $ama!es

1# $here are different types of eclusi'e remedies pro'isions, includin&:

a# @ro'isions that limit or alter the measure of dama&es a'ailale

EXAMPLE:

An eclusion of conseuential dama&es.

# -clusi'e remedies such as limits to repair or replacement of &oods

2# Such pro'isions are &enerally enforceale unless they:

)nconscionale or fail their essential purpose

3# !imitation of conseuential dama&es for personal inury:

"n the case of consumer &oods, this is prima facie unconscionale




*uestion 1

ar&e (illin&s, o%ner of a &as station, entered into a %ritten contract %ith Eudson Construction to uild a store on her lot.

)nder the terms of the contract, (illin&s %as to supply detailed plans and specifications for the store, and Eudson %ould uild

the store for 3<<,<<<. Accordin& to a pro'ision in the contract, all chan&es to the contract had to e in %ritin&.

Eudson Construction ro0e &round and %or0ed uic0ly on the store. Aout half %ay throu&h the proect, Ste'e Eudson, o%ner

of Eudson Construction, realiQed that construction %ould cost more than he ori&inally estimated as a result of delays in

recei'in& materials ordered and etreme shorta&es in construction materials due to a recent massi'e hurricane in the area.Eudson eplained the situation to (illin&s. Ee indicated he could not afford to ta0e a i& loss on the construction of the store

and estimated he could not complete the store for less than ;<,<<<. (illin&s refused to pay more, and Eudson ceased

construction.

"f sued for reach of contract, Eudson7s est defense is

A# duress, coercion, and impracticaility.

(# impossiility of performance.

C# sustantial performance.

$9 commercial impracticability.




*uestion 2

A clause in a loc0er rental contract at a local health clu reads, *Renters cancelin& their loc0er contract after usin& their loc0er

shall pay liuidated dama&es in the amount of ;.<< per day for the remainder or unepired portion of the term of the loc0er

rental a&reement.+ !oc0ers rent for ;<.<< per month or ;<<.<< per year. A renter %ith a year9lon& contract lea'es 2 days

early and the health clu demands payment.

"f the clu sues, the most li0ely outcome is that

A# ecause the renter %illfully reached the contract, liuidated dama&es %ill e allo%ed.

(# ecause the renter has sustantially performed on the contract, the clu %ill not e entitled to dama&es.

C9 because the contract remedy is disproportionate to the in4ury it is unli*ely the court will enforce the clause.

D# ecause the parties clearly a&reed to a specific measure of dama&es, the court %ill accept that measure.



RECAP QUESTIONS:




1. 4hat are epectation dama&es> Restores a&&rie'ed party to the situation they %ould ha'e een in if the contract had

een fulfilled.

2. Descrie four situations %hen the ri&ht to reco'er full epectation dama&es may not e a'ailale. 4here the cost of

performance &reatly eceeds mar0et 'alue of performance, %here the dama&es cannot e calculated, %here the

dama&es are unforeseeale, %here dama&es can e miti&ated

3. 4hen is specific performance 6O$ a'ailale> For ser'ice contracts



X. THIRD-PARTY BENEFICIARIES

"LLUSTAT"% >?:

$he 9999999999999999999999Z payment $he

!A4=-R paintin& [999999999999999999 AR$"S$

!A4 SCEOO! !A6D!ORD

donee beneficiary # creditor beneficiary #

A. "n General

1. "n a typical contract, the parties promise performances to each other. "f one party refuses to perform, the other has

standin& to rin& a claim for reach ecause the parties are in contractual pri'ity. "n some contracts, ho%e'er, one of

the parties promises a performance that %ill enefit a third party a third party eneficiary#.

2. $he critical issue in third9party eneficiary la%:

circumstances under %hich the third party eneficiary has standin& to enforce the contract

B. Classification of the Third(0arty Beneficiary

1. $he ri&ht of an a&&rie'ed third9party eneficiary to rin& an action a&ainst a reachin& promisor or promise %ill depend

upon the classification of the eneficiary, %hich differs under the First and Second Restatements althou&h the practical

effect is lar&ely the same#.

2. #irst estatement

a. $he first Restatement placed third9party eneficiaries into one of three cate&ories:

1# Creditor eneficiary:

4hen a promisee see0s a performance from a promisor that %ould satisfy

An oli&ation o%ed to a third party i.e. the landlord in the ao'e eample

2# Donee eneficiary:

4hen a promisee see0s a performance from the promisor in order to ma0e a &ift

of the performance to a third party i.e. the la% school 3# "ncidental eneficiary:

third parties that %ould enefit from a promisor7s performance as a practical

matter ut are not donee or creditors i.e. the nei&hor7s li'in& near the la% school

3. Second estatement

a. $he Second Restatement eliminates the *creditor+ and *donee+ eneficiary terminolo&y, and instead puts third9party

eneficiaries into one of t%o possile cate&ories:

1# intended eneficiaries

2# mere incidental eneficiaries

a# $he 0ey factor in determinin& %hether a party is an intended eneficiary is:

simply the intent to enefit test

# "ncidental eneficiaries, similarly to the First Restatement, are:

third parties that %ould enefit from a promisor7s performance as a practical

matter ut %ho are not intended eneficiaries

EXAMPLE:

$he residents %ho li'e in the nei&horhood %here !a%yer7s school is located %ill e enefited y the

mural, ut none of them can sue if Artist does not deli'er ecause they are incidental eneficiaries. Only

the school has a claim.



C. i!hts of 0arties to &nforce the Contract

1. Third(0arty Beneficiary,s i!hts

a. )nder oth the First and Second Restatement, an incidental beneficiary:

does not enoy any ri&ht to see0 enforcement of the contract

. Third(0arty,s i!hts a!ainst the 0romisor

1# Any third9party eneficiary, other than an incidental eneficiary, has a ri&ht:

$o secure enforcement of the a&reement from a reachin& promisor

c. Third(0arty,s i!hts a!ainst the 0romisee1# A third9party eneficiary has no ri&hts a&ainst the promisee in connection %ith the promised performance

under the ne% contract.

2# "nstead, a third9party eneficiary %ill only ha'e ri&hts a&ainst the promisee ased on:

4hether there %as a prior oli&ation et%een the promisee and third party eneficiary

i.e. the artist o%ed the landlord rent for the apartment so landlord can sue la%yer

d. 2estin! of the i!ht to Sue

1# $he parties to a contract are free to modify or rescind it y mutual consent, and they may modify or rescind a

third9party eneficiary pro'ision %ithout the eneficiary7s consent unless and until the eneficiary7s ri&hts under

the contract ha'e 'ested.

2# 8estin& occurs %ith re&ard to an intended eneficiary %hen:

a# Situation 51:

4hen the eneficiary rin&s suit on the matter i.e. la% school sues the artist

# Situation 52:

(eneficiary chan&es position y relyin& on the contract

EXAMPLE:

!andlord has had it %ith Artist and is ready to start e'iction proceedin&s. $he landlord then learns that

Artist has arran&ed that !a%yer7s payment for the mural e paid the landlord . "n li&ht of this, the landlord

decides not to continue %ith the con'iction proceedin&s. At this point, ecause the landlordKeneficiary

has chan&ed his position in ustifiale reliance, the landlordKeneficiary7s ri&hts ha'e 'ested.

c# Situation 53:

(eneficiary manifests assent to the contract at the reuest of the promisor or promisee

EXAMPLE:

@atron the la%yer# spea0s to representati'es of her alma mater, informin& them aout the mural that she

has arran&ed to e painted for the school. $he representati'es &ladly assent to the paintin&. Once the

school says it %ill accept the mural, it is too late to modify the contract %ith the artist.

d# Situation 5:

"f the ri&hts of the eneficiary ha'e 'ested under the epress terms of the contract

EXAMPLE:

)nder the terms of her life insurance policy %ith Eartford "nsurance, A7s desi&nations of eneficiaries

ecome irre'ocale upon A7s demise or adudication of incompetence. $he ri&hts of C, a desi&nated

eneficiary, a&ainst Eartford "nsurance %ill 'est upon the occurrence of either e'ent.

e. $efenses Available to 0romisor

1# (ecause a third9party eneficiary7s ri&hts are entirely dependent on the underlyin& contract:

Any 'alid defenses that the promisor has a&ainst the promisee are also effecti'e

a&ainst the third party eneficiary i.e. landlord steps into shoes of artist



EXAMPLE:

"f Lawyer and Artist enter into a contract in which Lawyer a!rees to pay artist for the paintin! of a wall

mural and Artist in fact does not paint that mural there is a failure of consideration and Lawyer,s

obli!ation to pay is dischar!ed. +oreover Lawyer can raise that as a defense a!ainst Artist,s landlord

if that landlord sues as a third(party beneficiary of the contract.

2# $he promisor may not assert defenses:

ased on separate transactions to the promisee

EXAMPLE:

Before Lawyer entered into a contract with Artist for the paintin! of the mural Lawyer had loaned

Artist money. Artist has not repaid the loan as promised. "n an action between Artist and Lawyer

Lawyer has a ri!ht of setoff. But if Artist,s landlord sued as a third(party beneficiary to the contract for

the mural Lawyer could not raise the setoff as a defense.

2. 0romisee,s i!hts a!ainst the 0romisor

a. 4hen the promisor does not perform, the promisee has a claim for reach of contract a&ainst the promisor.

. (ut if the promisor7s performance is intended to enefit a donee eneficiary:

then the promisee has not suffered any economic loss and therefore cannot reco'er dama&es

thou&h he may otain specific performance if appropriate

EXAMPLE:

!a% school is the donee eneficiary of a contract et%een !a%yer and Artist, %here Artist is the promisor promisin& a

performanceGthe paintin& of a mural# and !a%yer is promisee. "f Artist refuses to perform, the school can sue Artist.

Eo%e'er, a suit y !a%yer is prolematic. As to %hat !a%yer7s remedy mi&ht e, !a%yer7s loss is not monetary and so

epectation dama&es %ill not e a'ailale. Further, since the underlyin& contract is one for personal ser'ices, specific

performance %ould not e a'ailale either.

c. "f the promisor7s performance is intended to enefit a creditor eneficiary:

the promisee may secure specific performance to the promisor7s oli&ation i.e. artist can

sue la%yer for not payin& creditor landlord

1# A claim for money dama&es %ould, ho%e'er, epose the promisor to the possiility of doule liaility, since the

promisor is also liale to the third9party eneficiary.

2# Accordin&ly, some courts refuse to allo% the promisee to reco'er dama&es a&ainst the promisor:

unless the promisee has already made payment to the eneficiary to co'er the

default

EXAMPLE:

Artist owes money to the landlord. Artist and Lawyer enter into a contract whereby Lawyer a!rees to

pay artist,s landlord who is then the creditor beneficiary of that contract. "n this instance the Lawyeris the promisor 5promisin! performance@the payin! of Artist,s rent to the landlord9. "f Lawyer refuses

to pay Artist could sue Lawyer for specific performance of Lawyer,s promise to pay the creditor

beneficiary. The court may re/uire Artist to first pay Landlord before proceedin! however.



XI. ASSIGNMENT OF RIGHTS AND DELEGATION OF DUTIES

"LLUSTAT"% >;:

$he 999999999999999999999Z mort&a&e payments $he

D-($OR loan [99999999999999999999 (A6I

obligor # assignor/obligee#

$he

OR$/A/- CO.

assignee#

A. Assi!nment of i!hts

1. An assi&nment is:

transfer of a ri&ht to recei'e a performance under the contract

2. $o ma0e an effecti'e assi&nment of a contract ri&ht, the o%ner of that ri&ht must:

a. manifest an intention

. ma0e a present transfer of an eistin& transfer

3. i!hts to Be Assi!ned

a. $he &eneral rule is that:

all ri&hts are assi&nale suect to follo%in& eceptions

1# -ception 51:

if the assi&nment %ould materially alter the ris0 to or oli&ations of another party

EXAMPLE:

A and B are parties to a re/uirements contract under the terms of which A is obli!ated to supply B

with B,s monthly re/uirements for wid!ets. B,s ri!hts under the contract are not assi!nable to C if C,s

monthly re/uirements would !reatly e'ceed B,s.

2# -ception 52:

4hen the oli&or has a personal interest in renderin& the performance in uestion

to the oli&ee and not a third party

EXAMPLE:

A student attempts to assi!n his ri!ht to a private tutor who is pic*y about his students. Because the

tutor has a personal interest in who he tutors the contract is not assi!nable.

3# -ception 53:

4hen it %ould 'iolate applicale la% or pulic policy

EXAMPLE:

A state statute prohibitin! assi!nment of wa!es.

# -ception 5:

4hen assi&nment is prohiited y contract



a# Eo%e'er, most courts %ill treat an assi&nment in 'iolation of contractual restriction as:

a reach of contract y assi&nor ut not a asis for nullifyin& oli&ee7s ri&ht.

EXAMPLE:

"f a ar course has a *no assi&nment of ar course ri&hts+ pro'ision in its contract and one of its students assi&ns

the contract ri&ht to another student, the ar course has an action a&ainst the student %ho reached the contract

ut must pro'ide the ar course to the assi&nee.

. Assi!nment for 2alue Contrasted with Gratuitous Assi!nment

a. Assi!nment for value:

8alid a&ainst the oli&or and cannot e re'o0ed y the assi&nor

. A &ratuitous assi&nment has the follo%in& le&al effects:

1# (et%een the assi&nee and the oli&or:

"t is 'alid a&ainst the oli&or and he cannot claim lac0 of consideration as a defense

2# (et%een the assi&nor and the assi&nee:

)nder the la% of &ifts, an eecutory &ift is re'ocale ut an eecuted &ift is not. A &ift is eecuted%hen there is intention coupled %ith actual or symolic deli'ery.

EXAMPLE:

A recent !raduate of law school has paid for a bar course but decides instead to 4oin the cler!y. As a

!esture of love he transfers the ri!ht to the bar course to a friend not for value but as a !ift.

;. i!hts and %bli!ations of the 0arties after Assi!nment

a. i!hts of Assi!nee a!ainst the %bli!or

1# $he asic rule is that:

a# An assi&nee &ets %hate'er ri&hts to contract that the assi&nor had

EXAMPLE:

"f assi&nor paid for the full course, that is %hat the assi&nee is entitled to.

# $he assi&nee ta0es suect to %hate'er defenses that oli&or could ha'e raised a&ainst assi&nor

EXAMPLE:

"f assi&nor has not paid for the full course, the ar course can raise that as a defense a&ainst the

assi&nee.

2# 0ayment to Assi!nor

a# $he oli&or7s payment to the assi&nor:

. i!hts of Assi!nee a!ainst Assi!nor

1# )nless a contrary intention is manifested, one %ho assi&ns or purports to ma0e an assi&nment for 'alue

impliedly %arrants t%o thin&s to the assi&nee.

a# that he %ill not do nothin& to defeat or impair the 'alue of assi&nment and has no

0no%led&e of any fact that %ould do so

# that the ri&ht as assi&ned actually eists and in suect to no limitations or defenses

&ood a&ainst the assi&nor

EXAMPLE:

"f the ar course is assi&nin& accounts recei'ale to some creditor party 0no%in& full %ell that it has failed

on its performance, it %ill 'iolate this implied %arranty.




*uestion 3

At the e&innin& of arch, /eor&e entered into an a&reement %ith @at, a local housepainter, %herey @at %ould paint

/eor&e7s house y the end of Decemer. $he contract specified that @at %ould use paint from $om7s Eard%are, as $om7s sells

the hi&hest uality paint a'ailale in the area.

After the contract %as si&ned, @at told $om that he had another contract comin&. $om than0ed @at and ordered paint in

epectation of @at7s needs. (y 6o'emer, a re'olutionary ne% house paint came to mar0et ut %as not a'ailale at $om7s

Eard%are. @at and /eor&e a&reed that @at should use this ne% paint. $om is upset at the loss of the sale, and %ishes toenforce his ri&hts under the contract.

4ill $om e successful>

A# =es, ecause he %as a third9party eneficiary.

(# =es, ecause he ordered paint in anticipation of @at7s needs.

C# =es, ecause $om assented to the enefit of the contract.

$9 o because the reason for the contract was to paint Geor!e,s house.




*uestion +4

?osh, the o%ner of ?osh7s Car 4ash, %as tired of customers assi&nin& their ri&ht to a specialty car %ash and detailin& pac0a&e

to others. $o a'oid this prolem in the future, ?osh had his contracts re%ritten to specify the name of the customer and to

include the sentence, *Contract shall not e assi&ned.+ One such contract called for ?osh to %ash and detail Al7s four9door

sedan for 2<<. Al had an emer&ency at %or0 the day he %as to drop off his car at ?osh7s Car 4ash. On his %ay out the door,

Al eecuted a document assi&nin& his ri&hts under the contract to his nei&hor, (ill. (ill paid Al 2;< for the assi&nment. (ill

arri'ed at ?osh7s Car 4ash %ith the si&ned assi&nment and reuested that his t%o9door sport coupe e detailed and %ashed.?osh refused to honor the assi&nment.

Eas ?osh reached the contract>

A# 6o, ecause the ori&inal contact said assi&nments are prohiited.

(# 6o, ecause the name of the party is a material term.

C# =es, ecause the assi&nment %as in %ritin& supported y consideration.

$9 Ees because a sports coupe is comparable to if not smaller than a four(door sedan.



RECAP QUESTIONS:




1. 4ho are the parties in a $hird @arty (eneficiary scenario>

2. 4hat must the o%ner of a contract ri&ht do to properly assi&n that ri&ht>

3. "n %hat instances are contracts ri&hts not assi&nale>

. After a dele&ation of duties, %hat oli&ations , if any, remain %ith the dele&ator>

MBE Subjects I_Contracts Outline

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