CONTRACTS OUTLINE

1. Promises

a. Restatement §2: Promise is a manifestation of intention to act or refrain from acting…so as justifies promisee into understanding that a commitment has been made.

b. Hawkins v. McGee (“Hairy Hand” case)i. Doctor promised patient a “perfect hand.”

ii. Patient agreed, based on Dr’s guarantee. iii. Patient entitled to expectation damages (worth of a “perfect hand” as

promised)

2. Promissory Agreements

How and when is an agreement made?

a. Intention of the parties

i. Restatement §201: When 2 parties attach different meanings to a promise, the meaning attached by party A prevails if:

1. party A didn’t know of different meaning by party B2. party B knew the meaning attached by party A

ii. Lucy v. Zehmer (drunken promise case)1. Drunk man agrees to sell his farm; drafts “contract” on napkin, claims

too late that it’s a joke2. No objective indications that seller was joking3. Intention of buyer prevails

iii. Oswald v. Allen (Swiss coins case)1. Two collections of “Swiss Coins” and “Rare Coins” – neither party

understood meaning of the other when buyer said he would buy “all Swiss coins.”

2. Language ambiguous; no meeting of the minds3. No reason to believe either knew of other’s intent; no contract.

b. Offers i. Promissory agreements can be made when one party “offers” and the other

“accepts.”

ii. An offer creates a “power of acceptance” in offeree.

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iii. Restatement §24: Offer is manifested willingness to enter bargain, such that offeree understands his acceptance is invited and would conclude bargain.

iv. Mesaros v. U.S. (buying coins from ad)1. Ad to order rare coins from U.S. Mint not an offer, but an offer for the

buyer to make an offer.2. Therefore, buyer does not conclude bargain by filling in order form.

v. Note : most ads are not legal offers. Unless…

vi. Lefkowitz v Store: (mink coat case)1. Ad: “First come, first served”: specific coat at $1.2. Offer is clear, explicit and leaves nothing open for negotiation.3. Acceptance of such offer will complete contract.

c. Powers of Acceptance i. Restatement §36: An offeree’s power of acceptance terminated by:

1. rejection or counter-offer by offeree;2. lapse of time;3. revocation by offeror; or4. death or incapacity of either party

ii. Akers v. Sedberry (acceptance of resignation?)1. Offer was understood to last only during the conversation.2. She could not accept offer after the conversation finished.3. Had she asked for “time to consider” that would’ve been a counter-

offer, not an acceptance.

iii. An acceptance with conditions is considered a rejection or counter-offer, not a legal acceptance.

iv. If offer is revoked, it must be effectively communicated to offeree before offeree accepts. (If revocation is mailed, the letter must reach offeree).

v. Agreeing to accept does not hold that the offer will be held open, even if a date is given. Consider:

vi. Petterson v. Pattberg (acceptance rejected) 1. Offer to give a discount if mortgage paid off by certain date.2. Offeree comes on date specified, cash in hand.3. Offeror effectively revoked by telling offeree that the land was sold. 4. Offeror never said the offer wouldn’t be revoked before specified date.

Note: This is a unilateral contract. Offer cannot be accepted by a promise to perform, but actual performance only.

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Hypo: A offers to pay $100 if B crosses the Brooklyn Bridge. Can A revoke after B is 10 ft from the end? NO: this is unfair. If A can revoke even when B has partially performed, B will be less willing to enter into the deal.

d. Acceptance i. Offeror is “master” of the offer. He can specify methods by which offeree can

accept, whether it’s performance, or promise to perform.

ii. Davis v. Jacoby (perform or promise?)1. Offer: come help me, and I’ll leave you my estate.2. Offer not revoked by death of offeror, because offeror received valid

acceptance before death.3. Acceptance was a letter: “We’re coming.” This is enough, b/c offeror

said “let me know.”

Note: Preparation (not performance) is not enough to make an offer for a unilateral contract irrevocable. E.g., in Davis, preparing their house to leave is not enough. Davis must arrive and do the performance asked for to qualify for part performance.

iii. Purchase of a guaranteed product is not acceptance. You must notify manufacturer of your acceptance.

iv. Restatement §6: You can’t make people accept by silence unless…1. Offeree takes benefit, w/ reasonable opportunity to reject them, and

reason to know compensation was expected;2. Offeror stated that acceptance may be manifested by silence, and

offeree remains silent w/ intent to accept; or3. Because of previous dealings, silence is understood to be acceptance.

v. Cole v. Holloway (acceptance delayed)1. Buyer put in order to a salesman.2. Salesman’s company rejected offer after long delay, when price for

goods had gone up.3. Delay in communicating decision will be construed as acceptance.

Not fair to delay acceptance while waiting for market to change in your favor.

vi. UCC on acceptance 1. Article 2 covers sale of goods.

2. Can an offer be accepted, if the terms of agreement are inside box? Consider:

3. ProCD v. Zeidenberg (terms inside)a. A buyer may accept by performing acts that vendor proposes to

treat as acceptance.

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b. Buyer has accepted terms b/c he couldn’t use product w/o accepting terms that flashes up with the program.

Note: Though the terms were inside the box in ProCD the terms themselves (not to use product for commercial gain) are not unreasonable. However, if terms are outrageous, buyer should not be bound.

e. Incomplete Agreements i. Certainty: If terms of a contract aren’t fixed, there could still be a deal, if the

court can “fill in” the terms w/o violating the parties’ autonomy. Consider:

ii. Sun Printing v. Remington Paper (uncertain time period for contract)

1. Agreement to sell paper over a period of time, max price fixed.2. Terms missing : no time frame set for when prices would be effective.3. They only “agreed to agree” – not enforceable. However…

Note: Under UCC §2-204, parties can agree to agree. Parties can therefore be bound to negotiate in good faith.

Negotiating in good faith: (no requirement to good faith, unless initial agreement says they must do so.)

iii. Apothekernes v. IMC Chemical1. Parties had an initial agreement, subject to approval by one party’s

board of directors.2. Just because agent of company didn’t advocate the deal to his board of

dir, doesn’t make it bad faith!iv. Itek v. CAI

1. Parties agreed to make “every reasonable effort” to reach final agreement. This bound them to good faith.

2. Making a deal with a third party behind the other party’s back is bad faith.

f. Requirement for writingi. Statutes of frauds differ greatly from state-to-state.

ii. Not included in statute of frauds: employment K, construction K, etc.

3. The Justification PrincipleWhat makes a promise enforceable in court?

a. The Bargained-for Exchange i. Promises are enforceable when supported by consideration. Consideration

consists of a performance or a return promise that is bargained for, in exchange for the promise sought to be enforced.

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NOTE: Not all contracts need consideration to be valid!! E.g., if someone puts a gun to your head and says “Your car or your life,” that may be consideration, but it’s certainly not enforceable. In other cases, there may be no consideration at all, but it will be worthy of enforcement (see reliance, e.g.)

Giftsii. Congregation v. DeLeo (gift enforceable?)

1. Verbal promise for a gift not enforceable.2. Promisor didn’t make gift because of promise to name library after

him – no consideration.3. A hope or expectation for a gift, even a well-founded one, is not

reliance.4. No legal benefit to promisor, no detriment to the promisee (in

reliance), so no consideration.

iii. Schnell v. Nell (gift to wife’s friends)1. K: Give money to wife’s friends in “consideration” for 1 cent and

wife’s love and services to husband. Not enforceable.2. 1 cent is nominal, not intended to be real consideration.3. Wife’s services not induced by wish to give friends money.4. It was a promise to give a gift, not a contract with valid consideration.

Promises to forbear from acting as considerationiv. Hamer v. Sidway (forbearance from drinking..)

1. Uncle’s promise to pay $5,000 to nephew for his forbearance in drinking, smoking, etc. is enforceable.

2. Nephew refrained from acting when he otherwise had a legal right to do so. This performance is valid consideration.

Adequacy of considerationv. Batsakis v. Demotsis ($25 worth of Greek money for

$2,000)1. Inadequacy of consideration will not void contract. 2. To buyer, the Greek money was worth $2,000 US at that time. She

was willing to pay that much b/c that’s how much she valued them.

vi. Dyer v. National.. (forbearance from suing)1. Good faith forbearance to litigate a claim (even if claim is invalid) is

sufficient consideration. (good faith means, party thought the claim to litigate was valid).

Note: This is to encourage people to enter agreements that they think are worthwhile. Can’t have courts determining what’s adequate and what’s not for the parties. Goods should reach their highest value.

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Lack of Mutualityvii. Wickham v. Farmers

1. Buyer agreed to buy “all the coal I want” from seller, at a fixed price.2. Buyer had no obligation to buy. Therefore, seller got no consideration.3. Nothing was given by buyer in exchange for seller’s promise to hold

price open.

In contrast…viii. Wood v. Lady Duff Gordon

1. Having exclusive rights to place lady’s name obligated Wood to perform using reasonable effort. (implied obligation)

2. Wood’s obligation to perform is valid consideration. Contract valid.

Note: The UCC §2-306 says in the sale of goods: exclusivity imposes obligation to use reasonable efforts.

b. Mid-Term Modifications Need for consideration – common lawi. Restatement §73: Performing something that is already owed is not

consideration

ii. Levine v. Blumenthal (legal duty-not consideration)1. Landlord agreed to accept less per month from tenants for rental mid-

way through contract.2. A promise to do what promisor is already legally bound to do is not

sufficient consideration for the modification to be valid.

Unless! Unforeseen circumstancesiii. Restatement §89: Modification can be made if fair and equitable to do

so, AND if contract has not been fully performed on either side .

iv. Angel v. Murray (trash collector case)1. Through no fault of either party, burden on trash collector far exceeded

what was agreed to. Can he ask for more $$ under contract (modify it)?

2. Yes. Modification is fair and equitable, and circumstances were unforeseeable.

No need for consideration – UCCv. Gross v. Clarke

1. Printer raised magazine price mid-way; publisher didn’t object then. Publisher is bound by modification.

2. If contract is no longer fair, there’s nothing wrong in asking for more $.

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3. No consideration is necessary to make a modification, under UCC §2-209. But has to be in good faith (“hold up game,” e.g., no ok)

c. Reliance on a Promise (promissory estoppel) i. Restatement §90: If A promises something to B, with reasonable

expectation that it would induce B to act or refrain from acting (and B does in fact, act/refrain) then promise is enforceable if justice requires.

ii. Devecmon v. Shaw (promise to pay for Europe trip)1. Nephew incurred expense at the instance and request of uncle that he

would be reimbursed. Nephew reasonably relied on promise.2. Uncle’s estate is bound to fulfill uncle’s promise to pay.

Note: You must be worse off as a result of your reliance.

Reliance in Employmentiii. Feinberg v. Pfeiffer (induced to retire)

1. Promise to give a pension is enforceable b/c:a. Employee retired in reliance of that promiseb. Employee could have stayed longer, but cut off her

employment because of promise

Note: Inducing factor is important. (e.g., if employee in same situation as Feinberg was promised pension, then got cancer and quit work, inducement to rely may not be provable!

iv. Hayes v. Plantations (no reliance) 1. Employee was going to retire anyways. No inducement to rely.2. No reliance, no contract.

Reliance in General/Sub contractorsv. Drennan v. Star Paving

1. General used sub’s estimate on his bid. General is now bound to complete work at bidding price.

2. General relied on sub’s estimate. No formal acceptance (how can he accept, if he’s not sure he’s got the job yet?). But reliance, so there’s an enforceable contract.

vi. Acoustics v. CV Holder 1. General did no accept sub’s offer by using sub’s estimate in his bid.2. Silent acceptance does not work b/c no previous relationship.3. Sub found out by mistake that his estimate was used in bid

Note: Contractors is the rare case where one can rely w/o accepting. It is a conditional acceptance, b/c Gen can’t accept if contract not awarded. On the other hand, Subs can revoke their bids before Gen submits his total bid, b/c there has not yet been any reliance.

Irrevocable offers

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vii. UCC §2-205: Merchant can offer to hold open an offer to buy or sell goods if it’s in a signed writing.

1. NOT enough to say “this offer will lapse in a week” 2. Acceptable: “Offer held open for a week.”

viii. Restatement on Option contracts1. In exchange for consideration, party may agree to hold offer open.

d. Unjust Enrichment & Restitution Not concepts of contracts.

i. Hypo: you get a fake $1,000 check…and the bank actually cashes it for you! You got a benefit, but have no legit claim to it (unjustly enriched). Bank can recover $1,000 from you in restitution.

ii. Gifts are not recoverable under restitution.

Implied promiseiii. Sparks v. Gustafson

1. Services to friend continued even after friend’s death. Should friend’s son, who benefited, have to pay for benefits?

2. Yes. Two factors to unjust enrichment:a. D received benefit from Pb. It’s inequitable for D not to pay P for services rendered.

3. There was expectation that P would be paid; services were not gratuitous.

iv. If you render a service you know other party doesn’t want, then you can’t collect in restitution. (officious intermeddler)

v. You must have justified expectation for payment – if you were told expressly that you won’t be paid, you can’t collect.

Prior Legal obligation?vi. If promise is given to fulfill a prior legal obligation (that has been discharged

for some reason), then it’s enforceable under restitution. E.g. of such prior obligations:

1. debts barred by bankruptcy2. debts barred by statute of limitations, etc.

vii. Mills v. Wyman1. Father promised to pay X after he heard that X helped sick adult son.2. X can’t collect in restitution, b/c:

a. Service was rendered gratuitously at the time;b. Son was an adult: father owed no obligation on his behalf.

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Promise given after service renderedviii. Webb v. McGowin

1. P saved D’s life, but P crippled in the process. D promised to pay $$ to P for rest of P’s life.

2. D got a material benefit. D’s promise to pay means he would’ve wanted the benefit, supposing P had the chance to ask before rendering benefit.

ix. Value must be proportionate to the benefit. (E.g., can’t collect $1million for whistling and saving someone’s life).

4. The Justice PrincipleWhen do considerations for justice override enforcement of a contract?

a. Domain of Freedom of Contract i. Restatement §12: Capacity

1. A person has capacity to incur contractual duties unless he is:a. Under guardianship;b. An infant;c. Mentally ill or defective; ord. Intoxicated (other party must know. Think Lucy v. Zehmer)

ii. If one party is incapacitated, the contract is voidable, as distinguished from void. And only incapacitated party can void contract.

iii. Irrational behavior doesn’t amount to incapacity.

iv. Baby M case (surrogate mother)1. Mother did not have capacity to consent giving up her baby.

Agreement was made prior to birth; she could not have comprehended her decision at that time. Decision is never totally voluntary and informed.

2. Her consent is irrelevant, anyways – it’s against public policy to allow surrogacy contracts. It’s the sale of a child; or mother’s rights to the child.

b. Mistakes i. Parties make a mistake when they act on beliefs that are contrary to the facts

existing at the time of contracting. (Basic assumption on which contract was made is mistaken, and it has a material, adverse effect on performance required of him).

ii. Restatement §153: When mistake is made by only one party, contract can be voided if the mistaken party didn’t assume risk of mistake, and:

1. enforcement makes it unconscionable; or

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2. other party had reason to know of mistake, or his fault caused mistake.

Note: Regret is not a mistake! Taking risks with the market is natural part of commerce. I.e.: no future events.

iii. Stambovsky v. Ackley (haunted house case)1. Buyer bought house and discovered later that it was reputed to be

“haunted”2. Contract is voidable b/c

a. Seller was responsible for creating haunted reputationb. Buyer couldn’t have discovered the defect in his regular course

of inspecting house. (so not fair to say “buyer, beware”)

Failure to investigate - burdeniv. Woods v. Boynton (diamond for $1)

1. Seller sold diamond for $1. Both buyer and seller believed at the time that it was a topaz.

2. Contract is not voidable because of mistake. a. No fraud or bad faith on buyer’s partb. Mistake was fault of seller. Burden is on the seller to

investigate the stone.

Hypo: Suppose A sells her car to B for $450, and A later discovers it is worth $5,000. She can only void contract if B knew the true value and lied to her after she asked specifically about it. (misrepresentation). If he was silent and she never asked, then most courts say contract is good. It follows that goods will pass into the hands of those who value it most.

Note: Theory of contracting favors those who research value of goods they obtain. E.g., stocks: idea is to be rewarded for making informed decisions about what to buy.

v. Restatement §152: When both parties are mistaken, adversely affected party can rescind if he hasn’t assumed risk of mistake.

vi. Restatement §154: A party bears the risk when:1. risk is allocated by agreement;2. he is aware at time of contract that he has limited knowledge (Wood);3. court believes it is reasonable to so allocate. Factors considered:

a. person best able to discover value or mistake bears cost (usually the seller)

b. whether the transaction has been executed. If yes, then probably enforced.

vii. Elsinore v. Kastorff 1. General contractor submitted bid with Sub’s estimate, even though

Gen knew that sub made a calculation error.

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2. The contract is unenforceable. Relief is granted when one party knows of other’s error. Mistake was material to contract.

c. Unconscionability

i. Concern: is court justified in enforcing a contract when one party enjoys disproportionate power?

ii. Williams v. Walker Furniture1. Furniture store had cross collateral clause. (like rent-to-own). If

customer defaulted on payment of new goods, all the goods bought before will be repossessed. Terms of clause v unclear.

2. A court may refuse to enforce a contract they believe is unconscionable.

3. Unconscionable includes an absence of meaningful choice on the part of one party, together w/ terms that are unreasonably favorable to the other party.

5. The Compensation Principle

Restatement: The goal of contract remedies has not been enforcing specific performance, but compensating party who has been harmed by the breach.

a. Compensation or Punishment? i. Punitive damages are not recoverable for breach of K unless it is also a tort

for which punitive damages are recoverable.

ii. Punitive damages may make contracts more expensive – people less likely to enter into contracts.

iii. Even if contract specifies that party will be penalized, it will not be enforced. Fixing liquidated damages in advance will only be upheld if they are a reasonable measure of anticipated harm.

iv. Deliberate breach is not a tort.

b. Specific Performance 1. Prevailing law prefers money damages over specific performance

(except in land sale contracts: real property is unique). SP is harder to enforce.

2. Damages awarded at law; specific performance in equity

C. EXPECTATION REMEDIES

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Puts non-breaching party in the position they would’ve been in had the K been performed

i. Neri v. Retail Marine (Lost volume sale)1. Buyer paid higher deposit to get the boat into store faster. Buyer then

breaches.2. Seller claims lost-volume sale: he could’ve sold 2 boats, but only sold

one as a result of the breach3. Courts rejects argument, saying the boat was not lost-volume: it was

special ordered

ii. When buyer breaches :If buyer has contract to buy goods from seller and repudiates before delivery date, buyer is liable for [Contract price – Market value] (on day of delivery); or if seller resold (in good faith) then [Contract price – Resale price].

iii. When seller breaches :Seller liable for difference in K price and market value. However, buyer given a reasonable amount of time to replace good. So if buyer contracted to buy $750 watch, delivery on Oct. 1…market price on Oct. 1 is $1,000…but buyer bought similar watch on Oct. 5 for $1,200…Buyer can recover $450 (not just $250)

iv. Employer breaches; damages ?1. Employee now has freed up time (time he would’ve spent working

under the contract)2. Employee must try in good faith to find another comparable job to

mitigate costs.3. Damages are: [Contract salary – Salary from new job]4. If employee got a better job that paid more, then no damages are

awarded!

Lost Profits & Foreseeability

v. Restatement §351: Unforeseeability as a limitation on damages1. Damages not recoverable if breaching party could not have foreseen it2. Foreseeable damages are:

a.

vi. Locke v. U.S. (typewriter repairer)1. P was supposed to be placed on list of repairmen to be called for repair

jobs. D never put him on list.2. P entitled to expectation damages. (P’s share (1/4) total profits of all

repairmen)

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3. Not fair otherwise, since D made it impossible to determine exact profit b/c of D’s breach.

vii. Kenford v. County of Erie (sports arena)1. D backed out of a deal to build sports arena. P demands expectation

damages, in 20 year’s worth of expected profits2. No expectation damages! Projections are too speculative, and D

probably did not assume such a risk when contract was made.

viii. Hadley v. Baxendale 1. D’s delay in delivering mill shaft cost P profits.2. Profits can be exactly calculated, but no recovery, since P never

communicated to D that shaft was necessary in order to turn a profit. D could not have assumed the risk of lost profits when D agreed to deliver shaft. (How was D supposed to know it was P’s only shaft?)

D. RELIANCE Puts non-breaching party in position they were in before K

i. Security Stove v. American…1. D contracted to ship P’s things to convention, where P was renting a

booth. Rental fee was paid before K….can P collect?2. Yes, P knew he could hire someone to take the stuff. Reliance

recoverable.

ii. Sullivan v. O’Connor (botched nose job)1. P does not get expectation (value of promised nose), but reliance

(worsening of nose)2. In reliance, pain and suffering for all operations recoverable (since all

pain was for naught.) (Under expectation, no pain recovery, since it’s expectable to go through pain for surgery)

E. RESTITUTION Is not a concept of contracts! Unjust enrichment: is it unfair to allow D to keep goods or services without paying P for them?Quantum meruit: reasonable value of services

i. Oliver v. Campbell1. P fired before contracted period was up. Sues for quantum meruit.

(His K price was much lower than the true value of his services)2. Court said P pretty much finished his job, so can only recovery K

price.

Hypo: Buyer pays seller down payment of $2,000 for an item costing $1million. Seller breaches. Buyer finds item on market for ½ price: $500,000! Just because buyer is now better off b/c of seller’s breach, doesn’t mean seller gets to keep $2,000. That’s unjust enrichment!

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Two ways courts have gone when P’s K price is much lower than value of services: Treat like there was no contract at all: P gets value of services P shouldn’t get more than he would’ve gotten under K. K price is maximum

recoverable damage

Breacher must pay for value of goods even if the goods are useless to them now. (e.g., D hires P to build a bridge. D breaches half way through. D must still pay P value of half a bridge)

Note: If you expect profit, always sue for expectation! If expectation is uncertain, sue for reliance. (reliance is capped by provable expectation)

6. The Autonomy Principle

a. Interpretation of Contract Terms

Parol Evidence Rule: If parties enter a written agreement with intention to supercede all prior agreements (whether written or oral), then the it supercedes them! If you want to admit prior agreements (that weren’t included in final agreement), you must show:

Incomplete: Final agreement is not complete w/o including prior agreements

Separate transaction: prior agreements are unrelated to final agreement Fraud, accident or mistake Ambiguity

i. Dennison v. Harden1. “Fruit tree” is not an ambiguous term. Evidence of prior agreements

not admissible.

Trade usage

ii. Chicken case1. K didn’t specify grade of chicken. Trade usage called for higher grade

than seller was sending.2. Trade usage may have been in use, but buyer assumed risk of dealing

with seller, who was a new comer to the industry and may not have known trade meaning of “chicken”

iii. Courts want to enforce the intent of the parties. They look at the following, in order of importance:

1. Words : express terms in the contract

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2. Course of performance : how parties behaved after agreement (their understanding of it)

3. Course of dealing : what relationship between parties were before agreement in question

4. Trade practice : behavior of others within trade

What is good faith?iv. Greer v. LaSalle

1. In K, Seller had to remove contaminants of land at their expense, but could terminate K if cost to remove was “impracticable”

2. Seller has discretion, but must exercise it in good faith. Seller can’t use it as an excuse to get out deal so they can sell to a higher bidder.

v. Eastern v. Gulf Oil1. Buyer of oil had a great deal for purchasing oil (market went down).

Is it bad faith for buyer to increase their purchases b/c of price?2. No. However, it would be bad faith if buyer increased their customer

base to take advantage of K price.

b. Promises and Conditions

Important to distinguish between a promise and condition:

Promise: Both parties are obligated to perform.[X promises to pay Y $50 and Y promises to carry cargo by next wind.]

Condition: Just indicates when a performance is due.[X promises to pay Y $50 if cargo is carried by next wind. If it’s not carried by next wind, X doesn’t have to pay. Y is not in breach of anything]

Promissory Condition: Something is both a promise and a condition.[X promises to pay Y $50 if Y promises to carry cargo by next wind.]

i. Luttinger v. Rosen1. Buyer to buy house on condition that he get an 8.5% interest rate. He

can only get 8.75%, so he backs out.2. Seller offers to “make up the difference.” However, Buyer is under no

obligation to take up the offer – that was not the condition!3. No contract!

ii. Peacock Construction 1. K said General contractor would pay Sub “30 days after completion of

work and full payment by owner.” 2. No words of condition.

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3. “Full payment of owner” is what was expected (used as a measure of time), but not a condition on which to be paid.

4. Industry practice is for Gen to have bear burden if owner doesn’t pay.

Conditions can be waivediii. Burger King franchise

1. Franchisee had condition that he build 10 stores in 10 years2. BK led him to believe strict compliance not necessary.3. Condition was waived. Can’t repudiate contract now. 4. Conditions can be reinstated, but performer must be given reasonable

time to comply.5. A party can avoid condition if it involves disproportionate forfeiture

and if condition not essential to the K.

7. The Security Principle

a. Interests of parties impaired by breach

Anticipatory Breach (Repudiation): Contract starts at a future date, and one party indicates in advance that they will be breaching (unable to perform). Several ways to show this:

D says “I will not be able to perform” or “I will breach” D does something that is inconsistent w/ his ability to perform as

promised. If an event has occurred that would lead a reasonable party to believe

that D won’t perform, P can demand assurance from D, in writing. If no assurance can be provided, then there’s been repudiation.

i. Hochster v. De la Tour1. Employment contract to start performance on Oct. 1. D says he will

not be able to hire P afterall. 2. P does not have to wait until Oct 1 to bring action. P can rely on D’s

repudiation at the moment it has taken place. (P can now go and look for another job)

3. Damages are mitigated by P’s new job salary. (P gets nothing if new job pays more)

Non-breaching party gets reasonable time to accept repudiationii. U.S. v. Seacoast

1. D repudiated K. P asked D to reconsider, giving D 3 days to retract repudiation.

2. D retracts after 10 days. Afterwards, P signs a K with someone else.3. P gave D 3 days to retract. This means they accepted the repudiation

when D did not retract within 3 days. D has breached.

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b. Cancellation in response to breach

Material BreachIf one party materially breaches (fails to substantially perform), the other party may be entitled to cancel the K. Only a material breach relieves the non-breaching party from performance!

Breacher, however, has opportunity to fix it! If he fixes it, the breach is no longer material, and the non-breaching party must now perform his part.

i. Jacob v. Youngs (pipes in house)1. Pipes laid in house were not of a certain brand, as indicated in K.2. Cost to replace would be great (need to tear down walls)3. Anyways, pipes used were of same quality. No failure of substantial

performance. No material breach, K can’t be cancelled

ii. If party has substantially performed but was incomplete (or not in total compliance), what can be recovered? Consider cost to complete as specified. Is it disproportionate? If too much economic waste, then won’t enforce the specifics.

c. Divisible contracts

A contract can either be entire or severable. If price is paid per part (apportioned to each item of performance), then it’s severable. If consideration is paid in one single sum, it can be said to be entire.

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Did B materially breach?

Yes No

Did A treat it as a partial breach?

Was it an immaterial breach?

Yes YesNo No

DamagesDamages and

Discharge Damages Nothing

Hypo: Burma Shave signs…5 signs total, but the one with brand name is missing! Sign maker can’t recover under K, since the K was “entire,” not severable (K not divisible!). Also, BS doesn’t have to pay them in restitution either, since signs have no value to BS.

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d. UCC: Perfect tender rule

i. Under UCC, a buyer can reject goods if it doesn’t conform to the contract in any way.

ii. Before the period of time covered by the contract, seller has unconditional right to cure.

iii. After the contract period, if seller did not know of defects, he can be given a reasonable time to cure. (Or if buyer accepts, seller can discount the product instead)

iv. If buyer has accepted good believing it was cured or not knowing it was defective, buyer can revoke acceptance within a reasonable time. However, defect must substantially impair the value of the good to the buyer.

v. Even if the defect is not substantial and buyer is thereby prevented from revoking, buyer can still get damages for the breach.

8. Boundaries of Autonomy

a. Excuse for non-performance Circumstances out of the control of parties…reasons why they can’t perform. If the contract doesn’t provide for unforeseeable events, then the law provides default rules.

Basic assumption & impossibility i. Taylor v. Caldwell (stage burns down)

1. P rented stage from D for performances. Stage burnt down unexpectedly. Is D liable?

2. Restatement §263: If existence of a specific thing is necessary for performance of a duty, the K was made on the basic assumption that the thing would be there at the time of the performance (that it wouldn’t be destroyed in the interim)

3. Since performance was dependant on thing’s continued existence, a condition is implied that impossibility of performance due to destruction of the thing excuses performance.

But note: If X is hired to build a building, and 2/3 of it has been built when it burns down…X is still obligated to continue building! It is not impossible for him to start over. On the other hand, if X was hired to repair a building and it burns down, it is now impossible for him to continue.

Frustration of purposeii. Krell v. Henry (coronation)

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1. P rented a room to see coronation parade. Unforeseen circumstance: parade cancelled. Can P recover rental?

2. Yes. Foundation of K was on existence of the parade.

iii. If the risk for an unforeseeable event has not been allocated by K, courts will decide based on who is best able to bear the risk.

iv. Under UCC, a contract doesn’t have to performed if it becomes commercially impracticable to do so. (Meaning, at excessive and unreasonable cost).

1. Contingency must be unexpected2. Risk must not have been allocated in K3. Contingency has rendered performance impracticable.

v. Transatlantic Financing Corp case: Going around the Cape of Good Hope (rather then thru Suez Canal) is not impracticable.

9. Rights of Third Parties

a. Third party beneficiaries Nature of 3rd party beneficiary contract: Benefits someone who is not privy to K. 3rd party doesn’t even have to know K exists. 3rd party can enforce K.

Promisor Promisee

3rd party

i. Donee beneficiary: it appears from terms in promise that purpose of promise is to make a gift to the beneficiary or to confer upon him a right against promisor to enforce

ii. Creditor beneficiary: if promise to beneficiary satisfies some type of duty promisee has to the beneficiary.

iii. Incidental beneficiary: indirect beneficiaries that are neither donee nor creditor. (Are not intended beneficiaries)

iv. Martinez v. Socoma1. Government had K w/ private co. to hire and train unemployed.

Company breached. Can unemployed sue as 3rd party?

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2. No. Although they do benefit directly, the K was to further public purpose. Government did not intend for them to be able to sue as 3rd party.

Note: Generally, govt. is not liable to “the public” unless terms of a K explicitly state it.

Exception hypo: Govt. contracts w/ builder to make houses w/ 2 furnaces. Builder only includes one. House buyer later discovers breach and sues as 3rd party beneficiary. Ct held that buyer can sue…liability of builder not expanded by including buyer as possible P (govt. could sue builder for breach as well).

v. Defenses against a 3rd party (Restatement §309):1. K must be formed and valid for 3rd party to enforce (all the same rules

to regular K applies: necessity for consideration, etc.)2. If K ceases to be binding b/c of impracticability, non-occurrence of a

condition, etc.3. 3rd party claim is not subject to promisor’s rights or claims against

promisee or promisee’s claims or defenses against 3rd party4. 3rd party is subject to any claim or defense arising from own conduct

or agreement.

vi. Variation of a duty to 3rd party1. Duty to 3rd party can be modified or discharged, unless K forbids it2. Modification or discharge cannot take place if:

a. 3rd party relied to his detrimentb. 3rd party sued on Kc. 3rd party assented to K when asked for assent

b. Assignment and Delegation

Benefits are assigned; duties are delegated.

i. Adams v. Merced Stone1. Did brother effectively assign his rights to company’s money, when it

was verbally assigned?2. No. Verbal gift is not valid w/o delivery. (Or at least a delivery of a

symbol). Rights to a verbal gift terminate when:a. Assignor diesb. Assignor makes a subsequent valid assignment.

ii. Rights can be assigned unless substitution materially changes duty of obligor (e.g., A must deliver ice cream to B. B assigns his right to C, who lives 5000 miles away. A’s duty has materially changed)

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Notice of an Assignment

iii. If promisor has been told that there has been a valid assignment, he is now liable to the assignee. (e.g., A owes B money. B assigns right to C. A knows about assignment but pays B anyways. C can recover from A)

Delegation of duties

iv. An obligor can delegate duties unless it’s against terms of the promise. Unless oblige agrees, obligor still remains liable for his duties, even after delegation.

v. Sally Beauty v. Nexxus1. Nexxus had a contract w/ Best, under which Best was to be exclusive

distributor of Nexxus products. Best delegated this duty to Sally Beauty, owned by Nexxus’s competitor.

2. Delegation is improper; this is not what Nexxus bargained for. Performance by Sally would not be the same as by Best.

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