Contract Final Outline

Mutual Assent….......................................................p. 2Offer & Acceptance in Unilateral K……………….p. 3U.C.C. Method of Assent…………………………. p. 3Consideration……………………………………….p.3-4

Effect of Pre-Acceptance Reliance…………………p. 4Battle of the Forms…………………………………p. 4Postponed Bargaining………………………………p. 5Electronic Contracting……………………………...p. 5

Promissory Estoppel………………………………...p. 6Statute of Frauds…………………………………….p. 7Interpretation………………………………………...p. 7Parol Evidence Rule…………………………………p. 8Implied Terms & Good Faith………………………..p. 9

Minority & Mental Capacity………………................p. 10Duress & Undue Influence…………………………...p. 10Misrepresentation…………………………………….p. 11Nondisclosure………………………………………...p. 11Unconscionability…………………………………….p. 12Public Policy………………………………………….p. 12Mistake……………………………………………….p. 13Changed Circumstances……………………………...p. 13

Modification………………………………………….p. 13Express & Constructive Conditions………………….p. 14

Expectation Damages………………………………..p. 14Restrictions on Recovery…………………………….p. 15Alternatives to Expectation Damages……………….p. 16

General Themes……………………………………...p. 17

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Mutual Assent

Mutual assent info: According to objective theory of contracts, mutual assent is expressed by an external action taken by the party. In the law it doesn’t matter what the party’s intention was, only the external expression. Subjective intentions are difficult to read and may be misread; objective/external actions are a more solid basis for enforcing contracts between any given parties.

Offer: A promise to exchange something or perform an action (or restrain from acting), that becomes binding when accepted by the offeree.

Acceptance: Agreeing to the specified terms of an offer, resulting in formation of a binding contract. Acceptance must be communicated to be valid.

Objective Theory of Assent: If assent is externally expressed towards a contract, that contract must be upheld by the party regardless of the party’s intention. (Ray v. William G. Eurice & Bros.)

Unilateral mistake: When only one party to a contract misunderstood some term. Not a basis for relief by rescission.

Rule: There must be a meeting of the minds and a definite offer and acceptance between the parties for the contract to be enforceable. (Lonergan v. Scolnick.)

-In common law, acceptance must be the mirror image of the offer. A change in terms creates a counteroffer that terminates other party’s original offer.-Person must state that original offer is still open if wishes it such.

Rule: The main thing in interpreting an offer or acceptance is not what the contract-making party intended the ad to mean, but what a reasonable person would have thought it meant. (paraphrasing Williston). (Izadi v. Machado Gus Ford Inc.)

Rule: Prospective buyer cannot accept a counteroffer after receiving notice of its revocation by accepting the counteroffer within the time period given in the original offer. (Normile v. Miller).

Mailbox Rule: Acceptance of an offer is valid upon being dispatched by the offeree, unless contract states that it’s not effective until received.-Revocation is effective only when it’s received by a party.-Offeror is the master of the offer—decides mode of communication for acceptance.Unauthorized acceptance is still valid when it is actually received by offeror.

Bilateral Contract: Agreement in which both parties exchange promises with each other, and contract becomes binding upon the exchange.

-If one item is being sold but there are multiple potential buyers, the advertisement is an invitation to an offer, not the offer itself.

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Offer & Acceptance in Unilateral Contract

Unilateral Contract: Agreement in which one party gives a promise in exchange for the other party’s performance. (Only one promise exchanged).-Beneficial to offeror since the offer can be accepted only by the performance he specifies.-Offeror can make a unilateral contract with many offerees and then choose which performance to accept.-Classical view: offeror can revoke the contract at any time before offeree completes performance (outdated). Autonomy-focused view. (Petterson v. Pattberg).

Rule: In an offer for a unilateral contract, the offeror may not revoke when the offeree has already accepted the offer by doing substantial performance. (Cook v. Coldwell Banker).

-This is modern view, focusing on equity between parties. Courts wish to avoid injustice to the offeree who is vulnerable in a unilateral contract.

Substantial performance: A party’s completion of all essential requirements in a contract.

U.C.C. Method of Assent

Rule: Under the U.C.C., a contract for purchasing goods is made orally even though it’s uncertain exactly when the contract was made and even if some terms are left open. This holds where the conduct of the parties suggests contract formation (even if their documents don’t). Harlow & Jones v. Advance Steel Co.

Consideration

Definition: The value given by one party in exchange for a promise or performance by another party.

Functions of legal formalities:Evidentiary: Formality shows evidence that the contract exists in case of dispute. (ex: writing; certification by notary)

Cautionary: Formality prevents someone from committing himself thoughtlessly.Channeling: Marks the enforceable promise, providing an external test of validity.

Bargain for Exchange Theory: For there to be consideration in a contract, “the promise must induce the detriment and the detriment must induce the promise.” (p. 80).One party’s detriment must be the price of the promise and inducement for which it was made.

Benefit/detriment test: Consideration is the benefit to the promisor or detriment to the promisee. (Outmoded).

Rule: When one party chooses to waive its legal right to something at the request of another party, this counts as consideration for a promise. (Hamer v. Sidway).

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Example: A promises to pay B if B abstains from drinking/smoking/gambling until B is 21. B’s forbearance in exchange for money is consideration.

Dougherty v. Salt: Plaintiff received a promissory note for $3000 from his aunt which contained the words “value received”. It was to be payable on her death. The plaintiff sued the executor of the aunt’s estate for the money.

Rule: A note that is not supported by consideration is unenforceable.Reasoning: The note conferred a gift or bounty to be executed. The aunt didn’t receive any value in exchange for it. Hence, there is no consideration.

Batsakis v. Demotsis: Plaintiff Batsakis loaned 500,000 drachmae to the defendant in exchange for the defendant’s promise to repay $2000 plus interest to the plaintiff. The defendant later claimed that the drachmae she was loaned was only worth $25 in American currency, so she shouldn’t have to repay $2000.

Rule: A court will not void a contract only on the basis of unfair or inadequate consideration. Courts wish to preserve the parties’ autonomy to enter into contracts.

Plowman v. Indian Refining Co.Facts: Plowman and other plaintiffs sued Indian Refining co. for defendant to perform its side of alleged contracts made plaintiffs. Plaintiffs argued defendant had to continue making pension payments to them as was stated in a letter given to them by the vice-president.

Rule: Gratuitous arrangements or gifts without consideration are not enforceable as contracts. A condition that one party must perform is not consideration if it’s not a detriment.

Effect of Pre-Acceptance Reliance

Old Rule: Where an offer is withdrawn before the offeree accepted, and the offer language does not indicate a contrary intention, no contract was formed.-Doctrine of promissory estoppel is not applicable where an offer is made for an exchanged act or promise and the offeror didn’t receive any consideration. (James Baird Co. v. Gimbel Bros.)

Drennan v. Star Paving Co.: Plaintiff sued Defendant to recover damages when the defendant could not perform the paving work at the price quoted in its subcontracting bid.

Modern Rule: An offeree’s reasonable reliance on a promise binds the offeror to the contract even if there is no consideration.

Battle of the Forms

Rule: Common law principles apply to contracts dealing mainly with services rather than sale of goods. UCC applies to the sale of goods.

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-Under common law, an acceptance which has terms different from the original offer is a counteroffer which rejects the first offer. (Princess Cruises, Inc. v. General Electric Co.)

Rule: When a contract contains elements of both goods and services, whichever element is more dominant determines whether common law or UCC applies.

Mirror Image Rule: In common law, the offer being accepted by one party must be the same as the offer that was given to it by the other party.

Last shot Rule: The last form exchanged between parties before someone performs is the final true contract. Prior forms are negated by the subsequent forms that are exchanged.

In U.C.C.: The acceptance does not need to mirror the offer.

Rule: An offeree’s reply that claims to accept an offer but makes acceptance conditional on the offeror’s assent to new terms not found in the original offer is a counteroffer, not acceptance.

U.C.C. Section 2-207(1): There may be a valid contract where the acceptance contains additional terms not found in the offer, unless the offer specifically forbids acceptance from adding additional terms.-U.C.C. tends to favor the seller.

Section 2-207(2): The additional terms become part of the contract between parties unless the offer expressly limits acceptance to original terms; they materially alter it; or notice of objection to additional terms was given.

Postponed Bargaining

Walker v. Keith: Walker (D), the lessor, argued that the option provision in his lease with Keith (P), the lessee, did not fix rent with sufficient certainty to constitute an enforceable contract between the two of them.Issue: If essential terms such as price are not included in an option contract, and no standards are included whereby such terms may be judicially determined, does a contract exist?

Rule: Where essential terms such as price are not contained in an option contract, and there are no standards to judicially determine the terms, no contract exists.

Electronic Contracting

Shrinkwrap: often is a warning on outside of package informing purchaser that product contains seller’s contract terms. Use of product means purchaser agrees w/ terms.

Clickwrap: On computer, purchaser must scroll through page of contract terms and click “I agree”.

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Browse-wrap: Contract terms are somewhere on website. By using or browsing site, user agrees to the terms of use. Information is not usually downloaded here.

Silent Acceptance Rule: For shrinkwrap, the offer occurs when the product arrives in the mail, and acceptance occurs if plaintiff keeps the product past the time limit indicated on contract. Acceptance need not be communicated. (Brower v. Gateway 2000, Inc.)

-Only real contract is the form that comes with the product.-Buyer has time to consider whether to keep or return product. This preserves autonomy.

Rule: When a benefit is offered along with certain stated conditions and the offeree takes the benefit while knowing those conditions, this taking equals acceptance of the contract terms. Those terms are binding on the offeree.-Where a website user has used a website multiple times, it is bound by the restrictions imposed by the operator even if those terms appear after the user receives the information.

-Restrictive conditions still apply to a website user even if it doesn’t manifest agreement to those conditions when it receives information from the website. Register dot com v. Verio.

Liability in Absence of Bargained-for Exchange (Prom. Estoppel)

Promissory Estoppel: A promise which the promisor should reasonably expect to induce action or forbearance on the promisee or third person, and which does induce reliance, is binding if injustice can be avoided only by enforcement of the promise. Wright v. Newman.

3 elements of promissory estoppel: 1. A promise 2. Detrimental reliance on the promise 3. Injustice will be avoided only by enforcement of the promise.

-Detriment: Something that causes one to be worse off b/c the promise was broken than if one had never accepted the promise.-Reliance: A change in position, action taken, or forebearance because of the promise.-Promissory estoppel is based on equity—fairness in spite of consideration requirement.-Even if there is no consideration, P.E. may require contract to be enforced for equitability.

Shoemaker Facts: The Shoemakers bought a mortgage on their house from Commonwealth Bank, and they were required to carry insurance in the mortgage agreement. Based on an oral promise with a Commonwealth representative, they believed the defendant had insured them. However they found they were not insured when their house burned down.

Shoemaker Rule: Where party A makes a promise to party B to undertake some action for B (such as arranging insurance), and B fails to take that action for itself even if required to by another contract; and B loses property in an accident, then the promise is still binding on A. Second Restatement of Contracts. Shoemaker v. Commonwealth Bank.

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-Rule: For a charitable pledge to be enforced in Massachusetts, a party must demonstrate that there was a promise to give some property to a charitable institution and that this promise was supported by consideration or reliance. (King v. Trustees of Boston University.)

Statute of Frauds

General Rule: Specified types of contracts must be in writing in order to be legally binding on parties.

-Statute of frauds is mean to prevent fraud by requiring writing to clarify the terms. Paper gives evidence that K was formed.Cautionary function: parties can see what they agreed to.-Evidentiary function: written terms are evidence of the true contract terms.-Fraud: Misrepresentation or dishonest act, such as lying about facts.-Statute requires signature on paper to show assent to the agreement.Party can’t be charged with breach unless it signed the K.-Signature is a cautionary and evidentiary device. Party must be careful and know what it agreed to.

Crabtree v. Elizabeth Arden Sales Corp.Facts: Crabtree was hired by Arden to be the latter’s sales manager. The informal contract consisted of separate writings pieced together which showed Crabtree was to be hired for 2 years, with pay raises. He did not receive the second pay raise.

Rule: Separate forms in which the subject matter and occasion are connected may be examined together to find an enforceable contract under the Statute of Frauds.

Alaska Democratic Party v. RiceFacts: Rice was promised a job by the AK Democratic Party, but after quitting her former job and moving to the state the party told her they didn’t’ have a job for her.

Rule of Law: A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee (and does so) is enforceable notwithstanding the Statute of Frauds if injustice can only be avoided by enforcing the promise.

-Promissory estoppel and statute of frauds both have the purpose of preventing injustice and promoting honesty between parties.-Statute of frauds favors written contracts to prevent dishonesty and promote certainty of K.Writing preserves the autonomy of the parties.-Promissory estoppel emphasizes equity. Contract is flexible and detrimental reliance can be found by looking at parties’ actions.

Principles of Interpretation

Frigaliment Importing Co. v. B.N.S.-Buyer and seller argued over definition of “chicken” in contract.

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Rule: A party that uses a narrower interpretation of contract terms than everyday use bears the burden of showing the validity of its interpretation.-Court will enforce the more objective meaning (or nullify the contract) if parties disagree over meaning of contract terms.

-One party is bound by the second party’s meaning if the first party knew the second party’s meaning while the second did not know or have reason to know the first party’s interpretation.

-If both parties agree on a common subjective interpretation, that meaning controls even if it’s not objectively reasonable.-Trade usage of terms in an industry can be used as evidence of real meaning.

Reasonable Expectations Doctrine : Even if customers assent to standard form contracts without knowing the standard terms in detail, they are not obligated to follow unknown terms which are beyond reasonable expectation. (C & J Fertilizer Inc. v. Allied Mutual Insurance).

Parol Evidence Rule

Parol Evidence rule: Principle that prevents the parties of an agreement from introducing evidence of previous or collateral agreements in order to contradict or supplement terms of a written contract.-Integrated contract is final expression of contract. P.E.R. prioritizes this.-Partially integrated contract is where some terms are finalized while others are still open-ended.

-P.E.R. applies to any written contract. Doesn’t affect modifications made after contract was completed.-Judge may allow parol evidence if he finds ambiguity in contract. This evidence is not allowed to contradict the K however.

Classical Rule: If a contract is already complete as it is, parol testimony cannot be allowed to change its terms, such as warranties of quality. (Thomas v. Libby.)

Modern Rule: If there is ambiguity in contract, the court can examine surrounding circumstances and all given evidence to clarify the intended meaning of the contract. (Taylor v. State Farm Auto Insurance.)

Williston/classical view: Judge looks at four corners of the contract (just the K itself) to decide if there’s any ambiguity in contract.Modern view: Judge examines all given evidence in addition to contract to decide if it is ambiguous.

-P.E.R. doesn’t apply in the U.C.C., which draws on trade usage and background knowledge.

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Implied Terms

Definition: A provision not explicitly agreed to by the parties but instead interpreted within the contract by the court as being implicit. The implied term should not contradict any express terms in the K.

Rule: If there is an implied promise in the language of the contract which is imperfectly expressed, there is a valid contract.-An implied obligation to use reasonable efforts will cure an indefinite promise from being illusory. (Wood v. Lucy, Lady Duff-Gordon).

Illusory promise: fake promise by one party that doesn’t require definite action by that party. (“I’ll perform if I feel like it.). If promise is illusory, then no contract.

Morin Building Products v. Baystone: GM Corp.’s agent rejected the aluminum siding that Morin constructed for its factory based on a small aesthetic flaw. Morin was not paid and sued Baystone, its contractor.

Rule: Acceptance of performance in a primarily functional contract must be based on an objective standard. Function involves performance or commercial quality.

-Subjective standard may apply for aesthetic projects, but there is still a good faith requirement.

Good Faith

-Good faith suggests: honest purpose, faithfulness to obligation, fair dealing in business, absence of intent to defraud the other.

Locke v. Warner Bros. Inc.: Locke claimed defendant’s contract w/ her was a sham which it didn’t intend to uphold, discriminating against her on basis of sex because it refused to develop any of her projects.

Rule: If one party has power that affects the rights of the other party, the first party has a duty to exercise its discretion in good faith and fair dealing towards the second party.-Neither party can act so as to injure the right of the other party to benefit from the contract.

Requirements contract: Buyer promises to buy all the goods he needs for a specified time period exclusively from one seller, who promises to supply it.

Output contract: Seller promises to supply all the goods that it produces for a specified period (and at a set price) exclusively to one buyer. Quantity term is measured by seller’s output.

-U.C.C. good faith standard governs requirements and output contracts. The parties set an estimate against which performance may be measured.-A sudden large increase in a requirement’s buyer’s demand would breach the contract in bad faith, unless it was b/c of circumstances beyond its control.-Requirement buyer may drastically reduce its demand as long as it’s in good faith.

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Minority

Traditional Rule: A minor has the right to disaffirm a contract even if the other party has fully performed and the minor cannot return the consideration’s full value to the adult.

-A minor cannot void a contract for the reasonable value of “necessaries”.-A minor may not be able to void a contract if he committed tortious conduct (such as lying about his age or willfully destroying goods).

Dodson v. Shrader: 16-year old plaintiff bought a pick-up truck from the defendant and then wished to return it when it stopped working.

Dodson Rule (modern): A minor can recover the price of what he bought, but must also pay the seller for his use of the product, its depreciation, and negligent damage while he possessed it.

Paternalism: Theory that infringing on the rights of a minor is OK for that person’s own good. Favors the minor in contract problems instead of the seller.

Mental Incapacity

Hauer v. Union State Bank of Wautoma: Plaintiff accepted a loan from the defendant bank even though she was mentally incompetent to do so, and then sued to void the contract.

Rule: An incompetent person who has made a contract has the right to completely void that contract. Test for competency is whether the person had the mental ability to understand what he was doing. -If a party has notice or reason to suspect that the other party is mentally incompetent, its contract with that party may be voidable.

Duress and Undue Influence

Totem Marine Tug v. Alyeska: Plaintiff accepted a low settlement from defendant because it urgently needed to pay off debt to avoid bankruptcy. P charged that it accepted these terms under economic duress.

Duress Rule: A disadvantaged party can void a contract if it was accepted under economic duress. Elements of duress: 1. Coercive act induced the acceptance 2. Circumstances allowed no reasonable alternative3. Circumstances resulted from other party’s coercive acts. Duress is a content-based claim.

Threat: when you are worse off if you decline the offer (e.g. mugger kills you if you don’t give him money).

Odorizzi v. Bloomfield School District: Defendant convinced plaintiff to resign from his job by verbally threatening his livelihood and causing embarrassment.

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Rule: Undue influence occurs when a dominant party uses coercive pressure to persuade a vulnerable party to act in a way that it otherwise would not. This forced persuasion “overcomes the will without convincing the judgment.”-Undue influence = how the K was accepted.

7 factors of Undue Influence:

(1) parties discuss transaction at an unusual time, (2) they complete transaction in an unusual place, (3) insistence that the transaction be finished immediately, (4) extreme emphasis on negative consequences of delay, (5) use of multiple persuaders on one side against a single person, (6), weaker party has no third-party advice, (7) dominator’s assertion that there’s no time to check with attorneys.

Misrepresentation

Misrepresentation Test:-Defendant made a false representation knowing it was false,-Plaintiff detrimentally relied on that statement,-Plaintiff was damaged by reliance,-Defendant’s false statements affected material matters.

Materiality: the relevance of the statement in affecting the party’s decision to go forward with contract.

Syester v. Banta: Plaintiff was elderly widow who purchased dancing instruction from defendant under false and fraudulent representations.

Rule: If one party induces the other party’s assent by a fraudulent or material misrepresentation on which the second party relied, their contract is voidable. Second Restatement section 164(1).

Nondisclosure

Nondisclosure Rule: The seller has a duty to disclose facts that are materially pertinent to the value of property when the facts are known only to the seller and not within reach of the buyer’s observation. (Hill v. Jones)

Nondisclosure Test:1. If one party makes statement without knowing it was false but then learns it was false, it has a duty to disclose this to other party.2. Duty to speak if this would correct mistake of other party, if nondisclosure would mean a failure to act in good faith in accord w/ fair dealing.3. Duty also exists if speaking would correct a mistake concerning writing.4. Relationship of trust and confidence also requires duty to share relevant facts.

-General principle: Failure to share a material fact can justify rescission when the nondisclosure shows a failure to act in good faith and fair dealing. Restatement (Second) section 161(b).

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Shallow secret: Hidden fact that can easily be discovered through investigation. Buyer has duty to discover shallow secret.Deep secret: Cannot easily be discovered through inspection. Seller has duty to disclose it.

Unconscionability

-Unconscionability only is used when duress or UI cannot apply.

Rule: A court may choose not to enforce an adhesion contract that is unconscionable. Procedural unconscionability is based on “oppression” or “surprise” stemming from inequality between parties. Relates to structural presentation of the contract.

Substantive unconscionability is found if a contract term is unfairly one-sided (e.g. a contract allowing the stronger party to choose its forum for disputes while forcing weaker party to accept arbitration). Higgins v. Superior Court of Los Angeles County

-Sliding scale between procedure and substance elements. If one is heavy, you don’t need to show as much of the other.

Adhesion contract: terms are fixed by one party and the other must either take it or leave it, no negotiation.

Public Policy

-If a contract violates a statute, then it violates a public policy and it’s not enforceable.-A court may choose not to enforce a proper contract if it does damage to the public welfare or social system.

-Involves large degree of judicial discretion, which courts are wary of.-Policy violation must be raised by one of the parties in its claim.-Courts look at: nature and gravity of the violation, goals of the law or policy, and extent to contract terms violate policy.

Example: contract to hire a killer would be completely unlawful and against public policy.

R.R. v. M.H. & another: Surrogate mother (D) signed agreement with natural father (P) that she would give birth to his child and receive compensation for her services. However, she then changed her mind and decided she wished to keep the child.

Rule: MA statute does not allow any mother to surrender her child for adoption earlier than the fourth day after she gave birth. This is meant to allow her some time to assess her bond with the child. -An agreement is void if one party paid money to influence the mother’s decision concerning her child. The court does not want economic pressure to persuade a woman (who might be poor) to serve as a surrogate.

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Justification for Nonperformance

Mistake

Mistake is about a factual error at the time the contract was formed.

General rule: Rescission is allowed when mistake is about basic assumption that forms basis of contract, which materially affects the parties’ performances.

Restatement S. 152: Mutual mistake of fact does not allow rescission if the party seeking to back out has assumed the risk of loss. Risk may be allocated by the contract terms itself.

-Party may also bear risk when he knows he has limited knowledge about facts, but treats limited knowledge as sufficient. Restatement S.154 (b).-Court can also allocate risk of loss according to what’s reasonable. Restatement 154 C.

Changed Circumstances

General: Impossibility means it’s impossible for a party to perform contract. Rescission is possible when identified goods (ex: unique painting) are destroyed, or person who would do a service dies.

Restatement S. 261: A party is not required to give performance if doing so is impracticable because an event occurs that prevents performance. Economic difficulty or loss doesn’t excuse a party from performance. (Doctrine of impracticability).

Frustration of Purpose requires: (1) Main purpose of contract was frustrated by some event, (2) frustration was substantial—economic hardship does not count; (3) frustrating event was a basic assumption of contract. (Restatement S. 265).

-Changed circumstances deals with future events that make performance impossible.

Modification

Pre-existing duty Rule: A promise to pay an employee for doing what he is already obligated to do under contract is without consideration. There must be at least a small increase in employee’s performance in order to justify additional consideration from the other party.(Alaska Packers’ v. Domenico)

-Parties may still choose to create a fresh contract with proper consideration (value).

Kelsey-Hayes v. Galtaco: Plaintiff was forced to agree to pay higher prices to defendant in order to keep its business going, because defendant threatened to stop production due to its own financial losses. P had a three-year requirement contract with D.

Rule: A subsequent contract or modification that was accepted under duress does not supersede the earlier contract between two parties (it’s invalid). A party is also not permitted to breach a contract by refusing to deliver promised goods.

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-Comment 2 for U.C.C. 2-209(1): good faith obligation protects against one party dishonestly modifying an agreement for its own advantage without a legitimate reason.-Voluntary change is permissible if agreed to by both parties in good faith.

-Both common law and UCC look for voluntariness or duress.

Express and Constructive Conditions

Express Condition: unambiguous terms in a contract that refer to certain events that must take place in order for a party to perform its duty. The parties explicitly agree on such terms.

Constructive condition: A condition implied by the terms of the contract though not explicitly stated by the parties.

Oppenheimer & Co. v. Oppenheim: Plaintiff gave oral notice to the defendant where the contract terms expressly required it to deliver the landlord’s written consent.

Rule: Where a contract contains express conditions clearly stated, they must be literally performed as written. Substantial performance doesn’t fulfill express conditions. -When the express condition requires written notice by a certain date, other forms of notice won’t fulfill the condition.

Jacob & Young v. Kent: Defendant refused to pay plaintiff (construction company) for the house it had built b/c P hadn’t installed the right brand of pipe. Quality of pipe was same.

Rule: Where a contract contains constructive conditions, substantial performance is enough to fulfill them. Small deviations from the contract terms do not allow the other party to avoid payment. The property owner must pay for substantial performance.

-Performance is “substantial” when the differences from the contract terms do not diminish the building as a whole.

Substantial performance: A party’s completion of all essential requirements in a contract.

Expectation Damages

Definition: Compensation for the lost profits that a party reasonably expected to gain from a contract that was not completed.

General Formula: Damages = (loss in value + other loss) – cost avoided - loss avoided.

-Loss in value is difference between money that should have been received and what was actually received.-Other loss: all losses to the injured party besides loss in value.-Cost avoided: Expenditures saved by injured party b/c of breach.-Loss avoided: Resources saved and reused by injured party.

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Expectation interest: The value of a party’s expectation that a promise would be performed. Defendant may be required to pay the value of that performance.

Rule: When a buyer does not perform its contract for purchasing real estate, the seller may recover the difference between the contract price and the market value of the property at the time of breach. (Roesch v. Bray)

Rule: Damages from a contract breach are measured by the expectation of the parties involved. The non-breaching party may be entitled to compensation for the loss of its original bargain.-Party may recover the difference between cost of hiring new employee and cost of hiring former employee. Handicapped Children v. Lukaszewski.

Rule: The cost of completion is the proper measure of damages for breach of a construction contract. Diminution of the building’s value may only be the measure of damages if the completion cost would lead to “unreasonable economic waste.” American Standard Inc. v. Schectman.

Restrictions on Damage Recovery

General Rule: The non-breaching party may recover damages that are the direct and natural result of the breach and which were in the contemplation of both parties when they made the contract. Damages should be reasonably foreseeable from the breach. Hadley v. Baxendale.

Rule: It must be reasonably certain that there would have been a loss. Plaintiff may recover for lost expected profits if (1) the loss was contemplated by the parties when they made the contract, (2) if the loss was caused by the breach itself, and (3) if the loss is measurable. Florafax v. GTE.

-**If the fact of loss is reasonably certain, plaintiff need not show exact amount of losses.

-The non-breaching party must show that it would have earned the lost profits it is trying to recover in damages, if the contract not been breached. (Florafax case).

Mitigation of Damages

General Rule: Plaintiff cannot recover for injuries from defendant’s breach if the plaintiff could have reasonably avoided them. Plaintiff has duty to mitigate its damages from a breach.

Rule: When one party absolutely repudiates a contract, the non-breaching party cannot continue performing the repudiated contract and then claim damages based on full performance. Rockingham County v. Luten.

Repudiation: Breach of contract before other party’s performance was due.

Lost Volume Rule: If the plaintiff could have entered into another contract even if the first one had not been breached and profited from both, this is lost volume. The later contract does not replace the broken one. Lost volume seller is entitled to the net profit he lost because of the breached contract. Jetz Service Co.

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Efficient Breach

Efficient Breach theory: Courts should permit or encourage breach when it would be economically efficient for one party to break its contract and enter into another, more profitable transaction. Breaching party may profit more than it pays damages.

Rule: Employee who improperly terminates his contract will be liable for the employer’s lost profits (where appropriate), and for the difference in salary that the employer must pay someone of equal competence. Roth v. Speck.

Alternatives to Expectation Damages

Reliance Damages: Damages that plaintiff suffered in reliance on the contract.-This applies when lost profits are too speculative for expectation damages.

Rule: The injured party has a right to damages based on reliance interest including what it spent preparing for performance, minus any loss the injured party would have suffered if the contract had been performed. Wartzman v. Hightower Productions

Restitution Damages: Damages awarded to plaintiff when the defendant was unjustly enriched from the contract it breached, at the plaintiff’s expense.-Demonstrates emphasis on equity rather than just autonomy.

Rule: A party that stops work because of the prime contractor’s breach may recover in quantum meruit for the value of the labor and equipment already given to the prime contractor to prevent unjust enrichment.-If contract was only partly completed, non-breacher can sue for market value even if market value is more than the contract price. (Coastal Steel Erectors v. Algernon Blair Inc.)

-If non-breacher completely performed the K, restitution doesn’t apply.

Specific Performance: Requirement that the breaching party perform the contract instead of paying damages to non-breacher.

Test: For specific performance, must prove that:1. Damages would be inadequate;2. Terms of contract are specific and definite;3. Reasonably easy to make happen (doesn’t require court’s supervision);4. No S.P. for personal service (i.e. working);5. S.P. would promote fairness.City Stores Co. v. Ammerman

Agreed Remedies: Parties consent to negotiate a settlement in case of breach between themselves.

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Liquidated damages: Amount of money decided by parties as damages owed in the event of a breach. Security deposit for apartment is an example of an agreed remedy for breach (damaging the apartment).-Liquidated damages are not a punishment.

Test for liquidated damages:1. Damages must be difficult to prove or quantify.2. Parties must have intended clause to liquidate damages, not be penalty.3. Amount agreed upon must be reasonable forecast of harm caused by breach.Westhaven Associates, Ltd. v. C.C. of Madison Inc.

General Themes:

Rule vs. Standard-Standard is the underlying purpose or rationale for a rule. It’s more vague and open to personal interpretation than rule.-If a case can’t be decided by a strict rule, it’s decided by standard instead (such as child custody).-Reasonable person standard is useful as general guide to how parties should behave.-Rule is a specific guideline that’s easier to enforce on the ground.-Rules may be over-inclusive or under-inclusive however.

Autonomy vs. Equity-Abstractly, autonomy means freedom to pursue one’s interests and exercise positive liberty.-Enforcing contracts supports the reliability of promises and transactions.-Contracts are meant to enhance parties’ autonomy and allow them to trade resources securely.-Grounded on mutual assent of parties enhancing autonomy.-Classical (Williston) view of contracts is more pro-autonomy; contracts read literally.-Equity: Principle of fairness that suggests one party should not unjustly be able to take advantage of another through a contract or breach of K.-Doctrines of equity include promissory estoppel, good faith, minority, mental capacity, duress, misrepresentation, undue influence, nondisclosure, mistake, unconscionability, changed circumstances, and damages.-Corbin view of contracts is more pro-equity and flexible for interpreting contracts.

Consideration vs. Promissory Estoppel-Consideration is the value bargained for and received between the parties, and necessary for most contracts to be valid.-Promissory estoppel is a substitute for consideration in cases where non-enforcement of the contract would lead to injustice. P.E. is allowed if there was a promise and detrimental reliance by one party on another.

Benefit/detriment vs. Bargain-for-exchange (consideration)-Benefit/detriment: consideration means benefit to the promisor or voluntary detriment (restraint) of promisee’s interest. This is older view of consideration.-Bargain-for-exchange: promise must induce the detriment, and detriment induce the promise. This is the more modern view.-This focuses on the subjective motivation of promisee. What motivated promisee to perform?

Legal Formalities

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