blsa.uchicago.edu

Contracts according to E. Posner Aaron D. Lindstrom

ContractsBASES OF PROMISSORY LIABILITY ........................................................................ 4

BARGAIN CONTRACT: PROMISE PLUS CONSIDERATION ............................................................... 4 Bargain Requirement ................................................................................................... 4

Restatement (Second) § 71 definition of consideration: .......................................... 4 Elements of Consideration: ...................................................................................... 4

Sufficiency of Exchange ............................................................................................... 5 In General ................................................................................................................. 5 Pre-existing Duty Rule: performance or the promise to perform a pre-existing duty does not constitute consideration ..................................................................... 5 Mutuality of Obligation: no consideration means no duty to perform; illusory promise ..................................................................................................................... 6

MORAL OBLIGATION: PROMISE PLUS ANTECEDENT GIFT ........................................................... 7 Unjust enrichment (restitution/quantum meruit/quasi-contract) ................................ 7

Summary: ................................................................................................................. 7 Material benefit rule: material benefit + later promise = consideration .................. 8

CONSIDERATION – FORM OR SUBSTANCE? ............................................................................... 8 Form ............................................................................................................................ 8 Substance ..................................................................................................................... 9

PROMISSORY ESTOPPEL: PROMISE PLUS UNBARGAINED-FOR RELIANCE ....................................... 9 Restatement (Second) §90. Promise Reasonably Inducing Action or Forbearance . . . 9 Elements ...................................................................................................................... 9

Restatement (Second) §90(2): Charitable promise does not require reliance .......... 9 FORMALITIES IN CONTRACTING: THE STATUTE OF FRAUDS ....................................................... 10 POSNER SUMMARY ............................................................................................................. 10

Legal categories: .................................................................................................... 10

THE BARGAIN RELATIONSHIP ................................................................................ 12

THE AGREEMENT PROCESS: MANIFESTATION OF MUTUAL ASSENT ............................................ 12 Overview .................................................................................................................... 12 Ascertainment of Assent: The “Objective” Test ........................................................ 12

Custom’s relation to moral and legal obligations .................................................. 12 Offer: Creation of Power of Acceptance ................................................................... 13

Restatement (Second) §24. Offer Defined. ........................................................... 13 Restatement (Second) §26. Preliminary Negotiations. ......................................... 13

Acceptance: Exercise of Power of Acceptance ......................................................... 13 Method and Communication of Acceptance .......................................................... 13 Nature and Effect of Counter-Offer ....................................................................... 16

Termination of Offer: Destruction of Power of Acceptance ..................................... 17 Irrevocable Offer: Nondestructible Power of Acceptance ........................................ 17 Posner on Offer and Acceptance: .............................................................................. 18

INSUFFICIENT OR DEFECTIVE FORMULATION OF AGREEMENT: INDEFINITE, INCOMPLETE, OR DEFERRED TERMS .............................................................................................................. 19

Defective Formulation and Expression of Agreement ............................................... 19 Indefinite Agreements ................................................................................................ 20

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Incomplete and Deferred Agreement ......................................................................... 20 Remedies Where Agreement Incomplete or Indefinite .............................................. 21

AVOIDANCE OF CONTRACT .................................................................................... 22

OVERVIEW ........................................................................................................................ 22 CAPACITY TO CONTRACT: INFANCY; MENTAL INCOMPETENCE .................................................. 22 DEFECTS IN BARGAINING PROCESS ........................................................................................ 23

Things that disrupt the bargaining process (p. 445) ................................................. 23 Unilateral and Mutual Mistake ................................................................................. 23

Unilateral Mistake .................................................................................................. 23 Mutual Mistake ...................................................................................................... 24

Fraud and Duty to Disclose ...................................................................................... 26 Fraud ...................................................................................................................... 26 Duty to Disclose ..................................................................................................... 26

Duress ........................................................................................................................ 28 Business compulsion (or economic duress) ........................................................... 28 Duress and legal right ............................................................................................ 29

Unconscionability ...................................................................................................... 29 Unconscionability doctrine .................................................................................... 29 Consumer Transactions .......................................................................................... 30 Commercial Transactions ...................................................................................... 31 Freedom of contract reasons .................................................................................. 31 Posner review of unconscionability ....................................................................... 32

Illegality: Agreements Unenforceable on Grounds of Public Policy ........................ 32 Covenants not to compete ...................................................................................... 33

PERFORMANCE OF CONTRACT .............................................................................. 35

DETERMINING THE SCOPE AND CONTENT OF OBLIGATION ......................................................... 35 Integrated Writings and the Parol Evidence Rule ..................................................... 35

Parol Evidence Rule ............................................................................................... 35 Interpretation ............................................................................................................. 36

Rules of interpretations .......................................................................................... 36 ALLOCATION OF RISK: CONDITIONS AND WARRANTIES ............................................................ 38

Overview .................................................................................................................... 38 Parol evidence rule and the giving and taking of warranties ................................. 38

Express Conditions .................................................................................................... 38 Nature and Effect ................................................................................................... 38 Excuse of Conditions ............................................................................................. 38

Constructive Conditions of Exchange ....................................................................... 39 The Avoidance of Forfeiture .................................................................................. 39

Representations and Warranties of Quality .............................................................. 40 Express Warranties ................................................................................................ 40 Implied Warranties ................................................................................................. 40 Limitations of Warranties and Remedies: Contracts of Adhesion? ....................... 40

CHANGED CIRCUMSTANCES: IMPRACTICABILITY ...................................................................... 41 Earlier doctrine: impossibility .................................................................................. 41 Existing Impracticality .............................................................................................. 41

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Supervening Impracticality ....................................................................................... 41 Frustration of Purpose .............................................................................................. 41

RSC §265. Discharge by Supervening Frustration ................................................ 42 Posner on Impossibility, Impracticability, and Frustration .................................... 42

THE DUTY OF GOOD FAITH ................................................................................................. 42

BREACH OF CONTRACT AND PERMISSIBLE REMEDIAL RESPONSES ....... 43

Repudiation of promise to pay money when other party has fully performed ...... 43 COMPENSATORY DAMAGES .................................................................................................. 43

Basic Policies ............................................................................................................ 43 Types of Damages .................................................................................................. 43

Breach or Repudiation by Payor ............................................................................... 44 Breach or Repudiation by Performer ........................................................................ 44

Direct Damages ...................................................................................................... 44 Consequential Damages: Foreseeability; Mitigation; Certainty; Incidental Reliance .................................................................................................................. 45

PREVENTION, HINDERANCE, AND DUTY OF COOPERATION ........................................................ 45 EQUITABLE REMEDIES FOR BREACH OF CONTRACT: PROHIBITORY INJUNCTION AND SPECIFIC PERFORMANCE ................................................................................................................... 46

Overview ................................................................................................................ 46 EFFECT OF AGREEMENT LIQUIDATING DAMAGES OR ALTERING THE SCOPE OF LIABILITY OR REMEDY ........................................................................................................................................ 47

Requirements of liquidated damages: ....................................................................... 47 Liquidated damages must not be penalties ............................................................ 48

POSNER REVIEW OF REMEDIES: ............................................................................................ 48

APPENDIX ....................................................................................................................... 50

POSNER REVIEW OF CONTRACTS ........................................................................................... 50 General themes .......................................................................................................... 50 Contract law from another angle – theories ............................................................. 51 Debatable topics: ....................................................................................................... 52

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Bases of Promissory Liability

Bargain Contract: Promise Plus Consideration

Bargain Requirement

Restatement (Second) § 71 definition of consideration:

(1) To constitute consideration, a performance or a return promise must be bargained for.(2) A performance or return promise is bargained for if it is sought by the promisor in exchange

for his promise and is given by the promisee in exchange for that promise.(3) The performance may consist of:

(a) an act other than a promise, or (b) a forbearance, or (c) the creation, modification, or destruction of a legal relation.

(4) The performance or return promise may be given to the promisor or to some other person. It may be given by the promisee or by some other person.

Elements of Consideration:

Bargained-for exchange

Mere gratuity not binding

Kirksey v. Kirksey: mere gratuity is not binding; dissent says loss and inconvenience is consideration

Brother invites widow to move onto his land; she does, two years later he moves her into a shack, then he kicks her out. Dissent suggests her loss and inconvenience is consideration.

Must be bargained for

Bogigian v. Bogigian: consideration consists of bargained-for exchange

Wife gives up right to divorce settlement as part of selling a house without realizing it. Majority says she didn’t bargain for it. Dissent says she did benefit from release from mortgage, plus she signed a clear agreement.

Detriment

Relinquishment of a legal right

Langer v. Superior Steel Corp.: forbearance of a right is consideration regardless of actual detriment to promisee or benefit to promisor

L retires and SS promises $100 a month if he won’t go work for a competitor. SS stops paying, so L sues. “Good consideration exists if one refrains from doing anything that he has a right to do, ‘whether there is any actual loss or detriment to him or actual benefit to the promisor or not.’”

Act – giving or doing something

Thomas v. Thomas: £1 and repairs is consideration for house

Widow signs agreement with will executors to pay £1 yearly and to repair house in exchange for use of the house. She pays, but executor evicts her. Court says she had an agreement with valid consideration, placing some focus on the liability to repair.

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Forbearance

“[A] good consideration exists if one refrains from doing anything that he has a right to do, ‘whether there is any actual loss or detriment to him or actual benefit to the promisor or not.’”

Hamer v. Sidway: waiver of any legal right at request of another is consideration

Uncle promises nephew $5000 for refraining from drinking, tobacco, swearing, and gambling until 21. Because he forbore from exercising a right, he has consideration.

Benefit

Restatement of Contracts (Second §71) : suggests courts reject nominal consideration

Claims “that precedents are lacking to support the Blackacre illustration” which is selling a $5000 estate to son for $1.

Sufficiency of Exchange

In General

Traditional view of consideration: value does not matterWays to allow looking at value of consideration:

Fraud Unconscionability Nominal consideration raises questions as courts are suspicious of gratuitous

promises

Hamer v. Sidway: consideration doesn’t have to be of substantial value to anyone

Uncle promises nephew $5000 for refraining from drinking, tobacco, swearing, and gambling until 21. Because he forbore from exercising a right, he has consideration.

Apfel v. Prudential-Bache Securities: Absent fraud or unconscionability, the adequacy of consideration is not a proper subject for judicial scrutiny

Π sells idea to bank for computer municipal bond system, but after a few years, Δ backs out. The idea was bargained for and was consideration.

Jones v. Star Credit Corp: K is unconscionable when considerations are too unequal

Π buys refrigerator worth $300 for $1,400. Judge says mathematical disparity plus limited financial resources plus grossly unequal bargaining power made it unconscionable.

In re Greene: nominal consideration is not valid to make K enforceable

Mistress makes contract for $1 and “other good and valuable considerations” and gets thousands in return.

Pre-existing Duty Rule: performance or the promise to perform a pre-existing duty does not constitute consideration

Elements

A “subsequent agreement, to impose the obligation of a contract, must rest upon a new and independent consideration.”

A “promise to do what the promisor is already legally bound to do is an unreal consideration.” For a second contract to be valid, the “test is whether there is an additional consideration

adequate to support an ordinary contract, and consists of something which the debtor was not legally bound to do or give.”

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The “actual performance of that which one is legally bound to do stands on the same footing as his promise to do that which he is legally bound to do.”

Levine v. Blumenthal: promise to do what the promisor is already legally bound to do is an unreal consideration

Tenant asks for rent reduction from landlord, who agrees. When tenant doesn’t pay last month’s rent, landlord sues for original contract and wins.

Alaska Packer’s Assoc. v. Domenico: promise to pay a man for doing that which he is already under contract to do is without consideration; no holdups

Fishermen in middle of voyage “hold up” company for new contract. New contract is invalid upon return from Alaska.

Restatement §89. Modification of Executory Contract

“A promise modifying a duty under a contract not fully performed on either side is binding (a) if the modification is fair and equitable in view of circumstances not anticipated by the

parties when the contract was made; or(b) to the extent provided by statute; or(c) to the extent that justice requires enforcement in view of material change of position in

reliance on the promise.”

Angel v. Murray: A promise modifying a duty under a contract not fully performed on either side is binding (a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made

Garbage collector for the city requests a fee increase based on unexpected growth in the city. City council, after public hearings, approves increase. A citizen sues. Trial court finds for citizen under pre-existing duty rule; appellate court reverses under §89 of Restatement to allow the increase.

Pre-existing duty summary

Courts unlikely to enforce the modification if it appears to be a hold-up situation.

Mutuality of Obligation: no consideration means no duty to perform; illusory promise

If obligation lacking for one party, no contract – no obligation for other party. There is no consideration if there is no duty to do anything.

Rehm-Zeiher Co. v. FG Walker Co . : If a contract is non-enforceable by one party, either in whole or in part, it lacks mutuality of obligation and is unenforceable by the other party as well.

Distributor can refuse to take whiskey from distiller for any “unforeseen reason.”

Output or Requirements Contracts:

UCC §2-306. Output, Requirements, and Exclusive Dealings

(1) A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that 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.

McMichael v. Price: requirements contract upheld for mutuality

Sand middleman agrees to buy sand. There was obligation because he agreed to purchased all he could use and pit owner agreed to sell all middleman could use.

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Wood v. Lucy, Lady Duff-Gordon: implied promise meets mutuality of obligation (Cardozo)

Fashion designer contracts with man to market her style in return for ½ of profits, then backs out. Judge Cardozo inferred promise of marketer to try to market.

Omni Group, Inc. v. Seattle–First National Bank: satisfaction requirement does not necessarily mean illusory promise; satisfaction is a question of fact (can use reasonable standard)

A real estate developer (Omni) has the condition that it receive an engineer’s report and be satisfied by the report before it will buy. The seller backs out and argues “satisfaction” makes it illusory. K enforced.

Good faith can limit discretion and make a promise enforceable rather than illusory.

Moral Obligation: Promise Plus Antecedent Gift “Past consideration” is not bargained for and so is not consideration. Rationales for rejecting moral obligation:

o People might make promises without thinking seriously about them. Consideration doctrine protects people from rash promises.

o A promise creates a moral obligation by itself since promises should be kept.o If we enforce express promises for moral obligation, why shouldn’t we enforce implied promises

as well? Does that lead down a slippery slope?

Mills v Wyman: moral obligation is not sufficient consideration to support an express promise

A Good Samaritan cares for a son who dies anyway. Father promises to repay, then reneges. Mentions danger of leading to enforcement of implied promises.

Unjust enrichment (restitution/quantum meruit/quasi-contract)

Summary:

1. Also known as quasi-contract, unjust enrichment, and implied in law contract2. Designed to prevent unjust enrichment3. A person “who receives a benefit by reason of an infringement of another person’s interest or

of loss suffered by the other, owes restitution to him in the manner and amount necessary to prevent unjust enrichment.”

4. Not really a contract, it is an obligation imposed by law to insure justice and equity5. When is someone entitled to restitution:

(a) “One who, without intent to act gratuitously, confers a measurable benefit upon another, is entitled to restitution, if he affords the other an opportunity to decline the benefit or else has a reasonable excuse for failing to do so. If the other refuses to receive the benefit, he is not required to make restitution unless the actor justifiably performs for the other a duty imposed upon him by law.” (ADL: Applies to Webb and Harrington – has a reasonable excuse for failing to give an opportunity to decline the benefit. Correction: The intent to act gratuitously makes it a moot point.)

6. Elements of a quasi-contract (casebook):(a) Defendant received a benefit(b) An appreciation or knowledge by the defendant of the benefit(c) Under circumstances that would make it unjust for the defendant to retain the benefit

without paying for it.7. Elements (Posner)

(a) Benefit conferred

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(b) Benefit cannot be officious (doing his job) or gratuitous (gift) or mistake(c) No opportunity to bargain

8. The cases we have looked at involve promises and a benefit. The benefit by itself is not necessarily enough by itself to justify restitution.

Implied in fact: If you asked the parties whether some promise was intended, they would say yes.

Implied in law: The parties may not have said anything, to indicate a promise, but restitution (or unjust enrichment) means there is a promise implied in the law.

Material benefit rule: material benefit + later promise = consideration

“[W]here the promisors have received something from the promisee of value in the form of money or other material benefits under such circumstances as to create a moral obligation to pay for what they received, and later promise to do so there is consideration for such promise.”

Restatement (Second) §86. Promise for Benefit Received

(1) A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice.(2) A promise is not binding under Subsection (1)

(a) if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or

(b) to the extent that its value is disproportionate to the benefit.

Manwill v. Oyler: π must claim expectation to be compensated by Δ

Π benefited Δ by paying for land, grazing permit, and cattle. Statute of limitations passed, but Δ made new promise to pay for previous benefits. Moral obligation is not enough.

Webb v. McGowin: physical injury is material benefit and is consideration (OUTLIER)

Man saves another from being injured by block of wood, but is injured in process. Court held later promise by saved party to be binding.

Harrington v. Taylor: physical injury (voluntary, humanitarian act) is not consideration

Woman blocks axe strike to Δ and injures her hand seriously. Δ promises to pay her, and then reneges.

Consideration – Form or Substance?Serves two functions:

Form

1. Is it a pure formality? Evidence that the promisor wanted it to be a binding promise. If there is no value to consideration (a peppercorn for $1000 is okay), then it is a pure formality.

2. Attraction: it makes it easy for people to know that they will be legally bound. It adds predictability to making contracts. (Can make a contract not legally binding by just saying, “This is not legally binding.”

3. Evidentiary4. Cautionary5. Channeling6. Courts don’t seem to like this.

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a. They argue about whether it is sufficient. (If you really believe in form, sufficiency shouldn’t matter.)

b. They question the motive of the promise. (If you are just following formality that should be enough in spite of motive.) They do this through illusory promise.

Substance

1. Consideration should have value. (This conflicts with charitable donations, which tend to be enforced even though donors are getting nothing in return.)

2. Ordinary economic transactions are usually okay.3. Gifts are usually not okay.4. Holdup and misrepresentation cases are usually not okay.

Promissory Estoppel: Promise Plus Unbargained-For Reliance

Restatement (Second) §90. Promise Reasonably Inducing Action or Forbearance

(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.

Elements

• Promisor’s conduct and intent (objective)o A promiseo A reasonable expectation by promisor that it will induce reliance

• Promisee’s reactiono Promise does induce action or forbearanceo Reliance is justified

• Detrimental consequenceo Injustice can be avoided only by enforcement

• Limits on reliefo Remedy may be limited as justice requires

Ricketts v. Scothorn: allowing the donee to incur obligations on the faith that the note would be paid, the donor would be estopped from pleading want of consideration

Grandfather promised money to woman saying she should not have to work, then didn’t pay. Court awarded her the money.

Feinberg v. Pfeiffer Co.: reasonable reliance on a promise prohibits promisor from denying the promise

Employee promised pension if she’ll retire. She retires and new management cuts her pension. She sues and wins.

Restatement (Second) §90(2): Charitable promise does not require reliance

“A charitable subscription … is binding … without proof that the promise induced action or forbearance.”

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Allegheny College v. National Chautauqua County Bank of Jamestown: implied promise can constitute consideration (Cardozo)

Lady donates money to a college to be due 30 days after her death. After she dies, estate doesn’t pay, so college sues. Bank says it was a gift she repudiated; college says duty to name fund after her was consideration.

Grouse v. Group Health Plan, Inc.: damages are limited to those caused by the detrimental reliance

Pharmacist quits job to accept new job. Damages awarded are not what he would have earned if hired but rather what he lost by quitting old job plus declining at least one other employment offer.

Cohen v. Cowles Media Co. (I): merely breaking a promise is not enough to show injustice; must be other damage

Newspaper violated a promise of confidentiality made by a reporter. Source looses his job because he worked for political candidate and revelation tainted candidate. Source wins (overturned on appeal; see below.)

Formalities in Contracting: The Statute of Frauds1. The following contracts must be in writing:

a. Sale of goods greater than or equal to $500 (UCC 2-201)b. Sale of real estate interests (leases, easements, etc.)c. Transaction that cannot possibly be performed in one year

2. History – first enacted in 16773. Purpose:

a. Protects promisor from lying promisee who claims there was a contract.b. Could harm promisee who relies on a non-written contract.

4. Exceptionsa. In some jurisdictions, if I can show that I relied on the verbal contract, the court might

enforce the contract on reliance grounds.

Posner Summary1. We have focused on promises so far because that is central to contract law.2. Promises need not always be express, but can be inferred from actions.3. Promises/contracts are mutually beneficial.

Legal categories:

Consideration and bargained-for exchange:

i. He made a promise1. Statute of frauds2. Mutual assent

ii. It was supported by consideration1. Mutuality: not nominal consideration or an illusory promise

iii. He benefited or I suffered detriment.iv. There was a breach (promise was not kept).v. Flaws:

1. Gratuitous promise

Promisee relies Promissory estoppel

vi. Reasonably inducedvii. Detrimental reliance

viii. Promise must be enforced to prevent injustice

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ix. Reasons it does not overwhelm consideration1. Reliance can be hard to prove2. Injustice can be a high bar3. Remedies address the detrimental reliance and is generally less than

consideration doctrine remedies

Promisee confers a benefit on promisor

x. Restitution (unjust enrichment, implied in law, quantum meruit)1. Don’t always need a promise to enforce2. No officiousness3. No gratuitousness4. Can’t be case that the parties could have bargained at the time the

benefit was conferred

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The Bargain Relationship

The Agreement Process: Manifestation of Mutual Assent

Overview

Objectives of a bargain relationship:1. Agreement2. Performance

Assumptions:1. Individual bargainers will define their wants in a rational way and seek to satisfy them through

voluntary exchange.2. Both parties will gain from the completed exchange.

Benefits of contracts:1. Promotes exercise of individual freedom through private ordering2. Supports development of a market economy3. Encourages a system of decentralized power

Adhesion contract ≡ standardized agreements characterized by fine print clauses favoring the party with superior bargaining power who drafts the writing and submits it to the other on a “take-it-or-leave-it” basis

“Objective” approach to contractsPro: It protects the plaintiff’s reasonable understanding based upon what was said and done rather than what was thought.Con (maybe): It represents a move toward absolute liability.Questions: Who determines “reasonableness,” a court or a jury?

Ascertainment of Assent: The “Objective” Test

Embry v. Hargadine, McKittrick Dry Goods, Co.: manifestation of intent matters, not internal “real” intent; reasonable man standard

Managers contract expires and he goes during busy period to ask president if his contract is renewed. President responds, “Go ahead, you’re all right; get your men out and don’t let that worry you.” Π took that to be a verbal agreement to renew his contract for another year. Three months later, HM fired him. Π sued for breach of contract and won.

Lucy v. Zehmer: The law imputes to a person an intention corresponding to the reasonable meaning of his words and acts.

Δ claims he offered to sell the farm in jest and didn’t really mean to. Court enforces the contract.

Custom’s relation to moral and legal obligations

Bad consequences for making everything a legal binding:1. Costs to society are high for enforcing every promise2. Non-legal sanctions are more effective

a. The roles of reputation, trust, and other stigma are useful enough 3. Examples

a. Promise of confidentiality from newspaper to sourceb. Promise to go on a date

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Cohen v. Cowles Media (II): law does not create a contract where the parties intended none; every exchange of promises is not legally binding

Newspaper breaches promise of confidentiality to a source. Source has no remedy because no legal contract.

Offer: Creation of Power of Acceptance

Doctrine: There is a contract if A says, “I offer X” and B responds, “I accept X.”

Restatement (Second) §24. Offer Defined.

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

Restatement (Second) §26. Preliminary Negotiations.

A manifestation of willingness to enter into a bargain is not an offer if the person to who 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.

Lonergan v. Scolnick: if offeree knows the offeror did not intend a final agreement until offeror gave another assent, there was no acceptance

Δ selling land puts out an ad. Π inquires by letter and gets more info in a return letter. Δ mentions other potential buyer, and sells to that 3rd party before Π accepts. Π then tries to accept, but land already sold. Π sues; Δ wins since letters showed no final agreement.

Lefkowitz v. Great Minneapolis Surplus Store: when an offer is clear, definite, and explicit, and leaves nothing open for negotiation, it constitutes an offer, acceptance of which will complete the contract

Store’s ad offers fur coats and stole to first-comer. Π shows up twice to buy, but is denied b/c of house rule of selling to women only. Π wins on stole since value was specific, but loses on coats “worth up to $100.”

Southworth v. Oliver: a price quotation, with facts and circumstances considered, may constitute an offer

Another example of land being sold and cattle permits, but seller gave very definite and complete proposal. Court said it was an offer.

Acceptance: Exercise of Power of Acceptance

Method and Communication of Acceptance

The offeror is the master of his offer.

La Salle National Bank v. Vega: the offeror has complete control over the offer

Δ offered to sell some land, but stipulated in the offer that the offer had to be signed by trust before it was accepted. Since it wasn’t signed, there was no acceptance and no contract.

Burden is on offeree to accept properly.

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Hendricks v. Behee: an uncommunicated intention to accept is not acceptance; when an offeror calls for a return promise, notification of acceptance is always essential

Δ offered to sell land, but then withdrew offer before being notified of acceptance. No contract

Restatement §36. Methods of Termination of the Power of Acceptance

(1) An offeree’s power of acceptance may be terminated by(a) Rejection or counter-offer by the offeree, or(b) Lapse of time, or(c) Revocation by the offeror, or(d) Death or incapacity of the offeror or offeree.

(2) In addition, an offeree’s power of acceptance is terminated by the non-occurrence of any condition of acceptance under the terms of the offer.

Ever-Tite Roofing Corp. v. Green: offers must be accepted by the deadline or, if no deadline, within a reasonable amount of time

Roofer could accept by commencing work. His workers showed up at house ready to roof but were waved off by homeowner. Loading truck and coming was commencing work, so contract upheld.

UCC §2-206(b). Offer and Acceptance in Formation of Contract

(1) Unless otherwise unambiguously indicated by the language or circumstances,(a) An offer to make a contract shall be construed as inviting acceptance in any manner and

by any medium reasonable in the circumstances;(b) An order or other offer to buy goods for prompt or current shipment shall be construed as

inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or non-conforming goods, but such a shipment of non-conforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer.”

(2) Where the beginning of a requested performance is a reasonable mode of acceptance an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance.

Corinthian Pharmaceutical Systems v. Lederle Laboratories: price quotations are mere invitations to bargain; an offer is a manifestation of willingness to enter a bargain

Based on inside information that price is about to go up, buyer orders large quantity over automatic ordering system. Seller wins because price lists were not an offer; buyer order was an offer that was not accepted. Non-conforming order shipped by seller did not accept either.

Unilateral and Bilateral Contracts

Unilateralo The exchange of a promise for performanceo Can only accept by performance

Bilateralo The exchange of one promise for anothero Can accept by exchanging promises

Carlill v. Carbolic Smoke Ball Co.: offers for rewards are treated as unilateral contracts, where performance is acceptance

Advertisement offering reward if you catch the flu while using the product. Lady uses it and catches flu and is entitled to reward.

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Glover v. Jewish War Veterans of United States: no acceptance without knowledge of offer

Reward offered for finding murderer, but informant didn’t know. Informant not entitled to reward.

Law imputes to a person an intention corresponding to the reasonable meaning of his words and deeds.

Industrial America, Inc. v. Fulton Industries, Inc.: overt manifestation of assent – not subjective intent – controls the formation of a contract

Broker in mergers puts two companies in contact but doesn’t get paid. Broker accepted by performance, so contract is binding, even though offeror’s intent questionable.

Restatement §45. Option Contract Created by Part Performance or Tender

Posner: Acceptance only by performance.ADL: Unilateral contract

1. “Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it.”

a. Posner explanation: Promisee has the option of continuing performance or not, but the promisor is bound.

2. “The offeror’s duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer.”

Restatement §50. Acceptance of Offer Defined; Acceptance by Performance; Acceptance by Promise

(2) Acceptance by performance requires that at least part of what the offer requests be performed or tendered and includes acceptance by a performance which operations as a return promise.

Restatement §62. Effect of Performance by Offeree Where Offer Invites Either Performance or Promise

Posner: acceptance either by performance or return promiseADL: Bilateral contract

Mailbox Rule: when offer may be accepted by mail, the moment of mailing is the moment of acceptance

Adams: party who chooses medium of acceptance bears risk of medium failing

RSC §63. Time When Acceptance Takes Effect

Mailbox rule Acceptance of an option contract must be received to be effective

Posner’s chart:Offer counts when receivedAcceptance counts when sent (mailbox rule)Counteroffer counts when receivedRevocation counts when received

Intent does not matter. It is the external manifestation of intent that matters.

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RSC §69. Acceptance by Silence or Exercise of Dominion

(1) Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases and in no others: …(c) Where because of previous dealings or otherwise, the offeree has given the offeror reason to understand that silence of [or] inaction is intended by the offeree as a manifestation of assent, and the offeror does so understand.”

Illustration: “B relies on the order and forbears to buy elsewhere for a week. A is bound to fill the order.”

Ammons v. Wilson & Co.: in cases of previous dealings, silence may be taken as assent

Buyer was in the habit of getting shortening from Δ. In the past, he had placed orders and got goods within a week. This time, Δ waited 12 days to reject offer to buy; court enforced contract based on past dealings.

If the offeror could reasonably expect, given the offeree’s manifestation of intent, that acceptance has been given, then there is a contract.

Smith-Scharff Paper Company v. PN Hirsch & Co. Stores, Inc.: past dealings can imply a contract

Π had been making paper bags with Hirsch logo for 36 years. Hirsch went under, but first promised to “honor all commitments” by paying for Π’s inventory; then Δ backed out. Court enforced contract.

Harr is v. Time, Inc. : in a unilateral contract, performance is consideration; must notify offeror in reasonable amount of time; law disregards trifles

A 3-yr-old opens an advertisement and sues for promised watch. While technically a breach, law disregards trifles and Time wins.

Nature and Effect of Counter-Offer

Common law mirror image rule: offer and acceptance must be identical

A counter-offer is a rejection of the first offer and terminates power of acceptance in first offeree.

Minneapolis & St. Louis Railway Co. v. Columbus Rolling-Mill Co.: a counter-offer is a rejection

Railway company asks for prices for steel rails from the Δ. Δ replies with a specific offer. Π replies with an acceptance that did not fit within Δ’s original offer. Δ does not accept the counter-offer. Π tries to revive 1st offer.

UCC §2-207. Additional Terms in Acceptance or Confirmation

Oral agreement followed by confirmation(1) A definite and seasonable expression of acceptance or a written confirmation which is sent

within a reasonable time operates as an acceptance even though its states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

Written documents not containing identical terms(2) The additional terms are to be construed as proposals for addition to the contract. Between

merchants such terms become part of the contract unless:a. The offer expressly limits acceptance to the terms of the offer;b. They materially alter it; or

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c. Notification of objection to them has already been given or is given within a reasonable time after notice of them is given.

Conduct establishing the existence of a contract(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish

a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consists of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.

“Section 2-207 was intended to eliminate the ‘ribbon matching’ or ‘mirror’ rule of common law.”The UCC lessened the importance of boilerplate that no one reads because the “common law . . . unduly rewarded the party who sent the last form prior to shipping the goods.”

Posner on Battle of the Forms

a. Mirror image rule developed to deal with themb. In modern era, parties went to standard forms to protect their own interests. If two

merchants send each other their standard forms, the last form would win under the mirror image rule. Generally the seller always won because they included a form with delivery of the goods.

c. The UCC was intended to fix this.d. Formalism – mirror image rule is pretty formalistic, as is most common law.

i. Can give bad outcomes when the parties really did agreeii. Mirror image rule is very simple

iii. Mirror image rule seems to favor the seller as the buyer accepts the goods with the seller’s last form attached

e. UCC is much less formalistic, really on reasonableness and good faith in many cases.i. Everything becomes vague and left to jury, even very complex contract issues

ii. UCC is very complexiii. Seems to be “pro-buyer” although the buyers in commercial settings (especially

between two companies) might be as sophisticated as the sellerf. Posner solution

i. Use the mirror image in general, but don’t apply it as strictlyii. When deciding which terms to use in the event of discrepancy, ignore the

contradictory terms and use the default terms in the UCCiii. When applying §2-207, look for a common sense result, because the UCC was

written not to be formalistic, but to be “realistic”

Lenard Pevar Co. v. Evans Products Co.: performance counts as acceptance

Battle of forms between parties. Court used §2-207 to ignore mirror image rule and to end battle of forms.

Termination of Offer: Destruction of Power of Acceptance

Dickinson v. Dodds: at any moment before complete acceptance by the offeree, the offeror is as free as the offeree.

Seller had an offer open, but found a buyer. 1st offeree learned of buyer and still tried to accept. Selling to another revoked the offer. Posner: Just to be clear, Dickinson v. Dodds is not considered good law anymore.

Irrevocable Offer: Nondestructible Power of Acceptance

RSC §87. Option Contract

(1) An offer is binding as an option contract if it:

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(a) is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange of fair terms within a reasonable time; or

(b) is irrevocably made by statue.(2) An offer which the offeror should reasonably expect to induce action or forbearance of a

substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.

Posner: Option = offer + promise to hold offer open

Humble Oil & Refining Co. v. Westside Investment Group: option contracts are accepted by performance and are not rejected by counter-offers

Π paid $50 to keep option to buy open, but seller backed out. Π won specific performance of the contract to buy (enforcement of the option).

Petterson v. Pattberg: offer to enter unilateral contract was withdrawn prior to performance

Man tries to pay off mortgage and get promised reduction in principal, but mortgager refuses payment. Common sense says he accepted, but court allowed “I revoke, I revoke!” Appears to be partial performance, but pre-existing duty for first payment.

Marchiondo v. Scheck: partial performance of a unilateral contract creates an option contract

Real estate broker dismissed by owner right before a buyer accepts. Broker sued for commission and wins.

James Baird Co. v. Gimbel Brothers, Inc.: bidding using quote did not constitute acceptance

Contract places bid using quote from linoleum supplier, but linoleum supplier withdrew the quote after finding a mistake. Using the bid did constitute acceptance on the contractor’s part.

Promissory estoppel and the option contract

What is the link between promissory estoppel and partial performance creating an option contract?Someone who lets a person begin performance is estopped from claiming that the performance is not based on a contract. The offer induces the person and the person relies on that promise. It becomes an offer plus subsidiary promise not to revoke. (RSC §87(2))

Drennan v. Star Paving Co.: relying on subcontractor’s paving bid did create an irrevocable offer by detrimental reliance

Similar to Baird, with another mistake on part of subcontractor. The paving company revoked its offer, but court said reliance turned it into an option contract.

So what is the difference between Drennan and Baird? Can't offers be made to choose the outcome offeror wants?Baird default: subs offer is revocable (risk on general)Drennan default: subs offer is irrevocable (risk on sub)Default can be overridden simply by contracting around default and who is worried about risk

Electrical Construction & Maintenance Co., Inc. v. Maeda Pacific Corp.: where a bid is solicited, it is consideration for an option contract

ECM (sub) said it would only bid if Maeda (prime) would use its bid if it were the lowest. Δ agreed, won contract, then dumped sub. Sub won.

Posner on Offer and Acceptance:

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•Caveats: I am simplifying. The law is changing and is like a moving stream that you can't step into twice.

•Previously: Contract v. promissory estoppel v. restitution (3 bases of liability in contracts)•Offer and acceptance only apply to contract doctrine•Reason behind offer and acceptance: Did the two parties really intend to get into a contract in the first place? Is there mutual assent? •Will theory of contract and subjective theory of contract focuses on the mental state of the parties in making a contract (meeting of the minds). This is useful when dealing with cases of first impression, but it not accurate all the time.

Problems with will theory:•Offers: secret intentions don't control the terms of an offer; if a reasonable person would interpret it as an offer, it was an offer; looks at manifestations of will (objective theory)•Lefkowitz and Carbolic: the offeror probably does not really intend to make an offer; they are trying to be sneaky and to mislead unsophisticated consumers; courts tend to uphold the offer; more than reasonable person standard, this also includes protecting consumers•Mailbox rule: ignores change of intention if action of mailing has already occurred•Firm offers and option contracts: Dodds said you can't keep your offer open; Humble Oil says you left your offer open and are stuck with it even if that was not your intention•Tort/silence: reasonable inference that someone intended to accept was not the reason the court upheld the acceptance; the court was really applying policy reasons rather than looking at the intent of the trespasser•UCC: allows being bound to terms you did not suggest when it takes the default rules in the UCC•Consent and intent is important, but doctrine is more interested in actions.

Rules•There has to be a clear and determinate offer•Reasonable person •Directed at a person•Must be acceptance•Offers are prima facie not binding; however, they can be if accepted, before revoked, if option contract or firm offer supported by consideration, to enter a unilateral contract and there has been part performance, or to enter a bilateral contract and there is some reliance•Acceptances are valid if offer hasn't expired because of counter-offer or revocation, if time hasn't lapsed, if there is no inconsistent offer (as in Dickinson); in common law, there must be mirror image; if a unilateral contract, you must do exactly the performance; if you start performance, you can create an option contract, but you must perform exactly

If you want to enter a contract, you have to follow certain formalities. It is a funny kind of dance. The reason for the dance is to make it clear to parties, future courts, and the world what the intents of the parties were. It makes it a little harder to jump through these hoops, but it is necessary to make it legally binding or not. Same reasons that wills must be made in certain ways.End Posner Review---------------------------------------------------------------------------------------------

Insufficient or Defective Formulation of Agreement: Indefinite, Incomplete, or Deferred Terms

Defective Formulation and Expression of Agreement

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Raffles v. Wichelhaus (Peerless): when “latent ambiguity” present, parol evidence can be admitted to show a mistake

The “Peerless” case, in which cotton was supposed to arrive on one ship and arrived on another. Buyer declined to buy. Court said no contract because of ambiguity.

RSC §20. Effect of Misunderstanding

(1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and

a. Neither knows or has reason to know the meaning attached by the other; orb. Each party knows or each party has reason to know the meaning attached by the

other.(2) The manifestations of the parties are operative in accordance with the meaning attached to

them by one of the parties ifa. That party does not know of any different meaning attached by the other, and the

other knows the meaning attached by the first party; or b. That party has no reason to know any different meaning attached by the other, and

the other has reason to know the meaning attached by the first party.This relates to Unilateral and Mutual Mistake as well

Konic Internat’l Corp. v. Spokane Computer Services, Inc.: where a phrase of contract is reasonably capable of different interpretations, there is no contract

Δ agrees to buy surge protector for “fifty-six twenty” and it turns out to be $5,620 rather than the $56.20 it expected. Π demanded payment instead of return. Δ won because K never formed.

Indefinite Agreements

No contract if essential term still open

Varney v. Ditmars: there is no contract so long as any essential element is open to negotiation

Employee works at-will expecting he was extended under a contract, but essential terms of how profits would be divided was not set. Court says no contract.

Offers must be clear, definite and explicit

Lefkowitz v. Great Minneapolis Surplus Store: When “the offer is clear, definite, and explicit, and leaves nothing open for negotiation, it constitutes an offer, acceptance of which will complete the contract.”

Newspaper ad for sale of furs for $1 to first-comer. Customer denied b/c a man. Sues for furs and wins on the specific one.

Incomplete and Deferred Agreement

What can be made certain will be made certain (court will fill in gaps by objective standard)

MGM v. Scheider: if partial performance begun under a good faith understanding the remaining terms will be agreed upon yet, court will fill in the gaps by applying objective criteria (K itself, commercial practice, or custom)

Actor does pilot but refuses to perform in series. MGM sues; Δ argues contract was incomplete because start date of filming the series was not set. MGM wins.

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If material term open, no contract

Joseph Martin, Jr. Deli, Inc. v. Schumacher: an agreement to agree, in which a material term is left for future negotiations, is unenforceable

Landlord rents to tenant for five years with allowing renewal “to be agreed upon.” Landlord asked for more rent upon renewal, and tenant sued for rent at old price. No contract because price was uncertain.

Relationship specific investment ≡ tenant invests a lot in building a customer base (relationship with customers) but will only do it if he knows he will get to renew the contract (keep the relationship he invested to build); unlike a car that is fungible, and more like a special car made so that Posner can stick his head through the roof

Material terms can be resolved by objective standard if parties so intended

Oglebay Norton Company v. Armco, Inc.: “If it is found that the parties intended to be bound, the court should not frustrate this intention, if it is reasonably possible to fill in some gaps that the parties have left, and reach a fair and just result.”

Contract between steel supplier and shipping contractor where the methods they adopted for setting prices failed (industry magazine). Court established a reasonable rate.

Empro Manufacturing Co., Inc. v. Ball-Co Manufacturing, Inc.: agreement in principle is not a binding contract

Buyer (Empro) agrees in principle to buy assets from seller, who finds another buyer. Empro tries to enforce sale, but loses. (Easterbrook)

Remedies Where Agreement Incomplete or Indefinite

Hoffman v Red Owl Stores, Inc: promise does not have to have essential terms to allow invoking promissory estoppel

Franchiser induces Π to business and goods to take job as franchisee, then franchiser backed out. Π won under promissory estoppel claim.

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Avoidance of Contract

Overview1. General

a. Ways to avoid being legally bound:i. Impermissible parties to the agreement

ii. Impermissible defects in the bargaining processiii. Impermissible terms in the agreement

b. These cannot be waived by one of the parties – they are immutable.2. Capacity to Contract: Infancy, Mental Incompetence

a. Infancy (or minors)i. Minor has a voidable contract: he can get out by timely and appropriate

disaffirmance.ii. Other party has a non-voidable contract.

iii. Rule: The “contract of a minor, other than for necessaries, is either void or voidable at his option.”

1. Exceptions: Statutory exceptions, as well as marriage or agreement to support an illegitimate child

iv. Recovery for necessaries: minor is held to a promise implied by law, not the to promise he actually made; he is responsible for reasonable value, not what he might have improvidently agreed to pay

v. Effect of misrepresentation of age: 1. One extreme: minor not liable in tort for deceit2. Middle: minor cannot be estopped from disaffirming, but will be liable

for tort damages3. Other extreme: minor is estopped from asserting minority

b. Mental Incompetencei. Restatement (Second) §15

1. A person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect (a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, or (b) he is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition.

2. Where the contract is made on fair terms and the other party is without knowledge of the mental illness or defect, the power of avoidance under Subsection (1) terminates to the extent that the contract has been so performed in whole or in part or the circumstances have so changed that avoidance would be unjust. In such a case a court may grant relief as justice requires.

Capacity to Contract: Infancy; Mental IncompetenceWhy can minor enter a binding contract for necessaries?Since the minor needs to be able to buy the necessary, he also needs to be able to enter a contract for that necessary. Sellers of necessaries won’t sell to minors if the minor won’t be bound. The reasonable price caveat also protects the minor.

Why can’t a minor enter other binding contracts (e.g., for luxuries)?To protect the minor from being taken advantage of by an adult

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Bowling v. Sperry: contracts by a minor are voidable until coming of age; minors must pay reasonable amounts for necessaries

16-year old buys car from dealership; after it burns out a bearing, he disaffirms the contract. Court allows him to do this.

The law presumes competency. To show the contrary, the burden of proof rests on the person asserting lack of capacity to establish the same by clear and convincing proof. Presumption is reversed if there is a history of incapacity.Posner: These are hard cases. It is hard to prove incompetency at a given moment in time.

Heights Realty, Ltd. V. Phillips: test of mental capacity is whether a person is capable of understanding in a reasonable manner the nature and effect of the act in which the person is engaged

Woman released from contract to sell land and to pay broker’s commission when judged incompetent to understand what she was doing.

Defects in Bargaining Process

Things that disrupt the bargaining process (p. 445)

(1) Mistake(2) Fraud(3) Constructive fraud(4) Misrepresentation(5) Undue influence(6) Duress(7) Bad faith(8) Unconscionability

Unilateral and Mutual Mistake

1. Mistake ≡ a belief not in accord with the facts2. Unilateral mistake is by only one party3. Mutual means both mistaken

“The offeree’s actual or constructive knowledge of a mistake is often an important factor in judicial opinions granting relief to the mistaken party. Relief typically takes the form of rescission . . .”

Mistake doctrine applies to information in making the contract; making a mistake in performance breaches the contract.RSC §20. Effect of Misunderstanding applies to this as well.

Unilateral Mistake

“One who errs in preparing a bid for a public works contract is entitled to the equitable relief of rescission if he can establish the following conditions:

(1) the mistake is material;(2) enforcement of a contract pursuant to the terms of the erroneous bid would be

unconscionable;(3) the mistake did not result from violation of a positive legal duty or from culpable

negligence;(4) the party to whom the bid is submitted will not be prejudiced except by the loss of his

bargain; and

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(5) prompt notice of the error is given.”

RSC §153 – Unilateral mistake

Contract voidable by mistaken party if it adversely affects him and if he doesn’t bear the risk of the mistake and (a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or (b) the other party had reason to know of the mistake or his fault caused the mistake

Posner: Cases allowing rescission for unilateral mistakes is fairly rare – usually only in construction.

Boise Junior College District v. Mattefs Construction Co.: unilateral mistake may permit rescission of the contract

Contractor’s clerk mistakenly omits the price of glass in a construction bid, and it is 14% of the cost. Court rescinds.

Mutual Mistake

RSC §152 – Mutual mistake

Contract voidable by adversely affected party (unless he bears the risk of the mistake)

Least cost avoider: The person who could determine the mistake while incurring the least cost should bear the burden of the mistake.

Beachcomber Coins, Inc. v. Boskett: mutual mistake may permit rescission

Π, a coin dealer, bought for $500 a dime purportedly a rare coin from Δ, a part-time coin dealer. Δ had purchased the coin for $450. Coin was a fake. Π gets rescission.

Parties can allocate the risk of mistake

Lenawee County Board of Health v. Messerly: no rescission when a party assumes the risk of mistake

Land sold, but septic tank violates health regulation. Contract included as “as-is” provision.

Ayer v. Western Union Telegraph Co.: between a buyer and a seller, the party that selects the method of communication bears the risk of the communication failing

Seller uses telegraph company to send a message and telegraph makes mistake in the message about the price between the two parties. Seller bore the risk.

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POSNER REVIEW OF FIRST QUARTER

1. A contract is an exchange of promises or a promise for a performance.2. Consideration: there must be a quid pro quo

a. This has meant gratuitous promises are not enforceable, except charitable contributions.

b. Indefinite promises also raise questions of consideration (mutuality).3. Promissory estoppel

a. Promise enforceable for reliance4. Restitution

a. Conferring a benefit may also make a promise enforceable5. Offer and Acceptance

a. Offeri. Options (to make irrevocable offers)

b. Acceptancec. Conditions for validity and withdrawal

6. Avoiding Contractsa. Usually has consideration, offer, and acceptance, but because of the bargaining

process, the contract should not be enforced.b. Reasons

i. Incompetency (incompetent party might not be better of because of the ability to contract)

1. Infancy2. Mental incapacity

ii. Defects in bargaining process1. Fraud

a. Constructive fraud2. Mistake

a. Bilateralb. Unilateral

3. Different levels of information

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Fraud and Duty to Disclose

Fraud

• Requires a false statement, a misrepresentation

• Also requires reliance by the misled party

Constructive fraud

• Breach of duty (not present in adversarial situations – when at arm’s length)• Does not require fraudulent intent

Confidential/fiduciary relationship

• Types of confidential relationships: priest-penitent, doctor-patient, husband-wife, psychiatrist-client, and attorney-client

Undue influence

• Use of a confidence to obtain an unfair advantage• Taking unfair advantage of another’s “weakness of mind”• Taking “grossly oppressive and unfair advantage of another’s necessities or distress”

Mistake of fact

• Doesn’t count if person neglected a legal duty (such as duty to read)• Unconscious ignorance or forgetfulness of a fact past or present

Morta v. Korea Insurance Co.: rescission is possible if fraud, undue influence, or mistake proven

Π signs a release for $900 following a car accident and subsequently suffers from a blood clot. He loses because he doesn’t prove the options above.

Duty to Disclose

Historical Trend of duty to disclose

Formerly caveat emptor, or “let the buyer beware” Formerly needed an actual misrepresentation so a fraud claim could be made Modern trend is toward duty to disclose

RSC §161. When Non-disclosure is Equivalent to an Assertion

o A person’s non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases only:(a) Where he knows that disclosure of the fact is necessary to prevent some previous

assertion from being a misrepresentation or from being fraudulent or material.(b) Where he knows that disclosure of the fact would correct a mistake of the other party as

to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.

(c) Where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part.

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(d) Where the other person is entitled to know the fact because of a relation of trust and confidence between them.

Misrepresentation

• “[G]enerally a misrepresentation, to be actionable, must be one of fact rather than of opinion.”• Exceptions:

o Fiduciary relationshipso Artifice or trick employedo Parties not “at arm’s length” – adversarialo Representee does not have equal opportunity to find out the truth

Superior knowledge

• “A statement of a party … having superior knowledge may be regarded as a statement of fact although it would be considered as opinion if the parties were dealing on equal terms.”

Amount of information – all or nothing

• Where “a party to a transaction owes no duty to disclose facts within his knowledge or to answer inquiries respecting such facts, the law is if he undertakes to do so he must disclose the whole truth.”

Vokes v. Arthur Murray, Inc.: misleading b/c superior knowledge means opinions count as facts

Dance studio strings lady along telling her she is progressing rapidly when in fact she is terrible and wasting her money. Court finds fraud.

Fraud requires a misrepresentation, and not mere silence

Laidlaw v. Organ: silence is not fraud (if intelligence equally accessible to both parties)

Tobacco sale where buyer knows of end of blockade in War of 1812 and doesn’t respond to questions of seller. No fraud.

Requirements of duty to disclose:

Exclusive knowledge beyond diligent efforto Seller knows facts materially affecting the value or desirability and facts are only

accessible to himo If facts are not within the reach of diligent attention and observation of the buyer, seller

has duty to disclose. Material to transaction

Hill v. Jones: non-disclosure can be equivalent to an assertion and so create a duty to disclose

The sellers failed to disclose the existence of termite damage and the history of termite infestation that they knew about.

Integration clauses do not preclude fraud charges

• “[A]ny provision in a contract clause in a contract making it possible for a party thereto to free himself from the consequences of his own fraud in procuring its execution is invalid and necessarily constitutes no defense.”

• “[P]arol evidence is always admissible to show fraud. …”

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Information between parties

• Both parties do not have to be fully informed for a contract to be enforceable.o Impossible to be fully or equally informed

• Some ways out for the uninformed persono Fraud, constructive fraud, duty to disclose, and mistake

• The easier it is to rescind for lack of information, the less incentive there is for people to inform themselves.

o For what do we want to give incentives?

ADL – Considerations of duty to disclose:

• Material?• Relationship of trust?• Access to info?

Duress

• Wrongful threato To breach contract is not usually considered wrongful

• Holmes: A contract is a promise to do something or pay damages.• Deprive victim of free will

o Court now use the term “no reasonable alternative”• No adequate legal remedy

o Alaska Packers: hold-up and pre-existing duty• Austin had a pre-existing duty to fulfill K1, so it can’t use that duty as

consideration for a new K2• Duress:

• Threat: to stop working• No reasonable alternative: no replacement crews• Remedy: no court available in the ocean; employer could not have

sued for damages because they wouldn’t have enough money (judgment proof)

o Is duress stronger in Alaska Packers than in Loral?• Isolation is stronger

o There are cases that say that if you could have gotten a preliminary injunction, you cannot claim duress.

• Duress and pre-existing duty rule arguments are often made together. o Duress older doctrineo Pre-existing duty is newer

Business compulsion (or economic duress)

• Where the plaintiff is forced into a transaction as a result of unlawful threats or wrongful, oppressive, or unconscionable conduct on the part of the defendant which leaves the plaintiff no reasonable alternative but to acquiesce, the plaintiff may void the transaction and recover any economic loss.

Austin Instrument, Inc. v. Loral Corp.: economic duress occurs if party is precluded from exercising its free will to enter or reject a contract (OUTLIER)

Subcontractor threatens to withhold parts from Loral unless given rate increase, which could cause Loral to lose future government business.

RSC §175(1). When Duress by Threat Makes a Contract Voidable

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• If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.”

Duress and legal right

• Threats to do what the threatening person has a legal right to do do not constitute duress.

Machinery Hauling, Inc. v. Steel of West Virginia: no duress b/c at-will relationship; duress occurs if no reasonable alternative (more accurate reflection of duress cases)

Producer threatens to stop using Π as shipper unless reimbursed for some undelivered loads. Π not under duress.

Posner review on Duress

• Prongso Wrongful threat

Can it ever be unlawful to threaten to do what one has a legal right to do?

• Yes, such as blackmail. Lawful to tell the information, but unlawful to demand money for the silence.

Any bargaining could be a threat though? If you don’t pay $1 for the item, I won’t sell it to you. So, alternatives are more important.

o Deprives of free will/no reasonable alternativeso No legal remedy

Similar to lack of alternatives – but still mention all elements Preliminary injunctions could be used to solve this issue; if preliminary

injunction fails, you will have a better duress case• Classic case: Two people have an existing contract and then there is a second contract to

modify the original. This happens because one party cannot perform, so he demands other accept the modification or won’t ever get the performance.

• Courts: Courts don’t like to apply duress doctrine because then people won’t work things out on their own.

• Holdup situation: difference is that person with danger of injury can’t just accept breach because the breach gives no reasonable alternatives

Unconscionability

Unconscionability doctrine

• Procedural problems: absence of choice/ unequal bargaining powero Usually involves a consumero Usually involves a form contract (contract of adhesion)o Unfair surprise

• Substantive problems: unreasonably favorable to one partyo Oppressive terms

• Price, but shouldn’t evaluate if consideration is sufficient• Disclaimers are more common• Termination clauses also a common problem• Illegality

Impact on other parts of duty to read and freedom of contract

• Using this doctrine lessens the impact of other rules of contracts, such as “duty to read”

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• Common definition: A bargain “such as no man in his senses and not under delusion would make on the one hand, and as no honest and fair man would accept on the other.”

• Conflicts with normal contract assumption that “people should be entitled to contract on their own terms without the indulgence of paternalism by courts in alleviation of one side or another from the effects of a bad bargain … [and] should be permitted to enter into contracts that actually may be unreasonable or which may lead to hardship on one side.”

o Goes against the grain of common law of contracts, which holds up freedom of contract

o Perverse to prevent? Who are you helping? Harsh terms might be the only ones poor people can get. Without

protections for the companies, they won’t deal with riskier individuals.o Information failures justify striking down clauses

So provide information (truth-in-lending law)o Disturbs the allocation of the risk as the parties set it

Consumer Transactions

Cutler Corp. v. Latshaw: a court might not enforce terms used to ambush other party if they appear unconscionable

Confession of judgment in fine print on reverse of form and warrant of attorney give Π right to concede Δ’s case on Δ’s behalf. Π wins

Williams v. Walker-Thomas Furniture Co.: unconscionable contracts are not enforceable

A woman of “limited education separated from her husband … maintaining herself and her seven children by means of public assistance” bought fourteen items from the Π on an installment plan that didn’t give title to any until all paid off. She defaulted on the payments, so the furniture company sued for the outstanding balance.

Price setting in Walker-Thomas1. Demand side – need to keep prices down for competitive reasons and to be within

range of customer’s willingness-to-pay2. Supply-side - keep costs down – one way to do this is with the clause3. Furthermore – implied price also includes average amount defaulted on goods (this is

presumably positive; but given depreciation, in theory it could go negative)4. Thus, if take out clause, prices will go up

Monopoly problem – if they are monopolists – cannot get at them from ordinary K law. But case is just this K in front of them. If she wins, is society better off?1. No – company will jack up prices2. Yes – company can handle the costs; also prices already at the max. willingness to

pay – thus, she won’t buy3. Essentially courts forcing her to buy an insurance policy for $2 if can jack up price.

Would she prefer this? OR would she be better off w/o decision?a. Separate out her understanding (assume she does) and the market structure:

Walker’s values:i. Stereo – values this at $600

ii. Insurance policy that Walker-Thomas can’t repossess w/o process- values this at $20

b. Seller costsi. Stereo - $300

ii. Insurance - $50 (therefore won’t do it); but if only $5 will do it b/c less than her value (only do it if it worth more to her than it is to them)

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4. Furniture company assumes that customers do not want insurance – therefore do pro rata clause in K to prevent the need

5. Information – could she understand this? Would she have agreed to it?c. She might have, but she might have waited to buy the stereo till she paid off

the remaining

Jones v. Star Credit Corp: K is unconscionable when considerations are too unequal

Π buys refrigerator worth $300 for $1,400. Judge says mathematical disparity plus limited financial resources plus grossly unequal bargaining power made it unconscionable.

Commercial Transactions

UCC §2-302. Unconscionable Contract or Clause

• Official comment 1. “The basic test is whether, in light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract … The principle is one of prevention of oppression and unfair surprise … and not of disturbance of allocation of risks because of superior bargaining power.”

Weaver v. American Oil Co.: contract unconscionable because of unequal bargaining power and so not enforced

Hold harmless clause would make an oil company not liable for negligent burning of a service station owner; clause rejected and oil company liable.

Zapatha v. Dairy Mart: not unconscionable b/c of conditions at time of signing and understanding of contract by franchisee (more common case than Weaver)

Franchise agreement terminated b/c franchisee won’t sign updated contract; franchisee loses.

Freedom of contract reasons

1. Utilitarian explanation: a. If people are able to contract, they will become better off.b. If people can rely on promises, people can plan ahead and maximize benefits.

2. Libertarian explanation:a. Autonomy is an important value, and FOC is an important element of that autonomy.

Explanations for why courts might use unconscionability to limit freedom of contract

1. Informationa. Bad decisions (bounded rationality) or decisions made from a lack of info (info

failure) don’t make people better off.b. Counters

i. Average person has enough information, although not perfect info, to make a beneficial decision.

ii. Sellers have an incentive to provide information – to attract customers from competitors.

1. Rebuttal: Although competition will force brand specific information, it will not force info about the products instead (might say my toaster is safer than his, but won’t say a toaster oven is safer than my toaster). Example: truth-in-lending laws provide statements of information.

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2. Bargaining powera. Idea that stronger negotiator will take advantage of the weaker by removing the

choices of the weaker partner (especially monopoly)b. Counters

i. McDonalds does not have a monopoly; you can just go to Wendy’s.ii. Even if there is a monopoly, does striking down those contracts help

anyone?3. Competence/paternalism

a. Posner: This appears to be what is happening frequently.b. Judges want to protect people from making bad decisions, according to the judge’s

definition of bad.c. Judges believe they are looking out for people’s interests more than the people

themselves.4. “Welfare state”

a. Idea that credit is dangerous and can particularly hurt the poor.b. FOC restricted to prevent defaulting and losing property.

i. Counter: Poor person loses things he values (such as bed, sheets) to state that doesn’t value the items.

Laws that restrict freedom of contract

1. Usury laws: cannot borrow money above a certain interest ratea. In US, these laws have mostly disintegrated. States that don’t have the laws house

all the credit card companies.b. Payday loans

2. Restriction on the equity of redemptiona. People buy houses using mortgages. If you default, they get the house. As you pay,

you develop equity, which translates to owning a percentage of your house. Under FOC, people should be allowed to pay without getting title until the payments are complete.

3. Civil rights lawsa. Can’t enter a contract that is discriminatory (that employee might get more money in

return for risk of being fired for age)4. Penalty doctrine

a. Courts often strike down liquidated damages clauses5. Covenants not to compete

What if all of the sellers in a market use the same form? The consumers would not have any choice.If market is truly competitive, then just as everyone charges about the same price, so will they have about the same terms in their contracts.

Posner review of unconscionability

• Bit of a catch-all; covers the gaps in fraud, duress, and undue influence• Taking advantage of the person’s ignorance or lack of education• Often involve franchising agreements• Seems like a new doctrine, but has old roots• Is now dying because of its success – replaced by statutes• Courts often claim they require procedural and substantive unconscionability, so argue both

parts

• Posner: “Yeah, that’s the problem with these laws. It’s not clear they do any good.”

Illegality: Agreements Unenforceable on Grounds of Public Policy

RSC §600 – Illegality

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• “Illegality, if of a serious nature, need not be pleaded. If it appears in evidence the court of its own motion will deny relief to the plaintiff. The defendant cannot waive the defense if he wishes to do so. Indeed, if the court suspects illegality, it may examine witnesses and develop facts not brought out by the parties, and thereby establish illegality that precludes recovery by the plaintiff. If, however, the illegality is not serious, and neither public policy nor statute clearly requires denial of relief, courts refuse to give effect to facts showing illegality unless those facts are essential to establish a prima facie right of recovery or are pleaded by defendant”

Sinnar v. Le Roy: contract unenforceable for illegality

Agreement to procure beer license by bribe, Δ keeps the money. Π can’t enforce K.

Patterson v. McLean Credit Union: §1981 does not protect her, since it only covers making contracts and enforcing them

Woman alleges harassment and firing because of her race. She loses.

Covenants not to compete

Posner’s list on scope of covenants not to compete:

• Time: five years generally too long to be enforced• Geography: state is usually too big, although not always if national market• Industry: scope of skill

Why do employers value covenants not to compete?

• Investmentso To protect trade secrets

Other laws cover trade secrets; don’t need non-compete covenantso To protect customer lists

Accepted rationalo Because of employee skills gained during employment

• Breach won’t repay the damageo Judgment proof employee – doesn’t have enough money to pay the damages (and his

house is exempt)o Need deterrent

• 13th Amendment: no slavery

When a covenant not to compete is invalid, what does the court do about it?

Three options:• Overbroad covenant will not be enforced at all (Arkansas method)

o Outcome: will encourage employers to write reasonable non-compete clauses so they aren’t thrown out

• Blue pencil approach: may delete words to render it enforceableo Outcome: employers will write very broadly so that at least some non-compete

area wills survive: can’t work in Hyde Park, southern Chicago, Chicago city limits, Chicagoland, northern Illinois, Illinois, Midwest, US, Western Hemisphere, the mind of God

• Reasonable alterations

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Data Management, Inc. v. Greene: overbroad covenants not to compete shall be reasonably altered unless drafted in bad faith

Covenant not to compete for five years after termination remanded to alter and then enforce.

Watts v. Watts: contracts that are contrary are not enforceable

Cohabiting couple splits and woman sues to her share of property. Since this was not contrary to public policy, it was enforced.

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Performance of Contract

Determining the Scope and Content of Obligation

Integrated Writings and the Parol Evidence Rule

Parol Evidence Rule

For an oral agreement to vary a written contract:1. The agreement must in form be a collateral one, and2. It must not contradict express or implied provisions of the written contract, and3. It must be one that parties would not ordinarily be expected to embody in the writing.

What does collateral mean?• The one agreement is contingent on the other. The consideration of one contract is the

same. (I will buy the farm under the first contract if you will remove the icehouse; I will do what I am supposed to do anyway if you will remove the icehouse.)

• Why is the court more likely to allow parol evidence in a collateral agreement?• It makes it more probable that it was part of the same transaction, rather than

being a separate transaction.

Integration Parol evidence admitted?No YesPartial Consistent parol evidenceFull No

Judges and parol evidence

Parol evidence depends on the court’s tendencies: whether it is more formalistic or not.The judge must be strict about the intent, since he is the gatekeeper to decide whether the jury gets to see the parol evidence or not.

Posner recommends the UCC explanation of the parol evidence rule (UCC 2-202).

UCC §2-202. Final Written Expression: Parol or Extrinsic Evidence

Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented

(a) by course of dealing or usage of trade (Section 1-205) or by course of performance (Section 2-208); and

(b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.

Could a court use parol evidence to determine that the document was integrated? Seems circular

Exceptions to parol evidence: fraud, mistake

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Mitchill v. Lath: parol evidence is not admitted when the parties would have included the provision in the contract

Land sale w/ side agreement to tear down icehouse; side agreement not enforced on parol evidence.

Masterson v. Sine: integration prevents extrinsic evidence

Land sale w/ option for sellers to buy back for same amount plus depreciation value of improvements. Collateral agreement allegedly was to not assign the option to anyone but family.

Alaska Northern Development, Inc. v. Alyeska Pipeline Service Co.: unreasonable interpretation of contract cannot be supported by parol evidence

Contract subject to approval of owner committee (Δ) and rejected by it; Π’s interpretation was unreasonable and so extrinsic evidence prohibited

Luther Williams, Jr., Inc. v. Johnson: parol testimony is admissible to prove a oral agreement with a condition precedent

Contract allegedly conditioned on financing, so contract does not matter take affect until the condition precedent is met. Parol evidence admitted about condition precedent.

Interpretation

Rules of interpretations

a. Plain meaning rule (a.k.a. four corners rule)i. Written words best reflect the express intentions of the parties – parol evidence

subject to mistake and fraudb. Traynor’s rule – reasonably susceptible rule

i. No words are ever unambiguous – thus almost always need to consider the context of the K to understand what the intent of the parties were – words are fallible

ii. Thus, should admit evidence that industry standard might be differentiii. Note, judge will determine reasonable susceptibility of evidence before going to

juryc. Criticisms of reasonably susceptible rule

i. Any evidence can be admitted no matter how much you try to put in an integration clause

ii. No reason to think self-serving testimony of partisan witnesses made hazy by time will be better (Kozinski, p. 616)

iii. Creates unnecessary delay and frustration in the courtiv. Risk getting it wrong – best manifestation of parties’ intentions are what is

writtenv. Whenever stakes high enough to get K reformed, a party will always try to

introduce parol evidence to get out of Kd. Could the contractor have made a parol evidence rule to exclude the evidence?

i. Assume that plain meaning rule failedii. But parol evidence might not be admitted b/c K appears to be complete

2. Two rules:a. Plain meaning – if K clear – no evidence admitted (PG&E standard)b. Parol evidence – if K complete – no evidence admitted

RSC §202. Rules in Aid of Interpretation

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(1) Words and other conduct are interpreted in the light of all the circumstances, and if the principal purpose of the parties is ascertainable it is given great weight.

(2) A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted together.

(3) Unless a different intention is manifested,(a) where language has a generally prevailing meaning, it is interpreted in accordance

with that meaning;(b) technical terms and words of art are given their technical meaning when used in a

transaction within their technical field.(4) Where an agreement involves repeated occasions for performance by either party with

knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement.

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

A couple of approaches to interpreting (assume extrinsic evidence permitted)

1. Enforce K in literal meaning (like plain meaning rule in statutory interpretation)a. Would reduce litigationb. More certainty of worldc. But may be enforcing documents parties did not anticipate

2. Hypothetical bargain a. Try to figure out what the parties really intended at time of draftingb. What is going on in chicken casec. Problem: Judges might be bad at this

3. Majoritarian default rule – enforce how industry or relevant community usually uses the term.

4. Opposite of majoritarian (624) – interpret K against drafter of K. Often used in insurance Ks (all ambiguity interpreted against drafter)

a. Want to encourage drafter to be clear when drafting Kb. Not interpreting K – just punishing drafterc. Like Hadley – do you give damages that the average person would want or damages

actually deserve.

Words are imprecise (Traynor)

Pacific Gas and Electric Co. v. G.W. Thomas Drayage & Rigging Co.: admit parol evidence relevant to prove a possible meaning the language is reasonably susceptible to; words are imprecise and must be put in context (Traynor)

Dispute over whether contract to indemnify covers third parties only or Π too; Δ should have been allowed to introduce extrinsic evidence.

If the extrinsic evidence advances an interpretation to which the language of the contract is not reasonably susceptible, the evidence is not admissible

A. Kemp Fisheries, Inc. v. Castle & Cooke, Inc.: parol evidence is not admissible when an integrated contract that is unambiguous

Sale of boat w/o warranties but Π tries to claim parol warranties. Parol evidence should have been excluded.

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Frigaliment Importing Co. v. B.N.S. International Sales C orp. : Π has burden of showing narrow definition applies

Dispute over what the definition of chicken is. Two versions: trade usage might suggest only boiler chickens, but government definition includes fowl. Definition could be either; subjective intent of narrow definition is not proof.

Allocation of Risk: Conditions and Warranties

Overview

Parol evidence rule and the giving and taking of warranties

If disclaimer works, parol evidence rule won’t apply. High standard required to write out an implied warranty Can’t disclaim an express warranty

Express Conditions

Nature and Effect

Dove v. Rose Farms, Inc.: contract upheld for voluntarily accepting the terms and failing to perform

Law student loses bonus deal contingent upon not missing work by catching strep throat; since the central purpose of the contract was to encourage timeliness and attendance, he loses.

Wal-Noon Corp v Hill: necessary implications in the language of a contract are as much a part of it as expressed provisions

Lessees repairs leaking roof then realize lessor had contracted to repair; lessees breached contract by failing implied requirement to give notice to lessor

Jacob & Youngs v Kent: trivial and innocent omissions allow diminution in value damages rather than forfeiture damages (Cardozo)

Contract to build home specifies pipes must be made by certain company, and contractor mistakenly uses other pipes; contract upheld for trivial and innocent omission in performance

Excuse of Conditions

1. Waiver – the intentional relinquishment of a known righta. Different from estoppel b/c when waive you intentionally give something up, is

estoppel, it is your behavior which prevents you from asserting a right (whether or not intentional)

2. Considerations of forfeiture and restitution very similar- both involve attempt to seek fair allocation of profit and loss despite a party’s failure to comply fully with his obligations

3. Sometimes when forfeiture disproportionately harms one party, court may excuse non-occurrence of a condition if it was not a material part of the exchange

4. Constructive conditions of exchangea. Order in which conditions occur (e.g. condition precedent means B not bound until A

fulfilled obligation)b. How much performance before no forfeiture?

i. Fullii. Substantial

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c. Does restitution apply?

Clark v. West: if thing is consideration, then failing to do it breaches the contract; if thing is only a condition, it can be waived by implication

Π writes law books for ∆. Contract includes condition that if Π drinks liquor, he gets $2/pg, but if he doesn’t, he gets $4/pg. Deemed condition instead of K since consideration was for law books; abstention was just a method of writing books.

Forfeiture conditions

In order to enforce a forfeiture provision, three things must be shown: That is was a contract of adhesion That the forfeiture is disproportionately harsh That the party it protects was prejudiced

However, the burden of proof is on the party trying to evade the forfeiture.

Aetna Casualty and Surety Co. v. Murphy: party trying to evade a condition bears the burden of proof

Man doesn’t file claim soon enough and so forfeits his right to insurance. He argues that the insurance company was not prejudiced by his delay, so it shouldn’t matter, but he doesn’t produce proof.

Constructive Conditions of Exchange

The Avoidance of Forfeiture

Jacob & Youngs v Kent: trivial and innocent omissions allow diminution in value damages rather than forfeiture damages (Cardozo)

Contract to build home specifies pipes must be made by certain company, and contractor mistakenly uses other pipes; contract upheld for trivial and innocent omission in performance

Doctrine of substantial performance

A promisor who has substantially performed is entitled to recover, although he has failed in some particular to comply with his agreement.

Material breach

A material breach or a breach that goes to the root of the matter or essence of the contract defeats the promisor’s claim despite his part performance.

OW Grun Roofing & Construction Co v Cope: no substantial performance because appearance at the heart of the contract

Roof installed but tiles didn’t match.

Constructive condition:

A condition of performance is that the other guy pays. Once he fails to pay, performance no longer required. The person who breached first cannot sue for the resulting breach on part of other party.

Lowy v United Pacific Insurance Co: substantial performance in good faith, so paid

Π, subdivision owner, hired Δ to do excavating and grading work and street improvements. When Δ was 98% complete with the work, a dispute arose over payment for additional work, so Π sued for breach and withheld payment. Δ won.

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Partial performance and labor

The benefit and advantage which the party takes by the labor, therefore, is the amount of value which he receives, if any, after deducting the amount of damage [for loss of labor].

Employer must accept part performance and should pay for benefit received.

Britton v Turner: restitution requires employer pay for benefit received, minus damages

Contract to work for a year, but only works for 9 months; sues for partial payment and wins

Comment: Recovery in Restitution by a Plaintiff in Default

Representations and Warranties of Quality

Express Warranties

UCC §2-312(1) Warranty of good title UCC §2-313. Express Warranties

o Express warranties are created by: Affirmation of fact or promise Description of goods Sample or model (other goods must conform to model)

o Magic words are not necessaryo Good to review for exam

Implied Warranties

UCC §2-314. Implied Warranty: Merchantabilityo If seller is a merchant of that kind of good, then merchantability is impliedo Merchantable

Pass without objection in the trade Of fair average quality

UCC §2-315. Implied Warranty: Fitness for Particular Purposeo Seller must have reason to know of the particular purposeo Common example: shoes at shoe store have merchantability; if person goes mountain

climbing in them, no special purpose; if seller knows they will be used for mountain climbing and still sells them

UCC §2-316. Disclaiming Warranties o Look at in Restatement

Limitations of Warranties and Remedies: Contracts of Adhesion?

Henningsen v. Bloomfield Motors: attempt to disclaim warrant of merchantability is rejected

Personal injury by a car and dispute over dealer and manufacturer’s warranty (p. 703)

Limited remedies

The limited remedy of repair or replacement of defective parts fails of its essential purpose whenever, despite reasonable opportunity for repair, the goods are not restored to a non-defective condition within a reasonable time, whether or not the failure to do so is willful.

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Where the exclusive limited remedy of the contract fails of its essential purpose, however, the buyer is entitled to invoke any of the remedies available under the UCC.

UCC §2-719. Contractual Modification or Limitation of Remedy

If it fails of its essential purpose, remedy may be had.

Murray v. Holiday Rambler, Inc.: if exclusive limited remedy fails, it is disregarded and ordinary UCC remedies are available

Sale of a motor home that was a complete lemon (p. 708)

Changed Circumstances: Impracticability

Earlier doctrine: impossibility

Had to be literally impossible to perform If there had been only solid rock beneath the dirt, it would have been impossible. Impossibility doctrine has loosened to include excessive cost.

Existing Impracticality

Mineral Park Land Co. v. Howard: impracticability means when it can only be done at excessive and unreasonable cost

Deal to build a concrete bridge using gravel and earth from seller (p. 715); half of gravel is underwater and can only be removed at great expense. Buyer excused.

Party in better position to reduce the risk is liable for risky event occurring – more information

United States v. Wegematic: impracticability means beyond normal market conditions

Δ to provide Federal Reserve Board with computers by a certain date (with early delivery being very importance), but Δ failed to delivery by date, claiming delivery was impossible because of “basic engineering difficulties” that would have cost them millions of dollars. (p. 718)

Supervening Impracticality

Taylor v. Caldwell: when performance depends on the continued existence of a given person or thing, there is an implied condition that there will be an excuse for impossibility if the thing is not in existence

Π rents Music Hall from Δ for 4 concerts, but the musical hall burned down before any performances. Π excused from paying and Δ from providing the hall. (p. 724)

Method of analysis: what would parties do if there were no transaction costs (time limitations, costs)

Canadian Industrial Alcohol Co. v. Dunbar Molasses Co.: party who takes no precautions to minimize the risk must bear it (Cardozo)

Buyer (Π) will buy 1.5M gallons of molasses from the middleman/seller (Δ), but the refinery, a 3rd party only produced about 480K gallons. Court: the seller should have had a contract with the supplier or reduce the risk in some manner. (p. 729)

Frustration of Purpose

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RSC §265. Discharge by Supervening Frustration

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

Paradine v. Jane: when a party by his own contract takes on a duty, he is bound to perform it, regardless of accidents of inevitable necessity, because he might have provided against it (1648)

Court doesn’t care that a foreign army drove tenant off – still had to pay rent (p. 748)

Krell v. Henry: if the purpose of the contract is frustrated, parties are discharged from performance

Coronation parade and rental of rooms to view, but parade cancelled, so Π/apartment owner sues for rent anyway. Π loses. (p. 749)

Washington State Hop Producers, Inc v Goschie Farms, Inc: doctrine of supervening frustration relieves parties of duty to perform when purpose of the contract is frustrated

Hop base market ended by USDA termination of market.

Posner on Impossibility, Impracticability, and Frustration

The doctrines are pretty dramatic. Instead of the normal case being performance, they excuse performance. However, they are very rarely applied.

The Duty of Good FaithUCC §2-306. Output Requirements and Exclusive Dealings

UCC imposes a duty of good faith.

Feld v Henry S Levy & Sons, Inc: duty of good faith governed the amount of output, and ceasing output without notice or good faith reason was wrong

Bread crumb output contract where seller ceases production; seller loses.

Posner on Good Faith

Hard to say what good faith means In cases of strategic behavior (taking advantage of the other party), more likely to be violated

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Breach of Contract and Permissible Remedial Responses

Repudiation of promise to pay money when other party has fully performed

Corbin’s answero Recover damages based on the present value of that promise; discount future value to

present value and pay lump sum Acceleration clause

o Can contract to allow acceleration of the obligation in the event of default, defined to include repudiation

Unilateral contract exception to doctrine of anticipatory breach

RSC §243(3)

Where at the time of the breach the only remaining duties of performance are those of the party in breach and are for the payment of money in installments not related to one another, his breach by non-performance as to less than the whole, whether or not accompanied or followed by a repudiation, does not give rise to a claim for damages for total breach.

RSC §351. Unforeseeability and Related Limitations on Damages

Compensatory Damages

Basic Policies

Types of Damages

Compensatory (expectation) damages

Amount intended to put the plaintiff in the position he would be in if the contract had been performed

If he expected to pay and did, can’t recover those costs Π in fulfilled position

Restitution damages

An amount corresponding to any benefit conferred by the plaintiff upon the defendant in the performance of the contract disrupted by the defendant’s breach.

Δ in prior position

Reliance damages

Π to recover any expenditure made by him and for other detriment following proximately and foreseeably upon the Δ’s failure to carry out his promise.

Π in prior position Reliance damages cannot be higher than expectation damages

Sullivan v O'Connor: in medical malpractice, where expectation hard to calculate and restitution insufficient, reliance damages are appropriate

Entertainer’s nose job botched; damages awarded are reliance damages, rather than expectation or restitution

Posner on Damages

Expectation damages are the standard award.

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Some doctrines limit expectation damages, but they are consistent with the idea of putting the person in the position of the fulfilled contract.

Reliance (expenses) and expectation (profits on the contract)o Easier to prove expenses than lost profits

Breach or Repudiation by Payor

John Hancock Mutual Life v Cohen: you cannot anticipatorily breach future installment payments

Insurance company stops making installment payments on insurance policy; while it didn’t anticipatorily breach future payments, it must pay back payments and must pay future payments when due.

American Mechanical Corp v Union Machine Co: reasonably foreseeable losses may be recovered

Breached sale of land and equipment which caused bank to foreclose on American; damages to return to position prior to breach include difference between foreclosure sale price and contracted price

New Era Homes Corp v Foster: damages depend on whether a contract is severable

Breach of contract to remodel Δ’s home and payments by milestones.

Bernstein v Nemeyer: restitution only enforced when justice requires

Limited partnership to operate apartment complexes fails, and both parties lose entire investments; Δ lost $3M, so was not unjustly enriched.

Breach or Repudiation by Performer

Direct Damages

Mitigating (covering) is a standard obligation of the victim of the breach once breach has actually occurred.

Courts are naïve about prices – they think it is easy to predict, from their perspective of hindsight, what the price was going to do from an ex ante perspective

No duty to mitigate here because breach had not occurred yet, only repudiationo Unaccepted anticipatory repudiation is not a breach of contract

Reliance Cooperage Corp v Treat: in the event of an anticipatory breach, damages are still calculated from the date of actual breach, not accelerated to the date of repudiation

Anticipatory breach of contract to deliver barrel staves

Jacob & Youngs v Kent: difference in value awarded rather than forfeiture because cost of replacement grossly and unfairly out of proportion to the good to be attained

Particular pipes specified in contract but not used by contractor.

Rivers v Deane: standard damages in construction contracts are actual cost to repair (diminution in value is an exception)

Faulty construction of an addition that is structurally unsound and unusable

American Standard, Inc v Schectman: ordinary damages are cost of completion

Grading work not completed

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Why does it make sense to have cost of completion as the amount of damages in the consumer case?

Contract is supposed to put you in the place you would have been in if performance had occurred.

In commercial contract, the place you want to be in is measured in profit – you only want the money, and so diminution of value meets your expectation.

In consumer case, you want a product – to meet your expectation, you need the ugly fountain or the Reading pipes or the graded land.

Consequential Damages: Foreseeability; Mitigation; Certainty; Incidental Reliance

Rule of Hadley:

Causation: Such as arise naturally (in the usual course of things after the breach) Foreseeability: Such as may reasonably be supposed to have been in the contemplation of

both parties at the time they made the contract

Hadley v Baxendale: breaching party must know of special circumstances before can be held liable for them

Shaft of mill breaks and needs to be replaced; carrier not liable for unexpected damages

Spang Industries, Fort Pitt Div v Aetna Casualty: breachor pays for consequential damages that he should have reasonably foreseen

Steel delivered late for bridge construction, causing builder to have to do overtime work and “crash basis” construction that cost an extra $7K.

Posner on relationship between duty to mitigate and Hadley rule

Both cut back on ability to get damages Hadley: only get damages if you act well and provide information Mitigate: only recover fully if you take reasonable steps to limit damages

Hydraform Products Corp v American Steel & Aluminum Corp: consequential damages must be foreseeable, ascertainable, and unavoidable

Contract to supply steel for making woodstoves was breached by late and defective deliveries; damages beyond the number of stoves contracted for and the period of the contract were not foreseeable and so not awarded.

L Albert & Son v Armstrong Rubber Co: reliance damages are just to put the breachee in the position he would have been in

Contract to buy 4 machines to recondition old rubber; buyer wants reliance expenses for installing $3K foundation for the machines, and gets it. Seller pays.

Prevention, Hinderance, and Duty of Cooperation

Patterson v Meyerhofer: contracts imply that neither party will prevent the other party from carrying out the agreement

Buyer undercuts contract by buying houses at foreclosure sale herself. Seller sued for breach and was awarded his expected profit based on buyer’s purchase price.

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Equitable Remedies for Breach of Contract: Prohibitory Injunction and Specific Performance

Overview

Default: expectation (if calculable) Can request: specific performance Two common situations where specific performance is awarded:

o Real estate transactionso Unique goods (art, rare car, etc.)

Why do we have specific performance in the first place?

o Take case of unique Picasso. Pro-damages: you could give them the market value of the painting

• But the painting is priceless – very, very hard to get an accurate value Pro-specific performance: money is no substitute in some cases

o Same arguments for real estate – that it is unique and hard to value, although real estate markets undercut the second

o What is so great about expectation damages? Why not make specific performance the default remedy?

SP: don’t have to go through hassle of valuing things• But can’t always have the thing back – it might have been used up, etc.• Service/employment contracts: You might be concerned about service being

provided poorly by reluctant loser – result is bad paint job on your house which is not really where you would have been if it had been performed

o You can never get specific performance in an employment contract.

• Routine commodity transactions: transferring money is more efficient in a market economy and breaches may be more efficient than performance

o Posner: You should be skeptical of assertion that there is no adequate remedy at law.

Efficient Breach and Specific Performance

Suppose the seller could have three different costs ($50, 85, and 100) and doesn’t know which will be actual cost. Assume buyer values it at $90 and contract price is set at $80.

o Enter contract at T1, seller learns of actual cost at T2, and performance date is supposed to be T3.

o Expectation damages allow for efficient breach (social cost analysis or win-win)Seller’s cost

Buyer’s value

Price Expectation Damages Specific performance

No damages

50 90 80 Perform Perform Perform85 90 80 Seller pays $10 if

breaches; if performs it costs $5

Perform

Perform Breach

100 90 80 Seller pays $10 if breaches; if performs it costs $20

Breach

Perform Breach

Buyer is equal in both breach and performance, yet seller is better off in breach, so result is more efficient

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Behavioral impact of types of legal versus equitable relief

Decision to perform or breacho Efficient breach: if you breach and pay damages, the breachee is not injured and the

breachor comes out ahead as well, so it is more socially efficient Could get same outcome if parties could renegotiate, so breach and performance

might be equal• But that assumes that it doesn’t cost anything to negotiate• If it is cheap to negotiate, it becomes a distributional question• Under ED, the breachor gets the surplus• Under SP, the breachee gets the surplus

o Would expect prices to be lower because the seller knows he would have to pay more if he breaches in the future

o Under specific performance, you could have contract option to perform or pay liquidated damages; then, when the court enforces performance of the contract, it still ends up be expectation damages

Decision to rely (make reliance investment)o Buyer wants to invest on foundations to prepare for machines he is buyingo If the remedy is no damages, he will rely lesso If expectation damages, he would know reliance damages are covered and so be more

likely to relyo When the buyer is trying to decide how much to invest in the foundations, you want him

to invest some amount but not too much; you want him to invest the amount that it is likely to be more valuable to him than to the seller

o Problem with specific performance: it guarantees buyer will get the return he expected, even if his expectation was wrong

Decision to reveal information In Germany, specific performance is the standard remedy. Specific gives more compensation than is deserved

Curtice Brothers Co v Catts: specific performance is appropriate when there is no adequate remedy at law

Specific performance of delivery of tomato crop to canning business b/c no adequate remedy at law (OUTLIER)

Laclede Gas Co v Amoco Oil Co: specific performance is appropriate when there is no adequate remedy at law

Requirement contract for Amoco (Δ) to supply all the propane reasonably foreseeably required, while Π was to purchase the required propane from Δ and pay the promised price. Δ stopped supplying, so Π sued for injunctive relief and won.

American Broadcasting Company v Wolf: hard to get specific performance in a personal services contract

Good faith negotiation and first refusal provision with ABC and sportscaster; he then makes deal with CBS. No breach of first refusal

Effect of Agreement Liquidating Damages or Altering the Scope of Liability or Remedy

Requirements of liquidated damages:

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Reasonable forecast of just compensation for the harm that is caused by the breach The harm that is caused by the breach must be one that is incapable or very difficult of precise

estimationo Posner: How can we say that it is hard to calculate and yet was a reasonable forecast?

Southwest Engineering Co. v. United States:

Liquidated damages for delay in four construction contracts

Liquidated damages must not be penalties

United Air Lines, Inc v Austin Travel Corp: they are not penalties if they are reasonably proportional to the anticipated loss at the time of contracting and the actual loss is harm to calculate

Austin breaches by replacing United’s reservation database with another’s and so United sues for liquidated damages

Leeber v Deltona Corp: liquidated damages are not enforceable if actual damages could be ascertained at the date of contracting or if enforcing them at the time of breach would shock the conscience

Πs contract to buy condo in Florida but can’t close on time, forfeiting their 15% deposit as liquidated damages; Δ wins and keeps liquidated damages

City of Rye v. Public Service Mutual Insurance Co:

Contract to get occupancy certificate (city approval) in exchange for timely completion (secured by surety bond) (Handout)

Muldoon v. Lynch:

Contract for improvements to a cemetery plot, including imported Italian marble (Handout)

Posner Review of Remedies:

L i q u i d a t e d d a m a g e s

S p e c i f i c P e r f o r m a n c e

R e s t i t u t i o n R e l i a n c e

D i m i n u t i o n i n v a l u e C o s t o f p e r f o r m a n c e

F o r e s e e a b i l i t y M i t i g a t i o n S p e c u l a t i v e

L i m i t s

E x p e c t a t i o n

D a m a g e s

" G a p "n o p r o v i s i o n f o r b r e a c h

B r e a c h

C o n t r a c t

E x p e c t a t i o n

R e l i a n c e

P r o m i s s o r y e s t o p p e l

R e s t i t u t i o n

B e n e f i t c o n f e r r e d

N o c o n t r a c t

B a r g a i n

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Why won’t courts let people choose the damages, like they get to choose bonuses and benefits? No real explanation Courts are not big fans of freedom of contract and laissez-faire You cannot say in your contract that specific performance will be the remedy

o Usual excuse is jurisdictional: that parties can’t choose law or equity Fictional, since law and equity courts merged Can put covenant not to compete however You can also disclaim injunctive relief, usually by putting in liquidated damages

provision Specific performances:

o Routine for real estate and unique objectso Not usually for fungible objects and personal services contractso You cannot specifically enforce an employment contract, but you can get a negative

injunction Expectation damages are the default starting point You might ask for restitution because it is simple You might ask for reliance if your profits are hard to calculate Result of limits on expectation is that breachee is rarely fully compensated (so that it would be

indifferent to breach) Promissory estoppel

o You get reliance damages by defaulto You can get expectation damages, but “damages are limited as justice requires” (RSC

§90)

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Appendix

Posner Review of Contracts

General themes

Overviewo Contract law is extremely abstract. Each contract is different.

Different state common law Different statutes Different kinds of activity (employment, business, etc.) with their own bodies of

lawo Contracts govern:

Cooperation among people (i.e., almost all human activity)• Future oriented (promises)

o You learned: Basic principles and reappearing patterns in law

• Criminal: plea bargaining• Constitutional: waiving rights

Rules can’t just be applied to disputes• Similar to rules of grammar which are changing and have many

exceptions• We are really learning how to speak a foreign language and not a bunch

of rules Principles affecting cooperation and other topics

o Contracts must be voluntary Fraud, duress, holdup, monopolies, unequal bargaining power, relation-specific

investments, unconscionability, capability, contract modificationo Reasonably well-informed

Risk allocation, mistake, fraud (one party manipulates info), duty to disclose Tension between voluntary and informed

• Offer and acceptance (party relies, might lead to contract)o Formality

Statute of frauds, parol evidence, duty to read, unconscionability, completeness (essential terms), consideration, firm offers (recite consideration)

Courts use formality to reduce error in decisions and to prevent fraud (parol evidence rule)

• Relates to role of jury since courts have made rules that keep issues from the jury

• Admits court will ignore contracts because of missing technicalitieso Consideration v. promissory estoppel: allows courts to err in

other direction (ignoring formalities)o Conflicts with important social goals

Courts don’t like to enforce contracts that do this (gambling contracts are unenforceable, whistleblowers protected in spite of contract, etc.)

Contrary to public policyo Interpretation

Tension• Courts want to defer to intent of the parties• Courts want to set social policy and protect the weak

Not interpreting one person but two different people that might have different intents

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• If intents too far apart (Peerless, mistake doctrine), might not be a contract

• Courts put burden on one party to know better (based on sophistication)• Courts sometimes use interpretation to protect the little guy

Parties don’t have the time to write a complete contract (transaction costs), so courts use the hypothetical bargain construct to analyze

• Contracts frequently have gaps, since they can’t cover everythingo Remedies

Remedies are not nearly as varied as contracts Remedies are an example of interpretation; parties didn’t plan for this breach, so

what would the parties have wanted if they had thought of it Remedies might also be focused on compensating the victim

• Less interpretation aspect

Contract law from another angle – theories

Will theoryo Similar to libertarianism or classical liberalism or natural rightso Contract exists when the wills of two parties converge

“Meeting of the minds” comes from this Many doctrines can be explained under this (capacity, duress, fraud, etc.)

o Big in 1800s and early 1900so Protect people’s autonomy more than their welfareo Largely abandoned now

Limited explanatory value in contract law• What is a meeting of the minds?• Parties rarely have full information

Too crude an idea to explain the doctrines of contract law Welfarism or utilitarianism or law & economics

o Want people to be better off, not more free (what does it mean to be free, anyway)o Law & econ started in 60s or 70s and tried to explain all contract law using the tools of

economics People only enter contracts because they think they will be better off; so, courts

should enforce this and make them better offo Economic tools allow more explanation

Why expectation damages are better than specific performance – efficient breach theory, sometimes society doesn’t want people to keep there promises

• Might not be right (Posner doesn’t think it is), but it is useful Problems:

• Contradictionso Can’t explain penalty doctrine

• Vaguely puzzlingo Gratuitous promises – economics don’t really explain since

donor would feel better off Usefulness

• Transaction costs (anticipating future events, planning for them, writing them down)

Critical legal studies or history or skepticismo Partly in reaction to law and econ and partly an old ideao Contract law does not reflect a unifying theme but different values we haveo Historical theories about how doctrine evolveso Might just be skeptical that law actually means something (like a language meaning

something in itself and not just being a tool)o Not very helpful, but corrects the other two theories

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Judgeso Skeptical: Traynor, Cardozoo Formalistic: Friendly, Hand

Debatable topics:

Moral Obligation: Promise Plus Antecedent GiftConsideration – Form or Substance?Custom’s relation to moral and legal obligationsPosner on Battle of the Forms (look for quotes in book on UCC §2-207)Information between partiesUnconscionability (consider reading law review articles on page 510)

Freedom of contract reasonsCovenants not to competeInterpretationChanged Circumstances: ImpracticabilityWhy do we have specific performance in the first place?

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