Contracts I Outline

The Goals of Contract Law p2 – 59

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Remedies for a breach: Expectation, Reliance, and Restitution
Black letter law The usual remedy for the breach of a contract is an award of money damages. In general, the amount of damages awarded for the breach of a contract is an amount designed to put the promisee in the position she would have been in had the contract been performed, expectation interest. Expectation damages are measured by: • (1) the loss in value to the promisee caused by the breach; plus • (2) any incidental losses caused by the breach; plus • (3) any consequential losses caused by the breach; o minus • (4) any cost or loss avoided by the promisee as a result of not having to perform her own contract duties. Contract liability is generally strict liability, meaning that a promisor is liable for breach of contract even if she did not act negligently or she acted with a good motive. Terminology • Expectation interest—The promisee’s interest in being put in as good a position as she would have been in had the contract been performed. • Reliance interest—The promisee’s interest in being put in the position she would have been in had the contract not been made. Restitution interest—The promisee’s interest in recovering the value of the benefit provided to the promisor.

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Expectation damages—A court judgment directing the promisor to pay an amount of money designed to protect the promisee’s expectation interest. Reliance damages—A court judgment directing the promisor to pay an amount of money designed to protect the promisee’s reliance interest. Restitution—A court judgment directing the defendant to pay an amount of money designed to protect the plaintiff’s restitution interest. Incidental losses—Out-of-pocket expenditures caused by the breach (such as expenses incurred in attempting to find a substitute for the promised performance). Consequential losses—Losses of a type that are not ordinarily caused by the particular type of breach of contract; losses that are unique to the particular promisee.

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Hawkins v. McGee: Contract Damages restore a plaintiff to the position he would have been had the defendant performed Facts The patient’s father (P) sued a surgeon (D) for a breach of warranty following complications from a skin graft operation performed on his son Rule of Law • The purpose of damage awards is to restore the platiff to the position he would have been had the contract been performed • Standard remedy is money for damages not an order of specific performance.

When valuing money damages, it is usually falls back on what a reasonable person would value something… usually more objective Don’t start valuing the damages prior to the breach. Put them in the position they would have been had the contract been completed.

Remedies for a Breach: Measuring Expectation Interest
Black letter law Expectation damages are based on the value of the performance to the nonbreaching party based on the party’s own particular circumstances, and not its value to some hypothetical reasonable person. Restatement (Second) of Contracts § 347 cmt. b (1981). If a breach results in defective or unfinished construction and the loss in value to the promisee is not proved with sufficient certainty, the promisee may recover either: • (1) the diminution in market price of the property caused by the breach; or • (2) the reasonable cost of completing performance or of remedying the defects if that cost is not clearly disproportionate to the probable loss in value to her. Restatement (Second) of Contracts § 348(2) (1981). Punitive damages are not awarded for the breach of a contract a willful breach can be used as a factor that supports using the measurement that provides the plaintiff with greater compensation. If the promisee would have been in the same position or a worse position had the promisor performed, the promisee is only entitled to recover nominal damages. Acme mills Terminology • Nominal damages—A small sum fixed without regard to the amount of loss (for example, one dollar).

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Punitive damages (also known as “exemplary damages”)— “Damages awarded in addition to actual damages when the defendant acted with recklessness, malice, or deceit; specif., damages assessed by way of penalizing the wrongdoer or making an example to others.” Black’s Law Dictionary (9th ed. 2009). Equitable estoppel —“A defensive doctrine preventing one party from taking unfair advantage of another when, through false language or conduct, the person to be estopped has induced another person to act in a certain way, with the result that the other person has been injured in some way.” Black’s Law Dictionary (9th ed. 2009)

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• Grooves v. John Wunder: Damages of a construction contract equal the cost of remedying the defect Facts In an action for breach of contract to remove sand and gravel and re-grade property, the plaintiff was awarded 15,000 and appealed Rule of Law • In a construction Case, the correct measure of damages is the cost to the plaintiff of remedying the defect in the defendant’s performance • Acme Mills v. Johnson: Damages for a breach of a personal property contract are based on the value of the property at the time of delivery Facts Johnson (D) failed to deliver his wheat crop to the Acme Mills (P) according to the contract they had entered into Rule of Law • In contracts for the delivery of personal property at a fixed time and place, the vendee is entitled to damages based on the difference between the contract price and the market price of the property at the place and time of delivery. •

If the promisee would have been in the same position or a worse position had the promisor performed, the promisee is only entitled to recover nominal damages. The courts treat willful damages differently. In groves and pevyhouse, they both agree that it should be expectation damages, The issue is the measure of the damages • expectation damages are determined by the following formula: o (1) loss in value to the plaintiff from the defendant’s failure to perform or from any deficiency in performance; plus o (2) any incidental losses (i.e., expenses incurred after breach, usually in an effort to obtain substitute performance); plus o (3) any consequential losses; minus o (4) any cost or loss avoided by not having to perform. Demunition in value, difference in value of land now and prior to the breach

Remedies for Breach: Measuring Expectation Interest Cont…
Black letter law UCC: The UCC remedies are designed to put the non-breaching party in as good a position as if the other party had fully performed • UCC (buyer’s remedies): When the seller fails to deliver the goods or the buyer rightfully rejects them because they fail to conform to the contract, the buyer is entitled to • (1) recover any portion of the price already paid; and • (2) either cover and obtain damages under the cover remedy or, • if the buyer is not able to recover under the cover remedy, obtain damages based on the market price-contract price differential. UCC § 2-711.

UCC (buyer’s cover remedy): The buyer is entitled to recover the difference between the cost of cover and the contract price plus any incidental or consequential losses, minus any expenses saved in consequences of the seller’s breach, if the buyer’s cover was • (1) in good faith; • (2) without unreasonable delay; • (3) reasonable; and • (4) of substitute goods. UCC § 2-712. UCC (buyer’s contract price-market price remedy): If a buyer is not entitled to recover under the cover remedy, the buyer is entitled to recover the difference between the contract price and the market price at the time when the buyer learned of the breach, plus any incidental or consequential losses, less any expenses saved in consequence of the seller’s breach. UCC § 2-713. UCC: Even though a buyer is not required to cover when the seller fails to deliver promised goods or the goods are rightfully rejected, if the failure to cover was unreasonable and causes consequential losses, those consequential losses cannot be recovered under the doctrine of avoidable losses. UCC: If a buyer is entitled to recover damages under the market pricecontract price remedy, and the seller repudiated the contract, “when the buyer learned of the breach” is considered to occur upon the expiration of a commercially reasonable time after the buyer learned of the repudiation. UCC §§ 2-610, 2-713. See casebook p. 31. UCC (seller’s action for the price): If a buyer accepts goods and fails to pay for them, or the buyer wrongfully rejects goods and the seller is unable after reasonable effort to resell them at a reasonable price or the circumstances reasonably indicate that such an effort would be unavailing, the seller may recover the price promised by the buyer, plus any incidental losses. UCC § 2-709.

UCC (seller’s resale remedy): If a buyer wrongfully rejects goods, and the seller resells the goods in good faith and in a commercially reasonable manner, the seller may recover the difference between the resale price and the contract price, plus any incidental losses, but minus any expenses saved in consequence of the buyer’s breach. UCC § 2-706. UCC (seller’s contract price-market price remedy): If a seller is not entitled to recover under the “resale remedy,” the seller is entitled to recover the difference between the unpaid contract price and the market price at the time and place for delivery, together with any incidental losses, minus any expenses saved in consequence of the buyer’s breach. UCC § 2-708(1). UCC (lost-volume seller’s profit remedy): If any of the seller’s other available remedies would not put the seller in as good a position as performance would have, the seller can receive the profit it would have made from full performance, together with any incidental losses, minus any amount received from resale of the goods as scrap, if the seller can establish that • (1) it had the capacity to produce a unit in addition to the unit sold; • (2) it would have been profitable for it to have produced and sold both; and • (3) it probably would have made an additional sale had the buyer not breached. UCC (breaching buyer’s restitution remedy): In the absence of a liquidated damages provision, a buyer who breaches is entitled to restitution of any payment made to the seller (e.g., a down payment or deposit) to the extent the payment exceeds • (1) 20% of the total amount promised to the seller or • (2) $500, whichever is smaller. A breaching party’s restitution recovery is reduced by any damages recoverable by the nonbreaching party. UCC § 2-718(2). Expenses incurred by the non-breaching party in attempting to secure substitute performance, or in securing substitute performance, are “incidental losses.”

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Incidental losses that could have been avoided can still be recovered as long as it was reasonable to incur the expense. Restatement (Second) of Contracts § 350 (the common law’s parallel cover remedy).

When a repudiation occurs, the non-breaching party’s remaining contract duties are discharged (i.e., terminated) and an action for damages can be brought at once or the non-breaching party can wait and sue later. Attorney’s fees cannot be recovered in a breach of contract action unless the contract explicitly provides for such a recovery. Terminology • Cover – “The purchase on the open market, by the buyer in a breach-of-contract dispute, of goods to substitute for those promised but never delivered by the seller.” Black’s Law Dictionary (9th ed. 2009). • Repudiation (also known as “anticipatory repudiation” or “anticipatory breach”)—“A contracting party’s words or actions that indicate an intention not to perform the contract in the future.” Black’s Law Dictionary (9th ed. 2009). Missouri Furnance v. Cochran: The market price in effect on each of a series of scheduled delivery dates determines the damages awarded Facts MF (P) contracted with Cochran (D) for a year’s supply of coal; Cochran breached the contract after 6 weeks and MF entered into a replacement contract at a cost of more than three times the Cochran contract price Rule of Law • When a contract with multiple delivery dates is broken, the proper measure of damages is based on the difference in market prices for each of the scheduled delivery dates. •

The buyer is entitled to recover the difference between the cost of cover and the contract price plus any incidental or consequential losses, minus any expenses saved in consequences of the seller’s breach, if the buyer’s cover was • (1) in good faith; • (2) without unreasonable delay; • (3) reasonable; and • (4) of substitute goods. UCC § 2-712. Neri v. Retail Marine: A seller may recover its lost profits and incidental damages for breach of a retail sales agreement Fact Neri (P) backed out of a contract for the purchase of a boat and sought return of his deposit; RMC (P) counterclaimed for its lost profit Rule of Law • Under the UCC, “a retail dealer may recover loss of profits and incidental damages upon the buyer’s repudiation” of its contract • UCC (lost-volume seller’s profit remedy): If any of the seller’s other available remedies would not put the seller in as good a position as performance would have, the seller can receive the profit it would have made from full performance, together with any incidental losses, minus any amount received from resale of the goods as scrap, if the seller can establish that • (1) it had the capacity to produce a unit in addition to the unit sold; • (2) it would have been profitable for it to have produced and sold both; and • (3) it probably would have made an additional sale had the buyer not breached. • Illinois Central RR v. Crail: Wholesale, rather than retail, value is the proper measure of damages in appropriate cases Fact

The plaintiff’s coal delivery was short by 5,500 pounds so the court awarded him the retail value of the missing coal and the (D) appealed Rule of Law • Common law remedies must afford compensation only for the injury suffered and provide a right of recovery only for actual loss. •

Limitations on the Compensation Principle p60 – 97
First Limitation: Certainty Requirement
Black letter law The non-breaching party cannot recover for any losses that she cannot prove with reasonable certainty. Restatement (Second) of Contracts § 352 (1981).

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Majority rule (and UCC rule): A non-breaching party that is a new business can recover lost profits caused by the breach as long as such losses can be proved with reasonable certainty. • Minority rule: A non-breaching party that is a new business cannot recover lost profits caused by the breach because such losses are conclusively presumed to be incapable of being proved with reasonable certainty

As an alternative to damages based on the expectation interest • the non-breaching party can recover damages designed to protect her reliance interest. Restatement (Second) of Contracts § 349 (1981).

Majority rule: Damages to protect the reliance interest should be awarded in an amount to put the non-breaching party in the position it would have been in had it not entered into the contract. Restatement (Second) of Contracts §§ 344(b), 349. • Minority rule (reliance damages as a proxy for “zero profit” expectation damages): Damages to protect the reliance interest should be awarded in an amount to put the non-breaching party in the position it would have been in had it “broken even” (i.e., received a zero profit, but no loss) on the contract.

The non-breaching party’s reliance damages are reduced for any loss the breaching party can prove with reasonable certainty that the non-breaching party would have suffered had the contract been performed. Restatement (Second) of Contracts § 349 (1981). Minority rule: With respect to a contract for the sale of land, if the seller breaches because she is unable to convey a clear title and she had no reason to

know at the inception of the contract that she would be thus disabled, the buyer is only entitled to recover damages to protect the reliance interest (the so-called Flureau or “English” rule). See casebook at p. 41. Terminology • Essential reliance—Expenses incurred in preparation for performance and in actually performing the contract. Incidental reliance—Expenses incurred in reliance on the contract, other than expenses incurred in preparation for and in performing the contract (e.g., expenses incurred in collateral transactions).

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We will also discuss so-called “reliance damages,” the remedy that seeks to protect the non-breaching party’s so-called “reliance interest.” When a party cannot prove its expectation damages with reasonable certainty, it can recover damages that protect its reliance interest. Reliance losses can include • pre-contract expenses incurred in expectation of entering into the contract (such as the expenses incurred by the Chicago Coliseum Club prior to signing the contract with Dempsey) (the majority rule does not permit such expenses to be recovered, the minority rule does) essential reliance (expenses incurred after the contract is entered into in preparing to perform and in performing, such as the Chicago Coliseum Club paying Dempsey $10) incidental reliance (expenses incurred after the contract is entered into in collateral transactions, such as the railroad and pullman fares incurred by Security Stove to get to Atlantic City) harm from the breaching party’s performance (such as George Hawkins’ hairy hand or the Peevyhouse land) foregoing opportunities to make other contracts post-breach expenses that would not have been incurred had the contract not been entered into (such as the freight charges for the return shipment by Security Stove, and expenses incurred in

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attempting to avoid losses that would not have otherwise been incurred had the parties not entered into the contract). The majority approach is that reliance damages are designed to put the nonbreaching party in the position it would have been in had the party not entered into the contract. • The minority approach is that reliance damages are a proxy for a “break even” (or “zero profit”) expectation damages award.

The difference is important with respect to the non-breaching party’s ability to recover pre-contract expenses (majority rule—no; minority rule—yes). With respect to the reading for this class, you should know that a plaintiff in a single case can request inconsistent remedies. • For example, a plaintiff in a breach of contract complaint can request expectation damages, and also request reliance damages in the alternative. Thus, a plaintiff can argue that he or she should be awarded expectation damages, but also argue that if those damages are not awarded, he or she should be awarded reliance damages.

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There is a doctrine known as “election of remedies,” which provides that a party must at some point choose between inconsistent remedies. The doctrine is based on the fact that a party should not get a double recovery. However, “[g]enerally, a party must [only] make an election of remedies after the verdict is entered and prior to the entry of judgment.” The only time a winning party can recover attorney fees is when it is stated in the contract. Chicago Coliseum v. Dempsey: Speculative Lost-Profit damages cannot be recovered Facts • The CCC(P) made a contract with Dempsey (D) to participate in a boxing event billed as the Championship of the World; after CCC (P)

had spent considerable money in prep for the fight, (D) backed out of the agreement Rule • Although sums expended in the pursuit of a contract are not recoverable following a breach, anticipated profits may not be recovered when there is no evidence on which to base their calculation, and costs of enforcement, absent agreement, cannot be recovered, expenses incurred during the time between the execution of a contract and its breach may be recovered upon appropriate proof

For breach of contract where expectancy damages cant be reasonably predicted, the remedy should be based on the reliance interest: o To put the non-breaching party in the position it would have been in had it not entered into the contract. L. Albert v. Armstrong Rubber: Reliance Damages will be reduced for losses that would have ultimately occurred, even if the contract were performed Fact (D) sought to recover from (P) all of the expenses and losses if allegedly incurred in reliance on (P) promise to deliver four pieces of machinery, two of which were delivered late Rule of Law • • The court will not reimburse for losses incurred in reliance on a contract knowingly put the claimant in a better position that he would have been had the contract been performed.

MindGames v. Western Publishing: Facts A game manufacturer sued the company licensed to promote its product for lost but the court rejected the claim because the plaintiff was a new, established business, and the plaintiff appealed. Rule of Law •

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A non-breaching party that is a new business can recover lost profits caused by the breach as long as such losses can be proved with reasonable certainty. In this case, the company could not prove with reasonable certainity that it would bring in the expected revenue; it had no other game to base its argument off of.

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Second Limitation: Avoidable Losses
Black letter law The non-breaching party cannot recover damages for any loss that could have been avoided without undue risk, burden, or humiliation, unless the nonbreaching party made reasonable efforts to avoid the loss (the “doctrine of avoidable losses” or the “mitigation doctrine”). Restatement (Second) of Contracts § 350 (1981). With respect to employment contracts, a loss of salary or wages cannot be avoided without “undue risk, burden, or humiliation” by accepting another employment opportunity if it is of a different or inferior kind than the promised employment. Parker v. Twentieth Century-Fox Film Corp. (p. 66) The breaching party has the burden of proving that any of the non-breaching party’s losses should be excluded under the doctrine of avoidable losses. Any costs or losses actually avoided must be deducted from the non-breaching party’s recovery, even if there would not have been a duty to avoid those costs or losses under the doctrine of avoidable losses. The breaching party has the burden of proving any savings by the nonbreaching party as a result of not having to perform the contract. In determining which costs or losses the non-breaching party avoided from not having to perform the contract as a result of the repudiation or breach, only deduct those expenses that were in fact avoided (such as so-

called “variable” costs that would have been—but were not—incurred after repudiation or breach). • Do not deduct expenses that were actually incurred either before or after repudiation or breach (whether “variable” costs that were already incurred or “overhead” or “fixed” expenses incurred before or after repudiation or breach).

Gains by the non-breaching party on transactions after the repudiation or breach are not deducted from the non-breaching party’s “loss in value” from the breach unless such gains could not have been made except for the breach. Kearsage Computer, Inc. v. Acme Staple Co. (p. 64); UCC § 2-718 (lost volume seller rule) If the non-breaching party obtains substitute performance that is more costly than the promised performance, and that is also more valuable than the promised performance, the additional value of the substituted performance over the promised performance is not taken into account when determining “loss in value” as long as it was necessary for the non-breaching party to purchase the more costly and valuable substitute performance. In other words, the “loss in value” from the breach is zero, not a negative number. (Problem p. 74.) Majority rule (rejects the tort collateral source rule on the ground that contract damages are designed to compensate, not punish or deter): Losses avoided by the non-breaching party as a result of compensation for the breach from a source independent of the breaching party, (e.g., unemployment compensation or social security benefits) are losses avoided that are deducted from the nonbreaching party’s recovery, unless the breach was in bad faith. (Casebook p. 73). • Minority rule #1 (applies the tort collateral source rule without qualification): Losses avoided by the non-breaching party as a result of compensation for the breach from a source independent of the breaching party are notconsidered losses avoided and are therefore not deducted from the non-breaching party’s recovery. (Casebook p. 73).

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Minority rule #2 (applies the tort collateral source rule with qualification): Losses avoided by the non-breaching party as a result of compensation for the breach from a source independent of the breaching party are not considered losses avoided and are therefore not deducted from the non-breaching party’srecovery, unless the breaching party contributes to the source and the amount of contribution is affected by the breach. (Casebook p. 73).

Terminology • Collateral source rule (torts)—“The doctrine that if an injured party receives compensation for the injuries from a source independent of the tortfeasor, the payment should not be deducted from the damages that the tortfeasor must pay.” Black’s Law Dictionary (9th ed. 2009).

In reliance interest only if you cant be in the expectation interest. Usually its because the P cant prove damages to a reasonable certainty. Rockingham v. Luten: Non-Breaching Parties must attempt to Mitigate Damages Facts • Luten built a bridge for Rockingham and they notified him to stop because they didn’t want it anymore. Luten kept building it and expected to be compensated for the completed project The court held that Luten should have stopped the building project and just have been compensated for the expenses up to being notified to stop.

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Parker v. 20th Century-Fox Film: The Duty to Mitigate does not require a discharged employee to accept inferior Employment Facts • 20th Centruy decided to abandon production of a musical after it had secured Parker to play the lead rule. Instead, it offered to cast Parker in a lead female role in a werstern; she declined, choosing instead to sue for damages. In an employment case, the duty to mitigate damages does not require a discharged employee to accept alternative employment that is inferior to that promised by the defendant-employer

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Third and Fourth Limitations: Unforeseeable Damages & Emotional Disturbance Damages
Black letter law Majority rule (common law and UCC): Damages are not recoverable for loss that the breaching party did not foresee or have reason to foresee as a probable result of the breach when the contract was made. Restatement (Second) of Contracts § 351(1) (1981); UCC § 2-715(2) (“Hadley rule”). • Minority rule: Damages are not recoverable for loss that the breaching party did not expressly or tacitly agree to be liable for. Globe Refining Co. v. Landa Cotton Oil Co. (p. 78); Lamkins v. Int’l Harvester Co. (p. 82) (“tacit agreement test”). A court may limit damages for foreseen or foreseeable loss • • • (1) by excluding recovery for loss of profits, (2) by allowing recovery only for loss incurred in reliance, (3) or otherwise, if the court concludes that in the circumstances justice so requires in order to avoid disproportionate compensation. Restatement (Second) of Contracts § 351(3) (1981).

UCC: A seller can recover incidental losses, but not consequential losses. Damages for emotional disturbance are not recoverable unless (1) the breach also caused bodily harm or (2) the contract or the breach is of such a kind that serious emotional disturbance was a particularly likely result. Restatement (Second) of Contracts § 353 (1981). Generally will not be able to recover for emotional distress • • The second category is more likely to be established when the contract’s purpose is to protect the non-breach party’s personal interests (i.e., the purpose is to avoid emotional harm or to confer a particular enjoyment) or when there is not an available standard to determine the monetary loss caused by the breach. Valentine v. Gen. Am. Credit, Inc. (p. 87); Hancock v. Northcutt (p. 89).

Terminology • Consequential damages (or “consequential losses” or “special damages” or “indirect damages”)—“Losses that do not flow directly and immediately from an injurious act but that result indirectly from the act.” Black’s Law Dictionary 445-46 (9th ed. 2009).

Hadley v. Baxendale: Lost profits are awarded only when both parties expected them to be possible elements of damages Facts • Hadley was a miller and a crankshaft broke and it needed to be fixed. Production stopped at the mill. The shaft had to be sent to the engineers. Pickford and Co informed the mill’s worker that it would be sent to the engineers the next day if it was there by noon. The transportation was delayed and the mill remained closed for longer than expected. Hadley sued Pickford for the lost profits. Loss profit: RED FLAG – Dempsey, Mind Games Lost profits are not recoverable unless both parties are made aware that they will be sought as a part of damages in a breach.

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Becomes a policy choice. The court wants them to disclose any consequential damages in case the breach occurs. We want parties to understand what would happen if they breach Globe Refining v. Landa Cotton Oil: Facts • Contract was made for the sell of crude oil. Globe was to send tanks to Landa to get filled. To do so, Globe would incur shipping charges. Landa ended up cancelling the contract and Globe sued for loss of use of the tanks, loss of business, and shipping expenses. Trial court dismissed the case. Affirmed in appellate court

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A person can be held responsible only for such consequences from a breach of contract as may be reasonably supposed to be in the contract.

Lamkins v. International Facts • Involved the sale of a farm tractor that the P wanted lights on. The D told P that the lights were going to be there in 3 weeks, they should up a year later.  P was therefore unable to plant and harvest 25 acres of land. D could not be liable for P losing crops. The contract made no indication of that and D could not foresee that happening from not having the lights.  P should of mitigated damages

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Valentine v. General American: Emotional Distress and Punitive Damages cannot be recovered for a breach of contract Facts • Valentine was terminated from her employment and argued she had been deprived the peace of mind that comes from job security. She sued for breach of an employment contract and sought compensation for mental distress. Emotional distress and punitive damages are elements of a tort claim and cannot be found for in a breach of contract.

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Remember that any loss to be recovered must be foreseeable at the time the contract was made.

Restitution Alternative pg 98 - 133
Protecting the Restitution Interest
Black letter law

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As an alternative to damages for breach of contract, a non-breaching party who is excused from performing can assert a claim for unjust enrichment and obtain a recovery that protects the non-breaching party’s restitution interest. Restatement (Second) of Contracts § 373 (1981). A restitution recovery by the non-breaching party in an unjust enrichment case is not reduced because performance of the contract would have resulted in a loss to the non-breaching party. The remedy of restitution is not available if the non-breaching party has fully performed and the only part of the agreed exchange that has not been performed by the breaching party is the payment of a promised sum of money. (Casebook p. 108.) A claim for unjust enrichment requires the plaintiff to prove that the defendant has been unjustly enriched at the plaintiff’s expense. A party is only entitled to restitution if she has conferred a benefit on the other party. Restatement (Second) of Contracts § 370 (1981). For purposes of restitution, a benefit is considered “received” by the defendant if the plaintiff, at the defendant’s request, and in reliance on the defendant’s promise of compensation, performed a specific service. Restatement (Second) of Contracts § 370 cmt. a (1981); Joseph M. Perillo, Calamari & Perillo on Contracts 544 (6th ed. 2009) (“‘Receipt,’ however, is a legal concept rather than a description of physical fact. If what the plaintiff has done is part of the agreed exchange, it is ‘received’ by the defendant.”); Kearns v. Andree (p. 104); Farash v. Sykes Datatronics, Inc. (p. 105). If, however, the plaintiff’s actions in reliance on a promise of compensation were merely preparations to perform the contract, no benefit is considered “received” by the defendant for purposes of

restitution. Restatement (Second) of Contracts § 370 ill. 2 (1981); Boone v. Coe (p. 99); Curtis v. Smith (p. 106). The Statute of Frauds is not a defense to an action for unjust enrichment. Restatement (Second) of Contracts § 375 (1981). As a general matter, there is no requirement that a promise be in writing to be enforceable. (Casebook p. 907) The Statute of Frauds renders unenforceable a promise to convey an interest in land in the absence of a writing or an applicable exception (so-called “land contract provision”). Majority rule: A lease of property for one year or less (measured from the start of the lease, not the date of the contract) is not considered a promise to convey an interest in land for purposes of the Statute of Frauds’ land contract provision. Restatement (Second) of Contracts § 124 (1981); Casebook p. 909. • Minority rule: A lease of property for any period of time is a promise to convey an interest in land for purposes of the Statute of Frauds’ land contract provision.

When a transfer of an interest in land has been made, the buyer’s promise to pay the price ceases to be within the Statute of Frauds’ land contract provision. Restatement (Second) of Contracts § 125(3) (1981); Casebook p. 911. The Statute of Frauds renders unenforceable a contract that cannot be fully performed (i.e., performed by both parties) within one year of its making, in the absence of a writing or an applicable exception (so-called “one-year provision”). The termination of a contract for reasons other than full performance (e.g., breach) is not considered “performance” under the Statute of Frauds’ one-year provision, but terminating a contract under a “termination provision” will be considered “performance” if the provision is considered an alternative way of performing. (Casebook p. 914)

Majority rule: Under the Statute of Frauds’ one-year provision, full performance must simply be possible (even if exceedingly unlikely) within one year of the contract’s making (e.g., a “lifetime” contract can be performed within one year because of death). (Casebook p. 912). • Minority rule: Under the Statute of Frauds’ one-year provision, a contract cannot be fully performed within one year of its making if the parties plainly manifested an intention that full performance was not to take place within one year, even if such performance might conceivably have been performed within a year (e.g., a “lifetime” contract is not considered capable of being performed within one year simply because a party might die). (Casebook p. 913, 914).

When one party to a contract has fully performed, the Statute of Frauds’ oneyear provision does not prevent enforcement of the contract. Restatement (Second) of Contracts § 130 (1981); Casebook p. 915. A writing, to satisfy the Statute of Frauds, consists of any writing, signed by or on behalf of the party against whom the contract is sought to be enforced, that o (1) reasonably identifies the subject matter of the contract; o (2) is sufficient to determine the parties to the contract; and (3) states with reasonable certainty the essential terms of the unperformed promises in the contract. Restatement (Second) of Contracts § 131 (1981). Terminology • Quantum meruit—A phrase that means “as much as he deserves. “At common law, a count in an assumpsit action to recover payment for services rendered to another person. Quantum meruit is still used today as an equitable remedy to provide restitution for unjust enrichment.” Black’s Law Dictionary (9th ed. 2009). Statute of Frauds—1. “A 1677 English statute that declared certain contracts judicially unenforceable (but not void) if they were not committed to writing and signed by the party to be charged.” 2. “A statute (based on the English Statute of Frauds) designed to prevent

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Boone v. Coe: Certain contracts must be in writing Facts • Coe, a farm owner, contacted Boone to come down to Texas to live and work on his farm. He promised to build a house and give him the necessary equipment needed to plant and harvest crops. The Boones came down from Kentucky and upon arriving at the farm, Coe had not completed any of the promises he made. Boones went back to Kentucky and sued for the money spent to get down there. Coe motioned to dismiss. Affirmed May the plaintiffs recover for expenses incurred and time lost on the faith of a contract that is unenforceable under the statute of frauds? o No. The statute of frauds prohibits recovery for breach of a contract involving an interest in land or a contract taking a year or more to complete when the agreement was not put in writing.

Issue •

Rule •

United States v. Algernon Blair: Expenses incurred by a subcontractor are recoverable upon the prime contractor’s breach Facts • Coastal, a subcontractor for Blair, rented out his equipment to Blair to use for a construction project. Blair refused to pay rent on the equipment after he began to use them. Coastal took their machines and left. Brought suit for Quantum meruit. Trial court found Blair. Appellate court reversed and remanded May a subcontractor, who justifiable ceases work under a contract because of the prime contractor’s breach, recover in quantum meruit the value of labor and equipment already furnished pursuant to the contract irrespective of whether he would have been entitle to recover in a suit on the contract?  Yes.

Issue •

Rule Following termination of work under a contract, a subcontractor may recover in quantum meruit for the value of labor and equipment furnished regardless of whether it could have recovered those amounts in a suit on the contract They didn’t sue because of the breach of the contract, the breach allowed them to leave the job; they are sueing for restitution • • This was a losing contract, and restitution would be most beneficial. In a losing contract, you cannot sue for reliance damages. o Also, in reliance, you must deduct what could have been avoided. Since it is restitution, it is off the contract and losses that have been avoided do not need to be deducted. Restitution remedy is designed to prevent unjust enrichment of the party responsible for a material breach of an enforceable contract; the remedy is measured not by the loss suffered by the injured party, but by the gain received by the party in breach. Covenant The action lies for the breach of a promise arising out of a sealed instrument Writ of detinue • The action lies for the unlawful detention of identifiable personal property Writ of debt o The action will lie to recover a sum certain or an amount that the jury could reasonably ascertain Writ of Trespass o The action of trespass lies for the recovery of damages for an injury to the person, property, or relative rights of the plaintiff. General Assumpsit o This action lies for the breach of contract. • 6 types of contracts that fall within statute of frauds o marriage o year provision (takes longer than a year)

o land contracts  the term o Goods over 500.00 o Surety (promise to pay the debt of another)

Class No. 8—Restitution for the Party in Breach (pp. 113-126)
Black letter law Majority rule (common law): A breaching party who substantially performs its contract duties is entitled to sue the other party for breach of contract (i.e., a suit “on the contract”) if the latter fails to perform its contract duties. The damages caused by the former party’s breach will be deducted from the recovery. Restatement (Second) of Contracts § 237 (1981). Otherwise, a breaching party cannot sue for breach of contract. • Minority rule #1 (common law): A breaching party who substantially performs its contract duties and whose breach is not willful is entitled to sue the other party for breach of contract (i.e., a suit “on the contract”) if the latter fails to perform its contract duties. The amount caused by the former party’s breach will be deducted from the recovery. Otherwise, a breaching party cannot sue for breach of contract. Kelley v. Hance (p. 125); Pinches v. Swedish Evangelical Luthern Church (p. 123) (maybe). Minority rule #2 (common law): A breaching party cannot sue for breach of contract; recovery on the contract requires complete performance (Massachusetts rule, at least in construction cases, see p. 821).

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Majority rule (common law): A breaching party cannot sue for unjust enrichment and recover restitution from the non-breaching party. Stark v. Parker (p. 113); Steel Storage & Elevator Constr. Co. v. Stock (p. 125); Maxton Builders, Inc. v. Lo Galbo (p. 133). • Minority rule #1 (common law): A breaching party who did not substantially perform (or who substantially performed under the Massachusetts rule), but who did not breach willfully, can sue for unjust enrichment and obtain restitution for any benefit she provided

to the non-breaching party in excess of the loss caused by her own breach. Otherwise, restitution cannot be recovered. Schwasnick v. Blandin (p. 124); Kelly v. Hance (p. 125); Pinches v. Swedish Evangelical Luthern Church (p. 123) (maybe); Vines v. Orchard Hills, Inc (p. 127). • Minority rule #2 (common law): A breaching party (even one who breached willfully and did not substantially perform) can sue for unjust enrichment and obtain restitution for any benefit she provided to the non-breaching party in excess of the loss caused by her own breach. Restatement (Second) of Contracts § 374(1) (1981).

UCC (breaching buyer’s restitution remedy): In the absence of a liquidated damages provision, a buyer who breaches (irrespective of whether the breach is willful or whether there is a failure to substantially perform) is entitled to restitution of any payment made to the seller (e.g., a down payment or deposit) to the extent the payment exceeds o (1) 20% of the total amount promised to the seller or o (2) $500, whichever is smaller. o A breaching party’s restitution recovery is reduced by any damages recoverable by the non-breaching party. UCC § 2-718(2). A recovery protecting the restitution interest is an amount of money equal to the benefit that has been conferred upon the other party. Restatement (Second) of Contracts § 371 cmt. a (1981). o The amount of the benefit may be measured by  (1) what it would have cost the defendant to obtain it from a person in the plaintiff’s position (i.e., reasonable cost of performance); or  (2) the extent to which the defendant’s property has been increased in value (i.e., increase in market value). Restatement (Second) of Contracts § 371 (1981). o When a non-breaching party seeks restitution against a breaching party, the more generous measure for determining the amount of benefit is allowed, unless that measure is unduly difficult to apply. Restatement (Second) of Contracts § 371 cmt. a (1981). o When a breaching party seeks restitution, uncertainties as to the amount of the benefit provided to the non-breaching party are

resolved against the breaching party. Restatement (Second) of Contracts § 371 cmt. a (1981). o A non-breaching party who obtains restitution can obtain a recovery in excess of the contract rate for the benefit provided. See Restatement (Second) of Contracts § 373 cmt. d (1981) (“In the case of a contract on which [the non-breaching party] would have sustained a loss instead of having made a profit . . . his restitution interest may give him a larger recovery than would damages . . . .”). o A breaching party who obtains restitution cannot obtain a recovery in excess of the contract rate for the benefit provided. See Restatement (Second) of Contracts § 374 cmt. b (1981) (“[I]n no case will the party in breach be allowed to recover more than a ratable portion of the total contract price where such a portion can be determined.”). A claim for unjust enrichment by a breaching party should help make it clear why such a claim is considered to be “off the contract” (there has often been no breach by the other party and thus the breaching party cannot sue for “breach of contract”). o We’ve seen such a claim before (Neri v. Retail Marine Corp., p. 32 ). Thus, you already know that Article 2 of the Uniform Commercial Code (UCC) permits an unjust enrichment claim by the breaching buyer. UCC § 2-718(2). Note how under the UCC, even when the seller has not suffered any provable loss, there is still a deduction from the restitution recovery of 20% of the total amount promised to the seller or $500, whichever is smaller. This puzzling deduction has been referred to as a “statutory liquidated damages provision,” Stark v. Parker: Voluntarily quiting a job ahead of schedule may terminate the obligation of paryment Facts o Stark sued Parker for 27.33 for the job that he performed on Parker’s farm. Stark breached the contract that he had with Parker to work on his farm for one year for 120.00. The trial court instructed the jury that the plaintiff was entitled to recover for the time he did work, and if he had earned more than what the defendant had paid him so far,

he was entitled to damages, to be offset by any loss the defendant incurred as a result of the plaintiff abandoning the position. o Jury found for plaintiff. Issue o Did the plaintiff’s partial performance of the contract entitle him to payment for the services rendered? o No. A man may not voluntarily and without cause violate his agreement and make his very breach of that agreement the foundation for an action. Rule o A person may not voluntarily and without cause violate his agreement and make his very breach of that agreement the foundation for an action. An action indebitatus assumpsit is A form of action in which the plaintiff alleges that the defendant contracted a debt and, as consideration, promised to pay. An action in quantum meruit • • Is a count in an assumpsit action to recover payment for services rendered to another person

Britton v. Turner: Even a breaching plaintiff may recover under quantum meruit for the benefit of services rendered before the breach Facts o Britton agreed to work on Turner’s farm for 120.00. the Plaintiff quit after just over 9 months and sued for compensation for his work done on the farm. Issue o When the plaintiff has breached a contract, is he permitted to sue under quantum meruit to recover for services performed? o Yes. If a party has received a benefit for another’s work, that person should be compensated for the work done. Rule o Quantum Meruit is available to compensate a breaching plaintiff for the benefit received by a defendant before his breach

Pinches v. Swedish Evangelical Facts • Plaintiff was contracted to build a church for the defendants. The plaintiff did not build it according to specifications in the contract. Plaintiff wants to recover for money spent on the construction of the church and materials provided. The plaintiff built the building in good faith. Can a contractor recover for the work done in a contract if he negligently fails to follow the contract specifications of the building? Yes. At this time, it is impossible to correct the plaintiff’s mistake without partially destroying the building.

Issue • • Rule When a contractor delivers nonconforming work, he does not receive the contract price for his work; rather, the proper measure of damages is the contract cost minus the amount for diminution in value caused by the failure to conform. If you substantially perform, you can still sue on the contract •

Remedies for breach of contract: Liquidated Damages Clause and Equitable Remedies
Class No. 9—Liquidated Damages vs. Penalties (pp. 127-149) Black letter law Common law: The relevant time at which to measure damages is the time the breaching party’s performance was due. Vines v. Orchard Hill, Inc. (p. 127). A plaintiff in an unjust enrichment case has the burden of proving that the defendant was • (1) unjustly (2) enriched (3) at the plaintiff’s expense. • Because the plaintiff has the burden of proving unjust enrichment, a breaching plaintiff must prove that the benefit provided to the defendant exceeds the loss caused to the defendant by the breach. Vines v. Orchard Hill, Inc. (p. 127). Common law (majority rule) and UCC: A contract provision specifying the amount of damages in the event of a breach is enforceable only if the amount is reasonable in light of • (1) the anticipated loss or actual loss caused by the breach; and • (2) the difficulties of proof of loss after the breach. Restatement (Second) of Contracts § 356(1) (1981); UCC § 2-718(1) (“two look” approach). o Minority rule: A contract provision specifying the amount of damages in the event of a breach is enforceable only if (1) the amount is reasonable in light of the anticipated loss caused by the breach; and (2) potential losses were difficult to determine at the time of contracting. Kelly v. Marx (p. 141); E. Allan Farnsworth, Contracts 816 (4th ed. 2004) (“The traditional view is that uncertainty and difficulty are to be determined as of the time the contract was made, not at the time of the breach or of the trial.”) (“single look” or “prospective” approach).

A contract provision specifying an unreasonably large amount of damages in the event of a breach is unenforceable (the UCC uses the term “void”) on the grounds of public policy as a penalty. Restatement (Second) of Contracts § 356(1) (1981); UCC § 2-718(1). An “undifferentiated” agreed-upon damages clause (i.e., a clause that applies a single amount to a variety of breaches of varying degrees of importance) is unenforceable (or void) as a penalty. Wilt v. Waterfield (p. 142). In close cases, courts will take into account whether the parties labeled an agreed-upon damages provision a “forfeiture” or a “penalty.” Muldoon v. Lynch (p. 135). However, describing an agreed-upon damages provision as “liquidated damages” in the contract will not increase its enforceability. A contract provision providing for an unreasonably small amount as damages (“under-liquidation”) is not unenforceable as a penalty. Restatement (Second) of Contracts § 356 cmt. a (1981); UCC § 2-718, Official Comment 1. • Minority rule: A contract provision providing for an unreasonably small amount as damages is only enforceable if it satisfies the applicable test in black letter law rule no. 1. Samson Sales, Inc. v. Honeywell, Inc. (p. 145); Wilt v. Waterfield (p. 142). If the contract provides that a breaching party’s payment of money (such as a down payment) is to be retained by the non-breaching party in the event of a breach, the provision is considered an agreed-upon damages provision, and is therefore enforceable only to the extent it can be considered a valid liquidated damages provision. Restatement (Second) of Contracts § 374(2) (1981). A breaching party is only entitled to restitution to the extent the benefit provided exceeds a valid liquidated damages provision. Restatement (Second) of Contracts § 374(2) (1981); UCC § 2-718(2)(a).

When an agreed-upon damages provision is unenforceable or void, the rest of the contract remains enforceable. Restatement (Second) of Contracts § 356 cmt. a (1981). In such a situation, the non-breaching party is entitled to the remedies ordinarily available. E. Allan Farnsworth, Contracts 813 (4th ed. 2004). Majority rule: The party challenging the validity of an agreed-upon damages provision has the burden of proving it is unenforceable or void. • Minority rule: The party seeking to enforce an agreed-upon damages provision has the burden of providing it is enforceable. Williston on Contracts § 65:30. If an agreed-upon damages provision is an enforceable liquidated damages provision, costs or losses avoided or losses that should have been avoided are irrelevant. Terminology Liquidated damages—“An amount contractually stipulated as a reasonable estimation of actual damages to be recovered by one party if the other party breaches.” Black's Law Dictionary 447 (9th ed. 2009). Vines v. Orchard Hills: Liquidated damages are allowed if not a penalty Facts • Vines went to buy a condo from Orchard and paid the 10% down payment of 7880. Vines was then transferred to a different job far from the condo and breached the contract to buy the condo. Vines wanted to recover his down payment (restitution) and Orchard said no. • The trial court allowed Vines to recover and the appellate court found for orchard. Judgment set aside and remanded. Issue • Whether liquidated damages will be enforced if evidence supports a finding that it is in relation to actual damages loss and not to be a penalty. • Yes. Liquidated damages can be enforced if they are not higher than actual loss sustained.

Rule • A liquidated damages clause will be enforced so long as evidence supports a finding that it bears a relationship to the actual damages suffered by breach and is not a penalty.

Contractual Controls on the damage Remedy Muldoon v. Lynch: Contractual penalties require proof of actual damages; liquidated damages do not Facts • Muldoon, the contractor, entered into a written contract with Lynch, a widow, to improve a cemetery and build a monument. The contract was to be completed in 12 months, if not, forfeiture of 10 dollars per day would attach. The monument was delayed for 2 years. Is a sum named in a contract as a forfeiture to be regarded as liquidated damages or a penalty? Penalty. The general rule is that damages out to be compensatory and commensurate with the damages suffered. When it appears that the parties to a contract intended the sum named in a contract to be a forfeiture or a penalty, it has been held that the party in whose favor the penalty exists must prove his damages. Damages out to be compensatory and commensurate with the damages suffered, no more or less. If it appears that the parties intended the sum to be considered liquidated damages, then the courts usually will not interfere. But, if it appears that the sum is a forfeiture or penalty, the party whose in favor to collect must prove their damages.

Issue • •

Rule • • •

Yockey v. Horn Facts • Two former business partners agreed in a settlement when they separated. In the settlement, it had liquidated damages set for

50,000. Horn, upset at Yockey’s new business, sued and won 111,000. But the settlement stated that no suit could be brought. Yockey sued for breach of contract and won 50,000. Rule • Liquidated damages will be enforced if the amount estimated is reasonable either at the time of contracting or at the time of injury – provided that the non-breaching party suffered actual damages.

Penal Bond Where must stake was involved, they used the penal bond: • A promise under seal to pay specified sum of if by a certain date a particular event did not occur. Samson Sales v. Honeywell: An alarm monitoring company could not limit its breach of contract damages to fifty dollars Facts • Pawn Shop contracted with a security company to install a security system in the store and it would pay 1500 at the time of installation and 150 a month for 5 years. Honeywell bought the security company. The pawn shop was burglarized and sued Honeywell for negligent failure to transmit the alarm signal to the police. Honeywell stated that it is not an insurer and if such even occurred then they will only pay 50 dollars. The trial court found for plaintiff but only awarded 50 dollars. The appellate court reversed stating that the contract clause was an unenforceable penalty. Supreme held the ruling. Was the limitation of damages clause in the alarm monitoring agreement an unenforceable penalty? Yes. When the parties to a contract have agreed on the amount of damages in clear and unambiguous terms, the amount so fixed will be treated as liquidated damages and not as a penalty when

• • • Issue • • Rule •

o The damages would be uncertain in amount and difficult to prove o The contract as a whole is not unconscionable, unreasonable, and disproportionate in amount so as to justify the conclusion that it does not express the true intent of the parties o The contract is consistent with the conclusion that it was the intention of the parties that damages in the amount stated should follow the breach thereof Class No. 10—Equitable Remedies (Enforcing Promises by Specific Performance or Injunction) (pp. 149—181) Black letter law An order of specific performance or an injunction is a remedy within the trial court’s discretion. Most common equitable remedies An order of specific performance or an injunction will only be ordered if the remedy of damages would be inadequate to protect the non-breaching party’s expectation interest. Restatement (Second) of Contracts § 359 (1981). An injunction will be ordered instead of specific performance when the contract duty is • (1) one of forbearance (i.e., a promise not to do something); or • (2) one to act but an order of specific performance is denied for reasons inapplicable to an injunction (e.g., a promise to work solely for the plaintiff). Restatement (Second) of Contracts § 357 (1981); Lumley v. Wagner (p. 171). In determining whether the remedy of damages would be inadequate to protect the non-breaching party’s expectation interest, the following circumstances are significant: • (1) the difficulty of proving damages with reasonable certainty;

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(2) the difficulty of procuring a suitable substitute performance with the money awarded as damages; and (3) the likelihood that an award of damages could be collected. Restatement (Second) of Contracts § 360 (1981).

UCC (buyer’s remedy of specific performance): Specific performance may be ordered where the goods are unique or in other proper circumstances. UCC § 2-716(1). Even if specific performance is otherwise appropriate, a court will use its discretion and refuse to order specific performance if it is impossible for the breaching party to perform. Paloukos v. Intermountain Chevrolet Co. (p. 160); see also Restatement (Second) of Contracts § 357 cmt. c (1981) (“[A] court will not order a performance that is impossible.”). Majority rule: There is no adequate remedy at law for the seller’s breach of a land sale contract, even if the buyer has a contract to resell the property to a third party. • Minority rule: There is an adequate remedy at law for the seller’s breach of a land sale contract if the buyer has a contract to resell the property to a third party. (Casebook p. 163.) An award of damages is considered an inadequate remedy for the buyer’s breach of a contract to buy land. Casebook p. 753; Restatement (Second) of Contracts § 360 cmt. e (1981). A promise will not be specifically enforced if it would impose on the court burdens in enforcement or supervision that are disproportionate to the advantages to be gained from specific enforcement and to the harm to be suffered from its denial. Restatement (Second) of Contracts § 366 (1981). A promise to render personal service will not be specifically enforced. Restatement (Second) of Contracts § 367 (1981). A non-breaching party who obtains an order of specific performance will be ordered to perform her remaining contract duties as a condition to obtaining

the other party’s performance. If the non-breaching party’s duties are not appropriate for an order of specific performance, the court may decline to order specific performance of the breaching party’s contract duties. Restatement (Second) of Contracts § 363 (1981); Fitzpatrick v. Michael (p. 166). The existence of a liquidated damages provision does not preclude equitable relief. Restatement (Second) of Contracts § 361 (1981). An employee’s promise to not compete against her employer after the employment term ends is a contract in restraint of trade and is therefore void as against public policy, unless • (1) the promise is supported by a legitimate business reason; and • (2) the restriction is reasonable in duration, geographic scope, and line of business. ABC v. Wolf (p. 173). Majority rule: A court will revise an overbroad noncompetition covenant to render it enforceable if the party seeking enforcement obtained the covenant in good faith. Restatement (Second) of Contracts § 184(2) (1981); Data Management, Inc. v. Greene (p. 175). • Minority rule #1 (“blue pencil” rule): A court will revise an overbroad noncompetition covenant to render it enforceable, but only if this is possible by deleting specific words or part of a clause that, by its terms, is divisible (e.g., striking particular counties from an overbroad list of counties where the employee is prohibited from working). • Minority rule #2: A court will not revise an overbroad noncompetition covenant to render it enforceable. Terminology Specific performance—“The rendering, as nearly as practicable, of a promised performance through a judgment or decree; specif., a courtordered remedy that requires precise fulfillment of a legal or contractual obligation when monetary damages are inappropriate or inadequate, as

when the sale of real estate or a rare article is involved.” Black’s Law Dictionary (9th ed. 2009). Injunction—“A court order commanding or preventing an action.” Black’s Law Dictionary (9th ed. 2009). Noncompetition covenant (or “covenant not to compete” or “noncompete agreement”)—“A promise, usu. in a sale-of-business, partnership, or employment contract, not to engage in the same type of business for a stated time in the same market as the buyer, partner, or employer.” Black’s Law Dictionary (9th ed. 2009). Equitable remedy—“A remedy, usu. a nonmonetary one such as an injunction or specific performance, obtained when available legal remedies, usu. monetary damages, cannot adequately redress the injury.” Black’s Law Dictionary (9th ed. 2009). Legal remedy—“A remedy historically available in a court of law, as distinguished from a remedy historically available only in equity.” Black’s Law Dictionary (9th ed. 2009). Van Wagner v. S & M Enterprises: Money damages are the preferred compensation for a lessee upon breach of a lease by the lessor. Facts • Wagner operated a billboard business and leased out billboards to companies to advertise. Wagner entered into contract for a space on the side of a building for 3 years plus options to extend. Wagner placed a sign on the side of the building and unknown to Wagner, the building was sold to S & M. DEF wanted Wagner to leave the premise and he filed suit. Wagner wanted specific performance and damages The trial court declined specific performance in light that he has a adequate remedy at law for damages. It would be disproportionate harm to the DEF if it awarded specific performance

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Issue • In a contract for lease of advertising space, are money damages sufficient to compensate or should specific performance be awarded? Yes. You will only get specific performance only when money damages are inadequate

• Rule

Specific performance is not an appropriate remedy if monetary damages are available and specific performance would result in harm to the breaching party that is disproportionate to the benefit to the non-breacher. • Here the court reasoned that uniqueness in the sense of physical difference does not itself dictate the propriety of equitable relief. • Because this is a lease instead of a sale, specific performance will not be enforced. Sale of real property will enforce specific performance. • Civil Contempt • Usually is described as a proceeding whose primary aim is to give a remedy to the party in whose interest the equity decree was originally issued Criminal Contempt • Primarily to punish in order to vindicate the authority of the court and to preserve the dignity of the law. Fitzpatrick v. Michael: Equity will not enforce a personal service contract Facts • P worked as a nurse for D. P also took the many other rules to help D. In exchange for her help, D would pay P 8 dollars per week and upon his death would give her his house, furnishings, and cars. At some point D left and asked P to leave his home. D shut of all utilities and filed for trespassing. Once she left he boarded up the home. • P filed for specific performance of their agreement. • Trial court granted dismissal. Issue

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Is specific performance the appropriate remedy for a breach of a personal services contract? No. They cannot be enforced because it would require services that non of them want. Specific performance of personal contracts cannot be enforced in equity. Doing so would require services where they no longer desire any relationship Court held that statute of fraud invalidated the agreement of sale of land

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Lumley v. Wagner: The court would issue a prohibitory but not affirmative injunction Facts • Lumley hired Wagner to sing exclusively for his company for a season. A competitor convinced Wagner to not work for Lumley and come to his place. Lumley tried to stop Wagner and was granted an injunction Should the court continue the injunction preventing the defendant from performing for another opera company, because of her contract with Lumley? Yes. Even if the court lacks specific performance of an affirmative promise, it can still issue an injunction to not perform with the other company. An injunction will be ordered instead of specific performance when the contract duty is o (1) one of forbearance (i.e., a promise not to do something); or o (2) one to act but an order of specific performance is denied for reasons inapplicable to an injunction (e.g., a promise to work solely for the plaintiff). Restatement (Second) of Contracts § 357 (1981); Lumley v. Wagner (p. 171).

Issue •

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Rule •

The Domain of Legally Enforceable Promises
Class No. 12—Which Promises are Legally Enforceable?: Promises Supported by Consideration (pp. 182-210, 922-27, 929-30) Black letter law A promise, without some basis for it being enforceable, is unenforceable. Majority rule (common law and UCC): A seal has no legal effect on the enforceability of a contract (i.e., the distinction between sealed and unsealed contracts is abolished). • Minority rule #1: A seal is presumptive evidence of consideration. • Minority rule #2: A seal is a substitute for consideration. A promise that is supported by consideration or a “consideration substitute” is enforceable, unless other grounds exist that make it unenforceable. Courts do not inquire into the adequacy of the consideration when deciding whether a promise is supported by consideration. Restatement (Second) of Contracts § 79(b) (1981). A pretense of a bargain is not a bargain, and there is thus no consideration. Fischer v. Union Trust Co. (p. 201). It is immaterial that that the promisor’s desire for the consideration is incidental to other objectives. Restatement (Second) of Contracts § 81 (1981). A promise which is bargained for is consideration if, but only if, the promised performance would be consideration. Restatement (Second) of Contracts § 75 (1981). In general, the performance of a legal duty owed to the promisor that is neither doubtful nor the subject of an honest dispute is not consideration (“legal duty rule” or “pre-existing duty rule”). Restatement (Second) of Contracts § 73 (1981).

Majority rule: Promising to not assert a legal claim that turns out to be invalid is not consideration unless • (1) the claim is in fact doubtful because of uncertainty as to the facts or the law; or • (2) the promisor believes that the claim may be valid. Restatement (Second) of Contracts § 74 (1981) (an exception to the “legal duty rule”). Minority rule: Promising to not assert a legal claim that turns out to be invalid is not consideration unless • (1) the promisor is asserting the claim in good faith; and • (2) the claim has some foundation. Duncan v. Black (p. 207). Common law: A writing, to satisfy the Statute of Frauds, consists of any writing, signed by or on behalf of the party against whom the contract is sought to be enforced, that • (1) reasonably identifies the subject matter of the contract; • (2) is sufficient to determine the parties to the contract; and • (3) states with reasonable certainty the essential terms of the unperformed promises in the contract. Restatement (Second) of Contracts § 131 (1981). UCC: A writing, to satisfy the Statute of Frauds, consists of any writing, signed by or on behalf of the party against whom the contract is sought to be enforced, that • (1) evidences a contract for the sale of goods; and • (2) specifies a quantity. UCC § 2-201 Official Comment 1. A writing, to satisfy the Statute of Frauds, can be made before or after the contract is entered into. (Casebook p. 922.) Terminology Contract—“A promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.” Restatement (Second) of Contracts § 1 (1981).

Consideration—Something (such as an act, a forbearance, or a return promise) bargained for and received by a promisor from a promisee.” Black’s Law Dictionary 347 (9th ed. 2009). Seal—“A piece of wax, a wafer, or some other substance affixed to the paper or other material on which a promise, release, or conveyance is written, together with a recital or expression of intention by which the promisor, releasor, or grantor manifests that a piece of wax, wafer, or other substance is a seal.” Black’s Law Dictionary 1466 (9th ed. 2009). • Today, “wrriten under seal” will constitute as a seal in minority jurisdictions Congregation Kandimah v. DeLeo: An oral promise to make a gift must be supported by consideration or reliance Facts • A guy was dying and promised to leave 25,000 dollars to a synagogue. After he died the temple brought suit against his estate for the 25,000. The trial court found for the DEF and was upheld by the appellate and the Supreme court The 25,000 was a gift and the temple said, thanks we will name the library after you. This is not a bargained for exchange. If the dead guy said, I will give you 25,000 if you build a library and name it after me, then this is enforceable as a bargained for exchange. Is an oral promise enforceable if it doesn’t have consideration or reliance? No. An oral promise to make a gift cannot be enforced unless the promisee has acted in reliance or consideration of the promise Need to establish reliance or a bargained for exchange

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Issue • • Rule • •

The bargained-for exchange

After DeLeo, the materials assigned for this class focus on the most common way in which a promise can become legally enforceable—the promise was given as part of a bargained-for exchange. For a promise to be enforceable as part of a bargained-for exchange, it must be “supported by consideration.” By this we mean that the promisor’s promise was given in exchange for a promise or an act or a forbearance by the promisee. A promise that is given in exchange for a return promise is known as a bilateral contract (e.g., I promise to pay you $25 in return for your promise to wash my car). A promise that is given in exchange for a return performance (i.e., no return promise) is known as a unilateral contract (e.g., if you find my lost cat, I will pay you $25). It is important to keep in mind that the consideration for a promise in a bilateral contact is the return promise, not the promised performance. However, also keep in mind that “a promise which is bargained for is consideration if, but only if, the promised performance would be consideration.” Restatement (Second) of Contracts § 75 (1981).) Hamer v. Sidway: a legal detriment or forbearance can constitute adequate consideration Facts • An uncle promised his nephew 5,000 if he refrained from cigarettes, drinking, and gambling until he was 21. The nephew performed and wrote to his uncle. His uncle wrote back promising to give the money when he becomes responsible enough. The uncle dies soon after and the nephew sues for the money Whether a promise made to another to refrain from certain legal acts until a certain age is legally enforceable

• Issue •

• Rule •

Yes. The court ruled that the boy, by refraining from legally entitled acts, has performed his end of the contract. A promise is supported by consideration if one party suffers some detriment or forbearance as a result of the promise, but a court will not inquire into the value of each promise Unlike the previous case, the court here found there was sufficient reliance on the promise because the nephew refrained from doing acts that he had legal right to do.

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Fishcher v. Union Trust Facts • Daughter brought suit against her father’s estate to have mortgages satisfied under the terms of a warranty deed that transferred ownership of property to her as a gift Issue • Is love and affection consideration to support a fathers promise to pay a mortgage Rule • If the consideration for a promise to pay a mortgage is nothing more than a father’s love and affection, an action to enforce payment of a mortgage fails for lack of consideration • The real consideration for this transaction was the love and affection between Fischer Sr. and P, and his desire to provide for her support after he was dead. The consideration was not sufficient to compel the performance of a purely executory contract.

Duncan v. Black: Consideration that is illegal or against public policy does not support an exchange of promises Facts • Black sold 359 acres of farmland to Duncan. Black was to assure 65 acres of cotton. Black promised Duncan he could plant 65 acres of cotton on land. But the Allotment Act disallowed this promise of cotton.

Issue • • Is a promise obtained in exchange for consideration that is against public policy enforceable? No. The allotment act controls cotton surplus, resulting in a national benefit. County panel determinations are final and fixed with a parcel of land, and a party may not sell, trade, or assign an allotment to another. A court will not enforce a promise that was obtained in exchange for consideration that is illusory, illegal, immoral, or against public policy To appreciate the issue in Duncan, you need to be aware that as a general rule, the promise to perform, or the performance of, a legal duty owed to the promisor that is neither doubtful nor the subject of an honest dispute is not consideration (the so-called “legal duty rule” or “pre-existing duty rule”). If the legal claim is in fact invalid, there is arguably a legal duty to not assert it.

Rule •

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Adequate consideration—“Consideration that is fair and reasonable under the circumstances of the agreement.” Black's Law Dictionary 347 (9th ed. 2009). • This simply refers to a fair bargain. But who cares? All you need is consideration. • Under modern consideration law and the “peppercorn theory” (a mere “peppercorn” is sufficient consideration, as long as it was bargained for) you don’t need “adequate consideration.” Whether there is adequate consideration might be an issue down the road, however, with respect to certain matters (e.g., fraud and duress). Good consideration—“Consideration based on natural love or affection or moral duty . . . Such consideration is usually not valid for the enforcement of a contract.” Black's Law Dictionary 348 (9th ed. 2009). Inadequate consideration—“Consideration that is not fair or reasonable under the circumstances of the agreement.” Black’s Law Dictionary 348 (9th ed. 2009). Again, this is not generally an issue because all you need is some

consideration for a promise to be enforceable as part of a bargained-for exchange. Meritorious consideration—same as “good consideration.” Nominal consideration—“Consideration that is so insignificant as to bear no relationship to the value of what is being exchanged. . . . Such consideration can be valid, since courts do not ordinarily examine the adequacy of consideration . . . .” Black’s Law Dictionary 348 (9th ed. 2009). • However, A Dictionary of Modern Legal Usage on p. 592 states that “[n]ominal consideration is only of token value, whereas inadequate consideration has substantial value that is patently less than the value of the performance promised or rendered in return.” If a nominal sum is a mere “token,” this would suggest it was not truly bargained for and not true consideration. • However, because Black’s defines it simply as a sum bearing no relationship to the value of what is being exchanged, “nominal consideration” can be “consideration,” but there is a good chance it is not (think of Bertha Fischer’s dollar). Past consideration—“An act done or a promise given by a promisee before making a promise sought to be enforced. Past consideration is not consideration for the new promise because it has not been given in exchange for this promise . . . .” Black’s Law Dictionary 349 (9th ed. 2009). Peppercorn—“A small or insignificant thing or amount; nominal consideration.” Black’s Law Dictionary 1250 (9th ed. 2009). Sufficient consideration—“Enough consideration as a matter of law to support a contract.” Black’s Law Dictionary 349 (9th ed. 2009). This would seem to be no different from “consideration.” A mere promise is usually not legally binding. You need something more

Class No. 13—Which Promises are Enforceable? (Promises Inducing Reliance) (pp. 225-34, 241-46) “Signposts on the road.” Black letter law Majority rule: An oral promise to transfer of an interest in land may be specifically enforced notwithstanding the Statute of Frauds or a lack of consideration if the promisee, • (1) in reasonable reliance on the promise and • (2) the continuing assent of the promisor, • (3) has relied on the promise • (4) to an extent that injustice can be avoided only by specific enforcement. Restatement (Second) of Contracts § 129 (1981); Seavey v. Drake (p. 225) (the so-called “part performance doctrine”). Minority rule: The “part performance doctrine” is not recognized. See Casebook p. 227 (“Finally, at the other end of the spectrum are a few states which have firmly rejected ‘part performance’ as a justification for specific performance of oral land contracts . . . .”); Restatement (Second) of Contracts § 129 cmt. c (noting that some jurisdictions have rejected the rule in § 129). When deciding whether the “part performance doctrine” applies, courts will consider the extent to which the type of reliance is evidence of the promise and its terms. Restatement (Second) of Contracts § 129 cmt. b (1981); see also id. cmt. d (“[I]t is commonly said that the action taken by the purchaser must be unequivocally referable to the oral agreement. But this requirement is not insisted upon if the making of the promise is admitted or is clearly proven”). The mere payment of price for land, in full or in part, will not make the “part performance doctrine” available. In such a case, a money award of restitution is sufficient, and there is thus an adequate remedy at law. Casebook p. 227; Restatement (Second) of Contracts § 129 cmt. a (1981);

see id. cmt. d (“[T]he action [in reliance] must be such that the remedy of restitution is inadequate.”). Majority rule: For the “part performance doctrine” to apply, at a minimum there must be entry into possession by the promisee, with the promisorowner’s acquiescence. Casebook p. 227. • Minority rule: Entry into possession is not essential, as long as there was reliance that cannot be compensated with money. Restatement (Second) of Contracts § 129 cmt. d (1981). When a transfer of an interest in land has been made, a promise to pay the price (unless the price is itself “land”), if originally within the land-contract provision of the Statute of Frauds, ceases to be within it. Restatement (Second) of Contracts § 125(3) (1981). When one party to a contract has fully performed, the Statute of Frauds’ one-year provision does not prevent enforcement of the contract. Restatement (Second) of Contracts § 130 (1981); Casebook pp. 229, 915. A condition of a gratuitous promise is not consideration. Kirksey v. Kirksey (p. 230); see also Allegheny College v. Nat’l Chautauqua County Bank (at p. 238 n*) (Cardozo discussing Williston’s famous “tramp case”). Seavey v. Drake: Improving land in reliance on an owner’s promise to transfer property constitutes consideration Facts • PL’s father promised to give his son some land and he accepted by paying his father 200 debt on the land. The PL was given another piece of land and eventually occupied the land. PL paid 3,000 to improve the land by building a barn, house, etc. PL never received the deeds and his father died. PL is suing his father’s estate for the deeds to the land. Is a promise to give land valid when possession is taken and valuable improvements are made?

Issue •

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Yes. PL argued that proof of the promise rested with the fact that he had made substantial improvements to the land in reliance of the promise. Improving land in reliance on a promise to transfer the property constitutes valid consideration

Rule •

An oral promise to transfer of an interest in land may be specifically enforced notwithstanding the Statute of Frauds or a lack of consideration if the promisee, o (1) in reasonable reliance on the promise and o (2) the continuing assent of the promisor, o (3) has relied on the promise o (4) to an extent that injustice can be avoided only by specific enforcement The statute of frauds requires that the sale of land be in writing, but under the rules of equity, if partial performance has occurred, the statute of frauds is removed. Part performance is only enforceable by courts of equity, not law • Kirksey v. Kirksey: Reliance on a promise made without a bargain does not create contractual liability *Courts reluctant to use Reliance. It was Prior to Ricketts* Facts • PL was widowed and her brother in law wrote her a letter saying that she could move to his property and he would provide her with a place to raise her family. Shortly after receiving the letter she moved to his place. After 2 years, the DEF moved her to a less comfortable home and then kicked her out. PL sued for breach Is an offer to provide a place to live and land to work supported by consideration if the promisee abandons her home and possessions and moves? No. A change of residence in reliance on a promise is not sufficient consideration to create an enforceable contract.

Issue •

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Rule • In absence of a bargained-for exchange, a change in position taken in reliance on another’s promise does not constitute sufficient consideration to enforce the promise Bargained – for exchange o A benefit or detriment that the parties to a contract agree to as the price of performance in return for a promise

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Ricketts v. Scothorn: Promissory estoppel is an alternative to a bargainedfor exchange • Starting to recognize reliance Facts • Ricketts promised his granddaughter, PL, 2,000 dollars plus 6 cents per year for her to not work. In reliance, she quit work intending to use the money to pay her way. Ricketts paid for one year’s interest and not the 2,000 and then died. Can a person who intends to cause and actually does cause another to change his or her position in reliance on a promise be estopped from denying the promise? Yes. If the promise is not supported by consideration, it may be enforceable if it induced the promisee to rely on it to her detriment. If a person, in good faith reliance of the promise, changes his position for the worse, that party may bring a cause of action against the promisor. If a promise is not supported by consideration, it may be enforceable if it induced the promisee to rely on it to his detriment. The court acknowledged that the promise was gratuitous and lacked consideration. Nevertheless, the court enforced the promise basing its decision on principles of equity and on PL’s detrimental reliance on the promise

Issue •

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Rule • • •

Estoppel

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Prevents one from asserting a claim or right that contradicts what one has said or done before or what has been legally established as true.

Misfeasance and Nonfeasance • Misfeasance – Action either in tort or on the contract • Nonfeasance – only to an action on the contract Class No. 14—Which Promises are Enforceable? (Promissory Estoppel—Promises Inducing Reliance) (pp. 246-52, 253-261, 279290) Black letter law A promise is enforceable despite a lack of consideration if the promisee establishes the elements of promissory estoppel (i.e., promissory estoppel is a so-called “consideration substitute”), unless other grounds exist for rendering the promise unenforceable. Restatement (Second) of Contracts § 90(1) (1981). The elements of promissory estoppel are: • (1) the promisor made a promise; • (2) the promisor should reasonably expect the promise to induce action or forbearance by the promisee; • (3) the promise does induce action or forbearance by the promisee; and • (4) injustice can be avoided only by enforcing the promise. Restatement (Second) of Contracts § 90(1) (1981). In promissory estoppel cases, the following circumstances are significant to deciding whether injustice can be avoided only by enforcing the promise: • (1) the reasonableness of the promisee’s reliance; • (2) whether the reliance was of a definite and substantial character; and • (3) the formality with which the promise is made (the greater the formality, the greater the likelihood the promise was actually made

and that the promisor carefully considered the promise before making it). Restatement (Second) of Contracts § 90 cmt. b (1981). The remedy granted for the breach of a promise enforceable under the doctrine of promissory estoppel may be limited as justice requires (i.e., the court may choose, in the interest of justice, to only protect the reliance interest or the restitution interest instead of the expectation interest). Restatement (Second) of Contracts § 90(1) (1981). Unless there is unjust enrichment of the promisor, damages based on promissory estoppel should not put the promisee in a better position than she would have been in had the promise been kept. Restatement (Second) of Contracts § 90 cmt. d (1981). Majority rule: An oral promise that is enforceable under the doctrine of promissory estoppel but that is within the Statute of Frauds is not rendered unenforceable by the Statute if injustice can be avoided only by enforcing the promise. Restatement (Second) of Contracts § 139(1) (1981). • Minority rule: A promisee cannot use promissory estoppel to render enforceable an oral promise that is unenforceable under the Statute of Frauds. See John M. Perillo, Calamari and Perillo on Contracts 694 (6th ed. 2009) (“[A] few courts have rejected promissory estoppel as a device to overcome the requirements of the Statute of Frauds.”). For those courts that permit the use of promissory estoppel to circumvent the Statute of Frauds, a particularly important issue in deciding whether to permit enforcement will be “the extent to which the action or forbearance corroborates evidence of the making and terms of the promise, or the making and terms are otherwise established by clear and convincing evidence.” Restatement (Second) of Contracts § 139(2)(c) (1981). Terminology Promissory estoppel—“The principle that a promise made without consideration may nonetheless be enforced to prevent injustice if the

promisor should have reasonably expected the promisee to rely on the promise and if the promisee did actually rely on the promise to his or her detriment.” Black’s Law Dictionary 631 (9th ed. 2009). First National Bank v. Logan Mfg. Co. Facts • Bank was looking for new investment opportunities and came across Winamac Plastics and became interested. He loaned them 100,000 but noticed that wasn’t enough. He promised to get them 346,000 term loan and 250,000 operating loan. The company, relying on this, moved and made other expenses to start business. They were eventually unable to obtain the money the bank promised and started business in Iowa. The filed suit for damages. Issue • Was the bank liable for its failure to make the loans as promised? • Yes. The promisee relied on this money and made substantial change and lost money while relying on the loan Rule • Under the doctrine of promissory estoppel, a promisor who induces a substantial change in position by the promisee in reliance on the promise is estopped to deny enforcibility. • Unless there is unjust enrichment of the promisor, damages based on promissory estoppel should not put the promisee in a better position than she would have been in had the promise been kept

The elements of promissory estoppel are: • (1) the promisor made a promise; • (2) the promisor should reasonably expect the promise to induce action or forbearance by the promisee; • (3) the promise does induce action or forbearance by the promisee; and • (4) injustice can be avoided only by enforcing the promise. Restatement (Second) of Contracts § 90(1) (1981).

Stearns v. Emery-Waterhouse: promissory estoppel cannot avoid a statute of frauds defense to breach of a contract requiring more than a year to perform Facts • Stearns left his prior job to work for Emery. Emery made an oral contract for employment to the age of 55 with guaranteed salary of 85,000/year. This contract was never in writing. Stearns held that position for 2 years and then started at another position for 6 months and then was terminated prior to the age of 55. May an employee avoid a defense to his claim that raises the statute of frauds by showing detrimental reliance on an employer’s oral promise of employment for a minimum term? No. Equitable estoppel based on a promisor’s fraudulent conduct can avoid the application of the statute of frauds, but not to an employment contract that requires more than one year to perform. The courts are concerned that if they do not demand adherence to the statute of frauds, they will open the door to countless cases of detrimental reliance brought by employees who are upset over their termination.

Issue •

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Goodman v. Dicker: Promissory estoppel prevents a party making false assurances from denying liability for the induced party’s losses Facts • PL (dicker) was encouraged by DEF (goodman) to apply for a franchise to sell their products. DEF told PL that they would be granted the franchise. PL incurred expenses in reliance of opening up the franchise. The DEF then took away the franchise opportunity and PL sued.

Issue

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If a party incurs damages from false promises that a franchise will be granted, can he recover based on reliance or the promise? Yes One who, through language or conduct, encourages another to take actions he would not otherwise have taken, is responsible under the doctrine of promissory estoppel for any loss or injury the other party suffered due to their disappointed expectations.

Hoffman v. Red Owl Stores: Promissory estoppel allows recovery for damages arising from actions taken in reliance on the promises of another Facts • PL negotiated with DEF to obtain a franchise store; as negotiations continued, PL expended substantial amounts of money in reliance on DEF’s promise that he would be able to obtain a store for 18,000. When DEF’s financial demands finally exceeded PL’s resources, he was forced to abandon his negotiations. Can a party recover for worsening its position in reliance on promises made by another party? Yes. When a party should reasonably expect that its acts and promises would induce others to act and promises would induce other to act to their detriment, the doctrine of promissory estoppel will be used to serve the interest of justice and support a cause of action to compensate PLs for the failure of a party to keep its promises

Issue • • Rule •

The domain of the Legally Enforceable Promise Cont.
Class No. 15—Which Promises are Enforceable? (Promises Enforceable as a Moral Obligation: Promissory Restitution and Charitable Pledges) (pp. 210-225, 234-241, 252-253) “[O]n the borderline of quasi-contracts . . . .” Black letter law As a general rule, an act, forbearance, or promise by a promisee before the promisor’s promise was made is not a basis for enforcing the promisor’s promise (the “past consideration rule”). A promise to pay a contract debt made after default on the debt (and before or after the expiration of the applicable statute of limitations on the debt) is enforceable (in the amount promised but not exceeding the amount of the debt plus interest) and starts a new statute of limitations, despite a lack of consideration or reliance by the promisee. Restatement (Second) of Contracts § 82(1) (1981) (an exception to the “past consideration rule”). Majority rule: A promise under black letter law rule no. 2 is only enforceable if the promise is evidenced by a writing signed by the promisor, unless the promise is implied from part payment. (Casebook p. 216.) • Minority rule: A promise to pay a debt under black letter law rule no. 2 does not require a writing to be enforceable. (Casebook p. 216.) An express promise to pay a debt that was discharged or dischargeable in bankruptcy proceedings begun before the promise is made is enforceable, despite a lack of consideration or reliance by the promisee. Restatement (Second) of Contracts § 83 (1981) (an exception to the “past consideration rule”). Majority rule: A promise under black letter law rule no. 4 does not need to be evidenced by a writing to be enforceable. (Casebook p. 216.)

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Minority rule: A promise under black letter law rule no. 4 is only enforceable if the promise is evidenced by a writing signed by the promisor. (Casebook p. 216.) Minority rule: A promise is enforceable under the doctrine of “promissory restitution” if the following elements are established: o (1) a promise; o (2) the promise was made in recognition of a benefit previously received by the promisor from the promisee; o (3) the promisee did not confer the benefit as a gift; o (4) the promisor has been unjustly enriched; and o (5) enforcement is necessary to prevent injustice. Restatement (Second) of Contracts § 86 (1981); Webb v. McGowin (p. 216) (an exception to the “past consideration rule”).

If the value of the promise is disproportionate to the benefit provided (i.e., excessive), the promise is not enforceable beyond the amount of the benefit provided. Restatement (Second) of Contracts § 86(2) & cmt. i (1981). If the value of the benefit provided exceeds the value of the promise, only the value of the promise is provided. In re Schoenkerman’s Estate (p. 225). A court that has adopted the promissory restitution doctrine will consider, when deciding whether such a claim has been established, the following: • (1) the definite and substantial character of the benefit received; • (2) the formality in the making of the promise (including the thought given to the promise); • (3) part performance of the promise; • (4) reliance on the promise; • (5) unfair pressure by the promisee to obtain the promise; and • (6) the detriment incurred by the promisee in providing the benefit. Restatement (Second) of Contracts § 86 cmts. b & i (1981); Webb v. McGowin (p. 216) (for the sixth factor). It is usually unjust to not pay for a benefit received, even without a subsequent promise to pay for it, if

(1) the actions of the person providing the benefit were not “officious”; and • (2) the person provided the benefit with an expectation of compensation. (This is a way to establish a claim for “unjust enrichment.”) Minority rule: A charitable pledge is enforceable under the doctrine of promissory estoppel even without proof that the promise induced action or forbearance. Restatement (Second) of Contracts § 90(2); Salsbury v. Northwestern Bell Tel. Co. (p. 253). • Terminology Officious—“Volunteering one’s services where they are neither asked nor needed.” Merriam-Webster’s Collegiate Dictionary 861 (11th ed. 2003). Past consideration—“An act done or a promise given by a promisee before making a promise sought to be enforced. Past consideration is not consideration for the new promise because it has not been given in exchange for this promise . . . .” Black’s Law Dictionary 349 (9th ed. 2009). Promissory restitution—A promise that is enforceable because it was given in recognition of a moral obligation to pay for a benefit previously provided to the promisor by the promisee. promissory estoppel renders a promise enforceable because of the promisee’s detriment. The promise is made and then on reliance of that promise, the promissee acts upon the promise. Red Owl promissory restitution renders a promise enforceable because of the promisor’s benefit. After the benefit has been provided. Webb v. McGowin. Promises Grounded in the past Mills v. Wyman: A moral obligation generally is not sufficient consideration • Majority Approach

Facts • Wyman’s son was sick while at sea and stayed at Mills’s house and he cared for his son until he died. Wyman wrote a letter to Mills promising to pay him for any expenses incurred while taking care of his son. Is a mere promise with no consideration other than a moral obligation enforceable? No. his promise to pay was only a moral obligation and was not supported by consideration. The law does not enforce moral duties. A promise based on only a moral obligation is made without consideration and not enforceable. When Wyman offered to pay mills for the cost of caring for his son in his final days, it is more likely that Mills was motivated at least in part by his grief over the death of his son.

Issue • • Rule •

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Webb v. McGowin: A moral obligation is sufficient consideration IF a material benefit is received • Minority Approach Facts • PL saved DEF’s life by diverting a falling pine block from hitting DEF and because PL was seriously injured in the process, DEF agreed to pay for PL’s care and support for the rest of PL’s life Do past acts that saved a party’s life or prevented serious bodily harm sufficient consideration to support a promise to compensate the actor for life? Yes. The PL argued that by saving his life, McGowin received a benefit far in excess of money. Minority rule: A promise is enforceable under the doctrine of “promissory restitution” if the following elements are established: o (1) a promise;

Issue •

• Rule •

o (2) the promise was made in recognition of a benefit previously received by the promisor from the promisee; o (3) the promisee did not confer the benefit as a gift; o (4) the promisor has been unjustly enriched; and o (5) enforcement is necessary to prevent injustice. Restatement (Second) of Contracts § 86 (1981); Webb v. McGowin (p. 216) (an exception to the “past consideration rule”). Past acts that save life or prevent serious bodily injury, especially when they result in injury to the actor, are sufficient consideration for a promise by the rescued party to compensate the actor for life Webb’s saving of McGowin’s life was a material benefit that created a moral obligation on McGowin’s part to compensate Webb, which formed the basis of McGowin’s promise. Expectation of payment is an essential element of a claim for restitution Allegheney College v. National Chautauqua County Bank: A charitable subscription is supported by consideration • Minority Rule of Charitable Subscription Facts • Mary Yates Johnston made a donation to the college of 5,000, in her will and upon her death, in return they use it as a scholarship fund for students studying ministry. The college was suppose to name the scholarship after her. She gave the college 1,000 and after she died, the college brought suit for the rest of the funds. If a donor promised to make a charitable donation in exchange for the recipient establishing of a fund in the donor’s name and if the donor paid a portion of that donation, is the promise enforceable?

• Issue •

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Yes. The law of charitable subscriptions is often based on promissory estoppel, in which courts have substituted estoppel for consideration. A charitable subscription payable to a college is supported by consideration if the donor gave part of the funds during her life and stipulated that they were to be used as a memorial scholarship in her name. He relies on consideration, and Cardozo finds a bargain. Here, she said in her letter that this money was a gift if the school named the foundation/scholarship after her.

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Class No. 16—Which Promises are Enforceable? (Option Contracts) (pp. 261-279) Black letter law An offeror’s promise to keep an offer open is enforceable (known as an “option contract”) if the promise is enforceable on grounds that traditionally render a promise enforceable (e.g., consideration or promissory estoppel). Common law: In addition to black letter law rule no.1, an offeror’s promise to keep an offer open is enforceable if the promise • (1) is in writing; • (2) is signed by the offeror; • (3) recites a purported consideration for the promise; and • (4) proposed an exchange on fair terms • (5) within a reasonable amount of time. Restatement (Second) of Contracts § 87(1) (1981). • Majority rule: The “purported consideration” in black letter law rule no. 2 must have been received by the promisor to render the promise enforceable. See Smith v. Wheeler (Casebook p. 264) (noting that this is the majority rule).

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Minority rule: The “purported consideration” in black letter law rule no. 2 need not have been received by the promisor to render the promise enforceable (a so-called “false recital of consideration”). Restatement (Second) of Contracts § 87 cmt. c (1981); Smith v. Wheeler (Casebook p. 264).

UCC: In addition to black letter law rule no.1, a merchant offeror’s promise (or assurance) to keep an offer open is enforceable if the promise • (1) is in writing; and • (2) is signed by the offeror. Neither actual consideration, purported consideration, nor recited consideration is necessary. If the offeror promises to keep the offer open, but does not specify a period of time, the promise will be construed as a promise to keep the offer open for a reasonable time, but in no event may such period of irrevocability exceed three months. UCC § 2-205. An offer (even without an express or implied promise to keep the offer open) will be deemed irrevocable (i.e., treated as a binding option contract) if • (1) the offeror should reasonably expect the offer to induce action or forbearance of a substantial character by the offeree before acceptance; • (2) it does induce such action or forbearance; and • (3) injustice would result from permitting revocation of the offer. Restatement (Second) of Contracts § 87(2) (1981); Drennan v. Star Paving Co. (p. 269) (though finding an implied promise). For those jurisdictions that consider the seal to be a consideration substitute, the seal will only be recognized as a consideration substitute in an action at law, not in an action in equity (except for option contracts on fair terms, for which the seal will be recognized as a consideration substitute even in equity actions in a majority of jurisdictions that recognize the seal). (Casebook p. 262 n.*; Restatement (Second) of Contracts § 364 cmt. b (1981)). Terminology

Option contract (or “option” or “firm offer”)—“A contractual obligation to keep an offer open for a specified period, so that the offeror cannot revoke the offer during that period.” Black’s Law Dictionary (9th ed. 2009). Merchant—A person who deals in goods of the kind that are involved in the contract. UCC § 2-104. Common student mistakes Students often believe that a promise to keep an offer open, to be effective, must be in writing and satisfy the other various requirements when the promise lacks consideration. This is only one way of rending such a promise enforceable. If another traditional basis exists for making the promise enforceable (e.g., consideration or promissory estoppel), these requirements need not be established (under either the common law or the UCC). Students often fail to remember that under black letter law rule no. 4 (the UCC rule), purported consideration is unnecessary. Precontractual Obligation Thomason v. Bescher: A unilateral offer made under seal may not be revoked Facts • On 6/18, DEF made a written offer under seal to sell timber to PL. The offer provided that PL was required to demand a deed and get 6,000 case on or before 8/18. PL notified DEF that he had accepted the offer and would get the cash the following week. DEF then notified PL that the deal is off. Was PL entitled to specific performance where the offer was made under seal? Yes. A unilateral offer made under seal is irrevocable.

Issue • • Rule

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A unilateral offer made under seal is irrevocable within the time designated for acceptance of the offer. A solemn written covenant under seal giving an option within a time limited to purchase land is valid and enforceable in a suit for specific performance, though no consideration was in fact paid for the option, etc., and the parties giving the option cannot retract their offer within the time limited. Now, most states did away with the seal Nominal consideration replaces the seal and is recognized by the courts.

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James Baird Co. v. Gimbel Bros: An offer to make a bilateral contract may be withdrawn at any time before acceptance Facts • Gimbel Bros. was in the linoleum business and wanted to offer a bid for a construction of a building. An employee calculated the cost by ½. GB sent out the offer to sever contractors. After learning of the mistake, they sent a telegraph to the contractors withdrawing its offer and a new offer would be submitted. JB received the withdrawal after it had submitted a bid for the building contract. JB’s offer was accepted and sent a letter to GB as a formal acceptance of its offer. GB refused to recognize that the contract existed. Was there a contract between GB and JB, where JB had based its construction bid on GB’s erroneous and withdrawn estimates? No. an offer to make a bilateral contract may be withdrawn at any time prior to acceptance, unless the terms of the offer provide otherwise. An offer to make a bilateral contract may be withdrawn at any time prior to acceptance, unless the terms of the offer provide otherwise.

Issue • •

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Before they accepted, GB revoked. In Drennan, they did not revoke before they accepted.

Drennan v. Star Paving Co.: A promise is binding if it is reasonably expected to induce reliance and it in fact does Facts • PL was a general contractor who was preparing a bid for a job. The day bids were due, DEF offered to do the paving for 7131.60 which was the lowest bid of the rest of the companies. PL submitted a bid and was then later offered the construction job. DEF told PL the next day that they made a mistake in the price and PL told DEF that he relied on the price to secure the job. Did DEF’s offer create an obligation to perform according to the terms of the offer? Yes. A promise that the promisor should reasonably expect to induce action on the part of a promisee and that does induce such action is binding if injustice can be avoided only by enforcement of the promise. An offer (even without an express or implied promise to keep the offer open) will be deemed irrevocable (i.e., treated as a binding option contract) if o (1) the offeror should reasonably expect the offer to induce action or forbearance of a substantial character by the offeree before acceptance; o (2) it does induce such action or forbearance; and o (3) injustice would result from permitting revocation of the offer. Restatement (Second) of Contracts § 87(2) (1981); Drennan v. Star Paving Co. (p. 269) (though finding an implied promise).

Issue • •

Rule •

An offeror can revoke his contract anytime before acceptance

Class No. 17—Forming Bargained-for Exchange Contracts (Mutual Assent Requirement) (pp. 291-308) “If . . . it were proved by twenty bishops that either party, when he used the words, intended something else than the usual meaning which the law imposes upon them, he would still be held . . . .” Learned Hand Black letter law Unless a promise is enforceable because of a “consideration substitute” (e.g., promissory estoppel, promissory restitution, seal (minority rule), etc.), a promise is only enforceable if it was given as part of a bargain in which there was: • (1) a manifestation of mutual assent to the exchange; and • (2) consideration. Restatement (Second) of Contracts § 17(1) (1981). A manifestation of mutual assent to an exchange usually takes the form of an “offer” and an “acceptance.” Accordingly, a promise is enforceable as part of a bargained-for exchange if there was • (1) an offer; • (2) an acceptance; and • (3) consideration If both parties attach the same meaning to the offer, that is the meaning that will be applied to the contract (even if a reasonable person would attach a different meaning). Restatement (Second) of Contracts § 20 (1981); N.Y. Trust Co. v. Island Oil & Transport Corp. (p. 304). If the parties attach different meanings to the offer (a so-called “misunderstanding”), the meaning that will be applied to the contract is the meaning attached by the party who is least at fault for the misunderstanding. Restatement (Second) of Contracts § 20 (1981). There is no manifestation of mutual assent (and hence no enforceable bargained-for exchange contract) if the parties attach materially different

meanings to the manifestation (a so-called “misunderstanding”) and neither party is more at fault for the misunderstanding. Restatement (Second) of Contracts § 20 (1981); Raffles v. Wichelhaus (p. 292). Whether a communication is an “offer” is based on whether a reasonable person would construe it as an offer. Restatement (Second) of Contracts § 24 (1981). Whether a communication is an “acceptance” is based on whether a reasonable person would construe it is an acceptance. Embry v. HargadineMcKittrick Dry Goods, Inc. (p. 296). “Even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a [bargained-for exchange] contract unless the terms of the contract are reasonably certain.” Restatement (Second) of Contracts § 33(1) (1981). A manifestation of mutual assent is unnecessary for a promise that is rendered enforceable for any reason other than it being given as part of a bargained-for exchange (e.g., promissory estoppel), unless the promise is made conditional on a manifestation of assent by the promisee. Restatement (Second) of Contracts, Topic 2 (“Contracts Without Consideration”), Introductory Note (1981). If a promissory estoppel claim is based on a promise during the negotiation of a bargained-for exchange contract that was not entered into, or that was entered into but is unenforceable for some reason, the terms of the bargained-for exchange contract need not be reasonably certain. Restatement (Second) of Contracts § 34(3). The rule that a bargained-for exchange contract does not arise when the contract terms are not reasonably certain does not preclude an unjust enrichment claim by a party who started performing (assuming the elements of such a claim can be established). Kearns v. Andree (p. 104) (permitting unjust enrichment recovery when contract terms were not reasonably certain); Bentzen v. H.N. Ranch, Inc. (p. 308) (recognizing that such a claim

can be asserted, but finding no unjust enrichment because the plaintiff received a benefit for the part performance provided to the defendant). Specific performance will not be ordered unless the contract terms are sufficiently certain to provide a basis for such a remedy. Restatement (Second) of Contracts § 362 (1981); Wheeler v. White (p. 306) (Greenhill, J., concurring). Thus, the contract terms must usually be more certain to obtain an order of specific performance than an award of damages (i.e., money). The reason is that an order of specific performance will require complete performance by both parties, so the terms must be more certain. Terminology Mutual assent (or more accurately, “manifestation of mutual assent”)— “Agreement by both parties to a contract, usu. in the form of offer and acceptance. • In modern contract law, mutual assent is determined by an objective standard—that is, by the apparent intention of the parties as manifested by their actions.” Black’s Law Dictionary 132 (9th ed. 2009). Meeting of the minds—“Actual assent by both parties to the formation of a contract, meaning that they agree on the same terms, conditions, and subject matter. • This was required under the traditional subjective theory of assent, but modern contract doctrine requires only objective manifestations of assent.” Black’s Law Dictionary 1072-73 (9th ed. 2009) (emphasis added). Misunderstanding—When the parties attach different meanings to the offer. Restatement (Second) of Contracts § 20 (1981). Objective theory of contract—“The doctrine that a contract is not an agreement in the sense of a subjective meeting of the minds but is instead a series of external acts giving the objective semblance of agreement.” Black’s Law Dictionary (9th ed. 2009). Offer—“[T]he manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain

is invited and will conclude it.” Restatement (Second) of Contracts § 24 (1981). Acceptance—“[A] manifestation of assent to the terms [of the offer] made by the offeree in a manner invited or required by the offer.” Restatement (Second) of Contracts § 50 (1981). Offeror—“One who makes an offer.” Black’s Law Dictionary 1190 (9th ed. 2009). Offeree—“One to whom an offer is made.” Black’s Law Dictionary 1189 (9th ed. 2009). Common student mistakes Students have a habit of referring to a “misunderstanding” as a “mistake.” The doctrines of “misunderstanding” and “mistake,” while related (a “misunderstanding” is a type of mistake, a “mistake in the expression of assent”), the terms “misunderstanding” and “mistake” refer to two different contract doctrines (we will study the “mistake” doctrine in the future). Accordingly, to avoid confusion as to which doctrine is being addressed, do not refer to the “misunderstanding” doctrine as the “mistake” doctrine, or to a “misunderstanding” as a “mistake” (or vice versa). Students have a habit of referring to a “misunderstanding” as a situation in which the terms of the contract are not sufficiently certain. The terms of the contract are not sufficiently certain when terms are missing or left to be agreed upon (i.e., there are gaps in the contract). Restatement (Second) of Contracts § 33 cmt. a (1981). A misunderstanding occurs when the terms are agreed upon, but the parties attach different meanings to the terms. Students often state that there was no “meeting of the minds” when there was no manifestation of mutual assent. The phrase “meeting of the minds” should be avoided because it suggests that each of the parties intended to enter into a contract, and that each party intended the contract terms to

mean the same thing. Under the objective theory of contract, this is incorrect. See Restatement (Second) of Contracts § 17 cmt. c (1981) (“The element of agreement is sometimes referred to as a ‘meeting of the minds.’ The parties to most contracts give actual as well as apparent assent, but it is clear that a mental reservation of a party to a bargain does not impair the obligation he purports to undertake. The phrase used here, therefore, is ‘manifestation of mutual assent,’ . . . .”). Students often believe that a party is precluded from relying on the misunderstanding doctrine to avoid a contract when the party’s real reason for seeking to avoid the contract is some other reason (such as buyer’s remorse). This is incorrect. If there is no manifestation of mutual assent, a bargained-for exchange contract does not arise, and a party’s motive in seeking to avoid the contract is irrelevant. Forming Bargained-for Exchange Contracts: Mutual Assent Raffles v. Wichelhaus: There is no contract if the parties differ on the meaning of a term Facts • Raffles agreed to sell Wichelhaus a certain amount of cotton, to arrive on a ship called the Peerless. Their were 2 ships by the name of peerless sailing from the same port, to the same destination, but at different dates. Raffles placed the cotton on the different Peerless that Wichelhaus believed it was coming on. Was there a contract to purchase the cotton when one party expected it to arrive on a particular ship but the other didn’t? No. if the parties differ as to the meaning of an essential term of an agreement, there can be no contract. If the parties differ as to the meaning of an essential term of an agreement, there can be no contract

Issue • • Rule •

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There is no manifestation of mutual assent (and hence no enforceable bargained-for exchange contract) if the parties attach materially different meanings to the manifestation (a so-called “misunderstanding”) and neither party is more at fault for the misunderstanding. Restatement (Second) of Contracts § 20 (1981)

Embry v. Hargadine-McKittrick: Contracting parties’ intent is determined from their actions Facts • PL was employed by the DEF and his employment contract has ended and asked for a renewal. According to the PL, the DEF said “go ahead, you’re all right… Don’t let that worry you” after PL asked for a reinstatement of his employment contract. PL took this wording as a renewal. In Feb. DEF told PL that he will be terminated on March 1st and PL sued for breach and was seeking the year salary. Did the conversation between PL and DEF where the DEF made an ambiguous statement constitute a renewal of contract? Yes. It is determined by a parties’ outward expression and how a reasonable person would understand its meaning. The intent of the parties to make a contract is determined according to their outward expressions of intent Whether a communication is an “acceptance” is based on whether a reasonable person would construe it is an acceptance.

Issue • • Rule • •

Kabil Developments Corp. v. Mignot: Subjective intent is relevant to determine if a contract exists Facts • PL alleges that DEF made an oral agreement to supply them with helicopters to use during a construction project. DEF denied the existence of a contract. PL’s vice president testified that according to him, he thought they were in a contract with DEF’s and that they

had an obligation to supply helicopters. DEF objected to this testimony stating that it was subjective. Issue • • Did the court err by allowing testimony of what the PL believed? No. the subjective intention of a party to a contract is relevant evidence on the question of a party’s intent to make a contract. Although the outward expressions of a party are determinative, testimony as to whether a party thought he or she was entering into a contract is relevant to determine if a “reasonable person” would believe that a contract was formed. The subjective intention of a party to a contract is relevant evidence on the question of a party’s intent to make a contract.

Rule •

Wheeler v. White: If one part reasonable relies on a promise, the promise may be enforceable Facts • Wheeler and White entered into an agreement that white was going to obtain a loan of 70,000 for wheeler and they agreed to the terms of repayment. White then told wheeler to go ahead an prepare for the new building and that even if he wasn’t able to obtain a loan from a bank that he would get the money himself. In reliance of the agreement, wheeler demolished the buildings and ultimately prepared the property for construction. White then told wheeler that there was no loan. Is wheeler entitled to recover for white’s failure to obtain a loan? Yes. Where a promisee acts to his detriment in reasonable reliance upon an otherwise unenforceable promise, courts in other jurisdictions have recognized that the disappointed party may have a substantial and compelling claim for relief.

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Issue • • Rule •

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Promissory estoppel does not create a contract. The court acknowledges that there is no enforceable promise, but white is not allowed to raise the non-existence of such a promise as a defense.

Promissory estoppel can be used to make a contract enforceable when a contract is otherwise unenforceable. Class No. 18—Forming Bargained-for Exchange Contracts: Mutual Assent Through Offer and Acceptance (pp. 309-326) Black letter law An offer is not effective (i.e., cannot be accepted) until it is received by the offeree. E. Allan Farnsworth, Contracts 131 (4th ed. 2004). An offeror’s revocation of the offer is effective when the revocation is received by the offeree. Restatement (Second) of Contracts § 42 (1981). When the parties are in each other’s presence, or acceptance is given by telephone or other medium of substantially instantaneous two-way communication (i.e., the parties are able to communicate without any substantial lapse of time), an acceptance is effective when received by the offeror. Restatement (Second) of Contracts § 64 (1981). Unless the offer provides otherwise, an acceptance made in a manner and by a medium invited by the offer is effective and completes the manifestation of mutual assent as soon as it is put out of the offeree’s possession, regardless of whether it ever reaches the offeror. Restatement (Second) of Contracts § 63(a) (1981) (so-called “dispatch rule,” “mailbox rule,” “deposited acceptance rule,” or “Rule of Adams v. Lindsell”). • In such a situation, both the offeror and the offeree are bound (i.e., neither party can revoke). Morrison v. Thoelke (p. 309) (dispatch rule precluded offeree from revoking acceptance prior to receipt by offeror). If the address is wrong, mailbox rule doesn’t apply and thus becomes the receipt rule (acceptance upon receiving the mail).

Unless the offer provides otherwise, the “dispatch rule” does not apply to accepting an offer under an option contract. The acceptance is not effective until received by the offeror. Restatement (Second) of Contracts § 63(b) (1981); Kibler v. Caplis (p. 315). A rejection or counteroffer is not effective until received by the offeror. Restatement (Second) of Contracts § 40 (1981). The “dispatch rule” does not apply to an acceptance sent after a rejection is sent. In such a situation, whichever is received by the offeror first is effective. Restatement (Second) of Contracts § 40 (1981). An advertisement is ordinarily not considered an “offer,” even though the terms of a suggested bargain are stated in some detail. For an advertisement to be an offer, “there must ordinarily be some language of commitment or some invitation to take action without further communication.” Restatement (Second) of Contracts § 26 (1981). An offeree’s power to accept an offer is terminated if the offeror takes definite action inconsistent with an intention to enter into the contract and the offeree receives reliable information of the offeror’s action. Restatement (Second) of Contracts § 43 (1981) (“Rule of Dickinson v. Dodds”). When the offeror makes an offer of a unilateral contract (i.e., the offeror does not seek a return promise but seeks an act or forbearance), no acceptance occurs until the offeree fully completes the requested performance. Accordingly, the offeree can stop performing at any time without liability (because no contract has been formed). When the offeror makes an offer of a unilateral contract, an option contract is created (i.e., the offer becomes irrevocable) once the offeree tenders or begins the requested performance. Preparations for performance are insufficient to create an option contract under this rule. Restatement (Second) of Contracts § 45(1) (1981).

Terminology Bilateral contract—A contract in which a promise is exchanged for a promise. Unilateral contract—A contract in which a promise is exchanged for an act or a forbearance. Common student mistake Students have a habit of treating “unilateral contract” and “promissory estoppel” as the same thing. A unilateral contract is a bargained-for exchange contract (even if there really is not much actual bargaining) and thus requires an offer, an acceptance, and consideration. Promissory estoppel does not require an offer, an acceptance, or consideration. Morrison v. Thoelke: Acceptance by mail is effective on the date of mailing Facts • The appellees here are the owners of the property in Fl. The buyers/appellants signed a contract to purchase the property and mailed it to the sellers. The next day, the sellers signed the contract and sent it to the buyers’ attorney. Before the contract reached the attorney, they placed a call and repudiated the contract. The buyers recorded the actions. The owners of the property brought suit to quiet title, and wanted to enjoin the buyers from making any claim to the property. The buyers countered asking for specific performance Is a contract complete and binding when a letter of acceptance is mailed, thus barring repudiation prior to delivery to the offeror Yes. Acceptance of an offer is effective upon mailing and not upon receipt; once a document expressing acceptance has been mailed, the acceptance may not be withdrawn or repudiated unless the agreement of the parties provides otherwise.

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Issue • • Rule •

Adam v. Lindsell • DEFs had sent an offer to the PLs and expected the answer by mail. The DEFs offer was misdirected and delivered late. The DEFs expected acceptance earlier, they went ahead and sold the goods to another buyer. • It was determined that the delay was due to the DEFs misdirection of the offer. Once the offeror has chosen to use the mail, he bears the risk of delay associated with its use. Since acceptance was effective when the letter was mailed, the repudiation was invalid. Unless the offer provides otherwise, an acceptance made in a manner and by a medium invited by the offer is effective and completes the manifestation of mutual assent as soon as it is put out of the offeree’s possession, regardless of whether it ever reaches the offeror. Restatement (Second) of Contracts § 63(a) (1981) (so-called “dispatch rule,” “mailbox rule,” “deposited acceptance rule,” or “Rule of Adams v. Lindsell”). In such a situation, both the offeror and the offeree are bound (i.e., neither party can revoke). Morrison v. Thoelke (p. 309) (dispatch rule precluded offeree from revoking acceptance prior to receipt by offeror) Moulton v. Kershaw: Contract offers must contain definite terms Facts • Kershaw, a salt dealer, sent a letter to Moulton that said that Kershaw was able to offer salt in full car load lots for 85 cents per barrel. On the same day of the letter, Moulton notified Kershaw that they would buy 2,000 barrels. The next day, Kershaw told Moulton that they withdrew the letter offer. Issue • Did the letter sent to Moulton constitute a contract to sell salt? • No. The letter sent out be DEF was not an offer to sell a specific quantity of salt, but only an announcement or ad for business. The letter does not give an amount of how much salt is available to purchase. Rule

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An offer to make a contract must contain terms that are certain enough to be readily enforced

An advertisement is ordinarily not considered an “offer,” even though the terms of a suggested bargain are stated in some detail. For an advertisement to be an offer, “there must ordinarily be some language of commitment or some invitation to take action without further communication.” Restatement (Second) of Contracts § 26 (1981). Petterson v. Pattberg: An offer to make a unilateral contract may be withdrawn Facts • PL owned property and DEF owned a bond that was secured by a third mortgage on PL’s property. The mortgage provided that PL would repay it in equal quarterly payments of 250.00. DEF wrote to PL saying that he would accept cash for the mortgage and would make an allowance of 780.00 if the mortgage was paid when due. PL went to DEF’s house and knocked on the door; DEF asked who is it, and PL stated that he had come to pay off the mortgage. DEF replied that he had sold the mortgage, PL then showed him the money and that he was ready to pay of the mortgage. DEF refused to accept and PL paid off the mortgage to the other person. PL seeks the 780 promised. Did pattberg revoke the offer to accept the payment? Yes. An offer to make a unilateral contract may be revoked at any time prior to the tender of performance. Clearly the defendant's letter proposed to Petterson the making of a unilateral contract, the gift of a promise in exchange for the performance of an act. The thing conditionally promised by the defendant was the reduction of the mortgage debt. The act requested to be done, in consideration of the offered promise, was

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Issue • • Rule •

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payment in full of the reduced principal of the debt prior to the due date thereof. “If an act is requested, that very act and no other must be given.” (Williston on Contracts, sec. 73.) “In case of offers for a consideration, the performance of the consideration is always deemed a condition.” (Langdell's Summary of the Law of Contracts, sec. 4.) It is elementary that any offer to enter into a unilateral contract may be withdrawn before the act requested to be done has been performed. When the offeror makes an offer of a unilateral contract (i.e., the offeror does not seek a return promise but seeks an act or forbearance), no acceptance occurs until the offeree fully completes the requested performance. Accordingly, the offeree can stop performing at any time without liability (because no contract has been formed). When the offeror makes an offer of a unilateral contract, an option contract is created (i.e., the offer becomes irrevocable) once the offeree tenders or begins the requested performance. Preparations for performance are insufficient to create an option contract under this rule. Restatement (Second) of Contracts § 45(1) (1981). Everything is based on the Receipt rule, upon receiving of the acceptance unless you are dealing with the dispatch rule. Class No. 19—Forming Bargained-for Exchange Contracts: Offer and Acceptance (cont.) (pp. 327-41) Black letter law If an offer for a bilateral contract prescribes (i.e., requires) a time, place, form, or medium for acceptance, acceptance must comply with any such requirements in order for it to be effective (this is one reason why the offeror is called “master of the offer”). Restatement (Second) of Contracts § 60 (1981).

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To determine when the offer prescribes or merely suggests a time, place, form, or medium of acceptance, the objective theory of contract is applied.

If an offer for a bilateral contract does not prescribe a time, place, form, or medium of acceptance, the offer is construed as inviting acceptance in any way reasonable under the circumstances (which might include beginning performance, provided notice of beginning performance reaches the offeror prior to a revocation of the offer reaching the offeree). Restatement (Second) of Contracts § 30 (1981); id. § 54 cmt. b (discussing the requirement of notice of acceptance by performance); UCC § 2-206(1)(a). If an offer prescribes a time, place, form, or medium of acceptance and the offeree attempts to accept in a different way, the offeror will be estopped from arguing the acceptance was not effective if the offeror acquiesced and accepted the benefits of the offeree’s performance. Allied Steel & Conveyors, Inc. v. Ford Motor Co. (p. 338). If no time for expiration of a power of acceptance is specified in the offer, the power terminates at the end of a reasonable time. (Casebook p. 336.) An offer may create a power of acceptance in a specified person, a member of a specific group, or a member of the general public (the last is known as a “general offer”). Restatement (Second) of Contracts § 29(2) (1981); Carlill v. Carbolic Smoke Ball Co. (p. 327). The acceptance of an offer of a unilateral contract is effective upon completion of performance, and notification to the offeror is unnecessary for an effective acceptance unless the offer requests such notification. Restatement (Second) of Contracts § 54(1) (1981); Carlill v. Carbolic Smoke Ball Co. (p. 327). There is not an effective acceptance unless the offeree knows of the offer (there is no “manifestation of mutual assent” in such a situation). (Casebook p. 334, “Note: Unknown Offers of Rewards”).

In the absence of an enforceable promise by an employer of a definite term of employment (e.g., a promise to employ the employee for three years) or a promise of job security (e.g., a promise to only terminate the employee for “just cause”), the employment relationship between an employee and an employer is “at will,” meaning that the employee or the employer may terminate the employment relationship at any time and for any reason, without contractual liability (so-called “employment at-will” doctrine). A letter of acceptance that is misaddressed or that has insufficient postage, or the use of a medium of acceptance that is not invited by the offeror (e.g., sending a letter when the offer requires a telegram), is not effective upon dispatch as an acceptance under the “dispatch rule,”unless the notice of acceptance is seasonably dispatched and is actually received by the offeror within the time in which a properly dispatched acceptance would have arrived. Restatement (Second) of Contracts § 67 (1981). Terminology Employment at will—“Employment that is usu. undertaken without a contract and that may be terminated at any time, by either the employer or the employee, without cause.” Black’s Law Dictionary (9th ed. 2009). Carlil v. Carbolic Smoke Ball: A reward offered in an Ad. must be paid if the conditions are met Facts • DEF placed an ad that its smoke ball will prevent the Flu. The ad offered a 100 reward to any person who contracted one of the diseases listed after using the ball according to the directions. “1000 is deposited in a bank account showing our sincerity in the matter.” PL used the ball as directed and contracted one of the diseases. If one performs all the conditions for receiving a reward offered in an ad, has the offer been accepted? Yes.

Issue • •

Rule • One who performs the conditions for receiving a reward offered in an ad has accepted the offer, creating a contract for payment of the reward. The ad was construed as offering a reward because it sought to induce performance, unlike an invitation in most ads to negotiate or make an offer, which seeks a reciprocal promise. The acceptance of an offer of a unilateral contract is effective upon completion of performance, and notification to the offeror is unnecessary for an effective acceptance unless the offer requests such notification

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Cobaugh v. Klick – Lewis: the manifestation of an offeror’s intent determines whether an enforceable offer was made Facts • PL was playing in a golf tournament and came up to a hole that offered a car to anyone that could hit a hole-in-one. PL did on that hole and went to claim the car. The DEF refused to give him the car saying that it was given away 2 days ago in a charity. Was the DEF obligated to deliver the car, promised on the sign? Yes. The offeror’s manifested intent determines whether a person has the power to accept the offer. A requirement to accept the offer, he must be aware of the offer. If he hadn’t of seen the car/sign, then there was no offer.

Issue • • Rule • •

Allied Steel & Conveyors v. Ford Motor Co. Facts • Ford contracted to purchase machinery from Allied to be installed on Ford’s premises by Allied workers. The agreement contained a provision that made Allied responsible for the negligence of Ford’s

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employees arising out of Allied’s installation of the machines. The agreement stated that it should not be binding until accepted and acceptance is only acknowledged when a copy is sent back to ford. Prior to the copy being sent back to Ford, an employee of Allied was injured through he negligence of Ford’s employees. The employee sued Ford and Ford sued Allied. Was the clause in affect at the time of the injury even though the signed agreement had not been returned as the contracted stated? Yes If an offer merely suggests a manner of acceptance, other methods of accepting the offer are not precluded. If an offer prescribes a time, place, form, or medium of acceptance and the offeree attempts to accept in a different way, the offeror will be estopped from arguing the acceptance was not effective if the offeror acquiesced and accepted the benefits of the offeree’s performance.

Issue • • Rule •

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You should note that even if a contract is a unilateral contract, it is still considered a bargained-for exchange. You should also keep in mind that with a unilateral contract, acceptance and performance (and providing consideration) all take place at the same time. Class No. 20—Forming Bargained-for Exchange Contracts: Mutual Assent Through Offer and Acceptance (cont.) (pp. 341-53) Black letter law Except as provided in black letter law rule no. 2 below, an offeree’s power of acceptance is terminated by • (1) a rejection or counter-offer by the offeree; • (2) the lapse of time (either the amount of time specified in the offer or, in the absence of a specified amount of time, a reasonable amount of time);

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(3) revocation by the offeror; or (d) death of the offeror or offeree. Restatement (Second) of Contracts § 36(1) (1981).

The offeror’s death terminates the offeree’s power of acceptance upon death, not upon notice to the offeree. Restatement (Second) of Contracts § 37 (1981). When it is unclear whether an offeror intends a bilateral contract or a unilateral contract (i.e., when the nature of the invited acceptance—promise or performance—is in doubt), the offeree can accept the offer either by promising to perform or by performance, as the offeree chooses. Restatement (Second) of Contracts § 32 (1981). In such • • • • a situation, an acceptance by performance occurs if the offeree (1) tenders the beginning of performance; (2) tenders performance; (3) begins performance; or (4) performs. Restatement (Second) of Contracts § 62(1) (1981).

An acceptance by performance under black letter law no. 3 operates as a promise to render complete performance (thus, the resulting contract is a bilateral contract). Restatement (Second) of Contracts § 62(2) (1981). An offer to buy goods for prompt or current shipment is construed as inviting acceptance either by a prompt promise to ship the goods or by the prompt or current shipment of the goods. UCC § 2-206(1)(b). Davis v. Jacoby: Bilateral contracts are presumed unless it is shown that a unilateral contract was intended Facts • PL and her husband accepted an offer to take care of PL’s aunt and uncle in return for receiving the entire estate of the aunt and uncle, but the aunt’s and uncle’s wills made no provision for PL.

Issue

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Could the offer made by whitehead to leave his estate to the PLs in exchange for her services be accepted only by performance? No. Offers will be treated as offers to make a bilateral contract, which can be accepted by a promise to perform, unless there is evidence that the offer was to make a unilateral contract. The offeror’s death terminates the offeree’s power of acceptance upon death, not upon notice to the offeree.

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Brackenbury v. Hodgkin: Performance renders a unilateral contract binding Facts • PL moved to Maine to take care of DEF in reliance on DEF letter, which said that PL would get DEF property when she died if the PL would take care of her for the rest of her life, but DEF changed her mind and wanted PL off her property Are the PLs entitled to an order creating a trust to protect their interest in the farm? Yes. A unilateral contract becomes binding on the offeror when the offeree begins performance. The court says that the PLs acceptance was effective when they moved to the farm and began to take care of DEF.

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4/19/13 1:25 PM Class No. 21—Limited and Indefinite Promises (“Illusory Promises”) (pp. 353-68) Black letter law A party cannot breach an illusory promise. Davis v. Gen. Foods Corp. (p. 355). • You cannot sue on the contract for a breach of it because it is not a true promise • An illusory promise is no promise at all. An illusory promise is not consideration for a return promise. Accordingly, the party making the illusory promise cannot enforce the other party’s promise on the theory that it is enforceable as part of a bargained-for exchange (though it might be enforceable if there is a consideration substitute). A promise is not illusory when the condition determining whether the promisor must perform or not is something outside of the promisor’s control. A purported promise is only illusory when the promisor’s discretion to perform is completely within the promisor’s control. Accordingly, the promise is not illusory when the promisor’s discretion is limited in any way or when it is possible for the promisor to breach her promise. A contract that by its terms can be terminated or cancelled by the promisor renders the promisor’s promises in the contract illusory if the termination power is unrestricted (i.e., a power to terminate or cancel the contract for any reason at any time without notice to the other party). Laclede Gas Co. v. Amoco Oil Co. (p. 356). The power to terminate is not unrestricted if it is limited in any way, such requiring notice to the other side, requiring a certain amount of notice (e.g., 10 days’ notice), or being exercisable only under certain circumstances (e.g., a power to terminate only if the other party breaches or only “before shipment of the goods”). Gurfein v. Werbelovsky (p. 361); Restatement (Second) of Contracts § 77 ill. 4 & 5 (1981).

If a power to terminate or cancel a contract is exercised, the party terminating or cancelling the contract must still pay at the contract price for any goods or services already received under the contract. See, e.g., UCC § 2-607(1) (“The buyer must pay at the contract price for any goods accepted.”) (emphasis added). A promise is not illusory as long as it includes an implied commitment. Wood v. Lucy, Lady Duff-Gordon (p. 361). “A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.” UCC § 2-306(2). A promise to perform that is conditioned (expressly or impliedly) on the promisor’s satisfaction (objective or subjective satisfaction, i.e., “reasonable” satisfaction or “good faith” satisfaction) with the quality of the promisee’s performance or the quality of the goods provided is consideration for the other party’s promise, because the promisor’s discretion to not perform is limited (the promisor must perform if satisfied). Omni Group, Inc. v. SeattleFirst Nat’l Bank (p. 365). A seller of land is entitled to specific performance when the buyer breaches her promise to buy, provided that the buyer would be entitled to specific performance if the seller had breached (which will be the case unless the state follows the Idaho minority rule). See Obering v. Swain-Roach Lumber Co. (p. 358); Casebook at p. 163. (Although the seller would seem to have an adequate remedy at law (money damages), specific performance is usually justified on the idea of “mutuality of remedy.”). Terminology Illusory promise—“A promise that appears on its face to be so insubstantial as to impose no obligation on the promisor; an expression

cloaked in promissory terms but actually containing no commitment by the promisor.” Black’s Law Dictionary (9th ed. 2009). Mutuality of obligation—“The agreement of both parties to a contract to be bound in some way.” Black’s Law Dictionary (9th ed. 2009). Satisfaction contract—“A contract by which one party agrees to perform to the satisfaction of the other.” Black’s Law Dictionary (9th ed. 2009). Common Student Mistake Students tend to believe a promise is illusory simply because performance is conditioned (or contingent) on some event occurring, and therefore tend to believe promises are illusory when they are not. Remember, as long as a promisor’s discretion is limited in any way, the promise is not illusory. It will be unusual for a purported promise to be illusory. Obering v. Swain-Roach Lumber Co.: Lack of merchantable title does not render a sales contract void for lack of mutuality Facts • Obering and Swain entered into an agreement where Swain was to buy a farm and take the all the timber off the land and Obering was going to buy the farm from Swain. The agreement also contained a they had 4 years to remove the timber. Swain bought the farm and went to transfer deed to Obering and they refused to pay for the farm. If the parties entered into a contract obligating one of them to purchase property from the other who had not yet obtained any interest in the property, is the contract void for lack of mutuality? No. An offer to sell property is not binding until the seller obtains the land, but the seller’s lack of merchantable title does not render his contract with the buyer void for lack of mutuality.

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A seller of land is entitled to specific performance when the buyer breaches her promise to buy, provided that the buyer would be entitled to specific performance if the seller had breached (which will be the case unless the state follows the Idaho minority rule). See Obering v. Swain-Roach Lumber Co. (p. 358); Casebook at p. 163. (Although the seller would seem to have an adequate remedy at law (money damages), specific performance is usually justified on the idea of “mutuality of remedy.”).

Wood v. Lucy, Lady Duff-Gordon: An exclusive-dealing contract contains an implied duty to make reasonable efforts Facts • PL and DEF entered into a contract where PL was to have the exclusive right to market DEF’s designs and to place her endorsement on others’ designs. In exchange, DEF was to pay PL .5 of the profits. DEF was a famous clothing designer and many people bought her clothes just for the name. Is an exclusive agency agreement that does not explicitly recite consideration void lack of promise? No. Acceptance of an exclusive agency is an assumption of its duties, and a promise by the agent to perform the terms of the contract creates a mutuality of obligation that may be implied even though it is not expressed. A promise is not illusory as long as it includes an implied commitment. “A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the

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goods and by the buyer to use best efforts to promote their sale.” UCC § 2-306(2). Omni Group v. Seattle-First Nat’l Bank: Illusory Promises are not Enforceable Facts • PL made an offer to purchase property from the Clarks, subject to PL’s satisfaction with a feasibility study, but the Clarks declined to go through with the purchase transaction, and PL sued DEF, executor for Clark’s estate, for specific performance Is a promise to purchase property illusory simply because it is contingent on the purchaser receiving an acceptable suitability report? No. An exchange of promises is sufficient consideration to support a contract; but if one of the promises is illusory, there is a failure to consideration and the contract is not enforceable. An illusory promise is not adequate consideration, but a promise is not illusory simply because it depends on the satisfaction of a condition.

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The Restatement describes an illusory promise as “words of promise which by their terms make performance entirely optional with the ‘promisor’ . . . .” Restatement (Second) of Contracts § 77 cmt. a (1981). The classic illusory promise is, “I promise to pay you if I feel like it.” • Davis v. General Foods Corp. (p. 355) provides a useful example of this classic type of illusory promise. Another example is, “If you place an order with our company, we will consider accepting it.” See, e.g., Nat Nal Serv. Stations v. Wolf (p. 355). (Note that in Nat Nal there could not be an offer by the wholesaler because the wholesaler retained discretion to reject the order.

When an apparent offeror retains discretion to reject an acceptance—which is different from the power to revoke an offer prior to acceptance—there is no “offer.” Class No. 22—Limited and Indefinite Promises (cont.) (pp. 368-86) Black letter law Output contracts and requirements contracts are not unenforceable for lack of mutuality of obligation (i.e., neither party’s promise is illusory) or lack of definiteness (i.e., not having reasonably certain terms). Lima Locomotive & Mach. Co. v. Nat’l Steel Castings Co. (p. 369); UCC § 2-306 Official Comment 2; Restatement (Second) of Contracts § 33 ill. 10 (1981). “A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.” UCC § 2-306(1). Although all contracts include an implied duty of good faith and fair dealing, such implied duty cannot override or strike an express contract term. Corenswet, Inc. v. Amana Refrigeration, Inc. (p 373). “Even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain.” Restatement (Second) of Contracts § 33(1) (1981). “The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy.” Restatement (Second) of Contracts § 33(2) (1981). “The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be

understood as an offer or as an acceptance.” Restatement (Second) of Contracts § 33(3) (1981). UCC: If the parties intend to conclude a contract, but do not specify a price, the contract is not unenforceable for lack of definiteness. In such a situation, the price is a reasonable price at the time for delivery. UCC § 2-305(1), overruling Sun Printing & Publ’g Ass’n v. Remington Paper & Power Co. (p. 376). “A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.” Restatement (Second) of Contracts § 26 (1981) (this section is titled “preliminary negotiations”). If the parties orally manifest mutual assent to a bargain, the fact that they intend to prepare and adopt a written document memorializing the oral agreement already reached, but never adopt a written document, will not prevent the oral agreement from being binding. But if the parties manifest an intention to not be bound until they manifest mutual assent to the written document, then there is no contract until that occurs. Restatement (Second) of Contracts § 27 (1981). Terminology Output contract—“A contract in which a seller promises to supply and a buyer to buy all the goods or services that a seller produces during a specified period and at a set price. • The quantity term is measured by the seller's output. An output contract assures the seller of a market or outlet for the period of the contract.” Black’s Law Dictionary 371 (9th ed. 2009). Requirements contract—“A contract in which a buyer promises to buy and a seller to supply all the goods or services that a buyer needs during a specified period. • The quantity term is measured by the buyer's

requirements. A requirements contract assures the buyer of a source for the period of the contract.” Black’s Law Dictionary 373 (9th ed. 2009). Lima Locomotiv v. National Steel Output contracts and requirements contracts are not unenforceable for lack of mutuality of obligation (i.e., neither party’s promise is illusory) or lack of definiteness (i.e., not having reasonably certain terms). Feld v. Henry S. Levy & Sons Facts • The DEF was selling breadcrumbs to the PL under an agreement that obligated the DEF to sell to the PL all the crumbs it produced, but when the DEF discontinued producing breadcrumbs, the PL sued. Issue • Does an output contract requiring a supplier to sell a buyer all of a product if manufacturers, obligate the supplier to deliver reasonable quantities of the product for the duration of the contract term? • Yes. The contract between the DEF and the PL was an output contract that required the DEF to sell all the crumbs it produced to the PL. Rule • Parties to an output contract must use best efforts and reasonable behavior to set the quantities “A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.” UCC § 2-306(1). It isn’t illusory because if they were to make bread crumbs, they would have to sell them to that specific company and to no one else. This is similar to wood v. Lady but this time flipped – lady suing wood

Corenswet v. Amana PL was in a contract with DEF that DEF would supply refrigerators and either party could get out with a 10 day notice. After 7 years, DEF gave notice to begin supplying another company. Although all contracts include an implied duty of good faith and fair dealing, such implied duty cannot override or strike an express contract term Sun Printing v. Remington Paper: Contracts Must Include All Essential Terms Facts • Issue • • • Rule • The court is not at liberty to revise an agreement while attempting to construe it. “The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance.” Restatement (Second) of Contracts § 33(3) (1981). UCC: If the parties intend to conclude a contract, but do not specify a price, the contract is not unenforceable for lack of definiteness. In such a situation, the price is a reasonable price at the time for delivery. UCC § 2-305(1), overruling Sun Printing & Publ’g Ass’n v. Remington Paper & Power Co. (p. 376). Is a contract that is missing an essential term enforceable? No. Without an agreement as to time, there was no predictability or stability. The parties entered into a contract for the sale and purchase of paper but neglected to address the duration of a pricing term

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Empro Mfg. Co. v. Ball-Co. Mfg.: agreements that are subject to other agreements are not binding contracts Facts

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PL signed a letter of intent to purchase the assets of DEF, which was subject to several conditions, but the parties could not agree on the final terms of the contract. Is PL entitled to an order enforcing the letter of intent even though it was subject to a later agreement and further approval? No. The terms of the letter of intent show that the parties did not intend for it to be a binding agreement. An agreement that is made subject to a later agreement is not sufficiently definite to be a binding contract. “A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.” Letters of intent and agreements in principle often, and here, do no more than set the stage for negotiations on details. PL claims that it is entitled at least to recover its “reliance expenditures”, but the only expenditures it has identified are those normally associated with pre-contractual efforts: its complaint mentions the expenses “in negotiating with defendants, in investigating and reviewing defendants' business, and in preparing to acquire defendants' business.”

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Binding Preliminary Agreements – 2 categories: • (1) A fully binding preliminary agreement, which is created when the parties agree on all the points that require negotiation but agree to memorialize their agreement in a more formal document • (2) “Binding Preliminary Commitment” is binding only to a certain degree It is created when the parties agree on certain major terms, but leave other terms open for further negotiation.

The parties accept a mutual commitment to negotiate together in good faith in an effort to reach a final agreement. First, courts must be wary of “trapping parties in surprise contractual obligations that they never intended” to undertake. Second, “courts must enforce and preserve agreements that were intended to be binding, despite a need for further documentation or further negotioation,” for it is “the aim of contract law to gratify, not to defeat, expectations.”

Class No. 23—The Effect of Adopting a Writing: The Parol Evidence Rule (pp. 387-406) “[F]ew things are darker than [the parol evidence rule] or fuller of subtle difficulties.” James Bradley Thayer “There is scarcely any subject more perplexed than in what cases and to what extent parol evidence shall be admitted.” Thompson v. M’Clenachan (1827) Black letter law The parol evidence rule: An oral or written promise (otherwise enforceable) is rendered unenforceable by a subsequent integrated agreement if • (1) the promise is contradicted by a term in the integrated agreement; or • (2) under the circumstances the promise naturally (or “certainly” under the UCC) would have been included in the integrated agreement if the parties had intended it to be binding. Restatement (Second) of Contracts §§ 213, 216 (1981); UCC § 2-202. A court considers all relevant evidence (not simply the written document itself) when deciding whether a written document is an integrated agreement. Restatement (Second) of Contracts §§ 213 cmt. b & 214(a) (1981). If the prior promise is supported by consideration other than (i.e., “distinct from” or “separate from”) the promisee’s promise to enter into the integrated agreement or consideration within the integrated agreement, it is one that naturally would be excluded from the written contract. Restatement (Second) of Contracts § 216(2)(b) (1981). In deciding whether a promise naturally (or “certainly” under the UCC) would have been included in a subsequent integrated agreement if the

parties had intended it to be binding, the court might consider, in addition to any other relevant evidence: • whether the written agreement includes an integration clause (and the clause’s scope); the parties’ sophistication; whether the parties were represented by attorneys; the bargaining power between the parties (if a party has greater bargaining power it is more natural for a term favoring the weaker party to be excluded); whether the agreement was between businesspersons or between family members; whether such a promise is ordinarily included in a written agreement of that kind; whether the written agreement is a standardized form that does not lend itself to the insertion of additional terms; how closely connected the promise is to the principal transaction; whether the written agreement appears complete on its face (taking into account the written agreement’s length; the written agreement’s detail; and the written agreement’s formality, including whether it is typed or handwritten and whether it is signed by the parties); and whether the prior promise being rendered unenforceable would lead to an unreasonable result. Courts that favor the parol evidence rule (and therefore apply the rule broadly) are more likely to find that the promise contradicts a term in the integrated agreement (including an implied in fact or implied in law term). Mitchill v. Lath (p. 387). • Courts that disfavor the parol evidence rule (and therefore apply the rule narrowly) are more likely to find that the promise does not contradict a term in the integrated agreement (including rejecting the idea that the promise can contradict an implied in fact or implied in law term). Hatley v. Stafford (p. 394). Courts that favor the parol evidence rule (and therefore apply the rule broadly) tend to focus on whether reasonable persons naturally would have included the prior promise in the integrated agreement if they had intended it to be binding (Williston’s approach). • Courts that disfavor the parol evidence rule (and therefore apply the rule narrowly) tend to focus on whether these particular parties naturally would have included the prior promise in the integrated

agreement if they had intended it to be binding (i.e., the focus is more on whether parties actually intended the integrated agreement to eliminate the prior promise) (Corbin’s approach). Whether there is an integrated agreement and whether a promise is rendered unenforceable by a subsequent integrated agreement under the parol evidence rule are issues of law to be decided by the court. When deciding whether a promise is rendered unenforceable by a subsequent integrated agreement under the parol evidence rule, the court is to assume the promise was made. If the court determines that the prior promise is not rendered unenforceable under the parol evidence rule, the trier of fact (i.e., the jury in a jury trial and the court in a bench trial) decides whether the promise was actually made. Hatley v. Stafford (at p. 397). Terminology Integrated agreement—“[A] writing constituting a final expression of one or more terms of an agreement.” Restatement (Second) of Contracts § 209 (1981). Integration clause (or “merger clause”)—“A contractual provision stating that the contract represents the parties’ complete and final agreement and supersedes all informal understandings and oral agreements relating to the subject matter of the contract.” Black’s Law Dictionary (9th ed. 2009). Parol evidence rule—“The common-law principle that a writing intended by the parties to be a final embodiment of their agreement cannot be modified by evidence of earlier or contemporaneous agreements that might add to, vary, or contradict the writing.” Black’s Law Dictionary 1227 (9th ed. 2009). Common student mistakes Many students incorrectly believe that the parol evidence rule applies to evidence prior to the parties entering into an oral contract. The parol

evidence rule only applies when the parties reduce their agreement to a written contract (note the definition of “integrated agreement”). Many students incorrectly believe that the parol evidence rule applies to promises made after the parties enter into a written contract. The parol evidence rule only applies to promises before the parties enter into a written contract. Whether promises after the parties enter into a written contract can modify the written contract is not an issue involving the parol evidence rule (i.e., the parol evidence rule has no application to such an issue). • Rather, in such a situation the issue is whether there has been an effective modification of the written contract, an issue we covered this semester with respect to reliance on a promise to modify the contract (Casebook pp. 253-55), and an issue that we will cover in more depth in the spring. Many students incorrectly believe that the parol evidence rule applies only to prior promises that are oral. This mistake is understandable because the primary definition of “parol evidence” is “[e]vidence of oral statements.” Black’s Law Dictionary (9th ed. 2009). But the second definition of “parol evidence” is simply “extrinsic evidence” (i.e., any evidence outside the written contract), and that is what is meant by “parol evidence” in the term “parol evidence rule.” • So remember that the “parol evidence rule” applies to prior promises that are oral or written (like a memorandum of intended terms). See Robert A. Hillman, • Principles of Contract Law 231 (2004) (“[T]he rule also precludes evidence of prior written agreements that contradict the parties’ final written agreement.”). Mitchell v. Lath: the parol evidence rule bars the use of evidence to contradict or expand the obligations in a written agreement Facts

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The DEFs offered to sell their property to PL; PL was interested in the property, but told the DEFs they had to remove the icehouse from the property and the DEFs agreed Does the Parol Evidence Rule prevent PL from bringing an action to enforce the oral promise of the DEFs to remove the icehouse when it was not part of the parties’ written agreement? Yes. An oral testimony, even if admissible, cannot control over the terms of a written contract unless admitted without objection. It is intended to prevent attempts to modify a written contract by oral evidence, but it does not limit testimony to construe an oral contract that exists separately from the parties’ written contract The parol evidence rule bars the admission of evidence of an oral agreement that contradicts the term of a written contract when the purported oral agreement is closely related to the subject matter of the written agreement and addresses a matter that ordinarily would have been covered in the written agreement. Courts that favor the parol evidence rule (and therefore apply the rule broadly) are more likely to find that the promise contradicts a term in the integrated agreement (including an implied in fact or implied in law term). Courts that favor the parol evidence rule (and therefore apply the rule broadly) tend to focus on whether reasonable persons naturally would have included the prior promise in the integrated agreement if they had intended it to be binding (Williston’s approach).

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It can be either a ORAL or a WRITTEN promise prior to the Written Contract. Hatley v. Stafford: Non-contradictory parol evidence is admissible when the parties did not reduce their entire agreement to writing Facts

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PL filed an action against his lessor DEF. DEF would rent 52 acres to PL to grow wheat. The lease provided that DEF the right to buy out the lease paying PL his cost per acre but no more the 70 per acre to allow DEF to develop a mobile home park. PL was to pay DEF 1800 as rent and the balance later that year. PL alleged that DEF entered on the property and began cutting down his wheat. DEF argued that when they offered PL his cost per acre, he demanded 400 per acre based on the cost of his crop. PL contended that the buyout provision of the lease was intended only to operate during the first 30 – 60 days of the lease. Found for PL. Affirmed. Did the court err by allowing the PL to introduce evidence of a subsequent oral agreement with the DEF that served to modify the terms of the parties’ written agreement? No. Parol evidence may be used to establish an oral agreement placing a time limit on a contract provision when the time limit would not contradict the written contract and, based on the facts surrounding execution, the time limit may have been omitted given the level of sophistication of the parties.

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Courts that disfavor the parol evidence rule (and therefore apply the rule narrowly) are more likely to find that the promise does not contradict a term in the integrated agreement (including rejecting the idea that the promise can contradict an implied in fact or implied in law term). Hatley v. Stafford (p. 394). Courts that disfavor the parol evidence rule (and therefore apply the rule narrowly) tend to focus on whether these particular parties naturally would have included the prior promise in the integrated agreement if they had intended it to be binding (i.e., the focus is more on whether parties actually intended the integrated agreement to eliminate the prior promise) (Corbin’s approach). Class No. 24—Limitations on the Parol Evidence Rule (pp. 406—28)

Black letter law The parol evidence rule does not render unenforceable an agreement under which the parties agree that the written contract will not become effective until a particular event occurs (a so-called “condition precedent”), unless the agreement contradicts the written contract. Restatement (Second) of Contracts § 217 (1981); Long Island Trust Co. v. Int’l Inst. for Packaging Educ., Ltd. (p. 406). A fraudulent promise (i.e., a promise that the promisor, when making the promise, had no intention of keeping) is subject to the parol evidence rule when the promisee sues in contract to enforce the promise (assuming the elements of the parol evidence rule are established). Lipsit v. Leonard (p. 413). The parol evidence rule does not preclude the admissibility of a misrepresentation to void a written contract that was entered into as a result of the misrepresentation. Restatement (Second) of Contracts § 214(d); Lipsit v. Leonard (p. 413). “If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient.” Restatement (Second) of Contracts § 164(1) (1981). A party who has the power to void (or “disaffirm”) a contract loses that power by ratifying (or “affirming”) the contract. Ratification occurs by the party expressly ratifying the contract or impliedly ratifying the contract. Implied ratification occurs through • (1) some unequivocal act giving rise to a reasonable inference that the party intended to ratify the contract; or • (2) the party failing to disaffirm within a reasonable time after learning of the contract’s defect. LaFazia v. Howe (p. 418).

A party who voids a contract is entitled to restitution for any benefit provided to the other party through part performance. Restatement (Second) of Contracts § 376 (1981). Majority rule: The parol evidence rule does not preclude the admissibility of a misrepresentation to prove a tort claim, including tort claims for • (1) promissory fraud; and • (2) fraud in the inducement. Lipsit v. Leonard (p. 413). Minority rule #1 (extrinsic versus intrinsic fraud): The parol evidence rule does not preclude the admissibility of a misrepresentation to prove a tort claim, including tort claims for • (1) promissory fraud; and • (2) fraud in the inducement, provided that the fraud is extrinsic (i.e., “independent of the contract” or “extraneous to the contract”) and not intrinsic (“not directly at variance with the writing”). Bank of Am. Nat’l Trust & Sav. Ass’n v. Pendergrass (p. 416). Minority rule #2 (scheme to defraud): The parol evidence rule does not preclude the admissibility of a misrepresentation to prove a tort claim, including tort claims for • (1) promissory fraud; and • (2) fraud in the inducement, provided that the fraud is one element of a scheme to defraud (i.e., one element of an overall pattern of fraudulent acts). Steinberg v. Chicago Med. Sch. (p. 417). The elements of a tort claim for promissory fraud are: • (1) a promise made with no intent to keep it; • (2) the promisor intended the promisee to rely on the promise; • (3) justifiable reliance by the promisee; and • (4) resulting damage. The elements of a tort claim for fraud (deceit) in the inducement are: • (1) an intentional misrepresentation of a material fact; • (2) the misrepresentation was made to induce the recipient to enter into a proposed contract;

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(3) justifiable reliance by the recipient; and (4) resulting damage.

Factors to be considered in deciding whether reliance on a fraudulent misrepresentation prior to entering into a written contract is unjustified because of an integration clause or a disclaimer (i.e., “non-reliance clause”) include: • (1) whether the integration clause or disclaimer specifically covers the misrepresentation or is of a general, non-specific nature; • (2) whether the integration clause or disclaimer was read and understood by the party claiming fraud; and • (3) whether the integration clause or disclaimer itself was procured by fraud. LaFazia v. Howe (p. 418); Sabo v. Delman (p. 418). Majority rule: In a tort action for promissory fraud or fraud in the inducement, the plaintiff is entitled to damages to protect her expectation interest. (Casebook p. 418.) • Minority rule: In a tort action for promissory fraud or fraud in the inducement, the plaintiff is entitled to damages to protect her reliance interest. Lipsit v. Leonard (p. 413). Neither the parol evidence rule nor the Statute of Frauds precludes the admissibility of evidence to establish the grounds for the reformation of a written contract. Restatement (Second) of Contracts § 214(e) (1981) (parol evidence rule); id. § 156 (Statute of Frauds); Hoffman v. Chapman (p. 425). The equitable remedy of reformation of a written contract is available to make the document conform to the real intentions of the parties when the party can prove that the evidence is so clear, strong, and convincing as to leave no reasonable doubt that a mutual mistake was made in the document contrary to the parties’ actual agreement (i.e., there was a “mistake in integration”). Hoffman v. Chapman (p. 425); Restatement (Second) of Contracts § 155 (1981). Negligence by the party seeking reformation (i.e., the mistake in integration was caused by the party’s negligence) does not preclude a claim for

reformation, unless the negligence caused prejudice to the other party. Hoffman v. Chapman (p. 425). Terminology Condition precedent--“An act or event, other than a lapse of time, that must exist or occur before a duty to perform something promised arises. If the condition does not occur and is not excused, the promised performance need not be rendered.” Black’s Law Dictionary (9th ed. 2009). Fraud in the inducement—“Fraud occurring when a misrepresentation leads another to enter into a transaction with a false impression of the risks, duties, or obligations involved.” Black’s Law Dictionary (9th ed. 2009). Non-reliance clause—A provision in a contract stating that a party is not relying on any representations made by the other party outside of the written contract. Promissory fraud—“A promise to perform made when the promisor had no intention of performing the promise.” Black’s Law Dictionary (9th ed. 2009). Voidable contract—“A contract that can be affirmed or rejected at the option of one of the parties.” Black’s Law Dictionary (9th ed. 2009). Long Island Trust v. International Inst. For Packaging: Guarantors could use parol evidence to establish their guarantees were conditional Facts • Issue • Where a promise to guarantee payment of a note was delivered on the condition that the bank would obtain the signatures of all five identified guarantors, may parol evidence be used to support a defense to the guarantee? A bank brought an action against endorsers for the nonpayment of a renewed promissory note.

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Yes. The DEFs argue that the agreement they had with their loan officer, Dean, made their guarantee conditional on the bank’s procuring the signature of all the guarantors, including D’Onofrio. Since the bank failed to obtain all of these endorsements, the bank’s claim against the other guarantors is invalid. The parol evidence rule does not render unenforceable an agreement under which the parties agree that the written contract will not become effective until a particular event occurs (a so-called “condition precedent”), unless the agreement contradicts the written contract. Whenever you have a condition precedent, the theory is that a contract hasn’t been made until the condition precedent has been fulfilled.

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The Fraud Exception – Tort and Contract Lipsit v. Leonard: Recovery may be sought by alleging fraud where a promise itself cannot be enforced Facts • PL agreed to work for DEF and the terms of his employment were set out in a series of annual letters; DEF made other promises to PL not reflected in the letters to the effect that PL would eventually be given an equity position in the company for his good work When parties have a written agreement covering the terms of their relationship, may a party introduce evidence of oral promises to support a claim for fraud? Yes. A promise that implies an intention to fulfill constitutes a basis for reliance. A fraudulent promise (i.e., a promise that the promisor, when making the promise, had no intention of keeping) is subject to the parol evidence rule when the promisee sues in contract to enforce

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the promise (assuming the elements of the parol evidence rule are established). • The parol evidence rule does not preclude the admissibility of a misrepresentation to void a written contract that was entered into as a result of the misrepresentation.

The elements of a tort claim for fraud (deceit) in the inducement are: • (1) an intentional misrepresentation of a material fact; • (2) the misrepresentation was made to induce the recipient to enter into a proposed contract; • (3) justifiable reliance by the recipient; and • (4) resulting damage. Majority rule: The parol evidence rule does not preclude the admissibility of a misrepresentation to prove a tort claim, including tort claims for • (1) promissory fraud; and • (2) fraud in the inducement. Majority rule: In a tort action for promissory fraud or fraud in the inducement, the plaintiff is entitled to damages to protect her expectation interest. • Minority rule: In a tort action for promissory fraud or fraud in the inducement, the plaintiff is entitled to damages to protect her reliance interest. LaFazia v. Howe: A written contract provision disclaiming reliance on the seller’s representations bars a later action for fraud Facts • Issue • When a contract contains a specific disclaimer of reliance, does the contract serve to destroy the parties’ ability to pursue an action DEFs contracted with the PLs to purchase Oaklawn Fruit, a deli, without having any experience in such a business.

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based on an allegation that the agreement was executed in reliance on a false oral representation? Yes. A party who has the power to void (or “disaffirm”) a contract loses that power by ratifying (or “affirming”) the contract. Ratification occurs by the party expressly ratifying the contract or impliedly ratifying the contract. Implied ratification occurs through o (1) some unequivocal act giving rise to a reasonable inference that the party intended to ratify the contract; or o (2) the party failing to disaffirm within a reasonable time after learning of the contract’s defect. Factors to be considered in deciding whether reliance on a fraudulent misrepresentation prior to entering into a written contract is unjustified because of an integration clause or a disclaimer (i.e., “non-reliance clause”) include: o (1) whether the integration clause or disclaimer specifically covers the misrepresentation or is of a general, non-specific nature; o (2) whether the integration clause or disclaimer was read and understood by the party claiming fraud; and o (3) whether the integration clause or disclaimer itself was procured by fraud.

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Hoffman v. Chapman: Where parties agree on the property purchased, a mistake in the property description must be corrected Facts • On August 18, 1941, William A. Chapman and wife, of Gaithersburg, through a real estate agent, agreed to sell to appellants part of lot 4 in the section known as Homewood on Edgewood Road, the size to be 96 by 150 feet. The purchase price of this part, improved by a bungalow, was $3,600. Before the parcel was surveyed, appellants were given immediate possession. After the survey was made, the real estate agent sent the plat to

the Suburban Title and Investment Corporation with instructions to examine the title and arrange for settlement. • On October 20, 1941, when appellants made final payment in the office of the title company, they clearly understood that they were receiving only a part of lot 4 containing one dwelling; but the deed actually conveyed the entire lot, which was improved by other dwelling property. When the mistake was discovered some time afterwards, they were requested to deed back the unsold part, but they refused to reconvey. The grantors thereupon entered suit in equity to reform the deed on the ground of mistake. When parties are not mistaken as to identity of the property purchased, but an incorrect discretion is provided on a deed, does the misstatement qualify as a mutual mistake that equity will correct? Yes. When the parties understood that only part of low was being purchased and the dee prepared to accomplish the transfer incorrectly described the property, on sufficiently clear evidence, equity will correct the description to reflect the true intention of both parties. Neither the parol evidence rule nor the Statute of Frauds precludes the admissibility of evidence to establish the grounds for the reformation of a written contract. The equitable remedy of reformation of a written contract is available to make the document conform to the real intentions of the parties when the party can prove that the evidence is so clear, strong, and convincing as to leave no reasonable doubt that a mutual mistake was made in the document contrary to the parties’ actual agreement (i.e., there was a “mistake in integration”).

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Class No. 25—Interpreting (i.e., Determine the Meaning of) Promises and Other Contract Terms (pp. 428-447)

Black letter law See Class No. 17 black letter law rule no. 3 & n. 2. See Class No. 17 black letter law rule no. 4 & n. 3. In a case involving a misunderstanding (see class no. 17 terminology no. 3), if a promise or other term in an integrated agreement is ambiguous, extrinsic evidence (i.e., evidence outside of the written document) is admissible to give meaning to the promise or term (i.e., to determine whether either party knew or had reason to know of the meaning attached by the other party). If the promise or other term is unambiguous, it is given its unambiguous meaning. Majority rule (common law): To determine if a promise or other term in an integrated agreement is ambiguous, the court only considers the promise or term and the other provisions of the written document. If, after such a review, the court determines that the promise or term has a “plain meaning” (i.e., it is not ambiguous), that meaning is used. If, after such a review, the court determines that the promise or term is ambiguous, extrinsic evidence is admissible to give meaning to the promise or term. W.W.W. Assocs. v. Giancontieri (p. 431) (“plain meaning rule” or “four corners rule”). • Minority rule (including UCC rule): To determine if a promise or other term in an integrated agreement is ambiguous, the court considers any relevant evidence, including the language of the promise or term, the written contract’s other provisions, and extrinsic evidence. Pac. Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co. (p. 434); Columbia Nitrogen Corp. v. Royster Co. (p. 437) (UCC); Restatement (Second) of Contracts § 212 (1981); UCC § 2-202 & Official Comment 1(b) & 1(c) (“contextual” approach). The interpretation of a promise or another term in an integrated agreement is an issue of law to be decided by the court, unless the court admits extrinsic evidence and the issue of interpretation depends on the credibility of the extrinsic evidence or a choice among reasonable inferences to be

drawn from the extrinsic evidence. Restatement (Second) of Contracts § 212(2) (1981). However, “a question of interpretation is not left to the trier of fact where the evidence is so clear that no reasonable person would determine the issue in any way but one.” Restatement (Second) of Contracts § 212 cmt. e (1981). The plaintiff generally has the burden of proving each of the elements of a legal claim by a preponderance of the evidence.

Terminology Ambiguous—“[C]apable of being understood in two or more possible senses or ways.” Merriam-Webster’s Collegiate Dictionary 39 (11th ed. 2003). Four corners rule—“1. The principle that a document’s meaning is to be gathered from the entire document and not from its isolated parts. 2. The principle that no extraneous evidence should be used to interpret an unambiguous document.” Black’s Law Dictionary (9th ed. 2009). Interpretation of a promise or agreement—The ascertainment of a promise’s or agreement’s meaning. Restatement (Second) of Contracts § 200 (1981). Plain meaning rule—“The rule that if a writing, or a provision in a writing, appears to be unambiguous on its face, its meaning must be determined from the writing itself without resort to any extrinsic evidence.” Black’s Law Dictionary (9th ed. 2009).

WWW Associates v. Giancontieri: Contracts are enforced according to clear terms, without use of outside evidence Majority Rule Facts • Defendants, owners of a two-acre parcel in Suffolk County, on October 16, 1986 contracted for the sale of the property to plaintiff, a real estate investor and developer. The purchase price was fixed at $750,000--$25,000 payable on contract execution, $225,000 to be paid in cash on closing (to take place “on or about December 1, 1986”), and the $500,000 balance secured by a purchase-money mortgage payable two years later. The parties signed a printed form Contract of Sale, supplemented by several of their own paragraphs. Two provisions of the contract have particular relevance to the present dispute--a reciprocal cancellation provision (para 31) and a merger clause (para 19).

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The contract in fact did not close on December 1, 1986, as originally contemplated. As June 1, 1987 neared, with the litigation still unresolved, plaintiff on May 13 wrote defendants that it was prepared to close and would appear for closing on May 28; plaintiff also instituted the present action for specific performance. On June 2, 1987, defendants canceled the contract and returned the down payment, which plaintiff refused. Defendants thereafter sought summary judgment dismissing the specific performance action, on the ground that the contract gave them the absolute right to cancel.

Issue • Whether an unambiguous reciprocal cancellation provision should be read in light of extrinsic evidence, as a contingency clause for the sole benefit of plaintiff purchaser, subject to its unilateral waiver. No. Majority rule (common law): To determine if a promise or other term in an integrated agreement is ambiguous, the court only considers the promise or term and the other provisions of the written document. If, after such a review, the court determines that the promise or term has a “plain meaning” (i.e., it is not ambiguous), that meaning is used. If, after such a review, the court determines that the promise or term is ambiguous, extrinsic evidence is admissible to give meaning to the promise or term. This is not really a “parol evidence rule” issue because we are not (in theory) changing or adding to the written document. Rather, we are simply interpreting the promises and other terms that are in the contract (whether it is oral or written).

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Pacific Gas & Electric v. G.W. Thomas Drayage: Extrinsic evidence is admissible to show that the parties intended to ascribe a different meaning to their words Minority Rule

Facts • In 1960 defendant entered into a contract with plaintiff to furnish the labor and equipment necessary to remove and replace the upper metal cover of plaintiff's steam turbine. Defendant agreed to perform the work ‘at [its] own risk and expense‘ and to ‘indemnify‘ plaintiff ‘against all loss, damage, expense and liability resulting from ... injury to property, arising out of or in any way connected with the performance of this contract.‘ Defendant also agreed to procure not less than $50,000 insurance to cover liability for injury to property. Plaintiff was to be an additional named insured, but the policy was to contain a cross-liability clause extending the coverage to plaintiff's property. During the work the cover fell and injured the exposed rotor of the turbine. Plaintiff brought this action to recover $25,144.51, the amount it subsequently spent on repairs. During the trial it dismissed a count based on negligence and thereafter secured judgment on the theory that the indemnity provision covered injury to all property regardless of ownership.

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Issue • • Can extrinsic evidence be offered to clarify ambiguous meanings? Yes. Extrinsic evidence may be offered to clarify the meaning of a contract term when the parties intended such a meaning and the clause was susceptible of that meaning. Minority rule (including UCC rule): To determine if a promise or other term in an integrated agreement is ambiguous, the court considers any relevant evidence, including the language of the promise or term, the written contract’s other provisions, and extrinsic evidence.

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Frigaliment Importing v. BNS International Sales: A party that urges a special meaning of a contract term has the burden of proof Facts

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PL bought chickens from DEF and they both had a different interpretation of “chicken”. PL thought chicken was broiler or frying chicken and DEF interpreted chicken as any size, and that DEF was suppose to specify the exact type. DEF sent out the larger stewing chicken and PL brought suit Does the PL have the burden of proving his interpretation of chicken? Yes. The plaintiff generally has the burden of proving each of the elements of a legal claim by a preponderance of the evidence. The party that advocates a special meaning for a contractual term has the burden of proving that the special meaning was the one intended by both parties. Here, the judge allows extrinsic evidence because he determines that chicken can be ambiguous. Though, this contract fails because both sides are equally reasonable.

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This is pre UCC and is applying the “plain meaning rule”. Now, for the sale of goods, it will apply the “minority” rule which is the UCC rule. Minority rule (including UCC rule): To determine if a promise or other term in an integrated agreement is ambiguous, the court considers any relevant evidence, including the language of the promise or term, the written contract’s other provisions, and extrinsic evidence. •